Monday, March 15, 2010

Bank Shareholders: Forget About Dividend Increases

The most important dividend events of the past week included news that have regulators warned financial companies to restrict dividend increases and stock buybacks for the near future. According to Reuters, executives from Goldman Sachs (GS) and JP Morgan Chase (JPM) have had talks with regulators about returning more cash to shareholders. US Bancorp (USB) CEO was quoted saying that his bank has the ability to pay a higher dividend, although it is waiting for the green light by regulators. The issue is that once solid financial institutions such as US Bancorp (USB), Goldman Sachs (GS) and JP Morgan Chase (JPM) begin returning cash to shareholders, weaker companies might be forced to return cash to shareholders as well. Otherwise such companies might be at a disadvantage. Before the financial crisis hit Wall Street, banks and other financial institutions were favored amongst dividend investors for their dividend growth and solid dividend yields, fueled by their believed to be solid business models. The major financial institutions which were forced out of the Dividend Aristocrats list, after cutting dividends in response to TARP included Bank of America (BAC), State Street (STT) and US Bancorp (USB). The lesson that investors should have learned is to never fall in love with a certain sector so much that it represents a substantial chunk of your portfolio – always diversify risk across sectors.

Other than that few notable dividend increases occurred last week. The companies raising distributions were:

Lennox International Inc. (LII), through its subsidiaries, engages in the design, manufacture, and marketing of a range of products for heating, ventilation, air conditioning, and refrigeration markets in the United States, Canada, and internationally. The company raised quarterly distributions by 7% to 15 cents/share. This is the first dividend increase for the company since 2007. The stock yields only 1.30%.

Warwick Valley Telephone Company (WWVY) provides communication services to the residential and business customers in the United States. The company’s board of directors raised quarterly dividend by 9.10% to 24 cents/share. This is the second annual dividend increase for this company since 2009. The stock yields 7.30%.

Birner Dental Management Services, Inc. (BDMS), together with its subsidiaries, provides business services to dental group practices in Colorado, New Mexico, and Arizona. The company’s board of directors raised quarterly dividend by 17% to 20 cents/share. This is the first dividend increase for the company since 2008. The stock yields 5.10%.

Cohen & Steers, Inc. (CNS) manages income-oriented equity portfolios in the United States. The company’s board of directors doubled the quarterly dividend to 10 cents/share. Before you get too excited, investors should note that the new distribution is less than half of the highest quarterly distribution of 22 cents/share paid in 2008. The stock yields 1.70%.

Applied Materials, Inc. (AMAT) provides nanomanufacturing technology solutions for the semiconductor, flat panel display, solar, and related industries worldwide. The company’s board of directors boosted the quarterly dividend by 17% to 7 cents/share. This is the first dividend increase since 2007. The stock currently yields 2.30%.

Medicis Pharmaceutical Corporation (MRX), a specialty pharmaceutical company, engages in the development and marketing of products for the treatment of dermatological and aesthetic conditions in the United States, Canada, and Europe. The company raised its quarterly dividend by 50% to 6 cents/share. This was the first dividend increase since 2008. The stock currently yields only 1%.

Staples, Inc. (SPLS), together with its subsidiaries, operates as an office products company. The company sells various office supplies and services, business machines and related products, computers and related products, and office furniture. The company raised its quarterly dividend by 9% to 9 cents/share. This was the first increase in distributions since 2008. The stock yields only 1.50%.

I typically look for businesses with strong competitive advantages, which generate enough cash flows to not only grow the business, but also to pay increasing distributions. None of the companies mentioned above fit this criterion, as well as my ten year dividend growth requirement.

Full Disclosure: None

Relevant Articles:

- Which Bank will be next? Follow the dividend cuts
- US Bancorp (USB) cuts its dividend by 88%
- Yet Another Financial Company Cutting Dividends
- Dividend Cuts - the worst nightmare for dividend investors
- The ten year dividend growth requirement

4 comments:

  1. Never say never, but it will be a LONG time before I consider putting any money in the banking sector. Between the bailouts, bonuses, and the crazy bets they made....I'll pass on diversifing into this sector.

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  2. Thanks for the interesting link about the banks being restricted on buybacks and dividends. It seems to me that cash-rich banks would be thrilled that someone is telling them to not distribute their earnings. They're getting a free-pass to retain that cash and (presumably) reinvest it in new business (at the expense of their less-healthy competitors). In more "normal" times, they might be under more pressure to pay out to investors, but now, they can just say "Sorry guys, we'd like to, but THEY don't want us to. (And if you don't like it, complain to those federal regulators who always meddle in our business.)"

    IMO, the restriction is giving them the PR cover to do exactly what they'd want to do anyway.

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  3. I think the best financials aren't the dividend payers, such as GS and Berkshire Hathaway.

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  4. Berkshire Hathaway is a financial???

    ReplyDelete

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