Friday, January 30, 2009

Procter & Gamble (PG) Dividend Stock Analysis

(This article originally appeared on The DIV-Net January 23, 2009.)

The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care.

Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 52 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 3.10 % to its shareholders.

At the same time company has managed to deliver a 12.10% average annual increase in its EPS since 1999.

The ROE has decreased from 35-45% range in early 2000s to 18% by 2008. The severe drop in ROE seems to be mainly an effect of the Gillette acquisition.

Annual dividend payments have increased by an average of 10.90% annually over the past 10 years, which is lower than the growth in EPS.
An 11% growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1973, PG has actually managed to double its dividend payment every seven years on average.

If we invested $100,000 in PG on December 31, 1998 we would have bought 2190 shares (Adjusted for a 2:1 stock split in 2004). In March 1999 your quarterly dividend income would have been $312. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1069 by October 2008. For a period of 10 years, your quarterly dividend income would have increased 181%. If you reinvested it however, your quarterly dividend income would have increased over 243%.

The dividend payout has remained below 50% for the majority of our study period, with the exception of a brief spike in 1999 and 2000. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
I think that PG is attractively valued with its low price/earnings multiple of 15, a not too high DPR. However the current dividend yield is below the 3% minimum threshold that I have set. Two of PG’s competitors, JNJ and KMB both trade at P/E multiples of 13 times earnings. JNJ currently spots a 3.20% dividend yield, while KMB has a 4.40% yield. I would consider adding to my PG holdings on dips below $53.30.

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Wednesday, January 28, 2009

Using Tax Loss Harvesting to Find Dividend Bargains

There are two things that are certain in life- death and taxes. When investors sell a stock for a gain, they must pay either a long term or a short-term capital gains tax. Another example of taxable events concerning dividend investors in particular is that whenever a company sends a dividend check to you, you must recognize it as income and pay taxes on it, even if you choose to directly reinvest it in more shares.

Most investors who choose to avoid paying taxes for as long as possible open a retirement tax deferred account instead of going with the typical taxable account venues. Examples of tax-deferred accounts include Roth IRA’s, regular IRA and 401k.
There are of course pros and cons to investing through a taxable versus a non-taxable investment account.

The main reason for using a tax-deferred account is that your profits – capital gains and dividends are re-invested and compounded tax-free for decades before you even have to pay a dime in taxes.

The main reason why you should utilize taxable accounts is tax loss harvesting. The IRS lets you claim a deduction for investment losses against your ordinary income, up to $3,000 each year. However, if your total net capital loss is more than this amount, you can carry your losses forward to use in future years. If you have taxable events such as dividends or capital gains, you will have to pay taxes to the IRS.

Many investors use tax loss harvesting to sell their biggest losers in the final days of the year in order to get the tax benefits of this action. Investors then have to wait for 30 days before they purchase back the securities that they had sold in order to avoid the wash sale rule.

Given the fact that many investors tend to lock in the losses at year-end for tax purposes, one could expect to find some decent bargains at year-end. In fact, there is a strategy called January Effect which is the tendency of the stock market to increase between December 31 and the end of the first week in January. Once the tax calendar rolls over to a new year on January 1st investors quickly reinvest their money in the market, causing stock prices to rise. Furthermore, once there are fewer sellers left in the markets, an even slight increase in demand could lead to dramatic increases in stocks which were sold at the very end of the prior year.

As a result, I identified the worst performers in the S&P Dividend Aristocrats for 2008. Further research in order to determine how sustainable the financial situation really is, should be performed on a case-by-case basis as well. As a group however all of these companies have a sustainable payout as well as a defensive business model that should work out well in a recessionary period.

The companies for further research include:

Full Disclosure: Long APD,DOV,EMR,MHP,NUE,PEP

Relevant Articles:

- Dividend Aristocrats List for 2009
- When to sell my dividend stocks?
- Why do I like Dividend Aristocrats?
- Worst Performing dividend stocks so far in 2008

Tuesday, January 27, 2009

Pfizer/Wyeth Merger Arbitrage Opportunity

Yesterday, the big news that moved markets was Pfizer’s 68 billion dollar acquisition of rival Wyeth. Pfizer will pay $33 in cash plus 0.985 shares of Pfizer stocks for each share of Wyeth. At Monday Wyeth closed at $43.39, which is 10.30% lower than the combination of Pfizer stock and cash, at the current price for Pfizer at $15.65.

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.?

1. The next step in the process is that Pfizer will file with the SEC a Registration Statement on Form S-4 that will include a proxy statement of Wyeth that also constitutes a prospectus of Pfizer. Wyeth will mail the proxy statement/prospectus to its stockholders. The transaction is subject to the approval of Wyeth shareholders, and other customary closing conditions. The deal is likely to be reviewed by the Federal Trade Commission, which typically handles pharmaceutical acquisitions.

The transaction will be financed through a combination of cash, debt and stock. A consortium of banks has provided commitments for a total of $22.5 billion in debt, $22.5 billion in cash and 23 billion in equity. The deal is being financed by five banks: Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs and J.P. Morgan Chase.

2. Pfizer and Wyeth expect the transaction to close at the end of the third quarter or during the fourth quarter 2009.

3. Given the size of the deal it is unlikely that another suitor will come after Wyeth. One potential suitor that comes to mind could be Novartis (NVS). which will experience a similar problem just like Pfizer between 2011 and 2012, as several prominent drugs such as Diovan, Zometa,Femara, Lescol and Exelon which accounted for over one fifth of the pharmaceutical company’s 2007 sales will face US patent expirations.

4. The proposed transaction is subject to customary closing conditions, including approval by the stockholders of Wyeth, notification and clearance under certain antitrust statutes. In addition, the proposed transaction is subject to Pfizer's financing sources not declining to provide the financing due to a material adverse change with respect to Pfizer or Pfizer failing to maintain credit ratings of A2/A long-term stable/stable and A1/P1 short term affirmed. There are
no other financing conditions to closing in the merger agreement. Pfizer is financing the $22.50 billion debt with a jumbo one-year bridge loan and almost all the cash on its balance sheet.
After one year however, that bridge loan will come due and will have to be traded in for permanent financing, which could be jeopardized if the credit crunch hasn’t loosened by then.
After the deal was announced Fitch Ratings downgraded Pfizer's credit rating to 'AA' from 'AA+,' and placed the company's ratings on a negative watch. Moody's Investors Service and Standard & Poor's are reviewing their ratings on the acquirer. In the Pfizer loan agreement for the takeover, the banks can step back if Pfizer’s credit rating falls five notches below AAA to A or A2. If Pfizer’s credit rating falls enough for the banks to decline to finance the deal, Wyeth could potentially walk away with $4.5 billion.

In a document filed with the SEC there were several reasons why the deal might not go through
“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”

This would be an interesting deal to watch. Wyeth is trading at $43.39, Pfizer at $15.65, and the value of each WYE share if tendered by PFE today is $48.41. In the event that the deal closes as planned by late 3Q or early 4Q 2009, arbitrageurs could make as much as 11.50%.

