There are two extreme camps of Altria’s (MO) future prospects. One of the camps is the bullish one which claims that Altria is a near monopoly, which has a 50.40% of the US cigarettes market and has nothing else to do with its cash than to distribute it back to shareholders in the form of dividends or share buybacks.
Given the fact that MO is not a growth company, the stock is spotting a P/E of 11 and a generous dividend yield of 7.8%. Some of Altria’s biggest fans also like to add that the company has increased its dividends for 42 consecutive years. Given the fact that 97% of stocks returns since 1871 have come from reinvested dividends, it is not surprise that this dividend growth tobacco stock was the best performer in the S&P 500 for the 50-year period from 1957 to 2007.
Even though tobacco sales are decreasing, most cigarette manufacturers could afford to offset sales declines by boosting price tags for its products. Since advertising tobacco products is illegal in the US, it would be almost impossible for newcomers to compete against Altria and erode its market share.
Another important asset that the US based Altria owns is a 28.5% interest in UK based SAB Miller, which is not only one of the largest brewers in the world, but also one of the largest bottlers of Coca Cola products worldwide. Altria’s stake is worth about 4.26 billion dollars per the company’s balance sheet as of 12/31/2008.
The Altria bears cite several reasons why one should not own stock in this tobacco giant. First of all the Altria that was the best performer in the S&P 500 is much different than todays Altria. The company spun out Kraft Foods in 2007 and Phillip Morris International in 2008. Without the growth of the international tobacco markets in the emerging market economies where Phillip Morris International has a dominant role and a lower probability of lawsuits, Altria is stuck with the US market, which is in a decline.
Another reason that Altria bears cite is that the integration of UST might cause liquidity problems for the tobacco conglomerate. Historically, the stocks stop increasing their payments to shareholders because they are saddled with debt after acquisitions in their field. Altria financed its UST acquisition by a bridge loan for 4.3 billion as well as a 6.8 bln in loans with maturities varying from 18 months to 30 years and coupons ranging from 7.125% to 9.95%. Altria intends to access the public debt market in 2009 to refinance the bridge loan borrowings with long-term debt.
Another risk for Altria is litigation, that could potentially wipe out the whole company. Since tobacco is a heavily taxed product however, a complete ban on its use will be detrimental for state and federal budgets.
The company recently announced its 4Q 2008 results, where its earnings per share from continuing operations were $1.48, unchanged versus 2007.
Given the current economic environment, Altria is suspending its $4.0 billion 2008-2010 share repurchase program, $1.2 billion of which was completed in 2008. Altria believes it is in the best interest of shareholders to preserve financial flexibility while it completes the financing of the UST transaction. This change gives Altria the opportunity to monitor economic impacts on its business and protect its investment grade credit rating. During 2009, Altria intends to focus on earnings per share growth and continuing its strong dividend policy. The company recognizes the importance of share repurchases to investors and intends to evaluate them again in early 2010.
I am bullish on Altria but only if one holds one share of Phillip Morris international for every MO share that they own. Altria has been successful in integrating very well companies it has acquired, so UST’s acquisition should be beneficial to shareholders. Furthermore tobacco companies are generally immune from economic fluctuations since smoking is a habit that is difficult to stop. It could be argued that during recessionary environments more people start smoking and less get the courage to quit.
One could always snap tobacco shares on the cheap, as many investors fear that an adverse litigation could potentially wipe out cigarette manufacturers. If this happen however, many states will lose billions in revenues from tobacco giants like Altria.
The high dividend payout is definitely a warning sign, which would hurt the growth of future dividend increases. If the company decides to go one step further after suspending stock buyback program until 2010 and cuts its dividends I will be the first one to head for the exits.
Full Disclosure: Long MO and PM
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- Historical changes of the S&P Dividend Aristocrats
- When to sell my dividend stocks?
- Why dividends matter?
- Dividend Cuts - the worst nightmare for dividend investors.
