Friday, July 31, 2009
"The possibility of continued poor market conditions beyond 2009, along with increased pension funding requirements, compels us to take precautionary action," CEO Dean A. Scarborough said.
"The size of the dividend reduction reflects a combination of the company's near-term debt reduction target, as well as our target to pay a cash dividend of 40 to 50 percent of normalized earnings over time," he said, adding that when the company's outlook improves, it expects to raise its dividend." ( source)
This dividend cut ended Avery Dennison’s 32-year streak of consecutive annual dividend increases for this dividend aristocrat. The company last raised its distributions in December 2007. I didn’t own any stock in Avery, but If I did I would have sold it immediately after the news.
Avery Dennison Corporation (AVY) is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products.
In contrast, there were 28 dividend increases in the elite dividend index so far in 2009. The companies raising distributions this year include:
To open the spreadsheet in a new window, check here.
This marks the 8th dividend cut in the Dividend Aristocrats index so far in 2009. The other dividend cutters include:
One company, Rohm & Haas was taken over by Dow Chemical (DOW) in the first half of 2009.
Full Disclosure: I have positions in most of the stocks mentioned above
- Dividend Aristocrats keep raising their dividends
- Why do I like Dividend Aristocrats?
- When to sell my dividend stocks?
- High-Yield Dividends at Risk
Wednesday, July 29, 2009
While the US is a mature market, where smoking is a habit where a continuously lower percentage of the population is engaging in, the current legislation has created an environment where it is virtually impossible for new players to enter. That way tobacco companies like Altria (MO) could raise prices almost indefinitely in an effort to combat tax increases and decline in demand. Another way that Altria is dealing with this issue is by acquiring competitors in niches it has little presence, as well as streamlining its efficiencies in order to cut costs to the bone. Excise taxes represent a very high percentage of the price of a pack of cigarettes. Thus Federal and State governments have it in their best interests not to ban the use of tobacco products.
However just because Altria is supposed to be a slow growth company and Philip Morris International (PM) is supposed to be growing its EPS at 10-12% annually, does not mean that Philip Morris International would be a better investment over the long run. Investors, who get excited about future growth, tend to bid up the prices of such assets. Risks to this strategy include failures to the realization of the future growth. Thus buying a stock at inflated valuations simply because one expects growth to continue forever might produce inferior long-term returns, relative to the slower growth asset. Philip Morris International (PM) is on my Best High Yield Dividend Stocks for 2009 list.
Some of the risks for Philip Morris International are that the legislation at some of its large markets like Turkey has some catching up to do. Most recently the country banned smoking outdoors in places like bars and restaurants. If other promising “growth” markets catch up and increase the regulatory burden on tobacco products, Philip Morris International operations could end up spotting similar growth prospects to Altria’s domestic operations. Altria has it easier than PMI, since it mainly has one national government to deal with; with PMI, although the operations are diversified globally, it could end up dealing with several governments all at once catching up to increase hurdles for the company.
Another risk for Philip Morris is tobacco smuggling. In some emerging markets it is “relatively easy” for third parties to sell smuggled products at lower prices or to sell “counterfeit” products. Such products erode tobacco conglomerates market shares and could lead to further increases in taxes.
PMI generates almost 47.5% of its revenues and 45.4% of its operating profits from the European Union. 23.30% of its Revenues and 29.90% of its operating profits are derived from the Eastern Europe, Middle East and Africa region. Asia and Latin America account for 19.2% and 10% of revenues respectively. The former accounted for 19.70% of profits while the latter accounted for only 5% of profits in 2008. While the EU market is mature like the US one, the positive for PMI is that it has a growth kick. If you add in strategic acquisitions and cost initiatives, there is not wonder investors increasingly favor PMI over MO. The data is from Philip Morris International's 2008 Annual Report. (source)
Altria Group has business interests that range beyond tobacco, whereas PMI is mainly concentrated on tobacco products. Altria owns a 28.5% interest in UK based SAB Miller, which is not only the second largest brewer in the world, but also one of the largest bottlers of Coca Cola (KO) products worldwide. Altria could further grow by expanding in other “related” industries such as beverages or food production. PMI could also expand significantly by purchasing leading tobacco companies in different countries. This could provide quick increase in market shares for the company. Altria also owns Ste. Michelle Wine Estates, which is the fastest growing premium top-ten wine producer in the United States.
Over the past 5 years, PMI managed to increase its earnings per share by 53%, while Altria only managed an 18% raise.
At the same time PMI also delivered strong revenue growth of 60%, much better than Altria’s paltry 8%.
Since 2004 the annual EPS growth for PMI stands at 11.20%, and 4.30% for Altria. The cost initiatives that Altria has undertaken have paid off ok, as the US tobacco conglomerate revenues rose only by 2% per annum, while PMI’s revenues rose at a rate of 12.60% per annum.
Overall I am bullish on both stocks, but I do not have a preference for either one of them. While the past 5 years have been great for Philip Morris International, negative legislation could tamper growth in the future. I do like the economics of tobacco businesses, as it costs very little to make cigarettes, which are then sold at much higher prices to the consumer. The product is addictive but there's also an incredible loyalty to brands like Marlboro.
Full Disclosure: Long PM, MO and KO
Tuesday, July 28, 2009
Reader Saku tipped me on an interesting merger arbitrage opportunity, which has a large spread for arbitrageurs. In essence, AT&T (T) is acquiring Centennial Communications (CYCL) for $8.50/share, which was announced back in November 2008. The acquisition has been approved by Centennial's stockholders in February 2009 and remains subject to approval by the Department of Justice and Federal Communications Commission and other customary closing conditions. Once the transaction is complete AT&T would sell some assets in Louisiana and Mississippi to Verizon (VZ) for $240 million. If the merger between CYCL and AT&T occurs as planned, the sale of the assets to Verizon would close by 4Q 2009. The deal was expected to enhance AT&T's (T) coverage in Puerto Rico, the US Virgin Islands in addition to the rural Midwest.
