Showing posts with label trade. Show all posts
Showing posts with label trade. Show all posts

Thursday, February 26, 2009

The Demise of the Newspaper Industry

Yesterday Gannett slashed its quarterly dividends by 90% to $0.04/share. The company is responding to the recession in US and UK by reducing the payout to shareholders, which will save it close to $325 million/year. The new dividend is a cent and a half lower than its first dividend in 1967 of $0.054/share. The move comes about a month after company executives said they would meet to evaluate the dividend.

The most recent cut ended a streak of 39 consecutive dividend increases for this dividend aristocrat. I initiated a small position in Ganett back in May 2008. The first signs of trouble came in July when the company stopped increasing its dividends. Since it was well covered I just let dividends reinvest. As the market tanked I sold some covered calls, in order to recoup some of my investment back.

With the most recent dividend cut I sold near yesterdays open. I see further deterioration in Gannet’s newspaper business. The company doesn’t seem like a value proposition either, given the large portions of goodwill on its assets side of the balance sheet.

This marks the third dividend cut for the year for a member of the dividend aristocrats. There have been 12 dividend increases so far in 2009 on the other hand.

The newspaper industry has been hit hard by increased online competition and the economic crisis. Traditional media companies have been left with declining sales and profits and have had to cope by reducing workforce and cutting or suspending dividends altogether.

Just a week ago the New Times (NYT) suspended its dividends, after reducing the quarterly payments from $0.23 to $0.06/share in November.

The McClatchy Company (MNI) is another example of a newspaper company in trouble. In September 2008 the quarterly dividend was cut in half to $0.09 in an effort to preserve cash. In January however, the company announced a suspension of its dividend payments.

Before the early 1990’s the newspaper industry was doing very well, earning monopoly like returns. Here’s an excrept from Berkshire Hathaway’s 1991 letter to shareholders, explaining why newspapers were a wide moat business in the past:

"The industry’s staggering returns could be simply explained. For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were theeasiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.

The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.

Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven."

The thing that is most important, as a dividend growth investor is that sectors and stocks come and go and not one thing is certain. One has to remain flexible and not concentrate his/her portfolio holdings in just a handful of stocks from similar sectors.

For example in 1989, the number of companies in the dividend aristocrats index was only 26. Only 7 of the original companies still remain in the index right now. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG. Even buy and hold investors should expect some turnover. The percentage of companies that remain in the index after 10 years is about 30%. There have been about 116 companies that have gone through the index for the 15-year period form 1989 to 2004.

In addition to that, one has to constantly look for new additions to their dividend portfolio, which could turn out well for them. Investors should never “get married” to a position. If the position does not perform as well as you expected, it is ok to sell, even if you are a buy and hold investor.

The best investment is always ahead of you, not behind you.

Relevant Articles:

- Historical changes of the S&P Dividend Aristocrats
- Gannett Co (GCI) Dividend Analysis
- Gannett (GCI) leaves dividend unchanged at $0.40/quarter
- When to sell my dividend stocks?

Wednesday, December 31, 2008

TARP is bad for dividend investors

TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:

Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)

There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.

There is some talk that a TARP funding to banks essentially marks the end of their dividends.

"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.


Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties."
Source TARP Capital Purchase Program

What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.

Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.

Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.

Disclaimer:

Long STT

Relevant Articles:

- My Dividend Growth Plan - Diversification
- My Dividend Growth Plan - Money Management
- Why do I like Dividend Aristocrats?
- Bank of America (BAC) Dividend Analysis
- BB&T Corporation (BBT) Stock Dividend Analysis

Tuesday, December 2, 2008

Dividend Capture Strategy – The illusion of getting something for nothing

Dividend Capture strategies are gaining popularity among speculators who don’t want to be too exposed to market risk, while also being able to pocket the dividends. My reader Ammar Husami asked me about my opinion on the subject. The dividend capture strategy is very different in comparison to my dividend growth strategy. Before we go any further, there are four important dividend dates that investors need to understand well.

Dividend Declaration Date – This is the date on which dividends are declared by the board of directors.

Ex-Dividend Date – The Ex-dividend date is usually two days before the record date. This is the first day that the stock trades without the right to receive a dividend. On this day the price of the stock will be reduced by the amount of the dividend. The reduction comes from the price of the last trade in the previous session. If you purchase a stock on the ex-dividend date, you won’t receive a dividend until it is declared for the next time period. In order to be able to get the dividend, you will have to purchase the stock before the ex-dividend date.

Record Date - Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

Payment Date – This is the date on which the dividends are deposited directly in your investment account or sent in the mail.
The most important date of all is the ex-dividend date. If you purchase a stock one day before the ex-dividend date and sell it on the ex-dividend date, you will be entitled to receive the dividends.

Let’s view an example of this strategy. Below you could find a sample press release from General Electric (GE):

"August 22, 2008 9:15 AM EDT The Board of Directors of General Electric Company (NYSE: GE) authorized a regular quarterly dividend of $0.31 per outstanding share of the Company's common stock. The dividend is payable October 27, 2008 to shareowners of record at the close of business on September 22, 2008. The ex-dividend date is September 18, 2008.GE is a diversified global infrastructure, finance and media company that is built to meet essential world needs."

The declaration date is August 22, as this is when the press release went out. The record date is September 22, while the ex-dividend date is September 18. The dividend was paid on October 27, to all shareholders who owned GE stock at the close of business on September 17, 2008.