For updates on the merger, check out this page.

Relevant Articles:

- Pfizer’s deal with Wyeth could be a blessing for shareholders, not as good for long term growth.
- Is Pfizer (PFE) a value trap for investors?
- Dividend Aristocrats in danger
- Constellation Energy (CEG) Merger Arbitrage Opportunity.

Monday, January 26, 2009

Pfizer’s deal with Wyeth could be a blessing for shareholders, not as good for long term growth

There has been speculation on Friday that Pfizer might be looking to acquire Wyeth for 68 billion dollars. This morning PFE confirmed that it will indeed purchase WYE for $50.19/share - $33 in cash in addition to 0.985 shares of PFE. Despite the tough credit environment, Pfizer could still afford to get the financing to pay such a steep price since its balance sheet is conservative with over 26.8 billion in cash and equivalents for the quarter ending September 28, 2008. Furthermore pharma companies are seen as recession resistant enterprises, which makes lending to them a lower risk activity.
Various sources report that the deal could be financed through a compbination of debt and stock. Wyeth shareholders could receive up to $50.19/share in cash and Pfizer stock. Check out my recent review of Pfizer.

The major issue with Pfizer has been its inability to bring to market new blockbuster drugs, which would replace the revenues that the company would lose as a large portion of its drugs lose their patents around 2011-2012. Lipitor, which accounts for a quarter of company’s sales, is losing its patent in 2011. Despite spending between $7.2 and $8.1 billion annually on R&D over the past four years, Pfizer has not come out with any blockbuster drugs to replace the revenues its will lose from its major drugs that will be losing their patents. Some analysts estimate that Pfizer will lose 50% to 70% of its revenues by 2015 if it doesn’t bring new drugs to the market. Despite major cost cutting initiatives, the potential losses in revenues could potentially put the dividend payment in danger. Most recently Pfizer failed to increase its dividend to shareholders for the first time in 42 years. Right after the merger announcement, Pfizer's board also announced a 50% cut in its quarterly dividends to $0.16/share.

If Pfizer acquired Wyeth, it would be able to achieve an extra 23 billion in sales from Wyeth’s portfolio of drugs. Wyeth’s revenues are more diversified and unlike Pfizer the company does not rely on a single drug for a large portion of sales. Furthermore WYE has one of the best new product pipelines in the pharmaceuticals industry with over 60 news products in development. Some of the most important new drug launches include Tygacil, Torisel, Lybrel and Pristiq. Wyeth got three drugs approved last year -- antidepressant Pristiq, Relistor for constipation caused by narcotic painkillers, and the hemophilia drug Xyntha.

Some analysts are questioning whether a Pfizer/Wyeth merger is the best action for both companies, as it provides only a temporary solution to big pharma’s long term problems of focusing only on a handful of major blockbuster drugs which are harder to come, instead of creating multiple smaller partnership with biotech firms in order to capitalise on a wide portfolio of other drugs with lower revenues, which could grow much faster. It definitely seems as if Pfizer has been able to acquire its way in the drug business by merging with and acquiring rivals, including Warner-Lambert in 2000 and Pharmacia in 2003, instead of actually inventing useful drugs for treatment of diseases such as heart problems. Despite the fact that these two mergers have benefited earnings and revenues, Pfizer’s stock has lost more than two thirds of its value from its 2000 highs.

I view this merger very positively as a major development for Pfizer, which has spent the past few years mostly returning capital, instead of working on developing projects that would sustain current dividends and even promise increases in the future. The current acquisition will most probably lead to unchanged dividends for several years and Pfizer losing its dividend aristocrat status, as its board announced a 50% reduction in dividends. Most companies that are kicked out of the prestigious dividend index stop increasing their payments to shareholders because they are saddled with debt after acquisitions in their field. The good news is that at least the dividend payment is typically maintained in such cases. If the deal goes through, Pfizer shareholders will benefit in the near term. Without changing the company culture to actually create the drugs in house without paying a premium by acquiring rivals, Pfizer would face similar problems several years down the road, as some of Wyeth’s drugs face increased generic competition in the future, as they lose their patents.

Full Disclosure: None

-Is Pfizer (PFE) a value trap for investors?
-Dividend Aristocrats in danger
-Dividend Aristocrats List for 2009
-2009 Dogs of the Dow

Busy Week for Dividend Increases

As more and more large cap companies unveiled their results, there were many dividend announcements as well. Other large cap companies such as Intel, Microsoft, IBM and Google released quarterly results and provided guidance for future quarters. Other companies such as Bank of America set a negative tone with their most recent dividend cut, while others like General Electric provided reassurance that their dividend and triple A rating are safe and will be maintained. Despite the negative news several notable dividend increases occurred over the past week. This has been the most dividend increases I have seen since I began reviewing weekly changes in dividend policies for US publicly traded entities in 2008.

Polaris Industries Inc. (PII) announced that its Board has approved a 3% increase in its quarterly dividend to $0.39 per common share. Polaris Industries Inc. is a dividend achiever, which has consistently increased its dividends for 14 years. The stock currently yields 6.40%.

Pall Corporation (PLL) announced that its Board has approved an 11.50% increase in its quarterly dividend to $0.145 per common share. Pall Corporationis has consistently increased its dividends since 2005. The stock currently yields 2.00%.

Canadian National Railway (CNI) announced that its Board has approved a 10% increase in its quarterly dividend. Canadian National Railway is an international dividend achiever, which has consistently increased its dividends for 13 consecutive years. The stock currently yields 2.30%. The company has managed to double its dividends every four to five years since 1996.

Westamerica Bancorporation (WABC) announced that its Board has approved an increase in its quarterly dividends from $0.35 to $0.36 per common share. Westamerica Bancorporation is a dividend achiever, which has consistently increased its dividends for 17 years. The stock currently yields 3.10%.

ALLETE, Inc. (ALE), which engages in the generation, transmission, distribution, and marketing of electrical power, announced that its Board has approved a 2.3% increase in its quarterly dividends to $0.44 per common share. The stock currently yields 5.70%.

Natural Resource Partners L.P. (NRP), which engages in the ownership and management of coal properties, announced that its Board has approved an increase in its quarterly dividends to $0.535 per common share. Natural Resource Partners L.P. has consistently increased its dividends almost every quarter since going public in 2003. The units currently yield 10.20%. Over the past 5 years the partnership has managed to double its dividends.

Comm Bancorp, Inc. (CCBP) announced that its Board has approved an increase in its quarterly dividends from $0.27 to $0.28 per common share. Comm Bancorp, Inc. has consistently increased its dividends since 2005. The stock currently yields 2.90%.

Hudson City Bancorp, Inc. (HCBK) announced that its Board has approved an increase in its quarterly dividends to $0.14 per common share. Hudson City Bancorp, Inc. has consistently increased its dividends since 2000. The stock currently yields 4.00%.

