It was another slow week for dividend increases, as few well knows companies raised their dividends. There was some surprising news from American Express (AXP), one of the largest holdings of billionaire Warren Buffet. The provider of charge and credit payment card products surprised Wall Street by maintaining its current dividend of $0.18/share. This was contrary to recent moves by Wells Fargo (WFC), JP Morgan Chase (JPM) and US Bank (USB) to cut their dividends substantially. Amex is not a dividend achiever or aristocrat since it only started consistently raising its dividends in 2003. The stock currently yields 5%. The company does fit the profile of a potential financial dividend cutter, especially after receiving $3.389 billion worth of TARP money.
The board of Prospect Capital Corporation (PSEC) increased the quarterly dividend on the company's common stock to 40.5 cents per share from 40.375 cents. This marked the 17th consecutive quarterly dividend increase for the New York, NY private equity and mezzanine debt firm specializing in secured debt and equity investments. Prospect Capital Corporation currently yields 18%.
Bowl America A (BWL.A), which operates bowling centers in the United States increased its quarterly dividend payments to $0.155 from $0.15/share. This marks the 38 consecutive dividend increase for this Dividend Champion. The stock currently yields 6.40%.
Raytheon Company (RTN), designs, develops, manufactures, integrates, and supports technological products, services, and solutions for governmental and commercial customers in the United States and internationally, rewarded its shareholders with an 11% increase in its quarterly dividend from $0.28 to $0.31 per share. This marks the 6th consecutive year of dividend increases for the company. The stock currently yields 3.10%
Hatteras Financial (HTS), rewarded its shareholders with a 5% increase in its quarterly dividend from $1 to $1.05 per share. The mortgage real estate investment trust currently yields 17.50%. I wouldn’t jump on this ship yet however, given the short history that the company had on the market in addition to the irregular dividend schedule.
The board of Pepsi Bottling Group, Inc. (PBG) increased the quarterly dividend on the company's common stock to 18 cents per share from 17 cents. This marked the 6th consecutive annual dividend increase for the New York, NY manufacturer and distributor of Pepsi-cola beverages. Pepsi Bottling Group, Inc. currently yields 3.20%.
Overall I didn’t find any consistent dividend grower to spark my interest in further research except Bowl America. The rest of the stocks have a short history of raising their dividends, which doesn’t even come close to the ten-year period of dividend growth, which I require.
Full Disclosure: None
Relevant Articles:
- TARP is bad for dividend investors
- What Dividend Growth Investing is all about?
- Best Dividends Stocks for the Long Run
- Best High Yield Dividend Stocks for 2009
Monday, March 30, 2009
Friday, March 27, 2009
McDonald’s (MCD) Dividend Stock Analysis
This article originally appeared on The DIV-Net one week ago.
McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company's share of the US fast food market is several times larger than its closest competitors, Burger King (BKC) and Wendy's (WEN).
McDonald’s is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 32 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 6.70% to its shareholders.
At the same time company has managed to deliver an impressive 11.70% average annual increase in its EPS since 1999. Analysts are expecting MCD to grow EPS to $4.20 by 2010. The economic slowdown is making consumers to trade down and dine out at fast food places like the ones owned by the Golden Arches. Mcdonald’s has been focusing more on expanding the sales of existing restaurants since 2003 versus relying on new stores to be the driver for growth. Same store sales and profits have been driven by product innovation, and comparable-store sales growth, and are part of the company’s recent success. The constant innovations in the menu are indeed fueling strong same store sales volumes.
International operations, which accounted for almost half of operating profits in 2008, have been a major growth factor over the past two decades. This however exposes the company to fluctuations in exchange rates, which could add or detract from EPS performance.
The ROE has remained largely between 14% and 21% with the exception of lows in 2002 and recent highs for this indicator in 2008.
Annual dividends have increased by an average of 29.20% annually since 1999, which is almost three times higher than the growth in EPS.
A 29 % growth in dividends translates into the dividend payment doubling almost every two and a half years. Since 1978 McDonald’s has actually managed to double its dividend payment on average almost every four years.
The dividend payout has steadily increased over the past decade, due to the fact the dividend growth was much faster than earnings growth. Currently the payout is a little over 50%, which good. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.
McDonald’s is currently attractively valued. The stock trades at a P/E of 15, yields 3.70% and has an adequately covered dividend payment. The company has proven to be somewhat recession resistant. I would be a buyer of MCD at current prices, as long as it does not increase above $66.
Full Disclosure: Long MCD
Relevant Articles:
Wednesday, March 25, 2009
Using DRIPs for faster compounding of dividends
Dividends have historically contributed 35% - 40% of annual total returns over the past century. Re-invested dividends however are touted to have provided 97% of S&P 500 total returns between 1871 and 2008.
The main pro of dividend reinvestment is that you get the power of compounding in your favor. If you have also picked a solid stock that tends to increase the payments to stockholders every year you are essentially turbo charging your portfolio for the long run and should expect to receive even faster annual dividend raises.
There is another way to compound your dividends to the third degree using dividends reinvestment plans (DRIPs) which allow participants to reinvest the cash dividends in additional shares of common stock at a discount. Drips are a nice low cost way to purchase dividend stocks and build a stock portfolio. These programs allow investors to purchase shares in two ways either through reinvesting dividends or with optional cash payments that can be sent to the companies you want to invest in. One benefit of drips is that they allow dividend reinvestment in partial shares. Check out my recent review of DRIPs.
The most valuable benefit of drips is that some allow reinvesting your dividends by purchasing shares at a discount to the market price. This is an inexpensive way for these companies to raise capital.
I have provided a sample list of dividend reinvestment plans, which allow participants to reinvest the cash dividends in additional shares of common stock at a discount. It’s not a recommendation to purchase however:
If you are aware of any other drips offering a discount on dividend reinvestment, please add your comment below.
It’s interesting to note that most major companies that offer discount on dividend reinvestment plans are Canadian. Major banks such as Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Toronto-Dominion Bank (TD) and Royal Bank of Canada (RY) dominate the list. Canadian Income Trusts such as Pengrowth Energy Trust (PGH), Penn West Energy Trust (PWE) and Harvest Energy Trust (HTE) also reward shareholders with reinvesting their dividends by purchasing shares at 5% discount to the market price.
Few US companies are currently offering discounts on dividend reinvestment through their DRIPs. With the credit crunch I would expect companies to provide an additional incentive for shareholders to keep reinvesting their dividends through the company’s plan in order to have an easy way to finance operations.
It is important to understand however that these discount prices could be determined differently in different drips. Thus always consult the plan documentation for further details concerning specific DRIPs. Buying stocks just for the dividend reinvestment discount shouldn’t be the main reason behind the purchase. Always analyze each individual stock before investing in it.
Relevant Articles:
Monday, March 23, 2009
Dividends are Powering Up the Tech Sector
The past week marked an increase in positive dividend news from major companies. The most bullish news came from software giant Oracle, which declared its first ever quarterly dividend of $0.05/share. Most of the large cap tech companies from the dot-com boom eras are now mature plays on the sector. They could now afford to share an increased portion of their revenue streams with shareholders.
Cisco Systems is another major tech company, which announced its intent to pay a dividend eventually back in November 2008. The evolution of the large cap former tech bellwether darlings of Wall Street from the 1990’s is astonishing. As stocks like Intel (INTC), Microsoft (MSFT) and Cisco Systems (CSCO) are no longer growing as rapidly as they used to and become mature companies, they start distributing larger portions of their net incomes to shareholders in terms of dividends. The more important question however is whether these companies will continue paying out rising dividends to shareholders after the dividend tax is repealed.
Realty Income and Air Products and Chemicals were two other companies, which rewarded their shareholders with dividends.
The board of Air Products (APD) increased the quarterly dividend on the company's common stock to 45 cents per share from 44 cents. This marked the 27th consecutive annual dividend increase for the Allentown, Pennsylvania maker of atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. Air Products and Chemicals, Inc. is the sixteenth dividend aristocrat to raise its dividends in 2009. Check out my analysis of Air Products and Chemicals (APD).
Realty Income (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States., raised its dividends to $0.1420625 per share from $0.14175 per share. This is the 46th consecutive quarterly increase for this dividend achiever and the 53rd dividend increase since Realty Income went public in 1994. The new monthly dividend amount represents an annualized dividend amount of $1.70475 per share. Realty Income currently yields and is one my Best High Yield Dividend Stocks for 2009. Check out my analysis of Realty Income (O).
Full Disclosure: Long O and APD
Relevant Articles:
- Best High Yield Dividend Stocks for 2009
- Realty Income (O) Dividend Analisys
- Dividend Aristocrats keep raising their dividends
- Why do I like Dividend Aristocrats?
Cisco Systems is another major tech company, which announced its intent to pay a dividend eventually back in November 2008. The evolution of the large cap former tech bellwether darlings of Wall Street from the 1990’s is astonishing. As stocks like Intel (INTC), Microsoft (MSFT) and Cisco Systems (CSCO) are no longer growing as rapidly as they used to and become mature companies, they start distributing larger portions of their net incomes to shareholders in terms of dividends. The more important question however is whether these companies will continue paying out rising dividends to shareholders after the dividend tax is repealed.
Realty Income and Air Products and Chemicals were two other companies, which rewarded their shareholders with dividends.
The board of Air Products (APD) increased the quarterly dividend on the company's common stock to 45 cents per share from 44 cents. This marked the 27th consecutive annual dividend increase for the Allentown, Pennsylvania maker of atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. Air Products and Chemicals, Inc. is the sixteenth dividend aristocrat to raise its dividends in 2009. Check out my analysis of Air Products and Chemicals (APD).
Realty Income (O), which engages in the acquisition and ownership of commercial retail real estate properties in the United States., raised its dividends to $0.1420625 per share from $0.14175 per share. This is the 46th consecutive quarterly increase for this dividend achiever and the 53rd dividend increase since Realty Income went public in 1994. The new monthly dividend amount represents an annualized dividend amount of $1.70475 per share. Realty Income currently yields and is one my Best High Yield Dividend Stocks for 2009. Check out my analysis of Realty Income (O).
Full Disclosure: Long O and APD
Relevant Articles:
- Best High Yield Dividend Stocks for 2009
- Realty Income (O) Dividend Analisys
- Dividend Aristocrats keep raising their dividends
- Why do I like Dividend Aristocrats?
Saturday, March 21, 2009
Ten Links for March 21, 2009
As a new feature on the blog, I am adding the ten articles from around the blogosphere that I enjoyed. Check out the links below:
Barron's Electronic Investor has a nice overview of dividend investing resources available to investors in Where to Find High, Safe Stock Yields. Yours truly was also featured in there.