Centennial Communications Corp. (Centennial) is a regional wireless and broadband telecommunications service provider serving over 1.1 million wireless customers and approximately 582,200 access line equivalents in markets covering approximately 13 million Net Pops in the United States and Puerto Rico. In the United States, it is a regional wireless service provider in small cities and rural areas in two geographic clusters covering parts of six states in the Midwest and Southeast.
Up until July 13, in 2009 Centennial Communication (CYCL) traded at a small discount of 1% to 5% to the $8.50 offer price. In February 2009, John Paulson showed a 5,000,000-share position in Centennial (CYCL) in his funds 13-F filing with the SEC.
Back on July 8, AT&T announced that it expects to close the deal by the third quarter, because of added regulatory scrutiny. On July 14 however, the stock dropped 9.50% on above average volumes. Currently the stock is trading at $7.38, which is a 13.1% discount to the offer price. What might have been the reasons for this drop?
I found an interesting article from Bloomberg, explaining the reason for the drop: (source)
“Stifel Nicolaus & Co. said the carriers may have to review the terms of the deal. The U.S. Justice Department and the Federal Communications Commission are scrutinizing the transaction. The combined company would control 40 percent of Puerto Rico’s wireless market, which may prompt regulators to force AT&T to divest some assets, Stifel analyst Christopher King said today in an interview. Selling the Puerto Rican wireless business, which accounts for about a third of Centennial’s revenue, may cause AT&T to cut its offer, he said. “We’re clearly in a different antitrust environment,” said King, who is based in Baltimore. “This is certainly the first significant opportunity that the Obama administration will have had in the telecom sector to lay down the law.”
AT&T hasn’t been asked to divest assets in Puerto Rico, said McCall Butler, a spokeswoman. Steve Kunszabo, director of investor relations for Centennial, didn’t immediately return a call seeking comment.
AT&T, the second-biggest U.S. wireless carrier, and Verizon Communications Inc., its larger rival, swapped assets in May to appease concerns that AT&T’s Centennial purchase would hurt competition.”
While I agree that regulatory challenges are tough to predict, I believe that the small size of Centennial Communications (CYCL) could allow the merger to go through and close by the end of 2009. The problem with Puerto Rico is that it is viewed as a separate US territory, which is considered by regulators as somewhat between a colony and an independent state. Thus, Centennials 33%-40% share of the market there, in addition to AT&T’s market share could require more flexibility for the two carriers when dealing with regulators. The Puerto Rico wireless market is highly competitive however. In Puerto Rico, Centennial competes with five other wireless carriers: America Movil, AT&T Mobility, Open Mobile, Sprint Nextel, and T-Mobile. Thus, AT&T might have to sell other assets in order to appeal to regulators, in order for the deal to go through. I doubt that this would affect the offer price for Centennial Communications (CYCL).
I do believe that AT&T (T) would eventually acquire Centennial Communications (CYCL) at the price, agreed upon in 2008. At current levels of $7.38, the upside is 15.2%. If the deal falls through however, shares of the acquired company would most likely drop to $4. I would put a limit order for a small position in CYCL. It is important not to bet the farm on merger arbitrage opportunities. One of the reasons for the decline in the stock price could also be quick-tempered overleveraged arbitrageurs closing their positions in order to avoid margin calls, which happened with Anheuser Busch and Constellation Energy (CEG) deals.
In the best case I would be looking for a partial exit at somewhere above $8.20 and would evaluate my options later on.
Full disclosure: None for now, but could change in a few daysRelevant Articles:
- Constellation Energy Group (CEG) merger arbitrage opportunity
- Pfizer/Wyeth Merger Arbitrage Opportunity
- A merger arbitrage lesson to learn
- Merck/Schering-Plough Merger Arbitrage Opportunity
- AT&T (T) Dividend Stock Analysis
Monday, July 27, 2009
Checking the pulse of dividend increases is an exercise whose goal is to uncover potential dividend growth plays that I might have otherwise missed out on. Another reason for that is to refute the idea that dividend investing is dead. It is also interesting to look for trends in the data, while browsing through the list of dividend increasers. While the REITs have been slaughtered along with other financials, Master Limited Partnerships and consumer staples have done pretty well. But just because I wrote about a certain stock, does not mean that I am going to add it to my portfolio. I need to research it and make sure that it could afford growing its generous distributions.
Stanley Works (SWK), which a diversified worldwide supplier of security solutions for commercial applications as well as tools and engineered solutions for professional, industrial, construction and do-it-yourself use, increased its quarterly dividend by 3.1% to 33 cents a share.
The comment by Chairman and Chief Executive Officer John F. Lundgren was particularly bullish: "We remain very focused on the total return we deliver to shareholders and know that our dividend is a key component. We are proud to not only have maintained our dividend during this challenging period, but to raise it for the 42nd consecutive year in the face of this tumultuous economic environment."
This dividend aristocrat currently yields 3.40%.
Besides Stanley Works, several MLPs also raised distributions over the past week. Master Limited Partnerships have kept distribution increases despite the credit crunch, which is why many dividend investors are flocking this sector. MLPs offer both appealing current yields but stable and growing distributions. Not all MLPs are created equal however; the most stable ones are engaged in transportation of oil or natural gas.
El Paso Pipeline Partners, L.P. (EPB), which engages in the ownership and operation of natural gas transportation pipelines and storage assets, announced that its Board has approved a 1% increase over the last quarterly distribution of 32.50 cents per unit. The new distribution rate is 33 cents/unit. This is the 6th consecutive distribution increase for El Paso Pipeline Partners, L.P. since it went public in 2007. The units currently yield 7.00%.