Wesco Financial Corporation (WSC), which engages in insurance, furniture rental, and steel service center businesses, announced that its Board has approved a 2% increase in its quarterly dividends from $0.385 to $0.395 per common share. Wesco Financial Corporation is a dividend champion and an achiever, which has consistently increased its dividends for 37 years. The stock currently yields 0.50%.

Genuine Parts Company (GPC), which is engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical/electronic materials, announced that its Board has approved a 3% increase in its quarterly dividendsto $0.40 per common share. Genuine Parts Company is a dividend champion and an achiever, which has consistently increased its dividends for 53 years. The stock currently yields 4.80%.

Magellan Midstream Holdings, L.P. (MGG), which owns and controls Magellan GP, LLC, the general partner of Magellan Midstream Partners, L.P. (MMP), announced that its Board has approved an increase in its quarterly dividends to $0.359 per common share. Magellan Midstream Holdings, L.P. has consistently increased its dividends since it went public in 2006. This MLP currently yields 9.10%.

CMS Energy (CMS), which operates in energy businesses primarily in Michigan, announced that its Board has approved a 40% increase in its quarterly dividends to $0.125 per common share. CMS Energy had suspended its dividend in 2002 and initiated a reduced payment in 2007. The stock currently yields 3.00%.

Healthcare Services Group, Inc. (HCSG) announced that its Board has approved an increase in its quarterly dividends from $0.16 to $0.17 per common share. Healthcare Services Group, Inc. has consistently increased its dividends since 2003. The stock currently yields 2.00%.

The four stocks that grabbed my attention for further research include Polaris Industries, Canadian National Railway, Westamerica Bancorporation and Genuine Parts Company.

Full Disclosure: Long GE

Relevant Articles:

- Bank of America (BAC) might have to cut dividends
- Dividend Stocks in the news includes General Electric.
- TARP is bad for dividend investors
- Is GE’s dividend safe?

Friday, January 23, 2009

Dividend Investing Resources

I often get asked for assistance in finding the best information on dividends out there. I have compiled a list of helpful links for your reference.

No matter if you are a new or a seasoned dividend investor, there are several lists containing high quality dividend stocks which could provide a good start in your research. Such lists include the Dividend Aristocrats and the Dividend Achievers. I have mentioned previously what I liked about the Dividend Aristocrats and the Dividend Achievers as well.

Here’s a list of current dividend aristocrats. Here’s a list of the current members of the dividend achievers index.

For more financial Information which could aid in researching particular stock issues check out the resources below:

Morningstar - It provides ten year trend information for balance sheets, income statements and cash flow statements, which could be really useful for any fundamental investors.

Value Line- The best features of this service that I like are the historical Dow Jones charts along with dividends and earnings going back to 1920. Another extremely useful glimpse of Value Line’s services is the complementary list of free stock reports covering all 30 Dow Jones industrials companies.

SEC – The Securities and Exchange Commission website is where you could find a variety of filings, including but not limited to financial statements filed by public companies. Other filings include ownership changes by major investors such as Warren Buffett.

ADVFN – This site also provides useful historical financial information on US and foreign stocks. One thing that I like ADVFN better than Morningstar is that it offers free financial statement historical data for up to 15 years.

Google Finance – I enjoy checking recent quarterly or annual financial statements at Google Finance, as they seem to be updated more often than other sites offering similar services. This site is still in a Beta Version, so I would expect Google to add more functions to this service.

Yahoo Finance – I use Yahoo Finance for historical prices and dividends on the stocks I am researching. You could also create portfolios after you register, and track news related to the stocks that interest you. You should always try to check your information with other sites however, as I have found on several occasions missing data pertaining to stocks going ex-dividend. One another thing that I like about Yahoo Finance is the ability to check the holdings of various indexes, including the various Dividend Achievers Indexes.

If you are looking to learn more about dividend investing, then I would recommend starting out with The Div-Net, which has many members. The site is updated at least once a day with useful information pertaining to value and dividend investing.

Relevant Articles:

- The Dividend Investing and Value Network (DIV-Net)...
- Why do I like Dividend Aristocrats?
- Dividend Conspiracies
- Why do I like Dividend Achievers

Thursday, January 22, 2009

Can USB and WFC maintain their current dividends?

There has been a lot of speculation lately that Wells Fargo and US Bank will seek further TARP assistance, which might lead to dividend freezes or even worse, dividend cuts. Investors fear that banks will follow Citigroup and Bank of America in getting a second round of TARP financing as credit losses and provisions for credit losses keep increasing. While both USB and WFC are regarded as the strongest US banks at the moment and one of the few that will survive the financial crisis in their entirety, both companies are having a tough time convincing shareholders that they are a good investment.

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, which could lead to it losing its dividend aristocrat status. Yesterday the Minneapolis based institution reported a steep drop in 4Qearnings for to $0.15/share. This brings the 2008 EPS to $1.62. This marks the second quarter in a row that the company didn’t cover its current payments to shareholders. US Bank had to set aside $1.27 billion during the quarter to cover bad loans, compared to a loan loss provision of just $225 million in the fourth quarter of 2007. Furthermore the company continues to see deterioration in several of its loan portfolios, with chargeoffs to total loans ratio increasing to 1.4% from 0.6%. Its nonperforming loans stood at $2.62 billion, of which $0.64 billion were from the two failed California banks it recently acquired.
Investors ran for the exits, sending the stock to the lowest level since 1995. With its current yield of over 11% however, most investors are expressing serious doubts about the sustainability of the current dividend payments. Check out my analysis of USB from this link.

Wells Fargo is another financial institution whose shareholders are experiencing a roller coaster ride in their portfolios. On Thursday, an analyst from Friedman, Billings, Ramsay said the financial giant will likely have to cut its dividend. The analyst reiterated that current dividend reduces tangible common equity $5.65B annually. It remains to be seen what problems did Wells Fargo inherit with its most recent Wachovia’s acquisition. 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 current dividend of $0.34/share is well covered by earnings for the first three quarters. Wells is scheduled to report 4Q earnings on January 28, which will provide a better guidance to credit losses and issues related to Wachovia’s acquisition.

Full Disclosure: None

- TARP is bad for dividend investors
- Dividend Aristocrats List for 2009
- USB Dividend Analysis
- Bank of America (BAC) might have to cut dividends

Wednesday, January 21, 2009

Dividend Yields for major US indexes

When investing in index funds, Investors typically focus on the dividend yields on the indexes as a barometer for the whole market. With yields on major US indexes rising above the 10 year Treasury Notes for the first time in over 50 years, dividend stocks look more promising to investors seeking current investment income.

One thing to note however is that not all stocks in major US indexes pay dividends. Only 368 out of 500 stocks in the S&P 500 pay dividends. The average yield on those is 3.73% , which is a full percentage point higher than the yield on the broad market benchmark. (source indexarb). Dow Industrials is the most “dividend friendly” index as 29 out of 30 of its components pay dividends. Furthermore most of the stocks in the Dow Industrials also have had a long history of stable dividend rates or consistent dividend raises. General Motors is the only stock in the Dow Jones that doesn't pay a dividend.

