Posted by
D4L |
Tuesday, March 31, 2009
|
analysis
|
This article originally appeared on The DIV-Net March 23, 2009.
Linked here is a detailed quantitative analysis of General Dynamics Corp. (GD). Below are some highlights from the above linked analysis:
Company Description: General Dynamics is the world's sixth largest military contractor and also one of the world's biggest manufacturers of business jets.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
GD is trading at a discount to 1.), 2.) and 3.) above. Since GD's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, GD is trading at a 53.0% discount. GD earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
GD earned one Star in this section for 3.) above. GD has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 15 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:- NPV MMA Diff.
- Years to > MMA
GD earned both of the available Stars in this section. The NPV MMA Diff. of the $21,585 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as GD has. GD's current yield of 4.02% exceeds the 3.22% estimated 20-year average MMA rate.
Other: GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. GD has a long-term record of consistent earnings and dividend growth, which is reflected in its S&P Quality Ranking of A+. At the end of 2008, the company had a strong balance sheet with over $1.6 billion in cash just under $3.8 billion in debt. With a conservative debt to total cap of 27%, GD has the needed headroom to access the debt market for strategic needs. The company's strong free cash flows and a 20% cash payout ratio, should ensure the dividend in the near-term. Risks include cuts in the military budget, failure of the company to execute existing contracts, failure to win new contracts and a further deterioration in its business jet backlog.
Conclusion: GD earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks GD as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $56.66 before GD's NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 2.63%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is well below the 11.2% used in this analysis, thus providing a margin of safety. GD has a risk rating of 1.50 which classifies it as a low risk stock.
With its conservative balance sheet and strong free cash flows, GD is in a good position to weather near-term setbacks. The company is quick to react to the changing environment as demonstrated earlier this year when it reduced its workforce by 1,200 workers as result of the deterioration in its business jet backlog and continued weak demand. GD has earned a spot on my watch list with a buy price of $56.66. Though GD is trading well below my buy price, I plan to watch for additional deterioration in its business, which could lead to a better entry point. For additional information, including the stock's dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in GD (0.0% of my Income Portfolio).
What are your thoughts on GD?
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Sunday, March 29, 2009
|
process
|
It seems each week another dividend Aristocrat, Achiever or Champion cuts its dividend after increasing it for 10 or more years. In most cases the companies' investors were not surprised because they saw the early warning signs that indicated a dividend cut was imminent. Here are three signs that a company is heading toward a dividend cut:
I. Change In Business Conditions
An abrupt or permanent shift in a company's business model as a result of business conditions could lead to a dividend cut. Over the last 18 months or so, virtually all businesses have experienced an
adverse change in business conditions. However, the pertinent question is to what degree?
Consider Gannett Co. (GCI) who publishes 90 daily U.S. newspapers, nearly 1,000 non-daily publications in the U.S., and close to 300 U.K. titles. With the mass adoption of the internet, traditional news outlets such as newspapers are experiencing a slow death. GCI cut its dividend earlier this year after several years of declining earnings.
Pfizer's (PFE) recent dividend cut would fall in this category. After years of unsuccessful attempts to get approval of a "blockbuster" drug, the cash rich company sought a merger partner with a good drug pipeline. In anticipation of it proposed combination with Wyeth, PFE cut its dividend.
II. Dividend Yield Above Historic and Industry Norms
A dividend yield that is higher than average and/or higher than others in the industry are indications, not all is well with the company. The market is adjusting to compensate for the higher risk of holding the company. When dividend yields start creeping up, it is time to start evaluating if the company can continue to pay its dividend.
Consider Bank of America Corp. (BAC). Between 2000 and 2007 the company's dividend yield hovered in the 3%-4% range. In 2008, the dividend yield ranged from around 5% to the teens prior to its dividend cut. The same situation occurred with General Electric (GE) over the same period. GE's dividend yield from 2000-2007 normally were in the range of 1.5%-3.5%. However, in 2008 they the dividend yield than doubled as investors lost confidence in the company. Eventually, BAC and GE cut their dividends.