TC PipeLines, LP (TCLP), which transports natural gas from the western Canada Sedimentary Basin (WCSB) to various downstream markets in the United States, increased its quarterly distributions by 3.5% to 73 cents per unit. This is the tenth consecutive year where TC PipeLines, LP has increased its distributions. The units currently yield 7.50%.
Holly Energy Partners, L.P. (HEP), a master limited partnership which operates a system of refined product and crude oil pipelines, storage tanks, and distribution terminals primarily in west Texas, New Mexico, Utah, and Arizona, raised its quarterly distributions to 78.50 cents per unit, a 1.30% increase over last quarters distribution of 77.50 cents. This is the 19th consecutive quarterly distribution for Holly Energy Partners, L.P. The units currently yield 9.00%.
Suburban Propane Partners, L.P. (SPH), announced that its Board of Supervisors declared the 22nd increase in the Partnership's quarterly distribution from $0.815 to $0.825 per Common Unit. This master limited partnership engages in the distribution of propane, fuel oil, kerosene, diesel fuel, gasoline, and refined fuels, as well as marketing of natural gas and electricity in deregulated markets. Suburban Propane Partners, L.P.. is a dividend achiever, which has increased its quarterly distributions in each of the past eleven years. The units currently yield 7.60%.
Sunoco Logistics Partners L.P. (SXL), declared a cash distribution for the second quarter of 2009 of $1.04 per common partnership unit, which is a 2.5 percent increase over the prior quarter. The partnership engages in the transport, terminalling, and storage of refined products and crude oil, as well as the purchase and sale of crude oil in the United States.. Sunoco Logistics Partners L.P has regularly increased its quarterly distributions since 2002. The partnership currently yields 7.60%.
Western Gas Partners, LP (WES), declared a cash distribution of $0.31 per unit for the second quarter of 2009, representing an increase of $0.01 per unit over the prior quarter. Western Gas Partners, LP is a growth-oriented Delaware limited partnership formed by Anadarko Petroleum Corporation (APC) to own, operate, acquire and develop midstream energy assets. The partnership currently yields 7.20%.
Several companies, which are not MLPs, also raised distributions:
Park Electrochemical Corp. (PKE) increased its quarterly dividend by 25% to 10 cents per share. The company develops, manufactures, markets, and sells digital and radio frequency/microwave printed circuit materials for the telecommunications and Internet infrastructure, and computing markets; in addition to composite materials and parts for the aerospace markets. Park Electrochemical Corp. does not follow a pattern of regular dividend increases. In addition to that the stock currently yields 1.70%.
Lindsay Corporation (LNN) increased its quarterly dividend by 7% to 8 cents per share. Lindsay Corporation manufactures and sells automated agricultural irrigation systems that enhance or stabilize crop production while conserving water, energy, and labor. It operates in two segments, Irrigation and Infrastructure. The company started to regularly raise distributions in 2003. The stock currently yields 0.80%.
CARBO Ceramics Inc. (CRR), which engages in the manufacture and supply of ceramic proppant primarily used in the hydraulic fracturing of natural gas and oil wells, raised its quarterly dividend by 6% to 18 cents per share. This dividend increase represents the ninth consecutive year the company increased its dividend to shareholders. The stock currently yields 1.90%.
Full Disclosure: None
Friday, July 24, 2009
Walgreen Co has paid dividends for more than 76 years and consistently increased payments to common shareholders every year for 34 years. The company recently announced a 22.2% raise in its quarterly dividends.
Between June of 1999 up until June 2009 this dividend growth stock has delivered an annual average total return of 0.70% to its shareholders. The stock is changing hands at the same levels it was trading a decade ago.
The company has managed to deliver a 14.90% average annual increase in its EPS between 1999 and 2008. Earnings per share are expected to decrease to $2 in FY 2009, before recovering to $2.30 by FY 2010. Sales are also expected to increase from $59 billion in 2008 to $68 billion in 2010. Unlike its competitors, Walgreen seems to focus on internal growth either through opening new stores or focusing on proper location of in store merchandise, growth of products offered and making its operations more efficient. The company plans to slow down on the growth rate of opening new stores from high single digits to low single digits by 2011.
The Return on Equity has slightly decreased over the past decade from 19.70% in 1999 to 18% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 13.40 % annually since 1999, which is lower than the growth in EPS.
A 13 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1976, Walgreen Co has actually managed to double its dividend payment every five and a half years on average.
The dividend payout ratio has ranged between 13.6% and 20.9%. 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 low payout has enabled Walgreen to spend more on growing its business. As its markets become saturated I expect the company to increase its payout over time.
Currently Walgreen Co is trading at 14.50 times earnings and yields 1.90%. While the price earnings multiple and the dividend payout are attractive, the dividend yield is below my 3% entry criteria. I would only consider initiating a position in Walgreen on dips below $18.50. If the stock drops to $25 and premiums increase I would consider selling longer dated covered puts at strikes $20 or $17.50.
Full Disclosure: None
- An alternative strategy to covered calls
- Walgreen’s 22% Dividend Increase Analysis
- Bemis Co (BMS) Dividend Stock Analysis
- Emerson Electric (EMR) Dividend Stock Analysis
Wednesday, July 22, 2009
Dividends could be either sitting there or get reinvested. The beauty of dividends is that it is under the discretion of the individual investor to purchase more stock, buy equity in a different company/investment or spend it another way.
I do reinvest only a portion of my stocks directly; most other times however I let my dividends accumulate and I either re-invest in the same stock/s or in new stocks that have been on my watchlist.
It is important to keep costs as low as possible when allocating dividend income for reinvestment. Thus it is wise to open a discount brokerage account at places such as Zecco, Tradeking, Scottrade or Sharebuilder, which have relatively easy to use platforms and low commissions for stock trades.