Nasdaq 100 is the tech heavy index which consists of only 31 dividend payers, out of 100 stocks in the index overall. Without the power of dividends, the once high flying index might take much longer to reach its 2000 highs versus the fifteen years that took Dow Industrials to reach its 1929 highs after the Great Depression.

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Monday, January 19, 2009

Six Dividend Stocks Raising the bar

The stock market averages keep responding in a way that shows investors are expecting the worst in terms of profitability for most major US and Global corporations. Some pundits are getting bullish, while others are getting increasingly bearish. The odds of both camps being correct are slim to none. With this confusing information, what are investors supposed to do?
My main recommendation for buy and hold investors is to ignore all the day to day chatter and forecasts, since noone can predict enough market movements in order to make money. The best course of action to take is to assume a long-term strategy of buying stocks that keep increasing their dividends even during the current uncertain economic and market conditions.

CVS Caremark Corporation (CVS) announced that its Board has approved a 10.5% increase in its quarterly dividends to $0.07625 per common share. CVS Caremark Corporation has consistently increased its dividends since 2003. The stock currently yields 1.10%.

Cintas Corporation (CTAS) announced that its Board has approved a 2% increase in its annual dividends from $0.46 to $0.47 per common share. Cintas Corporation is a dividend achiever, which has consistently increased its dividends for 25 years. The stock currently yields 2.00%. Over the past 8 years the company has managed to double its dividends.

Enterprise GP Holdings L.P., (EPE), which is engaged in the ownership of general and limited partner interests of publicly traded partnerships engaged in the midstream energy industry and related businesses, announced that its Board has approved an increase in its quarterly dividend to $0.47 per unit. Enterprise GP Holdings L.P. has consistently paid and increased its dividends every single quarter since 2005. The partnership shares currently yield 9.20%.

Linear Technology (LLTC) announced that its Board has approved an increase in its quarterly dividend from $0.21 to $0.22 per common share in an effort to return value to shareholders. Linear Technology is a dividend achiever, which has consistently increased its dividends since 1992. The dividend growth has been astounding, as LLTC has managed to double its dividend payments to shareholders every three years on average for the past 16 years. The stock currently yields 3.80%.

Monsanto Company (MON), announced that its Board has approved a 10% increase in its quarterly dividend from $0.24 to $0.265 per common share. Monsanto Company has consistently increased its dividends since 2001. In fact the new dividend payment represents a 489% increase in comparison to the first dividend payments in 2001 of $0.045/share. The stock currently yields 1.20%.

Family Dollar Stores, Inc. (FDO) announced that its Board has approved a 8% increase in its quarterly dividend from $0.125 to $0.135 per common share. Family Dollar Stores, a dividend aristocrat that has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 1.80%.

LLTC looks like a promising dividend growth stock in order to gain some technology exposure in my dividend stock portfolio. I will add it to my list for further research. FDO looks promising in the current economic environment, however due to its low yield I would only consider initiating a position there on dips below $18.

Full Disclosure: Long FDO

Friday, January 16, 2009

When to buy back dividend shares that you have previously sold?

In a previous article, I discussed that when your dividend stock cuts or eliminates its dividend, it would be a good decision to admit that you were wrong on this decision and sell immediately. I understand that selling and admitting that one is wrong is a very difficult decision from a psychological standpoint. But it is essential to cut your losses on some investments that you would not otherwise consider buying in order to protect your capital and stay in the game.

Admitting that you are wrong and taking a decisive action, instead of hoping that the things would turn out for the better works both ways. When companies cut their dividends, I sell their stock immediately.My recent experience with ACAS is an example of that. However when a company that has cut or eliminated their dividends announces that it would start increasing its dividends again or its initiating a dividend payment I would definitely consider initiating a position. Dollar cost averaging my way into this position could be an ideal way to get a feel of how your investment might perform. Another entry signal that one could look for is for the company to increase its dividends for at least ten years, before buying back their shares in the stock.

Relevant Articles:

- Dollar cost averaging
- Dividends and The Great Depression
- ACAS Dividend News
- Worst Performing dividend stocks so far in 2008

Wednesday, January 14, 2009

Don’t chase High Yielding Stocks Blindly

Most investors who are close to or in retirement look for dividend stocks as a source of their retirement income. I believe that this is a great investment strategy, as long as these investors don’t chase high-yielding stocks. With the average market yields at 3%, stocks that yield more than 10% should not be automatically embraced in ones income portfolio, but examined more closely than usual. There are several reasons why a stock is yielding over 10%, one of them could be that the stock price has been in a severe down trend, which has increased the current yield on the stock.

Every dividend investor should be focusing not only on dividend income, but also evaluating the safety of their principal. If the high-yielding stock is paying a 10% current yield, but most of it is a return of capital, then chances are that the dividend payment will not be maintained in the future as the company’s capital base shrinks. Furthermore if a stock used to yield 3% but due to a decrease in its stock price is yielding 12%, the market might be sending a message that the current dividend payment is in danger of a cut. Financial companies like Bank of America (BAC) and Citigroup (C) in 2008 are a prime example of this scenario, as their current yields rose to 8%-10% because their stocks fell sharply in response to the softening of the general economy. Investors who purchased these stocks were hit on two fronts – the share prices dipped lower and the dividends were cut, which decreased yields on cost significantly. In other words if you are chasing a 30% dividend yield, then make sure that you don’t lose a lot in capital gains in the process. My experience with American Capital Strategies (ACAS) was a very good example of chasing a high-yield stock and getting burned in the process.

Before you invest your hard earned money in a dividend stock, always try to gauge how safe the dividend is, by looking at the dividend payout ratio and the dividend in relation to the cash flows per share. A high dividend payout ratio would tell you in most situations that the probability of any further dividend increases is greatly diminished. For most of the dividend aristocrats a dividend payout ratio of 50% or below indicates a healthy relation between the distributions and earnings, which also provides the dividend investor with a margin of safety. Lower dividend payout ratios also provide for more room to support for future dividend increases. There are however certain stocks which pay out more than 50% of their payout ratios to shareholders such as utilities, Canadian royalty trusts, Master limited Partnerships, oil tanker stocks as well as real estate investment trusts. Many investors, focusing on current income are buying onto these stocks in order to generate higher yields on their investments. The reason why these investments produce above average yields in most circumstances is because they also return capital as part of their distribution to stockholders. This is similar to you selling off a portion of your dividend holdings each year, and claiming the proceeds from this exercise a distribution to you. As dividend investors your primary goal is to generate income from earnings, which could be increased over time in order to beat the eroding power of inflation.

Investors shouldn’t focus exclusively on pass through entities such as Canadian Royalty trusts like PGH, PWE, HTE and MLP’s such as KMP and TPP as their investments could easily lose money if there are changes in the tax codes, which could negatively affect their portfolios. For example prior to 2006 many retired Canadians owned income trusts, which were taxed very favorably and paid out very handsome yields. In 2006 however the Canadian government announced that it was changing this corporate structure in 2011, sending trusts shares along with their distributions much lower.