Canadian Capitalist analyzed the Toronto Star article on Derek Foster, the self proclaimed "Canadian Youngest Retiree" and also gave us several reasons why Selling puts isn’t “money for nothing”.
Four-Pillars also analyzed the Derek Foster story in Is Dividend Investing Dead? The Derek Foster Story. He also hosted Edition #197 of Carnival of Personal Finance and included my post on master limited partnerships.
DividendsValue wrote about something that has been on my mind for months now -Should You Sell A Dividend Stock After A Dividend Freeze?. While I disagree with him on selling after a dividend freeze, since historic data does not support this decision, the article is showing how one could have cut their losses significantly.
Jason Kelly reviewed the most recent ebook from Dave Van Knapp of SensibleStocks.com titled "The Top 40 Dividend Stocks For 2009". Check out the book description from this page.
This article provides an opposing view to mine on dividend cuts and suspensions. Not Paying a Dividend is Now a Sign of Prudence.
Barron's Electronic Investor has a nice overview of dividend investing resources available to investors in Where to Find High, Safe Stock Yields. Yours truly was also featured in there.
Canadian Capitalist analyzed the Toronto Star article on Derek Foster, the self proclaimed "Canadian Youngest Retiree" and also gave us several reasons why Selling puts isn’t “money for nothing”.
Four-Pillars also analyzed the Derek Foster story in Is Dividend Investing Dead? The Derek Foster Story. He also hosted Edition #197 of Carnival of Personal Finance and included my post on master limited partnerships.
DividendsValue wrote about something that has been on my mind for months now -Should You Sell A Dividend Stock After A Dividend Freeze?. While I disagree with him on selling after a dividend freeze, since historic data does not support this decision, the article is showing how one could have cut their losses significantly.
Jason Kelly reviewed the most recent ebook from Dave Van Knapp of SensibleStocks.com titled "The Top 40 Dividend Stocks For 2009". Check out the book description from this page.
This article provides an opposing view to mine on dividend cuts and suspensions. Not Paying a Dividend is Now a Sign of Prudence.
Cliff Wachtel wrote a post in 5 parts titled "The High Dividend Stock Investor's Collapsing Dollar Survival Guide".
StockerBlog made a list of Monthly Dividend Stocks. Dividend Growth Investor readers know however that one could create a portfolio for monthly income,even if dividends are paid out every quarter.
TJ Smith from Bullish Bankers provided a list with "Five Dividends to Count On".
Disciplined Approach to Investing gave us an overview of Oracle Corp: New Dividend and Currency Impact. Cash Rich tech companies are starting to pay out dividends to shareholders.
Friday, March 20, 2009
AT&T (T) Dividend Stock Analysis
This article originally appeared on The DIV-Net one week ago.
AT&T Inc. provides telecommunications services to consumers and businesses in the United States and internationally.
AT&T Inc. is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend achiever. AT&T Inc. has been consistently increasing its dividends for 25 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.40% to its shareholders.
At the same time company has managed to deliver a very modest 1.40% average annual increase in its EPS since 1999. Analysts are expecting T to earn $2/share in 2009 and $2.26 in 2010.
AT&T also provides adjusted EPS from continuing operations, which exclude certain non-cash merger related costs of $0.49/share in 2008 (versus $0.73/share in 2007), Workforce reduction of $0.11/share and Merger Related trust investment losses of $0.05/share. If we sum all that up, AT&T’s EPS rises to $2.81. For the purposes of my analysis however, I used EPS from continuing operations.
The company has recently announced plans to eliminate 9000 job positions. It announced a 12000 cut in payrolls in December and create 3000 new jobs in March. Furthermore it expects to spend couple billions dollars less on capital spending in 2009.
The ROE has fallen from a high of over 27% in 1999 to 12.20% in 2008.
Annual dividend payments have increased by an average of 5.70% annually since 1999, which is much higher than the growth in EPS. Given the slow growth in earnings per share and a slowdown of share buybacks I doubt that future dividend increases could be sustained at that level.
The dividend costed AT&T $9.5 billion in 2008, which took over 70% of the company’s free cash flow of $13.3 billion for the year. There have been several bullish articles on the stock, which portray AT&T as a safe vessel to ride out the economic storm. As a contrarian I view these as a sell signal or hold at best.
Nevertheless a 6 % growth in dividends translates into the dividend payment doubling almost every twelve years. Since 1984 AT&T Inc. has indeed managed to double its dividend payment almost every twelve years on average.
The dividend payout has ranged between 43% and 91% over the past decade. Currently the payout ratio is at 74%, which is very high. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.
AT&T is well positioned in the wireless segment, as it always tends to unveil new and appealing phones to its subscriber base. The company is working its way in cutting costs through job reductions and realizing synergies from its mergers with the old AT&T and BellSouth. Furthermore the company is expecting to spend 18 billion on capex in 2009 versus 20 billion in 2008. Most recently the company announced after its earnings that it had no plans for significant buybacks in 2009.
The company has the cash to pay the dividend at the moment. Since telecoms in general need a lot of cash to sustain their networks, the credit crunch could affect the payment down the road.
AT&T Inc. is currently attractively valued. The stock trades at a price/earnings multiple of 10.70 and an above average dividend yield of 7.10%. The high dividend payout worries me at the moment and indicates a danger to its sustainability in the current environment or a further slowdown in dividend growth at best. Despite the fact that AT&T has the cash flows to sustain its current dividend, the above average dividend yield indicates that investors have concerns over the sustainability of the current dividend payment.
Thus I believe AT&T is a hold at current prices.
Full Disclosure: None
Wednesday, March 18, 2009
Master Limited Partnerships (MLPs) – an island of stability for dividend investors
Master Limited Partnerships are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. They combine the tax advantages of a partnership and higher dividend yields with the day to day tradability of common stocks.
MLPs consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLPs are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.
MLPs mail individualized K-1 tax forms to each unitholder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Because of MLPs specific legal structure, investors should consult with their tax advisor before investing in them.
The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.
Thus MLPs typically enjoy toll-road business models. Thus:
- They do not take title to the commodities transported
- Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
- They do not have significant credit risk as commodity prices balloon.
- MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines
Other qualities that enable these stable enterprises to keep increasing their dividends over time include:
-Long Useful Lives of their assets
-Fees are indexed to inflation, which provides an inflation hedge
-Most MLPs have a near monopoly in their area
-There is a high cost of entry and thus there is virtually no competition
There are different types risks to investing in MLPs as well, including Regulatory Risks, Interest Rate Risks and Liability Risks.
MLPs are subject to Regulatory Risks. Currently most partnerships enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings. If the government were to change MLP business structure, unitholders will not be able to enjoy the high yields in the sector for long. In addition to that since the fees that MLP charge for transportation of oil and gas products through their pipelines are regulated by the governments, this could affect the revenue stream negatively.
MLPs also carry some interest rate risks. During increases in the interest rates by the FED in 1994, 1999 and 2004 the partnerships didn’t produce decent returns to shareholders. Because of the ability to grow their cash flow base, MLPs could relatively outperform in a rising interest rate environment.
Liability risk -Unitholders typically have no liability, similar to a corporation's shareholders. Creditors however have the right to seek the return of distributions made to unitholders if the liability in question arose before the distribution was paid. This liability stays attached to the unitholder even after he or she sells the units.
The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLPs enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions. Despite the fact that the Alerian MLP Index lost 36.90% in 2008, the index is virtually unchanged so far in 2009.
The five MLPs with highest weights in the index include:
Kinder Morgan Energy Partners (KMP) owns and operates natural gas, gasoline, and other petroleum product pipelines. Also operates coal and other dry-bulk materials terminals and provides CO2 for enhanced oil recovery projects. KMP has managed to increase annual distributions by 13.90% on average since 1993. The partnership’s units currently yield 9.10%. Check out my analysis of Kinder Morgan, which is one of my best high yield stocks to own in 2009.
Enterprise Products Partners (EPD) owns onshore and offshore natural gas, natural gas liquids, crude oil and petrochemical pipelines and associated facilities. EPD has managed to increase annual distributions by 9.60% on average since 1999. The partnership’s units currently yield 9.80%.
Plains All American Pipeline (PAA) owns crude oil and refined products pipelines and associated facilities, primarily in Texas, California, Oklahoma, Louisiana and the Canadian Provinces of Alberta and Saskatchewan. Also involved in the marketing and storage of liquefied petroleum gas. PAA has managed to increase annual distributions by 7.40% on average since 1999. The partnership’s units currently yield 9.30%.
Energy Transfer Partners (ETP) owns natural gas pipelines and associated facilities. ETP also markets propane to retail customers in 40 states. ETP has managed to increase annual distributions by 13.50% on average since 1998. The partnership’s units currently yield 9.90%.
Oneok Partners (OKS) owns natural gas pipelines, processing plants and associated facilities, mostly in the Mid-Continent region. OKS has managed to increase annual distributions by 4.70% on average since 1994. The partnership’s units currently yield 10.20%.
As usual these MLPs are just a starting point for research and should not be taken as recommendations. Because of their unique structure, consult with a tax professional before investing in them.
Full Disclosure: Long KMR
Relevant Articles:
- Best High Yield Dividend Stocks for 2009
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- TEPPCO Partners (TPP) Dividend Analysis
- No Risk Stock Market Investing
MLPs consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLPs are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.
MLPs mail individualized K-1 tax forms to each unitholder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Because of MLPs specific legal structure, investors should consult with their tax advisor before investing in them.
The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.
Thus MLPs typically enjoy toll-road business models. Thus:
- They do not take title to the commodities transported
- Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
- They do not have significant credit risk as commodity prices balloon.
- MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines
Other qualities that enable these stable enterprises to keep increasing their dividends over time include:
-Long Useful Lives of their assets
-Fees are indexed to inflation, which provides an inflation hedge
-Most MLPs have a near monopoly in their area
-There is a high cost of entry and thus there is virtually no competition
There are different types risks to investing in MLPs as well, including Regulatory Risks, Interest Rate Risks and Liability Risks.
MLPs are subject to Regulatory Risks. Currently most partnerships enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings. If the government were to change MLP business structure, unitholders will not be able to enjoy the high yields in the sector for long. In addition to that since the fees that MLP charge for transportation of oil and gas products through their pipelines are regulated by the governments, this could affect the revenue stream negatively.