I don't typically look at dividend reinvestment on an issue-by-issue basis, but through the lenses of a diversified dividend portfolio. If I had received enough dividends to purchase an additional position and I had to choose between investing in the energy company Chevron (CVX) or the consumer staple Johnson & Johnson (JNJ) I would most likely reinvest my distributions into the energy sector if I were under allocated there.I also do not reinvest dividends if the companies I own do not pass my entry criteria at the time or companies which are way off base my entry criteria. I am a little more relaxed when it comes to reinvesting dividends versus initiating a position in a stock. I could reinvest dividends even if the payout ratio increased beyond 50% to say 60% or even if the current yield is about 2.70% and not 3%. I am pretty strict however about not paying more than 20 times earnings on a given stock. This is the main reason why I automatically reinvest only some of my position in Realty Income (O).
Some attractively valued stocks for dividend reinvestment right now include:
Pepsi Co (PEP) analysis
Clorox (CLX) analysis
Automated Data Processing (ADP) analysis
Kinder Morgan (KMP) analysis
Sysco Corp (SYY) analysis
Selective dividend reinvestment avoids purchasing overpriced shares with your monthly or quarterly distributions, which could be a real drag on total returns and portfolio income. It is important however not to get overallocated in a particular stock or group of stocks as well, as diversification should be also taken in consideration when dividends are being reinvested.
Full Disclosure: Long all stocks mentioned above
- Zecco Online Discount Stock Brokerage Review
- Johnson & Johnson - a solid dividend aristocrat
- Dividend Portfolio Investing for monthly income
- Why should companies pay out dividends?
Monday, July 20, 2009
Enterprise Products Partners L.P. (EPD), a midstream energy company, which provides services to producers and consumers of natural gas, natural gas liquids (NGL), crude oil, and petrochemicals, increased its quarterly distributions by 5.60% to 54.50 cents per share. Enterprise Products Partners L.P. is a dividend achiever, which has increased its quarterly dividend in each of the past eleven years. The stock currently yields 7.80%.
A. O. Smith Corporation (AOS), which, increased its quarterly dividend by 2.60% to 19.50 cents per share. A. O. Smith Corporation is a dividend achiever, which has increased its quarterly dividend for 16 consecutive years. The stock currently yields 2.00%.
Harleysville Savings Financial Corporation (HARL), which provides various banking services in southeastern Pennsylvania, boosted its quarterly dividend by 5.60% to 19 cents per share. Harleysville is a dividend achiever, which has increased its quarterly dividend for more than a decade. The stock currently yields 4.90%.
Fastenal Company (FAST), which operates as a wholesaler and retailer of industrial and construction supplies, boosted its semi-annual dividend by 5.70% to 37 cents per share. In addition to that Fastenal’s Board of Directors authorized purchases of up to 2,000,000 shares of its common stock. This authorization replaced any unused authorization previously granted by the Board of Directors. Fastenal Company did not purchase any of its outstanding common stock during the first half of 2009. Fastenal Company is a dividend achiever, which has increased its annual dividends since 1999. The stock currently yields 2.20%.
Ryder System (R), which provides transportation and supply chain management solutions, increased its quarterly dividend by 8.7% to 25 cents per share. Ryder System has regularly increased its quarterly since 2005. The stock currently yields 3.70%.
ONEOK (OKE), which engages in the purchase, transportation, storage, and distribution of natural gas, increased its quarterly dividend to 42 cents per share. ONEOK has increased its quarterly dividend in each of the past 7 years. The company is the general manager behind the master limited partnership Oneok Partners (OKS). The stock currently yields 5.30%.
Unum Group (UNM), which provides group and individual disability insurance products, announced a 10% boost to its quarterly dividend to 8.25 cents per share. This is the first dividend increase for Unum Group since the company slashed its payment in 2003. The stock currently yields 1.80%.
Landstar System (LSTR), which is a non-asset based transportation and logistics services company, providing transportation capacity and related transportation services to shippers, raised its quarterly dividend by 13% to 4.50 cents per share. Landstar System has regularly increased its quarterly dividend in each of the past four years. The stock only yields 0.50%.
Duncan Energy Partners L.P. (DEP), a master limited partnership which engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals, increased its quarterly distributions by 3.60% to 43.50 cents per unit. While Duncan Energy Partners L.P. has only been publicly traded since 2007, the partnership has managed to hike distributions at least once per year over the same period. The partnership units currently yield 9.60%.
Healthcare Services Group, Inc. (HCSG), which provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals, boosted its quarterly dividend by 6% to 19 cents per share. This was the 24th consecutive quarterly dividend increase for Healthcare Services Group, Inc. The stock currently yields 4.00%.
Anworth Mortgage Asset Corporation (ANH), a mortgage real estate investment trust which invests primarily in securities guaranteed by the U.S. Government, increased its quarterly dividend to 32 cents per share. Anworth generates income for distribution to shareholders primarily based on the difference between the yield on its mortgage assets and the cost of its borrowings. Although the stock currently yields 17.00%, its quarterly distributions have fluctuated between a high of 79 cents/share in 2001 to a low of 2 cents/share in 2005.
I would put Fastenal Company (FAST), A.O. Smith Corporation (AOS), Enterprise Products Partners L.P. (EPD) and Harleysville Savings Financial Corporation (HARL) on my watchlist for further research.
Full Disclosure: None
- Walgreen’s 22% Dividend Increase Analysis
- Master Limited Partnerships (MLPs)
- Why do I like Dividend Achievers
- Dividend Reinvestment is important
Friday, July 17, 2009
These partnership letters are different than Berkshire Hathaway’s (BRK.a, BRKb) letters to shareholders. Buffett wrote them between 1959 and 1969 and sent them out to the limited investors of the Buffett Partnership. He also provides additional information, which allows aspiring value investors to better understand how the young Buffett made his investment decisions early in his career.