Now I do believe that creating a diversified portfolio of income producing investments could include oil tankers, Canadian royalty trusts, master limited partnerships and real estate investment trusts. The goal of your retirement portfolio should be to not to overweight these investments with high current yield, but unstable dividend payments. In 2008 overweighting of shipping stocks such as DSX or FRO would have lead to decreases in dividend income as these stocks either cut severely or suspended their payments to shareholders.

I also believe that dividend investors should be tracking their yield on cost more closely than current yield. Yield on cost tracks the dividend yield on your original investment. If you bought a stock like JNJ, PG, MO one or two decades ago, you would be making a pretty decent yield on cost nowadays, which is close to what certain high yielding investments generate today.

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- The price of higher current yield -Canadian Royalty Trusts

- The case for dividend investing in retirement

- Ten Things to Know About Dividends:

- Diversification and portfolio allocation

This article appeared on The Div-Net one week ago.

Tuesday, January 13, 2009

Bank of America (BAC) might have to cut dividends again

Yesterday a bearish report from Citi Investment Research analyst Keith Horowitz sent Bank of America shares 12% lower. The analyst announced that he was expecting further deterioration in Bank of America’s earnings, by cutting his projection for 2009 EPS to just $0.25/share. Given this information, the current quarterly dividend of $0.32/share might not be sustainable.

The analyst expects that Bank of America might have to cut its dividend again, which could happen as early as January 20, when the company reports its latest quarterly results.

As a long-term investor, I typically ignore articles like that, since I seriously doubt that anyone in the investment banking community has any sustainable forecasting abilities. Instead I try to focus on something that is not as volatile as stock prices – I focus on a diversified list of companies from a variety of industries that have consistently grown their dividends over time. Nobody knows where the market is going to be in one year, five years or a decade. If you are able however to pick the best dividend stocks for the long run, you will be able to generate enough dividend income from your portfolio that would cushion any unsustainably severe bear market declines.

In the case of Bank of America however, I won’t be surprised if the company does indeed cut its dividends as it faces further writedowns, frozen credit markets and TARP restrictions. Several once prominent banks have cut their dividends twice since early 2008. Investors who were hoping that the worst is over suffered significant declines in their passive incomes again and again. Some fresh examples of this include FITB, C and KEY.

In summary I believe that the issue of Bank of America’s dividends is not if it will cut, but when it will do so. Historically, one of the main reasons why companies have lost their dividend aristocrats status between 1989 and 2004 is dividend freezes or cuts related to merging two different companies or restructuring ongoing operations. In the case of BAC, the company has purchased Countrywide and Merryl Lynch, which definitely will pose huge integration issues. These integration issues might make the company’s business less transparent, which could also mean that BAC might not be a good value even at $11/share.

Relevant Articles:
- Bank of America (BAC) Dividend Analysis
- Why do I like Dividend Aristocrats?
- Historical changes of the S&P Dividend Aristocrats
- Dividend Aristocrats List for 2009

Monday, January 12, 2009

Taking Stock in Coca-Cola (KO):

This is a guest post from Brad, who maintains and I have always enjoyed Brad's thorough stock analyses. Luckily, he is starting out a quality stock analysis subscription service which will definitely benefit your investment performance.

When you first examine Coca-Cola (KO) there is an immediate emotional response many individuals have to their product(s). Love it or hate it; the products of this company are consumed on a daily basis globally to the tune of nearly 1.5 billion times. To put this in some perspective that's the equivalent of 25% of the global population consuming a minimum of one product sold by the Coca-Cola Company each and every day.

This is the brand power on a massive scale with a strong domestic history in North America dating back to 1886. Globally Coca-Cola products are sold in over 200 countries and the company is the "largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the world." The company sells four of the top five carbonated brands around the world (Coca-Cola, Diet Coke, Sprite & Fanta), owns or licenses an additional 450 brands and possesses the largest beverage distribution system on the planet.

Coca-Cola operates in distinct global structures currently organized in the following regions:
  • Africa
  • Eurasia
  • EU
  • Latin America
  • North America
  • Pacific
  • Bottling Investments
  • Corporate
Global sales (non-North American) accounted for 76% of total revenues for the company in 2007 and provided 10% of total worldwide sales of all non-alcoholic beverages. 10% may seem small upon initial examination, but when you consider competition from PepsiCo, Nestle, Cadbury Schweppes, Groupe DANONE, Kraft Foods, Unilever and non-alcoholic products sold by global breweries the truly dominant presence of this company can be easily grasped.

The company in the face of such global competition has done an excellent job of concentrating on my Value Rule of doing what you do best. The company has not expanded operations into food or alternative products instead deciding to focus nearly exclusively on sparking and still beverages. This concentration on beverages and syrups for drink consumption allows the company to operate from a much lower cost structure which I will touch on later in depth.

From a quality control perspective the company holds ownership in 75% of all production, bottling and distribution operations in their global supply chain representing equity positions in 46 of its unconsolidated bottling operators. This is a significant strength for the company as it enables management to maintain tight control of operations, quality control, efficiencies in production & distribution and prevents operating risks from various disruptive elements. When you manage so many brands globally worth billions of dollars your focus on control should always be very high and sustained. It would cost too much for KO to operate independently in so many global markets and partners (majority or minority owned) allow the company to maintain oversight on important aspects of their business while not absorbing the entirety of costs. Specifically any equity investment in production and distribution operations ensures the company maintains control and protects its intellectual property such as product recipes or product development research.

The global economy has shown clear evidence of contraction coming out of 2008 and any global business can anticipate a slowing of growth in a number of markets. Concerns for KO exist currently in North America, Great Britain, Germany, India, Japan and Philippines for various economic or logistical reasons. Competitive factors always need to be accurately addressed when analyzing a company and there certainly is no shortage of global or domestic competition for the market share of Coca-Cola products. Competitive factors play a very important role in how the company executes pricing, advertising, sales, promotional programs, product innovation, production efficiencies, packaging technology, vending equipment, brand development and trademark protection.

KO has direct exposure to bottling and distribution operations of its products because of equity stakes in these businesses that are responsible for bringing their products to market. One major concern of late has been the increasing material costs and energy in the production and bottling process. The largest core cost for the company is nutritive & non-nutritive sweeteners such as high fructose corn syrup, sucrose, aspartame, acesulfame potassium, saccharin and sucrolose. These products are found in high concentrations in Coca-Cola products and recent high corn prices, while down in recent months, and have led to increased costs in raw materials required for production. Energy is needed not only to ship product to market but a large amount of heat is needed in the production process to appropriately dissolve the large amounts of sweeteners placed into the company's syrup products.