III. Diminishing Cash Available to Pay Dividends
Ultimately, the ability of a company to pay its dividend is determined by its cash position - both cash on its balance sheet and its ability to generate cash flow. All the companies above had one thing in common - a deterioration of cash flow available for paying dividends.
After GCI's free cash flow peaked in 2004 at $1.3 billion, it slipped over the next four years to $852 million in 2008. Though GE's free cash flow was increasing, the company was taking on significant debt. GE's debt increased from $201 billion in 2000 to $524 billion in 2008 and it could no longer afford its dividend.
A Look Ahead
Unfortunately, there will be more dividend cuts in the coming days. Two companies currently on my radar are Nucor Corp. (NUE) and Caterpillar Inc. (CAT).
On March 17th, NUE warned of a first quarter loss as the slumping economy sapped demand for the metal forcing it to cut output. "The economy has fallen off a cliff -- and there is no visibility as to the timing of the recovery," Nucor Chairman, Chief Executive and President Dan DiMicco said in a statement. NUE's free cash flows through 2008 had been strong and it ended 2008 with $920 million net debt (debt less cash) vs. $879 million in 2007. NUE is ok for now, but I look forward to reading their Q1 earnings release.
Last week CAT announced that its global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn has eroded demand for heavy equipment. In a separate announcement the company said it had notified an additional 2,454 workers in three states that they were losing their jobs as the company continues to try to bring production in line with plummeting demand. CAT's financial position is not as strong as NUE. Its free cash flow in 2008 was less than half of 2007 and it ended 2008 with no cash and $33 billion in debt vs. $27 billion net debt in 2007. This is another quarterly earnings release that I look forward to reading.
The above three items will help you determine which companies are at risk of cutting their dividends. Cash is king, so pay special attention to free cash flows and debt levels.
Full Disclosure: Long CAT and NUE.
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Thursday, March 26, 2009
|
who is...
|
Raul Alvarez was born in Havana Cuba in 1955 into a very successful family. Before fleeing to the U.S. during Castro's takeover, Raul's mother worked as a marine biologist and his father was the President of Cuban Airways. Raul recalls, "As an immigrant, and losing everything they lost, [my parents] were so determined to ensure that their kids wouldn't have to go through that and that they were absolutely self-sustaining."
Like most immigrants, the Alvarez family didn't believe in debt. When it was time for college, Raul chose a route that would minimize the financial burden on his family. For his undergraduate degree, Raul attended the University of Miami where he was entitled to free tuition because his mother taught in the graduate school. He graduated cum laude and was hired by an accounting firm.
He was asked to do some financials for one of his clients, and it wasn't long before he accepted a position as a director of finance with the company. This was the first of many moves in his career. Raul quickly ascend through the ranks and was always looking for the next strategic jump. To gain experience and move ahead, he leveraged his Hispanic background by took an operations job in Spain.
In 1987, looking to make another large career leap, he contacted the biggest player in the industry, but the door wasn't open - yet. Another competitor had started rebuilding itself and gave him an opportunity in 1989 where he served as a corporate vice president that oversaw acquisitions. Then in 1994, seven years after his initial contact, the industry leader came knocking. A friend had tipped the company off to Raul's quality of work.
"They approached me through a headhunter and I said I'm not gonna call you back! You didn't call me before, I'm not calling you!" His friend encouraged him to pursue this opportunity. It was something Raul had always talked about. Eventually, he decided to join the industry giant. As before, Raul quickly rose through the company's ranks.
So who is Raul Alvarez?
If you are a dividend investor you probably own shares in Raul's company and you have been lovin' it during this economic downturn. Raul Alvarez now goes by the name Ralph and is the President and Chief Operating Officer of one of the most successful companies in the word, McDonald's Corp. (MCD). He has helped MCD extend a six-year success streak with his focus on improving restaurant operations, adjusting prices and keeping down costs and is in line to take the reins when 64-year-old Chief Executive Jim Skinner retires.
Full Disclosue: Long MCD
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Tuesday, March 24, 2009
|
analysis
|
This article originally appeared on The DIV-Net March 16, 2009.