Thursday, February 5, 2009
Wednesday, February 4, 2009
As goes January so goes the year – Testing the January Barometer
There are many sayings on Wall Street including sell in may and go away, buy and hold, buy low sell high. While it is hard to argue with the timeless truth behind some of investing folklore, investors should always test various strategies in order to determine if a particular technique works for them.
One investing philosophy that I will try to test today is the so called January barometer, which foretells that as the market performs in January, so will the stock market perform over the next 11 months.
Using Dow Jones Industrials Monthly data from 1929 to 2008, I found that this telling is pretty accurate with an overall 67.50% success rate. That means there is only a 32.50% probability that the trend in January reverses and goes in the opposite direction in the next 11 months.
The January Barometer is most accurate with a 75.47% probability whenever we get a bullish signal. The January Barometer is least accurate with a 51.85% probability when the first month of the year closes in the red.
Markets have not been kind to investors in 2009, as Dow Jones industrials average fell 8.8% in the first month of the year.
As a long term dividend investor however, I don’t subscribe to following timing theories which have been derived after searching through reams of data, in order to find what had worked in the past, without asking the question why is this indicator actually working. I subscribe to the buy and hold approach where one buys a basket of quality dividend names, reinvests the dividends and hopes for the best. If investors spent the month of January in cash since 1929 in order to determine whether they should be long or short the markets, would have under performed the markets. $100 invested in stocks on December 31 of the preceding year and sold on the last trading day of January would have appreciated to 1204 by 1/31/2008.
Relevant Articles:
- Dow 370,000
- My Dividend Growth Plan
- When to sell your dividend stocks?
- The ultimate passive investment strategy
One investing philosophy that I will try to test today is the so called January barometer, which foretells that as the market performs in January, so will the stock market perform over the next 11 months.
Using Dow Jones Industrials Monthly data from 1929 to 2008, I found that this telling is pretty accurate with an overall 67.50% success rate. That means there is only a 32.50% probability that the trend in January reverses and goes in the opposite direction in the next 11 months.
The January Barometer is most accurate with a 75.47% probability whenever we get a bullish signal. The January Barometer is least accurate with a 51.85% probability when the first month of the year closes in the red.
Markets have not been kind to investors in 2009, as Dow Jones industrials average fell 8.8% in the first month of the year.As a long term dividend investor however, I don’t subscribe to following timing theories which have been derived after searching through reams of data, in order to find what had worked in the past, without asking the question why is this indicator actually working. I subscribe to the buy and hold approach where one buys a basket of quality dividend names, reinvests the dividends and hopes for the best. If investors spent the month of January in cash since 1929 in order to determine whether they should be long or short the markets, would have under performed the markets. $100 invested in stocks on December 31 of the preceding year and sold on the last trading day of January would have appreciated to 1204 by 1/31/2008.
Relevant Articles:
- Dow 370,000
- My Dividend Growth Plan
- When to sell your dividend stocks?
- The ultimate passive investment strategy
Warren Buffet’s Investment in Harley-Davidson, don’t get too excited about it
Shares of Harley Davidson, which is a dividend achiever, got a big boost yesterday, after legendary investor Warren Buffett snapped half of the company’s $600 million in bonds that will be issued. The bonds will mature in 2014 and carry an annual interest rate of 15%.
Warren Buffett made similar investments in fixed income equivalents (preferred stock) in General Electric and Goldman Sachs, both of which carried a 10% interest rate. Unlike GE and GS’s investments however, the 300 million-bond position that Buffett’s Berkshire Hathaway (BRK.a) is taking won’t come with a warrant to purchase some of Harley Davidson’s stock.
The money will help Harley Davidson in its three-part strategy that it issued in January, after losses in its finance unit led to a 58% drop in 4Q earnings. The strategy includes investing in the Harley-Davidson brand, getting a leaner cost structure as well as securing additional funding for its finance unit, which makes loans to dealers and customers.