A significant threat to the company is the extent to which Coca-Cola operates globally in over 200 countries. In each country the company operates within there are abundant government regulations or restrictions on product safety, product composition and competition. Governments, regardless of their composition, tend to be unpredictable in making rational decisions at times and this can adversely affect a business that has plans for expansion but is met by political resistance. It would not be uncommon for any government (local or regional) to adjust current laws or regulations to better protect national interests or competitive issues relating to their own domestic brands. The recent issue taken by The Food & Drug Administration (FDA) on Coca-Cola's new Diet Coke Plus demonstrates the oversight and resistance that the company can encounter when attempting to develop and market new products.Availability of key infrastructure is a current concern of mine, most specifically in India, where production, distribution and energy requirements are providing barriers to growth of the company's operations. In order for the company to meet food and safety, operating standards and distribution schedules in various markets the company requires the proper infrastructure in order to deliver market demand. Building domestic infrastructure is beyond the financial capacity of Coca-Cola in these markets so product either needs to be shipped farther distances into new markets or not offered due to complications of such limited logistics. With such a concentrated focus on the Chinese market I feel many investors have missed the clear barriers to entry that KO faces in many other emerging economies.

Coca-Cola battles this lack of available infrastructure with a focus on brand development in emerging consumer markets and establishing a very strong emotional response to their products. They sponsor large sports events, become integrated in communities through charitable events and spend large amounts of money on effective advertising. Once the brand has been successfully entrenched into a market domestic competition and governments have found it very difficult to place restrictions on their growth or to motivate change in consumer perceptions.

In recent years public initiatives have been created to restrict the sale and distribution of Coca-Cola and PepsiCo products within schools citing the concern for the recent and significant increases in obesity of young children. Some municipalities, school boards or governments have successfully implemented bans on dispensing machines in schools, but others have found strong resistance from school boards who receive lucrative donations to their sports teams, social programs or for new equipment as part of a negotiated partnership with one of the large corporations. The focus here, ethics aside, for the companies is their clear interest in funding social programs for brand development with the initiative to create lifelong loyalty to their brands and products by impressionable youth and create habit forming behaviours.

There are also a high number of serious economic, technological and social threats to the growth and profitability of KO. Each of the following items I've cited as a major concern for the company and are being handled adequately using a variety of methods by management:
  • The increasing trends in health awareness are here to stay and KO has been proactive with increased product development and advertising of brands such as Diet Coke and Fanta as well as the recent successful launch of their Zero products (Coke Zero, Sprite Zero).
  • Fresh water continues to be a concern as availability; prices and resources come under increased pressure in developing economies and markets. The health of consumers is a top concern of the company when they examine a market and spend considerable expense securing and treating water used in their products either directly or indirectly in the manufacturing process.
  • With the global economy likely to contract into 2009 growth and expansion into emerging markets may be more difficult than the company had previously targeted. This may put pressure on marketing budgets, but will likely lead to consolidation in the industry as smaller companies with high quality brands don't have access to credit/financing or aren't able to service high levels of internal debt.
  • Foreign currency and interest rates are major factors in the profitability of the company. Management balances the risk of operating in so many countries by hedging their exposure with derivatives. KO hedges operations up to 36 months in advance with most derivative instruments expiring within 24 months or less of their creation. While financial derivatives have been a toxic element to many businesses in the recent credit environment hedges held by the company help buffer cashflow from international operations from the significant volatility in the valuation of foreign currencies.
  • Unions and collective bargaining agreements (CBA) will always be a concern in any unionized environment. With 75% of sales outside of North America the company is well positioned to balance disruptions to operations in domestic markets. One part of owning equity stakes in bottling operations is to ensure that KO has a vested interest in how employees are treated to avoid such conflicts.
In May of 2007 Coca-Cola successfully acquired Energy Brands (Glaceau) for $4.1B in cash to increase its product portfolio of enhanced water drinks adding vitamin water to its list of health conscious brands. On September 3rd of 2008 Coca-Cola announced another strategic offer to purchase China Huiyuan Juice Group Limited for $2.4B in cash. KO has operated in China since 1979 and was a major sponsor of the recent summer Olympic Games held in Beijing. Still beverages have been a focus in the Chinese market in recent years and the acquisition of the Huiyuan Juice brands diversifies the product portfolio of KO in China. One strategic element that comes from this acquisition is the proposed expansion of their distribution network within the country. Costs and operations can be now streamlined with sales, distribution, manufacturing, product development and marketing benefiting from the merger of the two companies.

While we think of juice in North America as a product not associated with large-scale sales; juice products in China are an established and fast growing segment of the beverage market. Juice is actually a more profitable product from a margin perspective and the Minute Maid brand is a key complimentary product to the established Huiyuan brands in the Chinese market. KO has been looking for growth vehicles to support stronger domestic growth in China and local bottling partners between the two companies make a strategic fit. The deal is anticipated to close in early 2009 and be accretive to earnings within three years. The obvious threat to this deal is that it is conditional of Chinese regulatory approval but currently no problems with that process have been publicized or speculated upon.

While conducting additional research on the company I found a Virtual Vending Machine that was fun to gain a sense of the Coca-Cola brands offered globally by the company. With a supply chain valued at over $50B US it's easy to gain a sense of just how global this company is in all aspects of their businesses.

One key concern I always maintain with any company is a keen evaluation of their management. Executives are not only responsible for the daily operations of a company, but also establishing the corporate culture and expectations of how an organization expects to do business. No company grows to the size and scale of operations that Coca-Cola has without an extraordinary vision of where the company is going, how it will get there and a group of effective leaders to pave the way. In my evaluation of management, which I encourage all investors to do on their own, I've found very clear objectives and strategic priorities from management on where they expect the business to grow, operate and execute. The core competencies of the company are defined as consumer marketing, commercial leadership and franchise leadership which is clearly evident when you evaluate the company from a number of perspectives.

There was a recent transition in leadership at the company when Neville Isdell stepped down as CEO and Muhtar Kent assumed the role as new CEO. Muhtar Kent has been with the company since 1978, comes from a strong background in marketing and has a strong history of participating in the global operations of the company in many capacities. The transition between the two managers was smooth and without incidence which is something I always carry as a litmus test for preserving corporate culture and maintaining a pulse on the business.

In the spreadsheets provided I've listed the past five years of critical data for the company

(Data since 1988 made available via SAML or with full analysis purchase below).

Whenever I look through the operating numbers of a company I'm looking to evaluate three main items:
  • A consistent theme of performance
  • Conservative fiscal management
  • Emerging trends that hold the potential to influence the company either positively or negatively in the future
A portion of my analysis always focuses on vital criteria such as EPS, dividends, cashflows, debt/equity ratios, book value growth and other important metrics but running a successful business is more than just keeping those numbers in check. Your business has to be sustainable, flexible to meet global challenges and adaptive to changes in the consumer environment

I've accumulated various data on Coca-Cola and organized it in a spreadsheet very similar to my presentation of Taking Stock in COST. While each companies spreadsheet in my SA data will differ slightly based on their unique industry my focus will often concentrate on margins, return on equity, debt levels, book value growth, increases in costs and dividends. Remember that as a prospective owner in the business I want to investigate information that directly impacts my returns, my financial stake in the business and potential for future returns.

First on the list for examination are revenues and cost of goods sold (COGS). Revenue is income that the company receives from the sale of a good or service and COGS is the direct cost of producing that product or service.