Linked here is a detailed quantitative analysis of Genuine Parts Co. (GPC). Below are some highlights from the above linked analysis:
Company Description: Genuine Parts Co. is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
GPC is trading at a discount to 1.) and 3.) above. Since GPC's tangible book value is not available, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, GPC is trading at a 11.1% discount. GPC earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
GPC earned one Star in this section for 3.) above. GPC has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 53 consecutive years, most recently in January 2009.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to > MMA
GPC earned both of the available Stars in this section. The NPV MMA Diff. of the $9,292 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as GPC has. GPC's current yield of 5.79% exceeds the 3.3% estimated 20-year average MMA rate.
Other: GPC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. GPC's long-term record of rising sales, earnings and dividends is driven by its strong leadership and firmly supported by a healthy balance sheet. Its debt to total capital of 18% is well below the 35% target I prefer. The company's return on capital employed has been in the mid-to-high teens for the last four years. With little debt and free cash flow more than 1.5 times the dividend, GPC is in a good position to weather the current economic crisis and continue to grow its dividend. An above-average dividend yield, in excess of 5%, adds to GPC's total return potential. Risks include include weaker-than-expected product demand and a slow improvement in operating margins.
Conclusion: GPC earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks GPC as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could decrease to $40.83 before GPC's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 3.92%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is -3.5%. This dividend growth rate is negative and well below the 2.6% used in this analysis, thus providing a margin of safety. GPC has a risk rating of 1.75 which classifies it as a medium risk stock.
I must admit to being pleasantly surprised by GPC. I have driven by their NAPA Auto Parts stores my entire life and would have never guessed it was such a well run business. GPC has earned a spot on my watch list with a buy price of $31.06. For additional information, including the stock's dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in GPC (0.0% of my Income Portfolio).
What are your thoughts on GPC?
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Saturday, March 21, 2009
|
commentary
|
Are you looking for companies that can sustain and grow their dividend? In making that determination, a company's Statement of Earnings is one of the last places you should look. Cash is king for the dividend investor and the Statement of Cash Flows is where astute investors begin when they want to understand the viability of a company.
It's not that most companies have done anything wrong when preparing their Statement of Earnings, but under Generally Accepted Accounting Principles (GAAP) a lot of the entries have nothing to do with today's operations. Given this, I generally avoid most earnings related metrics (e.g. EBIT, EBITDA, payout ratio, etc.) Instead I focus on cash-based metrics, such as these:
Free Cash Flow - This has many definitions, but the one I use is operating cash flow less capital expenditures. Capital expenditures are deducted since you can't run a business for any period of time without expending some level of capital. These two numbers are easily located on the Statement of Cash Flows. This is the best snapshot of what cash the business has generated from "normal" operations and is available for dividends, debt, acquisitions and purchases of treasury stock.
Cash Flow Per Diluted Share - GAAP Earnings Per Share (EPS) has the same short-comings as GAAP earnings. When looking at EPS numbers I prefer a cash-based number. Cash Flow Per Diluted Share is calculated by taking the Free Cash Flow from above and dividing it by diluted shares outstanding (available on the Statement of Earnings).
Cash Payout Ratio - Dividend investors love payout ratios (dividends per share/EPS). Given my concerns with GAAP earnings and EPS, I once again prefer a cash-based version. The Cash Payout Ratio is calculated by dividing dividends per share by Cash Flow Per Diluted Share. Care should be taken when interpreting this ratio. For example, sometimes a high ratio with low debt is better than a low ratio with high debt.
Debt to Total Capital - Total capital is the sum of debt plus shareholders equity (both available on the Balance Sheet - don't forget the debt classified as short-term). Businesses are generally funded in one of two ways, equity or debt. Normally debt is more expensive than equity, while additional equity can potentially dilute current shareholders over the long-term. I consider a good balance to be 35% debt and 65% equity. I see the upper end for debt as 50% and then there needs to be a good reason for being there.
Cash Return on Capital Employed - This is simply Free Cash Flow divided by Total Capital (both are defined above). Again, I prefer using a cash number in the numerator. A lot of investors look at return on assets and return on equity. Each are flawed beyond their GAAP numerator. Return on assets ignores the liabilities side of the balance sheet, while return on equity ignores the debt component of capital.