The investment in Harley by Warren Buffett led to a huge increase in HOG stock, as it provided a huge dose of support for the brand. Investor’s shouldn’t get too excited about this deal however by purchasing Harley-Davidson stock. Buffett is definitely getting a sweet deal in Harley’s effort to capitalize on his name and get enough cash to sustain the company through the tough times. If Buffett believed that Harley’s stock is undervalued he would have purchased the stock directly. Since he is only purchasing bonds, without any warrants that would convert the bonds into equity, it definitely looks that he doesn’t believe Harley is undervalued enough for him to take an equity position. For ordinary investors however, getting in on a deal with similar terms is close to impossible.
In 2008 Buffett took perpetual preferred stock positions in General Electric and Goldman Sachs, for $3 billion and $5 billion respectively. According to the deal with Goldman, which was announced on September 23, the preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $5 billion of common stock with a strike price of $115 per share, which is exercisable at any time for a five-year term.
According to the deal with General Electric, which was announced on October 1, the perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Investors who mistakenly believed that these investments in General Electric and Goldman Sachs could be replicated by purchasing the common stock have lost a lot of money in the process. GE shares lost almost half of their value, while GS stock lost roughly one third.
Several pundits have also expressed concerns that Buffett suffered major losses on his investments in General Electric and Goldman Sachs. This delusion comes from confusing option strike prices with actual purchase prices. The options to purchase GE and GS stock give Buffett the right, but not the obligation to acquire shares in both companies at $22.25 and $115 per share respectively by 2013. In the meantime he is being paid $800 million/year in dividends.
As a dividend and value stock, Harley Davidson does appear undervalued. The dividend is well covered and the P/E is only at 5. This reflects investors’ worries that the downward EPS trend from 2006 record earnings of $3.94/share might continue over the next few years.
It will be interesting to see how the company copes with the uncertain economic climate. Harley Davidson is a great american brand, with a loyal customer base, which is most probably why Buffett bought 300 million in bonds in the first place. Since the company’s products are discretionary however, its target audience might delay purchases of new bikes for the time being.
Full Disclaimer: Long GE stock
Relevant Articles:
- Analysis of General Electric
- Warren Buffett – The Ultimate Dividend Investor
- Berkshire Hathaway Portfolio Changes for the quarter
- Don’t chase High Yielding Stocks Blindly
Warren Buffett made similar investments in fixed income equivalents (preferred stock) in General Electric and Goldman Sachs, both of which carried a 10% interest rate. Unlike GE and GS’s investments however, the 300 million-bond position that Buffett’s Berkshire Hathaway (BRK.a) is taking won’t come with a warrant to purchase some of Harley Davidson’s stock.
The money will help Harley Davidson in its three-part strategy that it issued in January, after losses in its finance unit led to a 58% drop in 4Q earnings. The strategy includes investing in the Harley-Davidson brand, getting a leaner cost structure as well as securing additional funding for its finance unit, which makes loans to dealers and customers.
The investment in Harley by Warren Buffett led to a huge increase in HOG stock, as it provided a huge dose of support for the brand. Investor’s shouldn’t get too excited about this deal however by purchasing Harley-Davidson stock. Buffett is definitely getting a sweet deal in Harley’s effort to capitalize on his name and get enough cash to sustain the company through the tough times. If Buffett believed that Harley’s stock is undervalued he would have purchased the stock directly. Since he is only purchasing bonds, without any warrants that would convert the bonds into equity, it definitely looks that he doesn’t believe Harley is undervalued enough for him to take an equity position. For ordinary investors however, getting in on a deal with similar terms is close to impossible.
In 2008 Buffett took perpetual preferred stock positions in General Electric and Goldman Sachs, for $3 billion and $5 billion respectively. According to the deal with Goldman, which was announced on September 23, the preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $5 billion of common stock with a strike price of $115 per share, which is exercisable at any time for a five-year term.
According to the deal with General Electric, which was announced on October 1, the perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Investors who mistakenly believed that these investments in General Electric and Goldman Sachs could be replicated by purchasing the common stock have lost a lot of money in the process. GE shares lost almost half of their value, while GS stock lost roughly one third.