MLPs also carry some interest rate risks. During increases in the interest rates by the FED in 1994, 1999 and 2004 the partnerships didn’t produce decent returns to shareholders. Because of the ability to grow their cash flow base, MLPs could relatively outperform in a rising interest rate environment.
Liability risk -Unitholders typically have no liability, similar to a corporation's shareholders. Creditors however have the right to seek the return of distributions made to unitholders if the liability in question arose before the distribution was paid. This liability stays attached to the unitholder even after he or she sells the units.
The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLPs enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions. Despite the fact that the Alerian MLP Index lost 36.90% in 2008, the index is virtually unchanged so far in 2009.
The five MLPs with highest weights in the index include:
Kinder Morgan Energy Partners (KMP) owns and operates natural gas, gasoline, and other petroleum product pipelines. Also operates coal and other dry-bulk materials terminals and provides CO2 for enhanced oil recovery projects. KMP has managed to increase annual distributions by 13.90% on average since 1993. The partnership’s units currently yield 9.10%. Check out my analysis of Kinder Morgan, which is one of my best high yield stocks to own in 2009.
Enterprise Products Partners (EPD) owns onshore and offshore natural gas, natural gas liquids, crude oil and petrochemical pipelines and associated facilities. EPD has managed to increase annual distributions by 9.60% on average since 1999. The partnership’s units currently yield 9.80%.
Plains All American Pipeline (PAA) owns crude oil and refined products pipelines and associated facilities, primarily in Texas, California, Oklahoma, Louisiana and the Canadian Provinces of Alberta and Saskatchewan. Also involved in the marketing and storage of liquefied petroleum gas. PAA has managed to increase annual distributions by 7.40% on average since 1999. The partnership’s units currently yield 9.30%.
Energy Transfer Partners (ETP) owns natural gas pipelines and associated facilities. ETP also markets propane to retail customers in 40 states. ETP has managed to increase annual distributions by 13.50% on average since 1998. The partnership’s units currently yield 9.90%.
Oneok Partners (OKS) owns natural gas pipelines, processing plants and associated facilities, mostly in the Mid-Continent region. OKS has managed to increase annual distributions by 4.70% on average since 1994. The partnership’s units currently yield 10.20%.
As usual these MLPs are just a starting point for research and should not be taken as recommendations. Because of their unique structure, consult with a tax professional before investing in them.
Full Disclosure: Long KMR
Relevant Articles:
- Best High Yield Dividend Stocks for 2009
- Kinder Morgan Energy Partners (KMP) Dividend Analysis
- TEPPCO Partners (TPP) Dividend Analysis
- No Risk Stock Market Investing
Tuesday, March 17, 2009
Dividend Aristocrats keep raising their dividends
Overall investors have mainly been focusing on dividend cuts in 2009. I believe that most stocks that pay out dividends are cyclical in nature. Thus, they do not have the specific competitive advantages, which provide for a long and sustainable annual dividend increases over time.
The starting list for any dividend growth investor, who is looking for companies, which have a proven track record of consistently raising their dividends for 25 years, is the S&P Dividend Aristocrats Index. There were 52 companies in the index at the end of 2008. So far this year the following dividend aristocrats have increased their dividends:
In January Bemis (BMS) increased its dividend to 0.90 from 0.88, which marked the 26 consecutive increase for the manufacturer of flexible packaging products and pressure sensitive materials.
Consolidated Edison (ED) increased its dividends by 1%, which marked the 35th annual consecutive increase for this provider of electric, gas, and steam utility services. The stock currently yields 5.80%. (analysis)
Family Dollar Stores (FDO) increased its dividends by 8%, which marked the 33rd annual consecutive increase for this operator of of self-service retail discount stores. The stock currently yields 1.90%. (analysis)
McGraw-Hill (MHP) increased its dividends by 2.30%, which marked the 36th annual consecutive increase for this provider of information services and products. The stock currently yields 4.10%. (analysis)
In February 3M (MMM) increased its dividends by 2%, which marked the 51st consecutive increase for this diversified technology company. The stock currently yields 4.30%. (analysis)
Abott Laboratories (ABT), which engages in the development, manufacture, and sale of health care products worldwide, increased the company's quarterly common dividend 11% to $0.40 per share. This marked the company’s 37th year of consecutive dividend increases. The stock currently yields 2.60%. (analysis)
Archer-Daniels-Midland (ADM) increased its quarterly dividend from $0.13 to $0.14/share, which marked the 34th consecutive increase for this agricultural commodities and products company. The stock currently yields 2.00%. (analysis)
Chubb Corp (CB), which provides property and casualty insurance to businesses and individuals, announced that its Board has approved a 6.10% increase in its quarterly dividend from $0.33 to $0.35 per common share. CB has consistently increased its dividends for forty-four consecutive years. The stock currently yields 3.30%. (analysis)
Coca-Cola (KO), which engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide, raised its quarterly dividend by 8% from $0.38 to $0.41 per common share. The company behind one of the world’s best-known consumer brands has rewarded its shareholders with an uninterrupted streak of increased dividends for 47 years. The stock currently yields 3.50%. (analysis)
Integrys Energy (TEG), which operates as a regulated electric and natural gas utility company increased its quarterly dividends payment to $0.68/share, which marked the fifty-first consecutive year of increased payouts. This utility company currently yields 7.00%.
Kimberly-Clark (KMB), which engages in the manufacture and marketing of health and hygiene products worldwide, announced that its Board has approved a 3.40% increase in its quarterly dividend from $0.58 to $0.60 per share. KMB has consistently increased its dividends for thirty-seven consecutive years. The stock currently yields 5.00%. (analysis)
Pitney Bowes (PBI) increased its dividends by 2.90%, which marked the 27th consecutive increase for this provider of mail processing equipment and integrated mail solutions. The stock currently yields 6.00%.
Sherwin-Williams (SHW), which engages in the development, manufacture, distribution, and sale of paints, coatings, and related products, boosted its dividends for the thirty first consecutive year. The stock currently yields 3.10%. (analysis)
Sigma- Aldrich (SIAL) increased its dividends to $0.145 from $0.13, which marked the 33th consecutive increase for this specialty chemicals company. The stock currently yields 1.70%.
Wal-Mart (WMT), which operates the largest chain of retail stores in various formats worldwide, announced that its Board has approved a 15% increase in its quarterly dividend to $0.2725 per share. Wal-Mart has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 1.90%. (analysis)
On the other hand only five have cut their dividends so far in 2009:
General Electric (GE)
State Street (STT)
Gannett (GCI)
US Bancorp (USB)
Pfizer (PFE)
The changes in the Dividend Aristocrat index should be expected and they are a natural process that occurs even in normal years. In 1989, the number of companies in the index was only 26. Only 7 of the original companies still remain in the index. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG. The percentage of companies that remain in the index after 10 years is about 35%. There have been about 116 companies that have gone through the index for the 15-year period form 1989 to 2004. The average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition. So as a dividend investor, you should expect year over year changes in the index.
I believe that the Dividend Aristocrats above are still showing a confidence in future cash flows by raising their dividends to shareholders even in the toughest crisis since the Great Depression. Only a company, which has a business model that allows it to generate increasing streams of cash, could support a long streak of dividend raises to stockholders. That’s why dividend investors should ignore the fear of dividend cuts from cyclical companies and instead focus on a diversified list of stocks from a variety of sectors with long track records of dividend increases until the current storm passes.
Full Disclosure: Long ED, FDO, MHP, KO, ADM, MMM, SHW, WMT, KMB,
- Dividend Aristocrats List for 2009
- Why do I like Dividend Aristocrats?
- Historical changes of the S&P Dividend Aristocrats Index
- When to sell my dividend stocks?
The starting list for any dividend growth investor, who is looking for companies, which have a proven track record of consistently raising their dividends for 25 years, is the S&P Dividend Aristocrats Index. There were 52 companies in the index at the end of 2008. So far this year the following dividend aristocrats have increased their dividends:
In January Bemis (BMS) increased its dividend to 0.90 from 0.88, which marked the 26 consecutive increase for the manufacturer of flexible packaging products and pressure sensitive materials.
Consolidated Edison (ED) increased its dividends by 1%, which marked the 35th annual consecutive increase for this provider of electric, gas, and steam utility services. The stock currently yields 5.80%. (analysis)
Family Dollar Stores (FDO) increased its dividends by 8%, which marked the 33rd annual consecutive increase for this operator of of self-service retail discount stores. The stock currently yields 1.90%. (analysis)
McGraw-Hill (MHP) increased its dividends by 2.30%, which marked the 36th annual consecutive increase for this provider of information services and products. The stock currently yields 4.10%. (analysis)
In February 3M (MMM) increased its dividends by 2%, which marked the 51st consecutive increase for this diversified technology company. The stock currently yields 4.30%. (analysis)
Abott Laboratories (ABT), which engages in the development, manufacture, and sale of health care products worldwide, increased the company's quarterly common dividend 11% to $0.40 per share. This marked the company’s 37th year of consecutive dividend increases. The stock currently yields 2.60%. (analysis)
Archer-Daniels-Midland (ADM) increased its quarterly dividend from $0.13 to $0.14/share, which marked the 34th consecutive increase for this agricultural commodities and products company. The stock currently yields 2.00%. (analysis)
Chubb Corp (CB), which provides property and casualty insurance to businesses and individuals, announced that its Board has approved a 6.10% increase in its quarterly dividend from $0.33 to $0.35 per common share. CB has consistently increased its dividends for forty-four consecutive years. The stock currently yields 3.30%. (analysis)
Coca-Cola (KO), which engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide, raised its quarterly dividend by 8% from $0.38 to $0.41 per common share. The company behind one of the world’s best-known consumer brands has rewarded its shareholders with an uninterrupted streak of increased dividends for 47 years. The stock currently yields 3.50%. (analysis)
Integrys Energy (TEG), which operates as a regulated electric and natural gas utility company increased its quarterly dividends payment to $0.68/share, which marked the fifty-first consecutive year of increased payouts. This utility company currently yields 7.00%.
Kimberly-Clark (KMB), which engages in the manufacture and marketing of health and hygiene products worldwide, announced that its Board has approved a 3.40% increase in its quarterly dividend from $0.58 to $0.60 per share. KMB has consistently increased its dividends for thirty-seven consecutive years. The stock currently yields 5.00%. (analysis)
Pitney Bowes (PBI) increased its dividends by 2.90%, which marked the 27th consecutive increase for this provider of mail processing equipment and integrated mail solutions. The stock currently yields 6.00%.