Using 2008 data from Morningstar, let's run the numbers on a couple of companies and see what we find:
Genuine Parts Co. (GPC)
Free Cash Flow: $425.3 million
Cash Flow Per Diluted Share: $2.63 (425.3/162)
Cash Payout Ratio: 59% ($1.56/$2.63)
Debt to Total Capital: 18% (500/(500+2,324.3))
Cash Return on Capital Employed: 15% ($425.3/(500+2,324.3))
General Electric Company (GE)
Free Cash Flow: $32,591.0
million
Cash Flow Per Diluted Share: $3.23 (32,591.0/10,098)
Cash Payout Ratio: 38% ($1.24/$3.23)
Debt to Total Capital: 83% (523,762/(523,762+104,665)
Cash Return on Capital Employed: 5% ($32,591.0/(523,762+104,665))
Based on the above, GE started out strong with a low cash payout ratio, while GPC's appeared to be on the high side. However, GPC has very little debt so it can afford to pay a richer dividend unlike GE. GPC is doing a much better job than GE in earning a return on its invested capital. Having low debt and generating a 15% return in a year like 2008, will turn some heads. As with any metric, these should not be considered in isolation. Also, you should look at multiple years, consider projections and review the scheduled debt payments in the footnotes.
To succeed as a dividend investor, you must find companies that can sustain and grow dividends by focusing on their ability to generate cash. You can fake earnings, but you can't fake cash.
Full Disclosure: No position in any of the aforementioned securities.
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Thursday, March 19, 2009
|
commentary
|
Looking back to the beginning of the current recession, there were two things that initially put the brakes on the economy: 1.) the sub-prime melt-down and 2.) virtual halt of residential construction. They go hand-in-hand. As new homes are constructed, many were being bought by those wanting to upgrade. In turn they had to sell their house. Eventually, as new home construction expanded while the buying population shrank, the only way to feed the beast was to expand the sub-prime market. Like most houses of cards, ultimately it failed. Has housing finally hit bottom?
I am not ready to call a bottom, but recently there has been some encouraging news. First, the Commerce Department reported housing starts jumped 22% in February to a seasonally adjusted annual rate of 583,000 from a revised 477,000 in January. This was the biggest percentage gain in 19 years. Single-family home construction increased 1.1% last month, and new construction of multi-unit buildings surged 80%. Building permits rose 3% in February, according to the Commerce Department report, to an annual rate of 547,000. Building permits are considered a reliable indicator of future activity in construction. This should be good news for homebuilders such as DR Horton Inc. (DHI), Toll Brothers, Inc. (TOL) and Pulte Homes, Inc. (PHM) who have seen their share prices collapse over the last 18 months.
Though some economists are inclined to write this off as a weather-related fluke, one homebuilder is saying that conditions are improving slightly in the industry. "Traffic is definitely up, and the number of contracts for houses has doubled on a per-month basis since October," said Ara Hovnanian, CEO of the homebuilding company Hovnanian (HOV).
Another sign of the thaw came March 17th when an analyst upgraded home improvement retailers Home Depot Inc. (HD) and Lowe's Cos. ( LOW) citing the HD's cost-control efforts and the LOW's potential for expansion as reasons. Home Depot's cost control efforts, fewer store openings and strong free cash flow helped the company deal with the troubled housing market. "Home Depot is demonstrating strong capital discipline. The company is spending cash wisely and only opening 12 new stores this year," Binder wrote in a note to clients.
In another note, Binder said Lowe's may be able to gain ground when people start looking forward to new store openings again. "While it doesn't feel like we need any more home improvement stores, Lowe's has half the number of stores Home Depot has in many major markets and convenience matters in this business. In other words, the company could get credit again at some point for having more unit growth opportunities relative to Home Depot. While spring selling will give us a better feel for inventory levels during prime selling season, we are encouraged by greater affordability and possible improvement in banks willingness to lend as bank balance sheets see some repair."
We must continue to cautiously manage our portfolios in this downturn, while keeping a watchful eye on our surroundings. Signs of new life make it easier for long-term investors to stand firm in their convictions.
Full Disclosure: Long HD
(Photo Credit)
References:
- Is a housing bottom in sight?