Several pundits have also expressed concerns that Buffett suffered major losses on his investments in General Electric and Goldman Sachs. This delusion comes from confusing option strike prices with actual purchase prices. The options to purchase GE and GS stock give Buffett the right, but not the obligation to acquire shares in both companies at $22.25 and $115 per share respectively by 2013. In the meantime he is being paid $800 million/year in dividends.
As a dividend and value stock, Harley Davidson does appear undervalued. The dividend is well covered and the P/E is only at 5. This reflects investors’ worries that the downward EPS trend from 2006 record earnings of $3.94/share might continue over the next few years.
It will be interesting to see how the company copes with the uncertain economic climate. Harley Davidson is a great american brand, with a loyal customer base, which is most probably why Buffett bought 300 million in bonds in the first place. Since the company’s products are discretionary however, its target audience might delay purchases of new bikes for the time being.
Full Disclaimer: Long GE stock
Relevant Articles:
- Analysis of General Electric
- Warren Buffett – The Ultimate Dividend Investor
- Berkshire Hathaway Portfolio Changes for the quarter
- Don’t chase High Yielding Stocks Blindly
Tuesday, February 3, 2009
Bad Start of the Week for Retail Investors
The week started on a negative note on Monday as broader indexes such as Dow Industrials closed below 8000. Investor’s sentiment wasn’t helped by dividend cuts in the retail sector.
Macy’s (M) board of directors announced a steep cut in its quarterly dividends from 13.25 cents to 5 cents/share. Furthermore the company decided to eliminate 4% of its workforce by laying off 7000 employees. The retailer expects much lower EPS numbers for 2009 at 0.40-0.55/share, versus $1.21 that Wallstreet analysts had expected previously. The news that really showed that management expects worse things ahead, other than the dividend cut, is the reduction in capital spending by 100-150 million dollars in 2009.
Other retailers such as Wal-Mart (WMT) , Target (TGT) and Family Dollar (FDO), all of which are dividend aristocrats, fell slightly on the news. Check out my analysis of Wal-Mart (WMT), Target (TGT) and Family Dollar (FDO). Despite the fact that both retailers are expected to perform well in the current economic turbulence, I do not like the low dividend yields at the moment. I am seeing slowing dividend growth both at Wal-Mart and Family Dollar as well. Wal-Mart will be announcing its annual results and hopefully a dividend increase on its Earning Release on February 17. FDO already increased its dividends by 8% in 2009.I would be adding to my retail holdings in Family Dollar and Wal-Mart on dips below $18 and $32 respectively. I will be looking at initiating a position at Target (TGT) on dips below $21.40. The major competitor to Wal-Mart is known to be increasing its dividends at a slower pace in the single digits during tough periods such as the 2000-2002 slowdown.
If the January Barometer is correct, we will be seeing lower prices by the end of the year, so seeing lower prices in the retail stocks mentioned above won't be surprising at all.
Full Disclosure: Long WMT and FDO
Relevant Articles:
- Wal-Mart Dividend Analysis
- FDO Dividend Analysis
- Six Dividend Stocks Raising the bar
- Dividend Aristocrats List for 2009
Macy’s (M) board of directors announced a steep cut in its quarterly dividends from 13.25 cents to 5 cents/share. Furthermore the company decided to eliminate 4% of its workforce by laying off 7000 employees. The retailer expects much lower EPS numbers for 2009 at 0.40-0.55/share, versus $1.21 that Wallstreet analysts had expected previously. The news that really showed that management expects worse things ahead, other than the dividend cut, is the reduction in capital spending by 100-150 million dollars in 2009.