Coca-Cola has successfully reported a profit over the past twenty years, but I want to evaluate the relationship and trend between revenues and COGS. This is important because I want to identify if one side of the equation is changing in any drastic manner relative to the other. The 20-year average for increases in revenues has been 7.12% and the increase in COGS has been 6.45%. This is positive in my view because I can see an established trend where overall revenues are increasing at a faster rate than overall costs. If these numbers were reversed (6.45% for revenues & 7.12% for COGS) I would be very concerned because it demonstrates that costs are increasing at a faster rate than revenues and that is not sustainable for any business. These trends affect the profit growth of a company and as a shareholder I may be concerned that management isn't doing a good enough job of managing their cost structure. Taking the past five years (a smaller snapshot) I get an average increase in revenues of 8.42% and average increase in costs of 8.36%. The margin between the two is smaller, but the trend remains intact.

Margins are one of the first calculations I ever determine when I've decided to look at a company in greater depth. There are two types of margins I want to identify and examine: gross margins and profit margins.

When we examine gross margins for KO we see a very healthy average of 63.85% on a historical basis. This means for every $1.00 the company receives in revenue they retain nearly $0.64 after direct production costs. Profit margins for KO are 17.46% and for every dollar the company receives in revenue they retain a profit of over $0.17.

This is a much higher gross & profit margin than many other businesses and is a direct effect of the type of business Coca-Cola conducts. They sell higher margin products around the world and do so because their costs are relatively low and brand loyalty is very high. We can clearly see variations in each margin category through different time periods where profit and gross margins fluctuated in relation to different economic periods. One thing to notice is whenever they dropped relative to the historical average they subsequently rebounded shortly after with increases in the margins.

SGAE as % of net sales is another category I always focus on that provides insights into how management is managing their own spending and not just that of the corporation. SGAE stands for "Selling, General and Administrative Expenses" and tracks the spending of non-core expenses that aren't linked to the production or operating process. Management may be great at minimizing costs and boasting a fat gross margin, but I want to focus on the question: Can they control the spending that directly impacts the profit margins their company achieves?

Readers will notice a stark contrast in SGAE versus my previous stock analyses with KO reporting its average SGAE as % of net sales of over 40%. This means that non-core production costs are 40% of total revenues! Normally this should be an alarm bell going off for any prospective investor, but we first need to put this number into the proper context. We can see that the historical trend has fallen over the past few years, but 38% is still a relatively high number in 2007.

We first need to identify that Coca-Cola's business is much different than other businesses. Although they have low production costs and significant gross margins, they spend a lot of money on advertising promoting their products around the world. KO didn't become the biggest and wealthiest brand in the world by restricting spending on promotion of their products and this commitment to effective advertising has led to sales increasing globally for the past twenty years. KO also operates in a variety of challenging markets where they may be focusing on conservation of market share for mature products and heavy spending for promoting new innovative products that are fuelling future sales growth.

To really put this into the proper perspective we need to compare margins to a company in the same industry: PepsiCo (PEP)

(Margin Analysis, Valuation Model & Dividend Discount Cashflow Calculator available via SAML or with full analysis purchase below).

Coca-Cola has a simple business model to understand and this benefits an individual investor who wants to focus on fundamentals. They sell carbonated & still beverages and syrups for consumption around the world, have a dominant brand image in hundreds of products, own stakes in nearly all their bottling operations, possess strong brand loyalty, are expanding into new markets with conservative acquisitions and focus on doing what they do best.

The company is profitable and by a large margin because they keep costs low and focus on maintaining very high margins. Despite slower sales growth than their main competitor (PEP) their growth of expenses has been lower resulting in revenue growth outpacing expense growth and this too is by a wider margin than PEP.

The company has made accretive acquisitions by not overpaying and continues to focus on growth of products domestically (Coke Zero) and abroad (Huiyuan Juice Group Limited). Although they've had a change of management the new CEO steps into a role that the company has adequately prepared him for as seen by his past leadership roles.

I've found that there are times when focusing on the simplest facts of a business result in some of the best businesses to invest in over the long-term. An individual who drinks one Coca-Cola product today is likely to drink another one tomorrow and again in the near future. A Coke tastes the same at 9am in the morning as it does at 5pm in the evening regardless of if those two drinks are consumed in opposite parts of the world and this creates the perpetual demand that the company has enjoyed for so many decades.

One of the most distinct and sustainable competitive advantages held in the world today is possessed by Coca-Cola. It's not a patent, a manufacturing process or real estate; it's the products, brands and operating structure that allow Coca-Cola to operate at a much more cost effective position than their global competition.

I don't want to discount that there are significant long-term threats due to an increase in health awareness and the short-term global economic dynamics. Management has done an admirable job diversifying their product portfolio to more health conscious brands and the one wonderful thing about a lower cost structure and significantly higher margins is that as a company you are well protected to weather any significant storm. While I never advocate that a company compete on price higher margins provide Coca-Cola with an adequate buffer to cushion any economic volatility so that the bottom line of the business is minimally affected.

(Disclosure: I own shares of Coca-Cola (KO), Kraft Food (KFT) and IGM Financial (IGM) at the time of this post).

If you are interested in receiving comprehensive stock investment reports like this one in the future, consider signing up for the SAML Service.

Sunday, January 11, 2009

Dividend Stocks in the news includes General Electric

The past two weeks have been pretty uneventful in terms of dividend increases, mainly due to the Christmas and New Year’s holidays. Once the majority of market participants returned to their trading desks, it was again business as usual. The markets did end the week 4.20% lower, which left the largest ETF by assets that tracks S&P 500, the SPY, down 1.2% on the year. The increase in unemployment to 16 year highs didn’t help either.

The negative tone for the week was set on Monday when a Sterne Agee analyst Nick Heymann speculated that General Electric (GE) likely faces a serious decision - sustain the dividend or the AAA rating. General Electric has confirmed on a number of occasions that it’s dividend of $1.24/share is safe throughout 2009. Despite the reassurance from GE however, there still is an increased chance that GE dividends might not be safe. Check out my analysis of GE from this link.

There were several other companies that announced increases in their payments to shareholders last week.

Genesis Energy, L.P. (GEL), which engages in the pipeline transportation of crude oil, natural gas, and carbon dioxide (Co2); gathering and marketing of crude oil; wholesale marketing of Co2; and processing of syngas , announced that its Board has approved an increase in its quarterly dividend from $0.3225 to $0.33 per unit. Genesis Energy, L.P. has consistently increased its dividends since 2003. The stock currently yields 11.90%.

Robbins & Myers, Inc. (RBN), which is a supplier of systems for critical applications in global energy, industrial, chemical and pharmaceutical markets , announced that its Board has approved an 11% increase in its quarterly dividend from $0.0375 to $0.04 per common share. Robbins & Myers, Inc. has consistently increased its dividends since 2006. The stock currently yields 0.80%.

Pentair, Inc. (PNR), announced that its Board has approved a 6% increase in its quarterly dividend from $0.17 to $0.18 per common share. Pentair, Inc. is a dividend achiever which has consistently increased its dividends for almost two decades. The stock currently yields 2.70%.