The dividend capture strategy claims that if you purchased the stock on the 17th of September and held it until the 18th; you would be eligible to receive the dividend. The problem with this strategy is that it assumes that markets are not efficient. Dividend Capture does seem appealing to investors who believe that they could get something for nothing, which in an efficient market is almost impossible as all news are immediately priced into the stock. In addition to that even if the trader does receive the dividend payment, there is no guarantee that the stock price won’t fall by more than the amount of the dividend declared.

The issue of taxes also comes to mind when determining whether to do the dividend capture or simply enjoy a simple buy and hold dividend strategy. If you simply owned GE shares and received a dividend from them every quarter, then the highest that you would get taxed at is 15%. In order for you to be eligible for the 15% tax on dividends when you do the dividend capture strategy, you have to hold the stock for at least 61 days. Furthermore, if you sell a stock after holding it for less than one year you will pay short-term capital gains taxes which could be up to 35% for the highest income brackets.

If we go back to the example with GE, the stock closed at 23.39 on Sep 17th. If you sold it on the close on Sep 18 at 24.79 you would have not only made a nice gain and be eligible to receive the dividend, but also would have avoided the volatility in the stock price.

The main issue is that traders with a short-term mindset who are trying to take advantage of the capture strategy could be exposing themselves to market fluctuations. This strategy could be profitable during bull markets as stock prices in general increase which would help the speculators in unloading their position at a profit; during bear markets when the volatility is very high, the risk of catching a big wave down is much higher.

As always, do your own research before trying any strategy that promises free lunch. In the meantime, I have selected several stocks to watch during their ex-dividend days in order to see if there’s any advantage that a dividend investor could achieve by knowing about the strategy of capturing dividends. The following stocks will be trading ex-dividend on December 3:

Bank of America, BAC, dividend amount $0.32, dividend yield 9.96%
Kimberly-Clark, KMB, dividend amount $.58, dividend yield 4.22%
Merck, MRK, dividend amount $0.38, dividend yield 6.12%
Mattel, MAT, dividend amount $0.75, dividend yield 5.96%
Pepsi Cola, PEP, dividend amount $0.425, dividend yield 3.17%
Pepsi Bottling , PBG, dividend amount $0.17, dividend yield 4.40%

Full Disclosure: I own shares of KMB, PEP, GE

Relevant Articles:

- My Dividend Growth Plan - Strategy
- Cola Wars - Coke versus Pepsi
- Analysis of General Electric
- Kimberly-Clark (KMB) Dividend Analysis

Thursday, January 24, 2008

Some Charts to watch

Even though this blog focuses on achieving long-term dividend income, I think that sometimes it might be ok to satisfy my readers who have a shorter term objective at trading/investing than me. For a short-term trader it is imperative to look at charts in order to analyze the situation tick by tick, trade by trade. I myself used to focus on very short term trends ( 1-2 days) before I embraced the dividend growth strategy that I write about in this blog. If you look at the daily charts of SPY and DIA, two well-known exchange traded funds that follow the S&P 500 and Dow Joned 30 indices, you will notice the smaller than average trading range today. It looks as if the market is at crossroads right now - trying to decide whether to go up, continue moving down or just move sideways for a while.
If I were short-term trading this market, my orders for tomorrow for SPY would be:

Buy Stop X amount of shares @ 135.47 , stop loss @ 133.30 and trail your stop loss upward for every penny that the ETF moves in your direction.

Sell Short Stop X amount of shares @ 133.30 , stop loss @135.47 and and trail your stop loss downward for every penny that the ETF moves in your direction.


The orders for DIA would be:

Buy Stop X amount of shares @ 123.93 , stop loss @ 122.25and trail your stop loss upward for every penny that the ETF moves in your direction.
Sell Short Stop X amount of shares @ 122.25 , stop loss @ 123.93and and trail your stop loss downward for every penny that the ETF moves in your direction.


If SPY or DIA open tomorrow @ 9:30 AM ET above 135.47 and 123.93 respectively, then the long side of the trade should not be implemented, but the short side could still be done. If SPY and DIA open tomorrow morning below 133.30 and 122.25 you should not implement the short side of the trade, but the long could still be done.
Also, if one of the trades is triggered and then stopped out, you should take the second trade. The worst thing that could happen is a 2% loss.
You should try not to risk more than 1% of your capital on SPY or DIA ( assuming that you take only one of the trades). Therefore if your capital is 25,000 and you were trading DIA you shouldn't buy or sell short no more than 148 shares; if you decide to trade SPY you should trade no more than 115 shares. (115 shares X $2.17 risk per share =almost 250, which is exactly 1% of your account balance).
Anyways, enough about our short-term trader audience. Good luck tomorrow everyone!

Tuesday, January 22, 2008

The Fed Cut Rates by 0.75% this morning!

The Federal Reserve Cut its rates by 0.75% today. I think that we have a pretty good opportunity to go long the market today, if the S&P 500 exceeds its 30 minuite high, with a stop loss at the 30 min low. However you should do this only for a trade and if entered into the trade, please trail your stop to cut your losses and/or protect some of any profits. Exit at the close if you are not stopped out. I expect further turbulence in the markets. Unfortunately fixed income is not going to yield as much so certificates of deposit would yield much less. I normally buy my CD's from Bank Midwest, which offers a competitive yield on their 9 month certificates.



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