Other retailers such as Wal-Mart (WMT) , Target (TGT) and Family Dollar (FDO), all of which are dividend aristocrats, fell slightly on the news. Check out my analysis of Wal-Mart (WMT), Target (TGT) and Family Dollar (FDO). Despite the fact that both retailers are expected to perform well in the current economic turbulence, I do not like the low dividend yields at the moment. I am seeing slowing dividend growth both at Wal-Mart and Family Dollar as well. Wal-Mart will be announcing its annual results and hopefully a dividend increase on its Earning Release on February 17. FDO already increased its dividends by 8% in 2009.I would be adding to my retail holdings in Family Dollar and Wal-Mart on dips below $18 and $32 respectively. I will be looking at initiating a position at Target (TGT) on dips below $21.40. The major competitor to Wal-Mart is known to be increasing its dividends at a slower pace in the single digits during tough periods such as the 2000-2002 slowdown.
If the January Barometer is correct, we will be seeing lower prices by the end of the year, so seeing lower prices in the retail stocks mentioned above won't be surprising at all.
Full Disclosure: Long WMT and FDO
Relevant Articles:
- Wal-Mart Dividend Analysis
- FDO Dividend Analysis
- Six Dividend Stocks Raising the bar
- Dividend Aristocrats List for 2009
Monday, February 2, 2009
Dividend Stocks proving that not all dividends are at risk
2008 was the year that brought a ton of dividend cuts in the financial sector. Banks like Comerica, Bank of America, Citigroup, Regions Financial and First Third Bank cut dividends several times, which jeopardized the incomes of many retirees. 2009 so far brought a second round of dividend cuts from Bank of America and Comerica. Even pharmaceuticals giant Pfizer had to cut its dividend in half after announcing its acquisition of rival Wyeth. Investors are constantly bombarded with news about dividend cuts including the fact that 4Q 2008 was the worst quarter for dividends since S&P began compiling the data in 1956. One would think that a tough credit environment, bank failures, and news of big corporations laying off thousands of employees every day most companies would conserve cash in preparation for the second round of the financial Armageddon that pundits forecast. Not all companies are cutting dividends however. Stocks like Wells Fargo and General Electric have recently reaffirmed that they will maintain dividend payments. Even better, many companies are also raising payouts to shareholders.
Novartis (NVS) announced that its Board has approved a 25% increase in its annual dividend to 2.00 swiss franks or about $1.71. Novartis is an international dividend achiever, which has consistently increased its dividends since 1997. The stock currently yields 3.60%.
McGraw-Hill (MHP) announced that its Board has approved a 2.3% increase in its quarterly dividend from $0.22 to $0.225 per common share. The company also announced that in an effort to maintain liquidity, it would delay making any additional share repurchases in 2009. McGraw-Hill is a dividend aristocrat, which has consistently increased its dividends for thirty-six consecutive years. The stock currently yields 4.10%.
Praxair (PX) announced that its Board has approved an increase in its quarterly dividend from $0.375 to $0.40 per common share. Praxair Inc. is a dividend achiever which has consistently increased its dividends for sixteen consecutive years. The stock currently yields 2.60%.
Norfolk Southern (NSC) announced that its Board has approved a 6.25% increase in its quarterly dividend from $0.32 to $0.34 per common share. Norfolk Southern is a dividend achiever which has consistently increased its dividends for seven consecutive years. The stock currently yields 3.50%.
Consolidated Edison (ED) announced that its Board has approved an increase in its quarterly dividend from $0.585 to $0.59 per common share. Consolidated Edison is a dividend aristocrat, which has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 5.80%.
Kinder Morgan Energy (KMP) announced that its Board has approved an increase in its quarterly dividend from $1.02 to $1.05 per unit. This represents a 14% increase over the distribution paid in 4Q 2007. Kinder Morgan Energy is a dividend achiever which has consistently increased its dividends for twelve consecutive years. The partnership units currently yield 8.50%.
California Water Service Group (CWT) announced that its Board has approved a 1.7% increase in its quarterly dividend from $0.29 to $0.295 per common share. California Water Service Group is a dividend champion, which has consistently increased its dividends for forty-two consecutive years. The stock currently yields 2.70%.
