Warren Buffett – The Ultimate Dividend Investor

Warren Buffett is the greatest investor in America. The famous value investor topped Forbes richest individuals list in 2008, overthrowing his pal Bill Gates from Microsoft from his twelve year period of holding this title. Investors have long followed Buffett’s advice on stock selection, economic issues and his pure genius common sense and business acumen. In a previous post I highlighted the individual holdings in Buffett’s Berkshire Hathaway portfolio as of June 30, 2008. This was a timely post, as Buffett recently made some major headlines when he announced that he was buying American stocks. Before investors follow Buffett's advice, they should understand the nature of the stocks that are in the Berkshire's portfolio. 

It seems to me that out of 38 holdings in BRK-A’s portfolio 12 companies are dividend aristocrats, one is a dividend champion and three are dividend achievers. Only 5 of his holdings do not play any dividends at all. One of its holdings’ business purpose (CDCO.ob) is limited to the orderly runoff or sale of its remaining assets. Based off current dividend payments for the stocks in his portfolio, Berkshire Hathaway makes $1.65 billion in dividend income per year. You could open the spreadsheet from this link as well. 

I am not at all surprised that the Oracle of Omaha has almost half of his portfolio in good quality dividend growers. Most companies that have managed to increase their dividends for long periods of time are ones that have wide moats as well as excellent competitive advantages in the marketplace. Having these qualities leads to rising earnings which tend to support a steady pace of increase in dividends. 

On a cautious note however, I would do my own homework before investing in any stocks that Berkshire Hathaway owns. Some of his holdings like Bank of America (BAC) recently cut their payments by 50% which prompted a massive drop in the stock. 

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Nucor Corporation (NUE) Dividend Stock Analysis

Nucor Corporation and its subsidiaries engage in the manufacture and sale of steel and steel products in North America. It operates in two segments, Steel Mills and Steel Products.
Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.

At the same time company has managed to deliver an 24.20% average annual increase in its EPS since 1998.

The ROE has increased from 13% range in 1998 to 30% by 2007.

Annual dividend payments have increased by an average of 39.70% annually over the past 10 years, which is much higher than the growth in EPS. Nucor’s last quarterly payment of $0.52/share consisted of $0.32 of regular dividend and $0.20/share in supplemental dividends.
A 40% growth in dividends translates into the dividend payment doubling almost every 2 years. If we look at historical data, going as far back as 1973, NUE has actually managed to double its dividend payment every four years on average. The last major dividend raise was between 2005 and 2006 when dividends increased by a whooping 475% in one year, helped by increased demand for metals worldwide. After this major move total dividends paid have actually decreased by 15% mainly because of a decrease in the supplemental dividends.

If we invested $100,000 in NUE on December 31, 1998 we would have bought 9249 shares (Adjusted for two 2:1 stock splits in 2004 and 2006). In March 1999 your quarterly dividend income would have been $300. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $5806 by September 2008. For a period of 10 years, your quarterly dividend income would have increased sixteen times. If you reinvested it however, your quarterly dividend income would have increased over nineteen times!
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.

The dividend payout has slowly increased from upper twenties to high forties over our study period. 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 NUE is attractively valued with its low price/earnings multiple of 5, a not too high DPR, as well as an above average dividend yield at 5.90% (3.80% if you only count the base dividend). The current dividend yield is way above average for this stock which could compensate for the lower expected growth in company’s fundamentals or even be a warning sign that Nucor’s dividend is in danger.

I do believe that NUE is an attractive buy candidate on dips below $32, since it adds some further diversification exposure to a dividend growth portfolio. Since Nucors main business, steel is a highly cyclical business I would proceed in purchasing NUE stock cautiously. Over the next few years I wouldn’t be surprised if this stock retraces all of its gains during the 2003- 2007 bull market and ends up below $20/share.

This post appeared on 114th Edition of the Festival of Stocks

Full Disclosure: None

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Dividend Yields are rising

The falling stock prices have pushed dividend yields on major US indices like S&P 500 and Dow Jones to levels not seen since the early 1990’s. The current trailing 12 month dividend rate for the Dow Diamonds ETF (DIA) that tracks Dow Industrials average is $ 3.02, which makes for a dividend yield of 3.64%.

The current trailing 12 month dividend rate for the SPDRs ETF (SPY) which tracks the S&P 500 is $2.78 which makes up for a current yield of 3.20%.

Given the uncertainty of corporate earnings amidst the current recession, the market is probably pricing in the fact that the dividend cuts which have largely been concentrated to the financial sector, would spread over to other industries as well.