Sherwin-Williams (SHW), which engages in the development, manufacture, distribution, and sale of paints, coatings, and related products, boosted its dividends for the thirty first consecutive year. The stock currently yields 3.10%. (analysis)
Sigma- Aldrich (SIAL) increased its dividends to $0.145 from $0.13, which marked the 33th consecutive increase for this specialty chemicals company. The stock currently yields 1.70%.
Wal-Mart (WMT), which operates the largest chain of retail stores in various formats worldwide, announced that its Board has approved a 15% increase in its quarterly dividend to $0.2725 per share. Wal-Mart has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 1.90%. (analysis)
On the other hand only five have cut their dividends so far in 2009:
General Electric (GE)
State Street (STT)
Gannett (GCI)
US Bancorp (USB)
Pfizer (PFE)
The changes in the Dividend Aristocrat index should be expected and they are a natural process that occurs even in normal years. In 1989, the number of companies in the index was only 26. Only 7 of the original companies still remain in the index. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG. The percentage of companies that remain in the index after 10 years is about 35%. There have been about 116 companies that have gone through the index for the 15-year period form 1989 to 2004. The average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition. So as a dividend investor, you should expect year over year changes in the index.
I believe that the Dividend Aristocrats above are still showing a confidence in future cash flows by raising their dividends to shareholders even in the toughest crisis since the Great Depression. Only a company, which has a business model that allows it to generate increasing streams of cash, could support a long streak of dividend raises to stockholders. That’s why dividend investors should ignore the fear of dividend cuts from cyclical companies and instead focus on a diversified list of stocks from a variety of sectors with long track records of dividend increases until the current storm passes.
Full Disclosure: Long ED, FDO, MHP, KO, ADM, MMM, SHW, WMT, KMB,
- Dividend Aristocrats List for 2009
- Why do I like Dividend Aristocrats?
- Historical changes of the S&P Dividend Aristocrats Index
- When to sell my dividend stocks?
Monday, March 16, 2009
Slow Week for Dividend Increases
The past week was one of the slowest for dividend increases for many months. In the meantime the number of dividend cuts keeps increasing. Just last week Cedar Fair LP (FUN), a dividend achiever which owns and operates 11 amusement and water parks in the United States and Canada, cut its quarterly distribution in half to $0.25/share. This ended the Sandusky Ohio based company’s streak of 20 years of consistent dividend increases.
Other dividend cuts were mainly in the financial sector, where Capital One Financial (COF) cut its dividends by 88% and Synovus (SNV) cut its already lowered dividend by 83%.
W.P. Carey & Co (WPC), which is an investment management company, increased its quarterly dividends to $0.496 from $0.494 paid in 4Q 2008. This represents a 2.90% increase over the dividend paid in 1Q 2008. W.P. Carey & Co has consistently increased its dividends at least once per year since 1999. This limited liability company currently yields 9.40%.
Equity Lifestyles Properties Inc. (ELS), which is a publicly owned real estate investment trust (REIT), increased its quarterly dividend payment by 25% to $0.25 from $0.20/share. The company cut its dividends in 2004, after which it has kept increasing them. The new payment is still about half ELS’s dividends in 2003 however. This REIT currently yields only 2.60%.
Full Disclosure: None
Relevant Articles:
- Why do I like Dividend Achievers
- Another day, another dividend cut
- Telling the truth or being positive?
- Many Dividend Stocks Keep Raising Their Payments
Other dividend cuts were mainly in the financial sector, where Capital One Financial (COF) cut its dividends by 88% and Synovus (SNV) cut its already lowered dividend by 83%.
W.P. Carey & Co (WPC), which is an investment management company, increased its quarterly dividends to $0.496 from $0.494 paid in 4Q 2008. This represents a 2.90% increase over the dividend paid in 1Q 2008. W.P. Carey & Co has consistently increased its dividends at least once per year since 1999. This limited liability company currently yields 9.40%.
Equity Lifestyles Properties Inc. (ELS), which is a publicly owned real estate investment trust (REIT), increased its quarterly dividend payment by 25% to $0.25 from $0.20/share. The company cut its dividends in 2004, after which it has kept increasing them. The new payment is still about half ELS’s dividends in 2003 however. This REIT currently yields only 2.60%.
Full Disclosure: None
Relevant Articles:
- Why do I like Dividend Achievers
- Another day, another dividend cut
- Telling the truth or being positive?
- Many Dividend Stocks Keep Raising Their Payments
Friday, March 13, 2009
PepsiCo (PEP) Dividend Stock Analysis
This article originally appeared on The DIV-Net one week ago.
PepsiCo, Inc. manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide.
PepsiCo is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. PepsiCo has been consistently increasing its dividends for 36 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a 4.70% annual average total return to its shareholders.
At the same time company has managed to deliver a 9.90% average annual increase in its EPS since 1999.
The ROE has remained largely between 31% and 38%, with the exception of 2004, when it fell to as low as 22%.
Annual dividend payments have increased by an average of 13.50% annually since 1999, which is much higher than the growth in EPS. Analysts are expecting slight increase in EPS for 2009 compared to 2008, given the sluggish state of North American economies. The strong US dollar could potentially hurt sales, as over 44% of PepsiCo’s revenues are derived internationally.
A 13.50 % growth in dividends translates into the dividend payment doubling almost every five years. Since 1978 PepsiCo has actually managed to double its dividend payment every six years on average.
The dividend payout has remained in a range between 31% and 42%. In 2008 the dividend payout ratio has surged to 51%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. The slow growth in earnings could put future dividend increases at risk.
PepsiCo is currently attractively valued. The stock trades at a price/earnings multiple of 15, has an adequately covered dividend payout and the current dividend yield at 3.50%, which is above the minimum threshold that I have set.
Full Disclosure: Long PEP
Relevant Articles:
- Cola Wars - Coke versus Pepsi
Wednesday, March 11, 2009
High Yielding Preferred Stocks Could Also Get the Dividend Axe
Preferred shares are typically equity with a higher ranking than ordinary shares. Preferred stock does not have voting rights but has a fixed dividend payment, just like a bond. In a bankruptcy or liquidation of the corporation, preferred shareholders have a superior priority over common shareholders, but a lower priority in comparison to bond holders. Preferred stockholders are also first in line to receive dividend payments, which are typically fixed. They don’t typically get to share in the prosperity of the enterprise however as preferred stock dividends do not increase. In tough economic conditions however, preferred stock dividends are much less likely to be cut or suspended; as long as the company continues operating as a going concern preferred stock dividends continue getting paid.
There are several ETF’s, which enable investors to participate in a basket of preferred stocks. One of the most active ETFs is the iShares S&P U.S. Preferred Stock Index (PFF) and the other is Powershares Financial Preferred (PGF). PFF currently yields 10.77% and has an expense ratio of 0.48%. Financials account for over 81% of PFF’s asset allocation, while materials and Health Care account for 8% and 7% respectively.
PGF currently yields 19.90% and has an annual management fee of 0.72%. PGF’s holdings consist only of financial preferred shares. The main difference with PFF is that PGF holds preferred stock in foreign banks such as Credit Suisse, HSBC, Royal Bank of Scotland and ING Group.
Preferred stocks have typically enjoyed above average dividend yields. In addition to that preferred shares have usually come from financial companies. Regulators require banks to have adequate capital to support their liabilities and require that they hold a certain minimum level of Tier 1 capital. Because preferred shares are normally less expensive to issue than common stock, banks issue preferred stocks quite often.
The financial crisis that started in 2007 has affected negatively the market for preferred shares, which have taken a beating. Investors who chased high yielding preferred stock ETFs got burned in the process as well. The iShares S&P U.S. Preferred Stock Index, which lost almost 24% in 2008 are down 45.70% year to date. The Powershares Financial Preferred ETF also lost 27.30% in 2008 and 55.7% so far in 2009.
Main reason why investors are fleeing preferred stocks is the high allocation of financial companies. The bailout of Freddie Mac (FRE) and Fannie Mae (FNM) by the US government resulted in elimination of dividends for preferred shareholders. Most recently Citigroup (C) announced that it would suspend dividends on some preferred shares, which could be a final blow to investors seeking fixed income. Investors are worried that the rest of financial stocks, which received TARP money, such as Bank of America (BAC), Wells Fargo (WFC) and US Bancorp (USB), could be next to cut the dividend payments on their preferred shares.
Because of the current uncertainty in preferred dividends, I do not view PFF and PGF as buys at these levels. Investors who learned the hard way not to chase yield should think twice before diworsifying into preferreds.
Relevant Articles:
- TARP is bad for dividend investors
- Can USB and WFC maintain their current dividends?
- Don’t chase High Yielding Stocks Blindly
- Which Bank will be next? Follow the dividend cuts
There are several ETF’s, which enable investors to participate in a basket of preferred stocks. One of the most active ETFs is the iShares S&P U.S. Preferred Stock Index (PFF) and the other is Powershares Financial Preferred (PGF). PFF currently yields 10.77% and has an expense ratio of 0.48%. Financials account for over 81% of PFF’s asset allocation, while materials and Health Care account for 8% and 7% respectively.
PGF currently yields 19.90% and has an annual management fee of 0.72%. PGF’s holdings consist only of financial preferred shares. The main difference with PFF is that PGF holds preferred stock in foreign banks such as Credit Suisse, HSBC, Royal Bank of Scotland and ING Group.
Preferred stocks have typically enjoyed above average dividend yields. In addition to that preferred shares have usually come from financial companies. Regulators require banks to have adequate capital to support their liabilities and require that they hold a certain minimum level of Tier 1 capital. Because preferred shares are normally less expensive to issue than common stock, banks issue preferred stocks quite often.
The financial crisis that started in 2007 has affected negatively the market for preferred shares, which have taken a beating. Investors who chased high yielding preferred stock ETFs got burned in the process as well. The iShares S&P U.S. Preferred Stock Index, which lost almost 24% in 2008 are down 45.70% year to date. The Powershares Financial Preferred ETF also lost 27.30% in 2008 and 55.7% so far in 2009.
Main reason why investors are fleeing preferred stocks is the high allocation of financial companies. The bailout of Freddie Mac (FRE) and Fannie Mae (FNM) by the US government resulted in elimination of dividends for preferred shareholders. Most recently Citigroup (C) announced that it would suspend dividends on some preferred shares, which could be a final blow to investors seeking fixed income. Investors are worried that the rest of financial stocks, which received TARP money, such as Bank of America (BAC), Wells Fargo (WFC) and US Bancorp (USB), could be next to cut the dividend payments on their preferred shares.
Because of the current uncertainty in preferred dividends, I do not view PFF and PGF as buys at these levels. Investors who learned the hard way not to chase yield should think twice before diworsifying into preferreds.