- Ahead of Bell: Lowe's, Home Depot upgraded
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Tuesday, March 17, 2009
|
analysis
|
This article originally appeared on The DIV-Net March 9, 2009.
Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:
Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.
Read More...
Summary only...
Posted by
D4L |
Sunday, March 15, 2009
|
commentary
|
When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. However, sometimes selling a stock is the right thing to do. In determining when to sell a dividend stock, I have one hard and fast sell rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. This rule has served me well. Since I have begun chronicling by investments online, there have been several stocks I sold immediately after a dividend cut. Here is a list of those stocks with my exit price and a recent price:
Symbol |
Date Sold |
Sell
Price |
Recent
Price |
% |
Washington Mutual Inc. (WM) |
12/11/2007 |
$18.11 |
$0.00 |
100% |
Wachovia Corporation (WB) |
4/15/2008 |
$25.89 |
$5.54 |
79% |
iStar Financial Inc. (SFI) |
10/3/2008 |
$2.32 |
$1.09 |
53% |
Bank of America Corporation (BAC) |
10/7/2008 |
$28.50 |
$3.14 |
89% |
SunTrust Banks Inc (STI) |
10/28/2008 |
$36.43 |
$9.36 |
74% |
First Industrial REIT (FR) |
11/4/2008 |
$10.22 |
$2.51 |
75% |
American Capital Ltd (ACAS) |
11/11/2008 |
$6.50 |
$0.59 |
91% |
Pfizer Inc (PFE) |
1/27/2009 |
$15.64 |
$12.73 |
19% |
General Electric Co (GE) |
2/27/2009 |
$8.59 |
$7.06 |
18% |
US Bancorp (USB) |
3/4/2009 |
$12.70 |
$8.82 |
31% |
The "%" column is the percentage decrease between the "Sell Price" and "Recent Price". As you can see, each of the stocks continued to fall after it was sold. That adds substantive evidence that my sell after a dividend cut rule is the correct thing to do. With that said, I have begun to question if there were other indicators that should have led me to an earlier sale. Four of the above stocks have one other thing in common - they froze their dividend before cutting it. The table below shows those stocks and the price on the dividend freeze date (declaration date), along with the three stocks I currently hold with a frozen dividend:
Symbol |
Date Froze |
Freeze
Price |
"Sell
Price" |
% |
Bank of America Corporation (BAC) |
7/23/2008 |
$30.64 |
$28.50 |
7% |
Pfizer Inc (PFE) |
12/15/2008 |
$17.36 |
$15.64 |
10% |
General Electric Co (GE) |
9/25/2008 |
$25.25 |
$8.59 |
66% |
US Bancorp (USB) |
9/16/2008 |
$33.34 |
$12.70 |
62% |
Home Depot Inc (HD) |
11/15/2007 |
$29.07 |
$18.00 |
38% |
M&T Bank Corp (MTB) |
7/23/2008 |
$68.51 |
$31.85 |
54% |
Royal Bank of Canada (RY) |
8/28/2008 |
$45.68 |
$22.99 |
50% |
The "Freeze Price" is the closing price the first trading day after the dividend freeze was announced. The "Sell Price" for the first four (those that I have already sold), is the actual price I sold it for and for the three I still hold it is a recent price. Based on the above, it appears the prudent thing to do would be to sell a stock after it freezes its dividend. Like a dividend cut, an investment with a froze dividend is no longer aligned with my dividend portfolio’s goal of building an ever-increasing source of dividend income.
Care should be taken in considering that not only have the above stocks fell over the last year or so, but virtually every other stock has fell. So what appears to be hard and fast rules in this market, will need to be evaluated under different phases of the cycle. But for now, selling after a dividend cut or a dividend freeze appears to be a prudent rule to follow. However, I do not see the dividend freeze rule as stringent as the dividend cut rule. Each situation needs to be evaluated and sometimes an immediate sale is not warranted. Considering all this, I would phrase my dividend rule as such:
When an individual stock held as a dividend investment freezes its dividend, this is a strong sell indicator. The specific facts and circumstances should be immediately evaluated and continuously monitored until the stock is either sold or it increases its dividend.