D&B (DNB) boosted its quarterly dividend from $0.30 to $0.34 per common share. The stock currently yields 1.80%.
Energen Corporation (EGN) announced that its Board has approved a 4.20% increase in its quarterly dividend from $0.12 to $0.125 per common share. Energen Corporation is a dividend champion which has consistently increased its dividends for twenty six consecutive years. The stock currently yields 1.70%.
TFS Financial Corporation (TFSL) announced that its Board has approved a 40% increase in its quarterly dividend from $0.05 to $0.07 per common share. The stock currently yields 2.20%.
The companies that definitely raised my interest for further research include Novartis, Norfolk Southers, Con Edison, Kinder Morgan, Praxair and McGraw-Hill.
Full Disclosure: At the time of this writing I owned KMR, ED, and MHP
Relevant Articles:
- Dividend Conspiracies
- Why do I like Dividend Aristocrats?
- Why do I like Dividend Achievers
- Dividend Aristocrats List for 2009
Novartis (NVS) announced that its Board has approved a 25% increase in its annual dividend to 2.00 swiss franks or about $1.71. Novartis is an international dividend achiever, which has consistently increased its dividends since 1997. The stock currently yields 3.60%.
McGraw-Hill (MHP) announced that its Board has approved a 2.3% increase in its quarterly dividend from $0.22 to $0.225 per common share. The company also announced that in an effort to maintain liquidity, it would delay making any additional share repurchases in 2009. McGraw-Hill is a dividend aristocrat, which has consistently increased its dividends for thirty-six consecutive years. The stock currently yields 4.10%.
Praxair (PX) announced that its Board has approved an increase in its quarterly dividend from $0.375 to $0.40 per common share. Praxair Inc. is a dividend achiever which has consistently increased its dividends for sixteen consecutive years. The stock currently yields 2.60%.
Norfolk Southern (NSC) announced that its Board has approved a 6.25% increase in its quarterly dividend from $0.32 to $0.34 per common share. Norfolk Southern is a dividend achiever which has consistently increased its dividends for seven consecutive years. The stock currently yields 3.50%.
Consolidated Edison (ED) announced that its Board has approved an increase in its quarterly dividend from $0.585 to $0.59 per common share. Consolidated Edison is a dividend aristocrat, which has consistently increased its dividends for thirty-five consecutive years. The stock currently yields 5.80%.
Kinder Morgan Energy (KMP) announced that its Board has approved an increase in its quarterly dividend from $1.02 to $1.05 per unit. This represents a 14% increase over the distribution paid in 4Q 2007. Kinder Morgan Energy is a dividend achiever which has consistently increased its dividends for twelve consecutive years. The partnership units currently yield 8.50%.
California Water Service Group (CWT) announced that its Board has approved a 1.7% increase in its quarterly dividend from $0.29 to $0.295 per common share. California Water Service Group is a dividend champion, which has consistently increased its dividends for forty-two consecutive years. The stock currently yields 2.70%.
D&B (DNB) boosted its quarterly dividend from $0.30 to $0.34 per common share. The stock currently yields 1.80%.
Energen Corporation (EGN) announced that its Board has approved a 4.20% increase in its quarterly dividend from $0.12 to $0.125 per common share. Energen Corporation is a dividend champion which has consistently increased its dividends for twenty six consecutive years. The stock currently yields 1.70%.
TFS Financial Corporation (TFSL) announced that its Board has approved a 40% increase in its quarterly dividend from $0.05 to $0.07 per common share. The stock currently yields 2.20%.
The companies that definitely raised my interest for further research include Novartis, Norfolk Southers, Con Edison, Kinder Morgan, Praxair and McGraw-Hill.
Full Disclosure: At the time of this writing I owned KMR, ED, and MHP
Relevant Articles:
- Dividend Conspiracies
- Why do I like Dividend Aristocrats?
- Why do I like Dividend Achievers
- Dividend Aristocrats List for 2009
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