Relevant Articles:
- TARP is bad for dividend investors
- Can USB and WFC maintain their current dividends?
- Don’t chase High Yielding Stocks Blindly
- Which Bank will be next? Follow the dividend cuts
Tuesday, March 10, 2009
Merck/Schering-Plough Merger Arbitrage Opportunity
In this tough market, investors are always looking for a way to make a buck. Merger Arbitrage is a strategy where investors could profit from the spread between the current price of the target and the expected price at close of the deal. This could be one strategy where investors could shore their funds during the current market turmoil and still make a buck.
Warren Buffett had a nice discussion on his arbitrage experience with Arcata Corp in the 1980’s in his 1988 letter to Berkshire Hathaway shareholders.
"To evaluate arbitrage situations you must answer four questions:
(1) How likely is it that the promised event will indeed occur?
(2) How long will your money be tied up?
(3) What chance is there that something still better will transpire - a competing takeover bid, for example?
(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?"
The big news yesterday was Merck’s multi billion-dollar deal to acquire Schering-Plough. For each share of Schering, shareholders will receive 0.5767 shares in the new company plus $10.50 in cash. Merck will use $9.8 billion of its own cash for the purchase plus $8.5 billion in short-term financing. The companies expect the deal to close in the fourth quarter of this year, subject to regulatory approval.
The merger is subject to shareholder approval from both companies. The FTC would have to review the deal for overlap in drugs and other products in development or currently sold by Merck and Schering-Plough. The FTC could also force the companies to sell some products before a green light for the merger is given.
Another stumbling block might be the arthritis drugs Remicade and golimumab, for which Schering-Plough acquired the rights to sell it internationally from Johnson and Johnson. Under "change of control" clauses in the companies' partnership agreements, J&J has the opportunity to acquire the full rights to the drugs if Schering-Plough gets taken over. That's why the deal is structured as a reverse merger, where Schering-Plough will be the surviving company under the Merck name.
Investors who believe that the merger will go through could profit by purchasing Schering-Plough shares and selling short 57.67 MRK shares for every 100 SGP shares bought. At the current prices for Merck (MRK) and Schering (SGP), which yesterday closed at 20.99 and 20.13 respectively, investors could earn a 12.30% return by the end of the year through this arbitrage opportunity.
Another pharma arbitrage play to watch is Pfizer/Wyeth Merger Arbitrage Opportunity. Pfizer (PFE) will pay $33 in cash plus 0.985 shares of Pfizer stocks for each share of Wyeth (WYE). On Monday Wyeth closed at $40.76, which is 10.30% lower than the combination of Pfizer stock and cash, at the current price for Pfizer at $12.63.
In a document filed with the SEC several reasons why the Pfizer/Wyeth Merger Arbitrage Opportunity might not go through were listed:
“ There is the possibility that the merger does not close, including, but not limited to, due to the failure to satisfy the closing conditions; Pfizer's and Wyeth's ability to accurately predict future market conditions; dependence on the effectiveness of Pfizer's and Wyeth's patents and other protections for innovative products; the risk of new and changing regulation and health policies in the U.S. and internationally and the exposure to litigation and/or regulatory actions. the ability to obtain governmental and self-regulatory organization approvals of the merger on the proposed terms and schedule; the failure of Wyeth stockholders to approve the merger”
It would also be interesting to see if Merck (MRK) will continue paying its current rich dividend to shareholders and won’t cut it, which was what Pfizer (PFE) did when its merger with Wyeth (WYE) was announced.
Full Disclosure: None
Relevant Articles:
- Pfizer/Wyeth Merger Arbitrage Opportunity
- Is Pfizer (PFE) a value trap for investors?
- Dow Chemical (DOW) To Acquire Rohm and Haas (ROH)
- Anheuser-Busch (BUD) Deal Finalized
Monday, March 9, 2009
Another day, another dividend cut
Capital One Financial Corporation (COF) is the latest financial company to cut its dividend. Capital One decreased its quarterly payment to $0.05/share from $0.375 in an effort to preserve more than $500 million in capital annually.
Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer said "We're moving today to reduce future dividends because in today's unprecedented economic and market conditions, our highest priority is managing our balance sheet to maintain its considerable strength and resilience. In addition, our ongoing dialogue with investors indicates that they value strong capital positions over dividend streams at this point in the cycle. Today's announced action is one of the most efficient ways to support capital levels in the current environment. The capital we preserve through the reduced dividend will reinforce our already-strong capital position, increase our flexibility to manage through the downturn, and enhance our ability to repay the U.S. Treasury Department's preferred stock investment as soon as it is prudent and appropriate to do so. When the economy recovers, we expect that returning capital to shareholders will once again be a key part of how we deliver value over the long-term."
The problem with Capital One however is that it was never a true dividend growth stock. It pretty much paid the same quarterly dividend of $0.0267 for 13 years. Then in January 2008 the company increased its dividend to $0.375 and initiated a $2 billion stock buyback program. Investors.
Because Capital One never had any record of consistently increasing dividends, I doubt that any dividend growth investors suffered as a result. The company that charges exorbitant rates to credit card holders should have rewarded shareholders better by sharing its prosperity through consistent dividend increases. The current dividend payment is still twice the size of the dividend payment in place over the whole 1995- 2007 period. I would not have been a holder of this stock as it never raised its dividend consistently even for ten years, unlike Citigroup, Bank of America, US Bancorp and Wells Fargo. Nevertheless I would consider selling Capital One (COF) shares as one never knows when their equity would be diluted by TARP preferred shares that the government owns. In November, 2008, Capital One Financial Corporation was the recipient of $3,555,199,000.00 of the Emergency Economic Stabilization Act Federal bail-out in the form of a preferred stock purchase.
If you still hold any financial shares and hope to generate dividends from them, check out whether your company that you own shares is on the TARP recipient list. If it is, chances are it will cut or suspend its dividend to you the shareholder. The typical excuses used by CEO’s are that this would make the company stronger and maintain its liquidity, or that would enable the company to repay the TARP money back. The best comment is that once the situation stabilizes, the dividend would once again become a priority.
Full Disclosure: None
Relevant Articles:
- When to sell my dividend stocks?
- TARP is bad for dividend investors
- Dividend Cuts - the worst nightmare for dividend investors.
- Wells Fargo Joins the Crowd of Dividend Cutters
Richard D. Fairbank, Capital One's Chairman and Chief Executive Officer said "We're moving today to reduce future dividends because in today's unprecedented economic and market conditions, our highest priority is managing our balance sheet to maintain its considerable strength and resilience. In addition, our ongoing dialogue with investors indicates that they value strong capital positions over dividend streams at this point in the cycle. Today's announced action is one of the most efficient ways to support capital levels in the current environment. The capital we preserve through the reduced dividend will reinforce our already-strong capital position, increase our flexibility to manage through the downturn, and enhance our ability to repay the U.S. Treasury Department's preferred stock investment as soon as it is prudent and appropriate to do so. When the economy recovers, we expect that returning capital to shareholders will once again be a key part of how we deliver value over the long-term."
The problem with Capital One however is that it was never a true dividend growth stock. It pretty much paid the same quarterly dividend of $0.0267 for 13 years. Then in January 2008 the company increased its dividend to $0.375 and initiated a $2 billion stock buyback program. Investors.
Because Capital One never had any record of consistently increasing dividends, I doubt that any dividend growth investors suffered as a result. The company that charges exorbitant rates to credit card holders should have rewarded shareholders better by sharing its prosperity through consistent dividend increases. The current dividend payment is still twice the size of the dividend payment in place over the whole 1995- 2007 period. I would not have been a holder of this stock as it never raised its dividend consistently even for ten years, unlike Citigroup, Bank of America, US Bancorp and Wells Fargo. Nevertheless I would consider selling Capital One (COF) shares as one never knows when their equity would be diluted by TARP preferred shares that the government owns. In November, 2008, Capital One Financial Corporation was the recipient of $3,555,199,000.00 of the Emergency Economic Stabilization Act Federal bail-out in the form of a preferred stock purchase.
If you still hold any financial shares and hope to generate dividends from them, check out whether your company that you own shares is on the TARP recipient list. If it is, chances are it will cut or suspend its dividend to you the shareholder. The typical excuses used by CEO’s are that this would make the company stronger and maintain its liquidity, or that would enable the company to repay the TARP money back. The best comment is that once the situation stabilizes, the dividend would once again become a priority.
Full Disclosure: None
Relevant Articles:
- When to sell my dividend stocks?
- TARP is bad for dividend investors
- Dividend Cuts - the worst nightmare for dividend investors.
- Wells Fargo Joins the Crowd of Dividend Cutters
Government Intervention in the financial system is bad for shareholders
Over the weekend the British government announced that it was increasing its stake in UK bank Lloyds TSB (LYG) to 65% and possibly 77% in return for insuring over 367 billion dollars in toxic assets. The government will do that by converting some of its preferred shares in the bank into common. As part of the agreement, the bank will take a "first loss" of up to 25 billion pounds, with the U.K. government shouldering 90% of any subsequent loss.
Lloyds was one of the most conservative lenders in the UK which didn’t have as much exposure to toxic assets until it acquired troubled bank HBOS back in September 2008. The way events unfolded back in September and October when banks worldwide were acquired shows that virtually no due diligence was made given the tight deadlines for the deals to materialize.
Eighty percent of the toxic assets came from HBOS, which Lloyds agreed to buy in a government-brokered deal in September 2008. HBOS reported $14 billion of loan losses last year, up fivefold from 2007.
Because of the losses from HBOS acquisition, Lloyds has been forced to seek asset protection program. While the stability of the banking system might be ensured with this deal, shareholders of any banks are being diluted across the board. Even banks that didn’t take excessive risks during the boom years are suffering, as they are merging with competitors who held the majority of bad assets. This leads the acquirers to seek government assistance and cut dividends to maintain liquidity. This hits shareholders two folds – first their ownership is diluted and second their dividends are cut or eliminated.
A similar picture is being painted in the US as well, as the government recently converted a large portion of its preferred stock into common at Citigroup (C), raising its stake to 36% of the company by converting $25 billion in TARP emergency aid into commons shares.