American Financial Group, Inc. (AFG), announced that its Board has approved a 4% increase in its quarterly dividend to $0.13 per common share. American Financial Group, Inc. Inc. is a dividend achiever which has consistently increased its dividends since 2005. The stock currently yields 2.30%.

Of the stocks below Pentair shows some promise for my dividend growth strategy. PNR could be an interesting dividend play on dips below $24. I like the fact that the company has managed to double its dividends almost every seven years on average.

Full Disclosure: Long GE

- Is GE’s dividend safe?
- Why do I like Dividend Achievers
- Analysis of General Electric
- When to sell my dividend stocks?

Friday, January 9, 2009

Dividend Cuts - the worst nightmare for dividend investors

Some fellow investors argue that a dividend cut might not necessarily be a bad event, since management shows proactive steps in order to conserve cash until the company situation turns better. Furthermore, if many companies cut their dividend, which was the occasion during The Great Depression, I would be selling at low prices which would never again be seen for decades to come. Since markets could overshoot higher or lower on positive or negative news, selling right after the bad news of a dividend cut could be an example of buy high, sell low investment proposition. Last but not least, another argument is brought up, concerning the fact that stockholders should act as owners and be fine with a dividend cut, as it will conserve cash for the company and help it in its recovery.

While I realize that these are some valid concerns, I disagree with them for several reasons. First, if a company that has increased or maintained its dividend cuts or suspends its dividend, it shows that it doesn’t have a firm grasp of the current situation due to it being a cyclical company or because its business model is broken. Dividends are typically a sacred cow in US, and companies like to please shareholders with stable or increasing payments over time. The best dividend friendly companies out there make their business decisions with their shareholders in mind. They are careful with the capital allocation process so that their new ventures do not collapse causing the company to lose money and forego a dividend payment. Once management cuts or suspends its dividends, there is nothing that could stop them from cutting the dividend again or suspending the payments indefinitely. Furthermore, a company that shows fiscal irresponsibility to be unable to maintain its dividend payment is in great danger to even declare creditors protection.

Second, if most dividend stocks were to cut their payments due to severe unforeseen financial circumstances selling most cutters or eliminators might force investors to sell at what appear to be low prices, which go lower several months down the road, as more and more companies can’t afford paying out a dividend. Not all stocks will cut their dividend payments over time however, and this process will be spread out to several months if not years in the worst case scenario. Even during the great depression there were industries and companies which maintained a stable dividend payment. Companies like AT&T, Exxon and IBM are three such examples.

The markets do tend to overshoot based off news. My recent experience in 2008 has shown me that companies that cut or eliminated their dividends have not been good investments this year. Several of the stocks that reduced or eliminated their payments to shareholders provided warnings ahead of time for investors to get out while their stocks were still worth something.

For example Washington Mutual and Wachovia cut their dividend payment in April 2008, well before their stocks became worthless. General Motors suspended its dividend payment in July 2008 when the stock was trading at $10. Investors who sold when these negative news were announced, would have saved themselves from further losses. This underperformance of dividend cutters and eliminators is not just a 2008 phenomenon – according to Ned Davis Research, stocks with negative dividend actions have significantly underperformed the S&P 500 over the past four decades.

I don’t buy into the ownership idea in order to stop receiving income from my investments. If you owned a franchise and you asked the company to forgive you the franchise fees if they want you to stay in business, chances are your business will not last long, even if a temporary concession is done. In the corporations of the 21st century, the shareholder is the last one to get paid, as funds are typically allocated to projects that don’t end up generating enough cash to payoff for themselves, or on stock buybacks which increase the value of management stock options, but do nothing to improve the bottom line.

In conclusion, selling when a stock cuts its dividend is a wise decision meant to protect your capital and keep you in the game. It’s a risk management decision where you show that you were wrong in selecting the stock and that the factors that caused you to purchase it in the first place are no longer valid.

Relevant Articles:

- Best Dividends Stocks for the Long Run
- Dividends and The Great Depression
- Which Bank will be next? Follow the dividend cuts
- High yield stocks for current income

Wednesday, January 7, 2009

2009 Dogs of the Dow

Dogs of the Dow is a strategy popularized by Michael O’Higgins where the ten highest yielding stocks in the Dow Jones Industrials Average are selected at the end of the each calendar year. Higher Yields typically works as a contrarian indicator as a way to identify bargains where the stock price has gotten low in relation to the dividend. Managements are reluctant to cut dividends, which are a sacred cow in the US, and would do so only if the situation is really bad.
Furthermore most of the blue chip stocks in the Dow Jones Industrials have similar price performances over time. By identifying the highest yielding securities, the strategy expects that it would generate the highest total returns over time, if price performance were similar.

The strategy has performed below average over the past 13 year with 2008 being a major blow for its supporters:

Let’s hope that 2009 would be a good year for Dogs of the Dow Investors. You could find the list for 2009 below. There were four new stocks added to the list – Bank of America, Alcoa, Merck and Kraft.

For more information on Dogs of the Dow strategy, visit

Disclaimer: Long GE

Relevant Articles:

- When to sell my dividend stocks?
- TARP is bad for dividend investors
- Best High Yield Dividend Stocks for 2009
- International Over Diversification

Monday, January 5, 2009

Dividend Aristocrats List for 2009

In December Standard and Poor’s updated their Dividend Aristocrats list. The companies which were added were:

Bemis (BMS)
Legg Mason (LM)

The companies removed from the list are:

Anheuser-Busch (BUD)
Bank of America (BAC)
Comerica (CMA)
Fifth Third Bancorp (FITB)
Keycorp (KEY)
Nucor (NUE)
Progressive (PGR)
Regions Financial (RF)
Wrigley Wm (WWY)

The biggest surprise is the removal of Nucor (NUE) from this elite list despite the fact that the company recently increased its payment to shareholders by over 9% to $0.35/share. Nucor does pay a special dividend in addition to the regular payment however. The special dividend payment has been decreasing over the past few years, as the regular payment has been increasing. The total quarterly payment for 3Q 2008 of 0.52/share was lower that 3Q 2007 payment of 0.61/share, which could be the reason why Nucor is booted out of the dividend aristocrats index. Check out my analysis of Nucor (NUE) from this link.

Wrigley and Anheuser-Busch were removed because they were acquired. The rest of the deletions include financial companies, which cut their payments to shareholders in 2008.
In 2008 the dividend aristocrats’ index outperformed the S&P 500 by 15.50 percent. The dividend aristocrates lost 21.55% in 2008 versus the 37.00% loss for the S&P 500.

To view the full list of Dividend Aristocrats in 2009, check out Standard and Poors website.

Free Stock Trade. Trade stocks for free on The Free Trading Community.

Relevant Articles:

- Why do I like Dividend Aristocrats?
- Dividend Aristocrats are outperforming the markets in 2008
- Are Drips Worth It?
- Long term returns of S&P high-yield aristocrats

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