The fees that Buffett was charging his limited partners were solely based on his performance. After all the partnerships merged into a single one in 1962, Buffett would get 25% of any profits over 6% that he partnership generated. In other words, if the partnership earned less than 6%, which was most probably how much it could have earned in fixed income, Buffett would get not compensation.
In one of his 1962 letters to limited partners, Buffett explained in detail the strategies he used to generate excessive returns.
The first group of companies (generals) he invested in was undervalued securities, where his partnership would hold about 5-10% of total assets in 5-6 companies and smaller positions in another ten or fifteen stocks. This group of stocks provided a relative margin of safety when purchased but behaved just like the market. Overall his portfolio in this section was relatively diversified, and but had a very good chance to generate excessive returns in up markets. One site that provides good ideas on generals is Old School Value.
The second group of companies that Buffett Partnership LTD tended to focus on was workouts. Those were stocks affected by corporate events like mergers and acquisitions, spin-offs, reorganizations and liquidations. Buffett did mention that this strategy would produce relatively stable earnings from year to year, which would make this portion of his portfolio outperform the markets in bad years, but underperform in strong markets. An example of such activity is the Pfizer/Wyeth merger announced in January 2009.
The third strategy where the Buffett Partnership concentrated was control situations. These were events where the partnership would initiate a large enough position in a company and try to influence corporate policy. A famous control situation is Berkshire Hathaway (BRK.A), which started out as an undervalued position.
Another important fact is that Buffett put his money where his mouth was – most of his net worth was invested in the Buffett partnership. In my research of successful companies I have found out that management which has a large chunk of their net worth in company stocks, tend to deliver more and are less likely to de-fraud individual investors. Companies where owners hold a large chunk of their net worth include Bill Gates holdings in Microsoft (MSFT), Richard Kinders holdings in Kinder Morgan (KMP) and John D. Rockefeller’s Standard Oil in the late 19th and early 20th century.
You could download them all from this link.
Here’s a timeline of the life of the Buffett Partnership:
1956 - Benjamin Graham retired and closed his partnership. At this time Buffett's personal savings were over $174,000 and he started Buffett Partnership Ltd., an investment partnership in Omaha.
1957 - Buffett had three partnerships operating the entire year.
1958 - Buffett operated five partnerships the entire year.
1959, -The company grew to six partnerships operating the entire year.
1960 -Buffett had seven partnerships operating: Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff and Underwood. In
1962- Buffett merged all partnerships into one partnership.
1966 -Buffett closed the partnership to new money.
1969 - Following his most successful year, Buffett liquidated the partnership and transferred their assets to his partners. Among the assets paid out were shares of Berkshire Hathaway.
- Warren Buffet - The richest investor in the World
- Warren Buffett’s Berkshire Hathaway Portfolio Changes for 1Q 2009
- What I learned from Warren Buffett’s Most Recent Letter to shareholders
- Should you follow Warren Buffett’s latest moves?
- Warren Buffett – The Ultimate Dividend Investor
Wednesday, July 15, 2009
The power of reinvested dividends could be seen if we concentrate of the recent stock market activities of the past decade. Back in 1999 and 2000 the internet and technology stocks were all the rage; it was not uncommon for a dot com entrepreneur selling anything from pet supplies to books to become a multimillionaire overnight after a successful initial public offering. Then the tech bubble burst, and millions of investors lost a ton of money. For example, the tech but not dividend heavy Nasdaq Composite is still below its all time highs set in March 2000.
The housing bubble helped the economy turn around in the early 2000’s and we had a great run up until 2007, when once again all time highs were being hit daily. After the financial bubble burst, taking down companies like Fannie Mae, Bear Stearns, Lehman Brothers and others, stock markets took a dive to levels not seen in 13 years.
At the same time, dividends paid out by the companies in the S&P 500 increased from 16.69 points in 1999 to 28.39 points in 2008. Expectations for 2009 dividends in the S&P 500 is for a drop to 21.60 points, mainly due to dividend cuts in financial related stocks. Normally however, dividend payments are not as volatile as stock prices, based off this chart of the past 32 years of quarterly payments for the S&P 500.
I used data on the S&P 500 ETF (SPY) to backtest the returns of S&P 500 and S&P 500 with reinvested dividends from June 30, 1999 to June 30, 2009. If you had invested $100 in the S&P 500 in June 1999 your investment would be worth about $67.10 now. If you reinvested your dividends however, the value of your investment would have been $78.80 or 17% higher.
The difference of course would have been much higher had dividend yields been higher over the past decade. The 1990’s bull market brought in large capital gains for investors and high stock prices. This pushed down yields as companies spent money on buybacks and aggressive acquisitions, forgetting whom they are actually working for.
For example if we look at Con Edison (ED), a New York electric, gas and steam utility, we would notice that the stock price has mainly been flat over the past decade. The stock has been supported by its strong dividend yield of 5%-6% over the past decade.
Ten years is not really that long of a period. If we stretch it out to 30 years for the S&P 500, which is a period almost equal to the typical investing lifespan of an average investor in the accumulation stage, the results from reinvestment of dividends is much more pronounced.
True dividend investors however understand that the S&P 500 dividends should be taken with a grain of salt, since only 70% or 80% of companies in the index pay any dividends. In addition to that careful dividend investors would most likely screen out most dividend companies in the index benchmark since only a select few have a history of consistently raising dividends for more than a decade.
True dividend investors would slowly build a diversified portfolio of income producing investments in order to get the full force of dividend reinvestment on their side. That is something I have doing for some time now. Some stocks where I keep reinvesting my dividends include:
Johnson & Johnson (JNJ) (analysis)
Dividends are a sign of quality. They force management to look at cash flow and how it invests in its business. I am confident in the ability of those companies to generate enough cash flow in order to support a growing stream of dividends.