Bank of America (BAC) might be largest casualty of the mortgage crisis. It completed its purchase of troubled mortgage company Country Wide Financial for $4.1 billion in July 2008. BAC also bought Merrill Lynch for a $50 billion in BAC stock. The bailout of Merrill Lynch was needed, as the company had an operating loss of $21.5 billion for the last quarter of 2008. Bank of America also disclosed it tried to abandon the deal in December after the extent of Merrill's trading losses surfaced, but was compelled to complete the merger by the U.S. government. Bank of America received $20 billion from the US government through the TARP program in addition to a guaranee of $118 billion in potential losses in January. That was in addition to the first $25 billion dollars that the bank received through the Troubled Assets Relief Program back in October 2008. In the meantime Bank of America (BAC) has cut its dividend twice. Our blog warned readers that BAC’s dividend was not well covered back in July 2008. We also warned about the second dividend cut in January as well.
Other banks, which might have been forced, into buying troubled companies include Wells Fargo (WFC), which acquired Wachovia (WB) several months ago. As a result Wells Fargo (WFC) took on $25 billion from TARP and reduced its dividend by 88% in an effort to maintain liquidity.
JP Morgan Chase (JPM) acquired troubled investment bank Bear Stearns backing June. Bear was one of the first victims of the sub-prime fiasco. Its problem two funds in the summer of 2007 were some of the first triggers that send shockwaves to markets worldwide, signaling he start of the bear market. In October 2008 JPM also took $25 billion in preferred stock from the treasury. Most recently it cut its quarterly dividend by 87%, from $0.38 to $0.05. Chief Executive Jamie Dimon said the cut was a precaution to ensure that the company has financial flexibility if economic conditions worsen. The move will save the company about $5 billion annually.
Shareholders who are still holding on to Bank of America, Wells Fargo and JP Morgan stock and hoping that once the crisis is over these stocks would go up, should be very careful in their analysis. If the US government initiated the next step in the TARP program and starts increasing its stakes in major US financial institutions this would dilute existing shareholders equity. In this situation $1 would be the upside target for most shares of US financial institutions.
Full Disclosure: None
Relevant Articles:
- TARP is bad for dividend investors
- Bank of America (BAC) Dividend Analysis
- Bank of America (BAC) might have to cut dividends again
- Wells Fargo Joins the Crowd of Dividend Cutters
Lloyds was one of the most conservative lenders in the UK which didn’t have as much exposure to toxic assets until it acquired troubled bank HBOS back in September 2008. The way events unfolded back in September and October when banks worldwide were acquired shows that virtually no due diligence was made given the tight deadlines for the deals to materialize.
Eighty percent of the toxic assets came from HBOS, which Lloyds agreed to buy in a government-brokered deal in September 2008. HBOS reported $14 billion of loan losses last year, up fivefold from 2007.
Because of the losses from HBOS acquisition, Lloyds has been forced to seek asset protection program. While the stability of the banking system might be ensured with this deal, shareholders of any banks are being diluted across the board. Even banks that didn’t take excessive risks during the boom years are suffering, as they are merging with competitors who held the majority of bad assets. This leads the acquirers to seek government assistance and cut dividends to maintain liquidity. This hits shareholders two folds – first their ownership is diluted and second their dividends are cut or eliminated.
A similar picture is being painted in the US as well, as the government recently converted a large portion of its preferred stock into common at Citigroup (C), raising its stake to 36% of the company by converting $25 billion in TARP emergency aid into commons shares.
Bank of America (BAC) might be largest casualty of the mortgage crisis. It completed its purchase of troubled mortgage company Country Wide Financial for $4.1 billion in July 2008. BAC also bought Merrill Lynch for a $50 billion in BAC stock. The bailout of Merrill Lynch was needed, as the company had an operating loss of $21.5 billion for the last quarter of 2008. Bank of America also disclosed it tried to abandon the deal in December after the extent of Merrill's trading losses surfaced, but was compelled to complete the merger by the U.S. government. Bank of America received $20 billion from the US government through the TARP program in addition to a guaranee of $118 billion in potential losses in January. That was in addition to the first $25 billion dollars that the bank received through the Troubled Assets Relief Program back in October 2008. In the meantime Bank of America (BAC) has cut its dividend twice. Our blog warned readers that BAC’s dividend was not well covered back in July 2008. We also warned about the second dividend cut in January as well.
Other banks, which might have been forced, into buying troubled companies include Wells Fargo (WFC), which acquired Wachovia (WB) several months ago. As a result Wells Fargo (WFC) took on $25 billion from TARP and reduced its dividend by 88% in an effort to maintain liquidity.
JP Morgan Chase (JPM) acquired troubled investment bank Bear Stearns backing June. Bear was one of the first victims of the sub-prime fiasco. Its problem two funds in the summer of 2007 were some of the first triggers that send shockwaves to markets worldwide, signaling he start of the bear market. In October 2008 JPM also took $25 billion in preferred stock from the treasury. Most recently it cut its quarterly dividend by 87%, from $0.38 to $0.05. Chief Executive Jamie Dimon said the cut was a precaution to ensure that the company has financial flexibility if economic conditions worsen. The move will save the company about $5 billion annually.
Shareholders who are still holding on to Bank of America, Wells Fargo and JP Morgan stock and hoping that once the crisis is over these stocks would go up, should be very careful in their analysis. If the US government initiated the next step in the TARP program and starts increasing its stakes in major US financial institutions this would dilute existing shareholders equity. In this situation $1 would be the upside target for most shares of US financial institutions.
Full Disclosure: None
Relevant Articles:
- TARP is bad for dividend investors
- Bank of America (BAC) Dividend Analysis
- Bank of America (BAC) might have to cut dividends again
- Wells Fargo Joins the Crowd of Dividend Cutters
Sunday, March 8, 2009
10 Links to Enjoy This Weekend
I will start another regular blog post on weekends in addition to my columns on dividend raisers for the week, stock analysis and education that I write. It will be featuring the best ten investing articles on the net that I have found and truly enjoyed. If you found an article that you enjoyed and learned a lot from, please do not hesitate to send it my way.My e-mail is dividendgrowthinvestor at gmail dot com.
Here is the list of the ten articles I enjoyed this week:
Canadian Capitalist posted about another way for dividend growth investors to compound their dividends in “DRIP discounts from BMO and RY”.
Saving to Invest informed us that the real unemployment rate will rapidly move from a recession to a depression in Week in Review: 15% - America's Real Unemployment Rate
Four Pillars informed us that GE’s dividend cut was first since 1938. It is interesting to note that GE stock is down almost 20% from the dividend cut announcement last Friday.
Dividendsvalue provided an interesting insight about financial companies and TARP in TARP Trips: You Can’t Stop At Just One.
Triaging My Way To Financial Success blog posted about General Motors in The Ultimate Value Trap – Bankruptcy Needed. It is pretty sad for shareholders that GM stock is trading at levels since 1933.
Buffetts Letter to Shareholders was big hit and was analysed by bloggers. Check out Fat Pitch Financials analysis of the event in Warren Buffett’s 2008 Letter to Shareholders.
Stocks are getting cheaper these days. Some are even trading below cash. Shadow Stock blog gives us a list of Four Net Cash Bargains.
The Dividend Guy Blog expects lower Future Stock Market Returns than the 10% average we have all learned to expect.
Dividend Cuts and Suspensions are a Natural Characteristics of Economic Cycle according to Dividend Tree.
MyMoneyBlog gives an interesting overview of a strategy called The Permanent Portfolio Asset Allocation.
Here is the list of the ten articles I enjoyed this week:
Canadian Capitalist posted about another way for dividend growth investors to compound their dividends in “DRIP discounts from BMO and RY”.
Saving to Invest informed us that the real unemployment rate will rapidly move from a recession to a depression in Week in Review: 15% - America's Real Unemployment Rate
Four Pillars informed us that GE’s dividend cut was first since 1938. It is interesting to note that GE stock is down almost 20% from the dividend cut announcement last Friday.
Dividendsvalue provided an interesting insight about financial companies and TARP in TARP Trips: You Can’t Stop At Just One.
Triaging My Way To Financial Success blog posted about General Motors in The Ultimate Value Trap – Bankruptcy Needed. It is pretty sad for shareholders that GM stock is trading at levels since 1933.
Buffetts Letter to Shareholders was big hit and was analysed by bloggers. Check out Fat Pitch Financials analysis of the event in Warren Buffett’s 2008 Letter to Shareholders.
Stocks are getting cheaper these days. Some are even trading below cash. Shadow Stock blog gives us a list of Four Net Cash Bargains.
The Dividend Guy Blog expects lower Future Stock Market Returns than the 10% average we have all learned to expect.
Dividend Cuts and Suspensions are a Natural Characteristics of Economic Cycle according to Dividend Tree.
MyMoneyBlog gives an interesting overview of a strategy called The Permanent Portfolio Asset Allocation.
Saturday, March 7, 2009
Seven Solid Dividend Increases bucking the trend of dividend cuts
Last week marked one of the worst times for dividend investors as several prominent companies cut their dividends significantly. The last bastion of companies standing, which were paying dividends such as US Bancorp and Wells Fargo, disappointed their shareholders with dividend cuts. In addition to that markets fell to fresh 12-year lows.
However there were several notable dividend increases from a few solid investor focused stocks. Companies that still continue raising their dividends show that they have enough cash flows to not only operate successfully but also appear relatively immune to overall disruptions in the economy.
Wal-Mart (WMT), which operates the largest chain of retail stores in various formats worldwide, announced that its Board has approved a 15% increase in its quarterly dividend to $0.2725 per share. CEO Mike Duke said, "The strength of our operations and the resulting strong financial position allow us to increase our dividend payout to shareholders again this year. Our free cash flow remains strong enough to fund Wal-Mart's growth around the world, make strategic acquisitions and fund returns to shareholders through dividends and share repurchases."
Wal-Mart is a dividend aristocrat, which has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 1.90%. Check out my analysis of Wal-Mart.
WGL Holdings (WGL), which engages in the delivery and sale of natural gas, and provides energy-related products and services, announced that its Board has approved an increase in its quarterly dividend from $0.355 to $0.3675 per common share. WGL Holdings is a dividend champion, which has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 4.70%.
Qualcomm (QCOM), which designs, manufactures, and markets digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology and other technologies, announced that its Board has approved a 6% increase in its quarterly dividend from $0.16 to $0.17 per common share. Qualcomm has consistently increased its dividends for six consecutive years. The stock currently yields 1.90%.
General Dynamics (GD), which provides business aviation; combat vehicles, weapons systems, and munitions; shipbuilding design and construction; and information systems, technologies, and services, announced that its Board has approved an 8.60% increase in its quarterly dividend from $0.35 to $0.38 per share. General Dynamics has consistently increased its dividends for fifteen consecutive years. The stock currently yields 3.20%.