If it is decided not to sell the stock, the pressure to sell should increase as time passes. Another strong indicator to sell would be if the dividend freeze persists long enough to incur a flat dividend year-over-year. Dividend freezes need to be monitored closely. In many instances they are the first step to a dividend cut.
Full Disclosure: Long HD, MTB, RY
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Thursday, March 12, 2009
|
commentary
|
In January 2008, I pondered the possibility of adding a tech company to my dividend income portfolio. It couldn't be just any tech company since most are quite volatile and don't produce sufficient cash to pay a consistent and rising dividend. Two tech companies that were worthy of consideration were Microsoft (MSFT) and Intel Corp (INTC) due to their ability to generate free cash flow. I considered INTC the stronger of the two and had high hopes, but things didn't initially work out. Eventually, patience prevailed and when INTC's price and interest rates dropped to the point the numbers made sense, I purchased it. So what's INTC's outlook now?
While flipping through some of the finance and IT free magazines that I get at work and came across an interesting article on INTC in the February 16, 2009 ComputerWorld magazine. The article, "Intel Looks to Pull Itself Out of Economic Hole", could be perceived as negative on the surface but after closer consideration offered me some assurance that INTC would prevail in the end.
The article described the horrendous fourth quarter that INTC endured where revenues fell 23% and profits 90%. In February INTC announced plans to close four manufacturing facilities in Malaysia, the Philippines and Silicon Valley that would reduce its workforce by 6,000 jobs. Things are so bad that INTC did not provide projections for the first quarter due to "economic uncertainty and limited visibility." Sounds bad, right?
The hope came from INTC's plans to invest $7 billion over the next two years upgrading U.S. factories in Arizona, Oregon and New Mexico so they can produce chips based on 32-nanometer (nm) technology and accelerate the shipments of it first 32nm chips into Q4/2009. Why is spending this much money during an economic downturn a good thing?
Forrester Research Inc. analyst Frank Gillett said not moving ahead with the 32nm plan could blunt the company's hard-earned technology edge over Advanced Micro Devices Inc. (AMD). This is the is the fundamental core of INTC's competitive strategy - use its huge cash flow to constantly push into manufacturing technologies that lower costs, making investments that can't be matched by competitors. Will this work?
Leslie Fiering pointed out that one of INTC's tremendous strength's is process control in manufacturing. Contrast that with AMD's strategy of spinning off all its manufacturing into a new joint venture and relinquishing some control over the manufacturing process. INTC is smart enough to play both sides of the fence. Its deal with Taiwan Semi will let INTC cut costs in making chips that rely on older manufacturing technology while putting its money into pushing the new manufacturing technologies where its future lies.
While most analysts are projecting significant drops in chip sales during 2009, INTC has the vision and ability to execute its long-term strategy. The road will not be smooth, but it in the end, my money is on Intel.
Full Disclosure: Long INTC
Additional Reference: 20 stocks worth watching
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Tuesday, March 10, 2009
|
commentary
|
The week before last we mentioned that JPMorgan (JPM), the second-largest U.S. bank, slashed its dividend by 87% to $0.05. Possibly that wasn't quite enough to keep keep big brother happy, so JPM took their quarterly dividend down to $0.01/share. The dividend is to be paid on Friday, April 3, 2009 to common stockholders of record as of Friday, March 20, 2009. JPM closed down 8.14% - it is always good to deliver bad news twice.
Last Wednesday, following in JPM's footsteps, U.S. Bancorp (USB) slashed its dividend by 88% to $0.05/share. U.S. Bancorp Chairman, President and Chief Executive Officer Richard K. Davis said, "The decision to reduce our quarterly dividend was thoughtfully considered and very difficult, given the importance of the dividend to our shareholders." USB closed down 12.48% after the announcement. Then dropped another 18.2% on Thursday.
While the financials continue to wither, some companies are designed to flourish in these difficult economic times. Last Thursday, Wal-Mart (WMT) reported that same store sales, ex-fuel, for the month rose 5.1%, and its Board increased the quarterly dividend 15% to $0.2725/share. WMT's dividend now yields around 2%. This is the 35th consecutive year WMT has raised its dividend. CEO Mike Duke said, "The strength of our operations and the resulting strong financial position allow us to increase our dividend payout to shareholders again this year. Our free cash flow remains strong enough to fund Wal-Mart's growth around the world, make strategic acquisitions and fund returns to shareholders through dividends and share repurchases."