Full Disclosure: Long ED, CVX, JNJ, MCD, MO and PG
-Should you re-invest your dividends?
Monday, July 13, 2009
Walgreen’s President and CEO Greg Wasson said: “This dividend increase reiterates our confidence in our key growth strategies and our ability to generate strong free cash flow in the future. This is a good next step in our continuing effort to provide meaningful returns to our shareholders.”
This is certainly a bullish statement, especially in a market environment where companies are slashing dividends across the board in an effort to conserve cash. Even more bullish is the fact that the company has managed to raise its distributions by an average compound rate of 15% over the past decade. This translates into the dividend payment doubling every 5 years.
$1000 invested in Walgreen 20 years ago would have generated only $17.70 in dividend income in 1990. By 2009 this investment would be generating an annual yield on cost of 18.80%.
That’s truly great news, except for the small dividend yield that the company currently boast as well as the low dividend payout ratio. Walgreen has only paid out somewhere between 14% and 21% of its earnings as dividends over the past decade. The dividend yield on based on the new quarterly distribution is 1.91%. I was amazed by the outstanding dividend growth at Walgreen and even considered making an exception with my minimum entry requirement of 3%, just to get a piece of this company.
The stock is changing hands at the same levels it was trading in 1999, despite the solid dividend growth. Earnings have risen by an average of 13.4% over the past decade.
As I dug deeper however, I noticed that the company managed to quadruple its dividend payment over the past decade simply because it wasn’t paying enough to begin with in 1999. The dividend yield was 0.5%, which even after 10 years of above average dividend growth translates into an annual yield on cost of 2%. The dividend yield was very low between 1998 and 2006.
In addition to that, the company seemed to have slowed down its dividend hikes between 1997 and 2002 to somewhere close to the historical rate of inflation.
It seems that the dividend growth is not as consistent as I would like it to be. The low dividend yield does not compensate for the risk of slowdown in future dividend growth. The P/E multiple is attractive at 15 times forward 2009 earnings. Thus I would only consider initiating a position in Walgreen on dips below $18.50. If the stock drops to $25 and premiums increase I would consider selling longer dated covered puts at strikes $20 or $17.50.
Full disclosure: None
Friday, July 10, 2009
Bemis Company has paid dividends annually since 1922 and quarterly since 1931 and consistently increased payments to common shareholders every year for 26 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.30% to its shareholders. The stock has lost over one third from its all-time high in 2007.
The company has managed to deliver a 4.70% average annual increase in its EPS between 1999 and 2008. Analysts are expecting flat EPS of $1.60 for 2009 and a slight increase to $1.75 by 2010. Bemis has not been able to increase profitability since 2004, as its earnings per share have remained flat. One bright statistic is that cash flow per share has increase from $2.88 in 2004 to $3.26 in 2008.
The Return on Equity has decreased over the past decade from 16% in 1999 to 11.50% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 7.5 % annually since 1999, which is higher than the growth in EPS. If earnings per share remain flat, future dividend growth would be far from spectacular.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1988, Bemis Co has actually managed to double its dividend payment every seven years on average.
The dividend payout ratio is currently above 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. If earnings remain flat and the company doesn’t start any cost cutting initiatives, future dividend growth could be jeopardized.
Currently Bemis Co is trading at 15.50 times earnings and yields 3.70%. It does seem that Bemis Co is attractively valued at the moment based on yield and price/earnings mutliple. The flat earnings, decreasing returns on equity and rising dividend payout ratio make this stock a hold, not a buy. I would only add to existing position there if I owned it or initiate a small position in Bemis if the stock drops below $18.
Full Disclosure: None
- Eli Lilly (LLY) Dividend Stock Analysis
- Clorox (CLX) Dividend Stock Analysis
- Why do I like Dividend Aristocrats?
- 3M (MMM) Dividend Stock Analysis
Wednesday, July 8, 2009
In 1969, Warren Buffett closed his partnership, citing the fact that the market was overpriced and that bargains fitting the strict value investing principles that Graham taught him were tough to uncover.
At the same time he concentrated his actions on a small textile operation called Berkshire Hathaway, which is his flagship holding company. His success at Berkshire is astounding, but it is not merely due to value investing strategy, as is commonly known. Had Buffett not branched out of strict value investing principles that Graham taught him; Berkshire Hathaway would have remained a relatively small conglomerate. Buffett did branch out into other strategies however. His insurance operations are similar to selling naked puts or calls – he generates enough premium which in most cases doesn’t have to be paid out for many years to come, giving him a low cost source of financing. His recent deal to sell long term puts (LEAPs) on four major stock indices is another example of branching out.
Buffett also essentially shorted the US dollar. In 2002, Buffett entered in $11 billion worth of forward contracts to deliver U.S. dollars against other currencies. By April 2006, his total gain on these contracts was over $2 billion. In 2005 he reduced his exposure to the currency futures he was holding. His play on the weakening dollar is by purchasing solid businesses which derive a portion of their earnings from outside the US.
Most people I talk to also seem to believe that Buffett owns a concentrated portfolio of 10-15 positions, which allows him to allocate the most funds in his best ideas. A recent look at Berkshire Hathaway’s stock portfolio revealed 40 stock positions from a variety of industries such as consumer staples, utilities, financials, retailers, energy and many other sectors. In addition to that Berkshire Hathaway owns a variety of businesses ranging from insurance ( Geico and General RE) , Utilities ( Mid american), Apparel, Building Products, Flight Services, Retail, Financial, and Conglomerates such as the recently acquired Marmon Holdings.