Piedmont Natural Gas (PNY), which engages in the distribution of natural gas to residential, commercial, industrial, and power generation customers, announced that its Board has approved a 3.80% increase in its quarterly dividend from $0.26 to $0.27 per share. Piedmont Natural Gas is a dividend champion, which has consistently increased its dividends for thirty-one consecutive years. The stock currently yields 4.30%.
Essex Property Trust (ESS), which engages in the ownership, operation, management, acquisition, development, and redevelopment of apartment communities, announced that its Board has approved a small increase in its quarterly dividend from $1.02 to $1.03 per share. Essex Property Trust is a dividend achiever, which has consistently increased its dividends for fourteen consecutive years. This real estate investment trust currently yields 7.50%.
Canadian Natural Resources Limited (CNQ), which engages in the acquisition, exploration, development, production, marketing, and sale of crude oil, natural gas liquids, natural gas, and bitumen, announced that its Board has approved 5% increase in its quarterly dividend from $0.10 to $0.105 per share. Canadian Natural Resources Limited is an international dividend achiever, which has consistently increased its dividends since 2001. The stock currently yields 1.00%.
The latest list of solid dividend raisers proves that income investors should seek to invest in companies with business models that are not cyclical. Companies which have a moat in a certain geographical area, industry or product should do fine irrespective of the overall gyrations of the economy and the stock market. It is companies like these that could generate increasing streams of income, which dividend growth investors are after.
Full Disclosure: Long WMT
Relevant Articles:
- Wal-Mart Dividend Analysis
- Dividend Aristocrats List for 2009
- The Dividend Edge
- Best Dividends Stocks for the Long Run
However there were several notable dividend increases from a few solid investor focused stocks. Companies that still continue raising their dividends show that they have enough cash flows to not only operate successfully but also appear relatively immune to overall disruptions in the economy.
Wal-Mart (WMT), which operates the largest chain of retail stores in various formats worldwide, announced that its Board has approved a 15% increase in its quarterly dividend to $0.2725 per share. CEO Mike Duke said, "The strength of our operations and the resulting strong financial position allow us to increase our dividend payout to shareholders again this year. Our free cash flow remains strong enough to fund Wal-Mart's growth around the world, make strategic acquisitions and fund returns to shareholders through dividends and share repurchases."
Wal-Mart is a dividend aristocrat, which has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 1.90%. Check out my analysis of Wal-Mart.
WGL Holdings (WGL), which engages in the delivery and sale of natural gas, and provides energy-related products and services, announced that its Board has approved an increase in its quarterly dividend from $0.355 to $0.3675 per common share. WGL Holdings is a dividend champion, which has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 4.70%.
Qualcomm (QCOM), which designs, manufactures, and markets digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology and other technologies, announced that its Board has approved a 6% increase in its quarterly dividend from $0.16 to $0.17 per common share. Qualcomm has consistently increased its dividends for six consecutive years. The stock currently yields 1.90%.
General Dynamics (GD), which provides business aviation; combat vehicles, weapons systems, and munitions; shipbuilding design and construction; and information systems, technologies, and services, announced that its Board has approved an 8.60% increase in its quarterly dividend from $0.35 to $0.38 per share. General Dynamics has consistently increased its dividends for fifteen consecutive years. The stock currently yields 3.20%.
Piedmont Natural Gas (PNY), which engages in the distribution of natural gas to residential, commercial, industrial, and power generation customers, announced that its Board has approved a 3.80% increase in its quarterly dividend from $0.26 to $0.27 per share. Piedmont Natural Gas is a dividend champion, which has consistently increased its dividends for thirty-one consecutive years. The stock currently yields 4.30%.
Essex Property Trust (ESS), which engages in the ownership, operation, management, acquisition, development, and redevelopment of apartment communities, announced that its Board has approved a small increase in its quarterly dividend from $1.02 to $1.03 per share. Essex Property Trust is a dividend achiever, which has consistently increased its dividends for fourteen consecutive years. This real estate investment trust currently yields 7.50%.
Canadian Natural Resources Limited (CNQ), which engages in the acquisition, exploration, development, production, marketing, and sale of crude oil, natural gas liquids, natural gas, and bitumen, announced that its Board has approved 5% increase in its quarterly dividend from $0.10 to $0.105 per share. Canadian Natural Resources Limited is an international dividend achiever, which has consistently increased its dividends since 2001. The stock currently yields 1.00%.
The latest list of solid dividend raisers proves that income investors should seek to invest in companies with business models that are not cyclical. Companies which have a moat in a certain geographical area, industry or product should do fine irrespective of the overall gyrations of the economy and the stock market. It is companies like these that could generate increasing streams of income, which dividend growth investors are after.
Full Disclosure: Long WMT
Relevant Articles:
- Wal-Mart Dividend Analysis
- Dividend Aristocrats List for 2009
- The Dividend Edge
- Best Dividends Stocks for the Long Run
Friday, March 6, 2009
Wells Fargo Joins the Crowd of Dividend Cutters
Wells Fargo was yet another financial company to cut dividends today. Dividend Growth Investor readers have been warned about this one in January and as late as this Wednesday. The company’s board of directors cut the payment to 0.05/share from 0.34 in an effort to retain $5 billion annually. The statement by the president and CEO of Wells Fargo is pretty interesting to read:
“This was a very difficult decision but it’s absolutely right for our Company and our shareholders because it will further strengthen our ability to grow market share and to continue our long track record of profitable growth,” said President and CEO John Stumpf. “We will return to a more normalized dividend level as soon as practical. We have among the most loyal shareholders in America – individuals and institutions alike – and we’ve always recognized the value of dividends. Operating results for the first two months of the year are strong. Our ability to grow market share in this environment and to benefit from new business opportunities remains second to none. Our merger with Wachovia is on track and we remain as optimistic as ever about its potential benefits for all our stakeholders.”
The company’s dividend cut marks the end of a brutal week for dividend cuts in the financial sector, which started with PNC cutting its dividend early in the week. After that it was HSBC (HBC), which also announced plans to raise $17.70 billion from shareholders through a rights issue. US Bancorp (USB) was next by cutting dividends by 88%. Wells Fargo’s statement is another slap in the face for shareholders, as the company, just like US Bancorp, announced that it could afford the current dividend, but chooses not to in order to bolster its balance sheet and take advantage of opportunities.
WFC was one of the first companies to receive bailout funds from the Troubled Assets Relief Program. This dividend achiever has increased dividends for 20 consecutive years. The previous dividend of $0.34/share was well covered by earnings. Despite the rally in the shares, I would consider seling into strength. One could never tell if the company needed to cut the dividend or cut it because it knew it could get away with it.
Financial stocks used to be great dividend investments, but not anymore.As a result of all the dividend cuts in the financial sector, dividend growth investors that sold after the dividend cuts are now underweight financials. I am beginning to wonder if dividend investors’ long-term results would suffer in the event that financial stocks experience a rapid recovery once the current recession is over. Both US Bancorp (USB) and Wells Fargo (WFC) have expressed confidence in their ability to increase dividend in the future. I would continue monitoring the activity in the financial sector and look for dividend increases there over the next few years.
Full Disclosure: None
Relevant Articles:
- Can USB and WFC maintain their current dividends?
- TARP is bad for dividend investors
- US Bancorp (USB) cuts its dividend by 88%
- Yet Another Financial Company Cutting Dividends
“This was a very difficult decision but it’s absolutely right for our Company and our shareholders because it will further strengthen our ability to grow market share and to continue our long track record of profitable growth,” said President and CEO John Stumpf. “We will return to a more normalized dividend level as soon as practical. We have among the most loyal shareholders in America – individuals and institutions alike – and we’ve always recognized the value of dividends. Operating results for the first two months of the year are strong. Our ability to grow market share in this environment and to benefit from new business opportunities remains second to none. Our merger with Wachovia is on track and we remain as optimistic as ever about its potential benefits for all our stakeholders.”
The company’s dividend cut marks the end of a brutal week for dividend cuts in the financial sector, which started with PNC cutting its dividend early in the week. After that it was HSBC (HBC), which also announced plans to raise $17.70 billion from shareholders through a rights issue. US Bancorp (USB) was next by cutting dividends by 88%. Wells Fargo’s statement is another slap in the face for shareholders, as the company, just like US Bancorp, announced that it could afford the current dividend, but chooses not to in order to bolster its balance sheet and take advantage of opportunities.
WFC was one of the first companies to receive bailout funds from the Troubled Assets Relief Program. This dividend achiever has increased dividends for 20 consecutive years. The previous dividend of $0.34/share was well covered by earnings. Despite the rally in the shares, I would consider seling into strength. One could never tell if the company needed to cut the dividend or cut it because it knew it could get away with it.
Financial stocks used to be great dividend investments, but not anymore.As a result of all the dividend cuts in the financial sector, dividend growth investors that sold after the dividend cuts are now underweight financials. I am beginning to wonder if dividend investors’ long-term results would suffer in the event that financial stocks experience a rapid recovery once the current recession is over. Both US Bancorp (USB) and Wells Fargo (WFC) have expressed confidence in their ability to increase dividend in the future. I would continue monitoring the activity in the financial sector and look for dividend increases there over the next few years.
Full Disclosure: None
Relevant Articles:
- Can USB and WFC maintain their current dividends?
- TARP is bad for dividend investors
- US Bancorp (USB) cuts its dividend by 88%
- Yet Another Financial Company Cutting Dividends
Johnson & Johnson (JNJ) Dividend Stock Analysis
This article originally appeared on The DIV-Net one week ago.
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide.
Johnson & Johnson is a major component of the S&P 500, Dow Industrials and the Dividend Aristocrats Indexes. One of the company’s largest shareholders includes Warren Buffett. JNJ has been consistently increasing its dividends for 46 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a 5.60% annual average total return to its shareholders.
At the same time company has managed to deliver a 13.40% average annual increase in its EPS since 1999.
The ROE has remained largely between 20% and 30%.
Annual dividend payments have increased by an average of 14.10% annually since 1999, which is much higher than the growth in EPS. Analysts are expecting flat EPS for 2009 compared to 2008, given the state of the economy and the erosion of market share by certain products losing patent protection. The strong US dollar could potentially hurt sales, as over 50% of Johnson & Johnson’s revenues are derived internationally.
A 14% growth in dividends translates into the dividend payment doubling almost every five years. Since 1974 JNJ has indeed managed to double its dividend payment almost every 5 years.
The dividend payout has remained in a range between 35% and 45%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
JNJ is attractively valued. The stock trades at a price/earnings multiple of 12, has a low DPR and the current dividend yield is the 3% minimum threshold that I have set.