S&P didn’t help either as it lowered its dividend growth forecast for the S&P 500 dividends to a little over 1% from the 2007 dividend rate of $27.73. Furthermore S&P maintained a cautious outlook for dividend growth in general in 2009, since some of the recent dividend cuts by financials won’t be felt until next year.

The current crisis will most probably result in a halt to the strong dividend growth experienced by S&P 500 companies over the past 30 years. It would be interesting to see whether the dividend growth would plateau like it did during the 2000-2002 bear market or it would reverse as many companies across all industries are affected by the slowdown.

As the current yields on stock market indexes are going up north, I would update my screening model to reflect the current marke conditions and to only select issues which have current yields of at least 3.00% up from 2%.

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Constellation Energy (CEG) Merger Arbitrage Opportunity

One of the four techniques implemented by Benjamin Graham was merger arbitrage. There’s been some good evidence that this strategy has worked for several decades for some value investors such as Graham and Buffett, producing double digit returns.

Buffett had a nice discussion on his arbitrage experience with Arcata Corp in the 1980’s in his 1988 letter to 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.?

This leads us to the potential acquisition of Constellation Energy by Berkshire’s MidAmerican Holdings. George from Fat Pitch Financials was the first to alert his readers on this opportunity. The merger has already been announced in September at a price of $26.50/share in cash. In addition, MidAmerican provided an immediate $1 billion cash infusion to Constellation Energy through the purchase of preferred equity. The definitive agreement has been approved by both companies’ boards of directors and is subject to, among other things, shareholder and customary federal and state regulatory approvals.

The transaction is expected to close within nine months from September 19th announcement date. The agreement expires nine months after its execution but may be extended by either company for up to three months.

If the deal does not materialize for some reason or another the stock could easily drop precipitously, as the company might face a drop in its debt ratings and loss of confidence from its trading partners. I do believe however that if the deal with Midamerican were to be canceled, EDF might still step in and make a competing offer, but the terms might not be as good for CEG’s shareholders. EDF did offer $35/share previously, but Constellation’s board rejected the offer and chose Berkshire’s MidAmerican Holdings offer instead. Given the ample liquidity that Berkshire Hathaway has at the moment I do believe that the merger has a higher chance of occurring.

I would be considering purchasing CEG on dips below $23.50. One definitely has to be nimble with this position however; therefore I would look into exiting some or all of my positions in CEG on spikes above $25.50. This is highly speculative position, which is geared towards absolute performance. CEG currently pays a quarterly dividend of $0.4775/share, which makes up for an annual yield of 8.20%.

For updates on Constellation and MidAmerican check out this website. In addition to that check the PRELIMINARY PROXY STATEMENT AMENDMENT filed with the SEC from this link.

Full Disclosure: I am long CEG

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5 dividend stocks increasing their payments in this tough market

Last week we saw further market volatility as major indexes continued extending their losses for October, which could turn out to be the worst month for the markets since 1938. There was an announcement from S&P which decreased the expected dividend growth for 2008 to 1.20% and also provided a cautionary outlook for dividends and earnings in 2009.

Despite all the doom and gloom there were several notable dividend increases over the past week.

Microchip Technology (MCHP), a leading provider of microcontroller and analog semiconductors, announced an increase in the dividend to 33.9 cents per share. Microchip initiated quarterly cash dividend payments in the third quarter of fiscal year 2003 and has increased the cash dividend by 9.4% from the dividend level one year ago. The stock currently yields a whooping 6.30%. I doubt that future dividend raises could increase at the same rate, given the high payout ratio, unless of course earnings could triple by the end of the next decade.

Aflac's (AFL) announced that its Board has approved a 16.70% increase in its quarterly dividend from $0.24 to $0.28 per common share effective first quarter of 2009. Aflac is a dividend aristocrat which has increased its dividends for 26 consecutive years. The stock currently yields 2.60%.

Eaton Vance Corp. (EV) announced that its Board has approved a 3% increase in its quarterly dividend from $0.15 to $0.155 per common share. The company is a member of the dividend achievers index having increased its dividends for over 2 decades. The stock currently yields 3.40%.

Goodrich Corporation (GR)announced that its Board approved an 11% increase in its quarterly dividend from $0.225 to $0.25 per common share. Despite this raise and last years double digit dividend increase, the company only has two years of back to back dividend increases over the past decade. The stock currently yields 2.90%.

Airgas, Inc (ARG) announced that its Board approved an 33% increase in its quarterly dividend from $0.12 to $0.16 per common share. The company has paid dividends since 2003 and the new rate is over five times the quarterly dividend payments in 2003. The stock currently yields 1.60%.

As always, the dividend increases list led me to put AFL and EV on my list for further research.

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