Another example is his investments in Gillette, acquired by Procter and Gamble(PG) ; Coca Cola (KO) and Johnson & Johnson (JNJ). Buffett purchases businesses with wide moats, which he believes have strong growth potential, that would lift earnings and distributable cash flows. His yield on cost on his 1988-1994 $1.298 billion investment in Coca Cola (KO) is a staggering 25.20%. His average purchase price comes out to $6.49/share, whereas the annual dividend is $1.76/share after the most recent dividend increase.
Another interesting investment is in See’s Candies, which he purchased for $25 million in 1972, at a time when its pre-tax earnings were $5 million on $30 million of sales. The confectionary maker in a slow growth industry currently generates enough cash flow, which is then redirected to other business opportunities. In fact over the past 35 years, the capital needs for the company have risen from $8 million to $40 million annually, while it has returned $1.35 billion worth of pre-tax earnings to be allocated somewhere else.
Yet another myth about Buffett is that he doesn’t like dividends. The contrary is true – from his early days of buying farmland and operating a newspaper route to buying pinball machines Buffett has been particularly interested in the distributions from his business. His investments in See’s Candies and other businesses like Coca Cola (KO) and Johnson & Johnson (JNJ) throw off enough cash in the form of dividends to Berkshire Hathaway that he then allocates appropriately. The same is true for many dividend investors, which are primarily interested in purchasing stable wide moat businesses, that have the ability to grow earnings. That way these companies can afford to consistently raise distributions to shareholders. Dividend investors then allocate their dividends received in the best manner suitable – either by purchasing more stock or spending it on their own needs.
Another myth about Warren Buffett is that he never sells. In 1998 he sold his position in McDonald’s (MCD) for a tidy profit. In his 1998 Letter to Shareholders, Buffett called this move “a very big mistake”. While McDonald’s stock closed 1998 at $38 it did fall to as lot as $12 at the bottom of the 2000-2003 bear market, before staging a massive rally during the 2003-2007-bull market. The stock is one of the few, which have not seen their shares fall of a cliff in the recent bear market.
The future of Berkshire Hathaway is really what gives nightmares to its investors. Due to its sheer size, it has to concentrate only on opportunities in the billions of dollars. In “THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE” he explained that “if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average”
It would be impracticable to concentrate on hundreds of smaller deals, which could potentially generate higher returns. One idea that Berkshire could implement is to franchise Buffett Partnership’s business model to hundreds of small value investors with $1 million in seed capital, and watch them become the next Buffett. This could bring in new life to Berkshire.
Buffett seems to like companies, which generate enough in royalties due to their high moats for many years to come. Such competitive advantages that allow them to spend a considerable amount of funds upfront on research and development to create a unique product and then sell it for many years in the future is closely resembling the idea of passive income that many investors are constantly seeking out. Such companies which generate “royalty” type of revenues includes See’s Candies, Microsoft (MSFT), Coca Cola (KO), and pharmaceuticals companies such as Pfizer (PFE) or Eli Lilly (LLY).
Below I have summarized some interesting materials I found about Buffett:
Buffett Partnership Letters
Berkshire Hathaway Shareholder Letters
Buffett’s E-mail correspondence about Microsoft
THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE
This article was featured in the Carnival of Personal Finance: New Zealand Edition!
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- Warren Buffett – The Ultimate Dividend Investor
- Coca Cola (KO) Dividend Stock Analysis
- Warren Buffett’s Berkshire Hathaway Portfolio Changes for Q1 2009.
Tuesday, July 7, 2009
I believe that whether the bottom has been hit or not astute dividend investors should seize the opportunity that the current bear market offers. I ran a screen on the S&P Dividend Aristocrats index to identify attractively valued stocks using the following criteria: (source Yahoo Finance)
1. Dividend Payout Ratio is less than 50%
2. Price/Earnings Ratio is less than 20
3. Current Dividend Yield is at least 3%
There were 12 companies that made the cut. Check the list below:
(VFC) VF Corp (analysis)
(MHP) McGraw-Hill Companies (analysis)
(PG) Procter & Gamble (analysis)
(AFL) AFLAC Inc (analysis)
(CB) Chubb Corp. (analysis)
(ABT) Abott Laboratories (analysis)
(JNJ) Johnson & Johnson (analysis)
(MMM) 3M Co (analysis)
(DOV) Dover Corp. (analysis)
(EMR) Emerson Electric (analysis)
(SWK) Stanley Works (analysis)
(NUE) Nucor Corp. (analysis)
The thing that separates these companies from other dividend stock lists is that they have a tendency to increase their dividends consistently every year. With an average yield of 3.60% this list has generated an average dividend growth of 11% over the past decade. If history were to repeat itself over the next 6 –7 years, the average yield on cost should be double what you can get today. In the worst case I expect that the income stream growth from this list of stocks would at least match the rate of inflation over time.
Full Disclosure: I have positions in all stocks above except for VFC and SWK, which I plan on buy on dips. Trade stocks for free through Zecco.com, the Free Trading Community.
Monday, July 6, 2009
General Mills (GIS), which manufactures and markets branded and packaged consumer foods worldwide, approved a 9% increase to its quarterly dividend to 47 cents per share. General Mills is a former dividend aristocrat, which has fought back to regain its status in the elite dividend index since 2004. The stock currently yields 3.20%.
Senior Housing Properties Trust (SNH), which owns independent and assisted living communities, nursing homes, rehabilitation hospitals, wellness centers and medical office buildings throughout the United States, increased its quarterly distributions by 1 cent to 36 cents per share. Senior Housing Properties has increased its annual dividend in each of the past eight years. The stock currently yields 8.80%.
MFA Financial, Inc. (MFA) announced that its board has approved a 13.6% increase in its quarterly dividend from $0.22 to $0.25 per share. The company primarily invests in mortgage-backed securities (MBS) that include hybrid and adjustable-rate MBS (ARM-MBS). The dividend is pretty volatile, ranging from a low of 5 cents a share in 2005 and 2006 to a high of 32 cents in 2002. The current yield is 14.70%.