I do not see the recent reduction in Berkshire Hathaway’s stake in JNJ as a negative. Buffett has sold at the wrong time before as well. Furthermore he could afford to invest his proceeds in preferred shares with warrants, which deliver him 10%-15% dividend yields.
Full Disclosure: Long JNJ
Relevant Articles:
- IBM Dividend Stock Analysis
- Microsoft (MSFT) Dividend Stock Analysis
- Procter & Gamble (PG) Dividend Stock Analysis
- Taking Stock in Coca-Cola (KO):
Thursday, March 5, 2009
Telling the truth or being positive?
Intelligent Speculator is a blog about investing, news and comments about the markets and the relevant news. It also supplies users with free stock picks that will hopefully help you get ahead. You can visit the blog at IntelligentSpeculator.net.
It is always quite a dilemma isn’t it? No matter if you are a politician or a company executive, you are faced with this crucial decision once things start to go wrong. Which one? Telling the truth or painting a more interesting picture of the situation. So you think this is an obvious choice? Not so I would say.
I always find it interesting that citizens think it is always in our best interest to tell the truth about the financial situation. Of course in theory it sounds so obvious. But there are so many examples. Take General Motors (GM). I think every single planet in North America (and many other parts of the world) know they are in a major danger of going bankrupt and that they need a massive intervention by the US Federal Government. Will it happen? Who knows really? But if you are buying a car, don’t you think that could come into play when deciding about buying one brand as opposed to another? Wouldn’t you think for a second that you might have more problems with your warranty for example? And so it does become self-fulfilling in a way. GM is in trouble, it announced to everyone that it could face bankruptcy without help. Because of that, the few that are buying cars right now are mostly staying away from GM creating an even bigger problem for the executives and the government. How long can it go? Probably not very long unless the government takes out the uncertainty about what will happen in GM’s future. Want numbers? Toyota has suffered a 32% decrease in sales this January in the US market. Terrible isn’t it? But GM has suffered an even bigger loss with a number about 50% lower than in 2008!!! Let’s not remember that in the US, GM and Toyota (TM) have a similar market share.
I think the same applies to financial markets in general. We all know that we rely on a system based on trust. Trust that the US dollar and other currencies is worth something. Trust that the government will provide services but also trust that our banks, despite having very little liquid assets, will be able to provide liquidity when needed. But with the banking crisis that has been ongoing for over a year now, it is that exact confidence that is under attack. What would happen if consumers started doubting that their banks could give them back their money? Sure, the FDIC insures deposits in the US, but we all know it is in theory possible for the FDIC and the entire system to collapse.
And so the US government had a tough challenge in my opinion. On one hand, you do not want to worry the citizens or generate any panic that could become self-fulfilling, but on the other hand, how do you convince citizens that Wall Street requires a $800 billions bail-out if you do not explain how dire and serious the situation is? Probably the best way is the one that has just happened. Bring in a president that inspires so much confidence that citizens will trust him when he tells them it is necessary and that it must pass. That is probably the best thing that could have happened and probably the way it should be.
Ask for answers and explanations, but always know that it is potentially better to have Americans not waking up to news about a possible system collapse. We’ll never know for sure what happened but when Lehman Brothers and a few others collapsed, a major part of it was rumors about their liquidity problems generating margin calls that in turn created more liquidity issues, and so on… do we really want to risk that happening with an entire system?
Relevant Articles:
- The future for US Auto Stocks
- Taking Stock in Coca-Cola (KO):
- Dividend Yields for major US indexes
- The Demise of the Newspaper Industry
It is always quite a dilemma isn’t it? No matter if you are a politician or a company executive, you are faced with this crucial decision once things start to go wrong. Which one? Telling the truth or painting a more interesting picture of the situation. So you think this is an obvious choice? Not so I would say.
I always find it interesting that citizens think it is always in our best interest to tell the truth about the financial situation. Of course in theory it sounds so obvious. But there are so many examples. Take General Motors (GM). I think every single planet in North America (and many other parts of the world) know they are in a major danger of going bankrupt and that they need a massive intervention by the US Federal Government. Will it happen? Who knows really? But if you are buying a car, don’t you think that could come into play when deciding about buying one brand as opposed to another? Wouldn’t you think for a second that you might have more problems with your warranty for example? And so it does become self-fulfilling in a way. GM is in trouble, it announced to everyone that it could face bankruptcy without help. Because of that, the few that are buying cars right now are mostly staying away from GM creating an even bigger problem for the executives and the government. How long can it go? Probably not very long unless the government takes out the uncertainty about what will happen in GM’s future. Want numbers? Toyota has suffered a 32% decrease in sales this January in the US market. Terrible isn’t it? But GM has suffered an even bigger loss with a number about 50% lower than in 2008!!! Let’s not remember that in the US, GM and Toyota (TM) have a similar market share.
I think the same applies to financial markets in general. We all know that we rely on a system based on trust. Trust that the US dollar and other currencies is worth something. Trust that the government will provide services but also trust that our banks, despite having very little liquid assets, will be able to provide liquidity when needed. But with the banking crisis that has been ongoing for over a year now, it is that exact confidence that is under attack. What would happen if consumers started doubting that their banks could give them back their money? Sure, the FDIC insures deposits in the US, but we all know it is in theory possible for the FDIC and the entire system to collapse.
And so the US government had a tough challenge in my opinion. On one hand, you do not want to worry the citizens or generate any panic that could become self-fulfilling, but on the other hand, how do you convince citizens that Wall Street requires a $800 billions bail-out if you do not explain how dire and serious the situation is? Probably the best way is the one that has just happened. Bring in a president that inspires so much confidence that citizens will trust him when he tells them it is necessary and that it must pass. That is probably the best thing that could have happened and probably the way it should be.
Ask for answers and explanations, but always know that it is potentially better to have Americans not waking up to news about a possible system collapse. We’ll never know for sure what happened but when Lehman Brothers and a few others collapsed, a major part of it was rumors about their liquidity problems generating margin calls that in turn created more liquidity issues, and so on… do we really want to risk that happening with an entire system?
Relevant Articles:
- The future for US Auto Stocks
- Taking Stock in Coca-Cola (KO):
- Dividend Yields for major US indexes
- The Demise of the Newspaper Industry
Wednesday, March 4, 2009
US Bancorp (USB) cuts its dividend by 88%
It’s official – the board of directors cut the quarterly dividends by 88% to $0.05/share. This follows recent dividend cuts from JP Morgan(JPM) and PNC Financial (PNC), which cut their quarterly dividends by 87% and 85% respectively in an effort to conserve cash.
US Bancorp CEO said the following: "The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders. It was, however, the right decision, as our industry continues to confront uncertainty in the financial markets and a weakening economy. It is important for our shareholders to know that we are not reducing the dividend and preserving capital from a position of weakness, but from a position of strength and a desire to continue to invest in and expand our business. We are benefiting from a flight to quality as we continue to lend, acquire deposits and grow our fee-based businesses. In addition, we are investing in our franchise and employees, positively impacting our customers and the communities we serve. A strong capital position is essential to manage, grow and prosper in this challenging environment. Our company's capital position is solid, evidenced by a Tier 1 capital ratio of 10.6 percent at December 31, 2008.”
The company also announced that it would be reinstating its dividends whenever the economic picture stabilizes. This decision would save the Minneapolis based bank approximately $2.6 billion dollars annually.
The move wasn’t surprising since USB couldn’t cover its previous payment of $0.425 for the last two quarters. In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years. The latest move lead US Bancorp losing its dividend aristocrat status. In my analysis of US Bancorp (USB) back in April 2008 i warned that the high dividend payout ratio is a warning sign that dividend growth might be less spectacular in the future.
I don’t own any USB stock but if I did, I would be a seller on this mornings open. One could never tell if the worst for financials is over. US Banks have collectively shown that if they find a way to avoid sharing profits with their shareholders, they would cut or suspend dividend payments. Once again the lesson learned for investors is to never chase high yielding stocks which do not have a good enough coverage of their current dividend payment. In addition to that, concentrating the majority of one’s dividend income portfolio in one or two sectors such as financials or utilities is a recipe for disaster.
Of all the major banks, Wells Fargo (WFC) is also rumored to be the next to cut its dividends. It fits the profile of a dividend cutter perfectly - it has already received billions in TARP money.
Full Disclosure: None
Relevant Articles:
- Can USB and WFC maintain their current dividends?
- USB Dividend Analysis
- TARP is bad for dividend investors
- Don’t chase High Yielding Stocks Blindly
US Bancorp CEO said the following: "The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders. It was, however, the right decision, as our industry continues to confront uncertainty in the financial markets and a weakening economy. It is important for our shareholders to know that we are not reducing the dividend and preserving capital from a position of weakness, but from a position of strength and a desire to continue to invest in and expand our business. We are benefiting from a flight to quality as we continue to lend, acquire deposits and grow our fee-based businesses. In addition, we are investing in our franchise and employees, positively impacting our customers and the communities we serve. A strong capital position is essential to manage, grow and prosper in this challenging environment. Our company's capital position is solid, evidenced by a Tier 1 capital ratio of 10.6 percent at December 31, 2008.”
The company also announced that it would be reinstating its dividends whenever the economic picture stabilizes. This decision would save the Minneapolis based bank approximately $2.6 billion dollars annually.
The move wasn’t surprising since USB couldn’t cover its previous payment of $0.425 for the last two quarters. In November, USB received $6.6 billion from TARP. In December the bank failed to increase its dividend to shareholders for the first time 37 years. The latest move lead US Bancorp losing its dividend aristocrat status. In my analysis of US Bancorp (USB) back in April 2008 i warned that the high dividend payout ratio is a warning sign that dividend growth might be less spectacular in the future.
I don’t own any USB stock but if I did, I would be a seller on this mornings open. One could never tell if the worst for financials is over. US Banks have collectively shown that if they find a way to avoid sharing profits with their shareholders, they would cut or suspend dividend payments. Once again the lesson learned for investors is to never chase high yielding stocks which do not have a good enough coverage of their current dividend payment. In addition to that, concentrating the majority of one’s dividend income portfolio in one or two sectors such as financials or utilities is a recipe for disaster.
Of all the major banks, Wells Fargo (WFC) is also rumored to be the next to cut its dividends. It fits the profile of a dividend cutter perfectly - it has already received billions in TARP money.
Full Disclosure: None
Relevant Articles:
- Can USB and WFC maintain their current dividends?
- USB Dividend Analysis
- TARP is bad for dividend investors
- Don’t chase High Yielding Stocks Blindly