Despite the slow week for dividend increases, I am looking forward to a relatively busy July, since historically some well-known dividend aristocrats like Walgreen (WAG) and Stanley Works (SWK) tend to raise their dividends during the current month.
Walgreen (WAG) has raised its dividend every July over the past five years. This dividend growth stock has been raising dividends for 34 consecutive years and has a 5-year dividend growth rate of 21.30%.
Stanley Works (SWK) has raised its dividend every July over the past five years. This dividend growth stock has been raising dividends for 41 consecutive years and has a 5-year dividend growth rate of 4.20%.
- High Yielding Companies boosting distributions
- Realty Income (O) and Medtronic (MDT) Boosting Distributions
- Target (TGT) and Clorox (CLX) confident in raising dividends
- Dividends and Stock Buybacks in the news
Thursday, July 2, 2009
Emerson Electric Co.has paid uninterrupted dividends on its common stock since 1947 and increased payments to common shareholders every year for 52 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 4.90% to its shareholders. The stock is down over 50% from its 2007 and 2008 all-time highs.
The company has managed to deliver an 8.40% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $2.35 for 2009 and $2.20 by 2010. This would be a decrease from the 2008 earnings per share of $3.11. The economic crisis is currently affecting the St. Louis based company, which recently announced a 25% decline in orders for the past three months. Emerson Electric does expect to restructure its operations in order to make them more cost effective. In addition to that the relative diversification of its revenue sources by continents and five major business segments should soften the fall in earnings. Another positive for the company is the fact that it focuses on new product introductions, which could add greatly to profitability. Strategic acquisitions could also add to the bottom line as well.
The Return on Equity has increased over the past decade from 22% in 1999 to 27% in 2008. The reason for the increase is managements implementing capital efficiency initiatives after a string of acquisitions. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 7% annually since 1999, which is slightly lower than the growth in EPS.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1982, Emerson Electric Co. has actually managed to double its dividend payment every nine years on average.
Despite the expectations for lower earnings and revenues for 2009 and 2010, I believe that the dividend payment would not be affected. The worst that could happen is that dividend growth slows down for the next two years, before resuming its 7% annual rate of increase. Despite being regarded as a cyclical company Emerson has raised distributions for over half a century, so a recession should not create a steep shift in the company’s dividend policy.
The dividend payout ratio remained below 50% for the majority of the past decade. The only exception was the 2001-2003 period, when profitability suffered from the economic downturn at the time A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Emerson Electric Co. is trading at 13 times earnings and yields 4.00%. I believe that Emerson Electric Co.is attractively valued at the moment. I would be looking forward to adding to my position there.
Full Disclosure: Long EMR
Wednesday, July 1, 2009
Contests are a tricky thing. Most participants might choose riskier stocks, which could go higher much faster if the market was bullish, versus higher quality issues, which have lower volatility. Thus observing investors making bets without having any funds at risk, is not the same as putting your money where you mouth is.
The companies I selected were representative of four high yielding sectors- real estate, energy transportation, utilities and tobacco. Despite the high yields, the dividend payments seemed sustainable enough even during the financial meltdown. The average yield on the four stocks mentioned below is 6.88%. The riskiest stock of the four seems to be Realty Income (O), since real estate is one of the hardest hit sectors in the US. Kinder Morgan (KMP) and Con Edison (ED) are pretty much utility like investments, while Phillip Morris International (PM) should do fine in a crisis, as smokers find it tougher to quit.
Realty Income (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company ended 2008 at $23.15 and has distributed $0.85 in dividends so far this year. At the current price of $21.92 the investment is underwater by 1.64%. This dividend achiever, which has consistently increased its distributions several times/year since 1994, currently spots a very attractive 7.90% yield. Check out my analysis of Realty Income.
Consolidated Edison, Inc. (ED), ended 2008 at $38.93. At the current price of $37.42 plus the $1.18 in dividends collected during the first two quarters the investment in this provider electric, gas, and steam utility services has lost 0.85%. Currently this dividend aristocrat yields 6.30%. Check my analysis of Consolidated Edison.
Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. One of the largest master limited partnerships in the US has generated a total return of 16.33% in 2009, one third of which came from this dividend achievers generous distributions. The units of this partnership currently yield 8.30%. Check my analysis of Kinder Morgan.
Philip Morris International Inc (PM) manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. The largest publicly traded manufacturer and marketer of tobacco products closed 2008 at $43.51/share and has paid $1.08 in dividends in 2009. At the current price of $43.62 the investment is up by 2.74%. This dividend growth stock currently spots an attractive 5.00% yield and recently announced its expectations to return some $9 billion in cash to its shareholders during 2009 in the form of dividends and share buybacks.Overall my picks gained 0.70% year to date. If you add in dividends, the total return was 4.10%. Check out the performance of the other bloggers year to date returns in the table below:
1 Four Pillars 48.83%
2 Intelligent Speculator 43.32%
3 The Wild Investor 41.45%
4 Where does all my money go 28.72%
5 The Financial Blogger 13.29%
6 Million Dollar Journey 4.76%
7 Dividend Growth Investor 0.70%
8 Zach Stocks -3.09%
9 My Traders Journal -11.36%
S & P 500 +3.16%
I would like to emphasize the fact that successful dividend investing is a long-term process. I strongly doubt that a time frame of less than 15 years is indicative of whether the performance of the stock picks above is sustainable or not. Having a diversified portfolio of at least 30 individual companies from several sectors, sizes and locations is essential in order to be diversified and avoid taking unnecessary risks. Check out the Best Dividend Stock for the Long Run list, which is a good addition to today's post.
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