Other companies are poised to perform by raising their cash dividends to shareholders. Here are several that have recently done just that:- Qualcomm (QCOM) lifts its qtr. dividend 6% to $0.17/share (yield 1.84%)
- General Dynamics (GD) boosts its qtr. dividend 8.6% to $0.38/share (yield 3.48%)
- WGL Holdings (WGL) raises its quarterly dividend 3.5% to $0.3675/share (yield 4.68%)
For more companies around the world with a long string of consecutive dividend increases, see Dividends Value's Stock Ideas page.
Full Disclosure: Long WMT
(Photo: Steve Woods)
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Sunday, March 08, 2009
|
carnival
|
Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.
Below are the carnivals that I participated in this week, along with a link to my article:Articles I enjoyed reading included (in no particular order):
The DIV-Net Featured ArticlesArticles From DIV-Net MembersThe Wealth, Money & Life Network Featured ArticlesOther ArticlesThere are some really good articles here, please take time and read a few of them.
(Photo: Sachin Ghodke)
Read More...
Summary only...
Posted by
D4L |
Thursday, March 05, 2009
|
quotes
|
As mentioned in previous articles, I love inspirational (and other) quotes. I see quotes as a portal to someone’s inner self. They reveal much about the person both good and bad. Read enough of a person’s quotes and you will get to know the person. Let’s spend some time getting to know Warren Buffett through his quotes.
- A public-opinion poll is no substitute for thought.
- We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
True success does not come from copying what everyone else is doing. You Can’t Beat the Herd by Following the Herd.- Time is the friend of the wonderful company, the enemy of the mediocre.
- Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
- Chains of habit are too light to be felt until they are too heavy to be broken.
- If a business does well, the stock eventually follows.
- Our favorite holding period is forever.
When buying a dividend stock, the quality of the company is the number one consideration. Given enough time, a quality company will always rise above lesser competition. When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second tier players. Buffett has used the quality + time formula for decades.- If past history was all there was to the game, the richest people would be librarians.
- In the business world, the rearview mirror is always clearer than the windshield.
With the internet, everyone has access to massive amounts of financial data on public companies. Never confuse data with information - the former takes up space while the latter is useful. Your stock evaluation process should include quantitative and qualitative analysis. While it is important to understand how a company has performed using a quantitative analysis, it is more important to determine how the company will perform in the future using a qualitative analysis. This is much more difficult since no internet site provides an instant glimpse into the future.- You only have to do a very few things right in your life so long as you don't do too many things wrong.
- Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
- Wide diversification is only required when investors do not understand what they are doing.
- Risk comes from not knowing what you're doing.
Have a plan for managing risk. Buffett has spent a lifetime perfecting his process and abilities. Though he shuns diversification, we would be wise not to do so until our abilities are on par with his.- It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
- It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction.
Life is much more than just making money. The above rings true in so many aspects of our lives. Success is measured in many different ways.- There seems to be some perverse human characteristic that likes to make easy things difficult.
- Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
- I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
- Price is what you pay. Value is what you get.
Over time we make all things overly difficult and complex. Sometimes it is good to step back, focus on the basics and avoid the needless mistakes.- I always knew I was going to be rich. I don't think I ever doubted it for a minute
- We enjoy the process far more than the proceeds.
Life is a journey. Find something you love and enjoy the trip! We can all learn something from like-minded individual who have been successful in their field. Still wanting more Buffett quotes?
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Tuesday, March 03, 2009
|
commentary
|
A well-rounded dividend investment portfolio just doesn't happen by accident. As noted in Charlie Munger’s 10 Rules for Investment Success, “Allocate assets wisely: Proper allocation of capital is an investor’s No. 1 job.” It is human nature to want to jump on the what's hot bandwagon and ignore what is considered boring, like utilities.
Long considered the domain for "widows and orphans", utilities have developed a somewhat stodgy reputation. Why are utilities considered good for widows and orphans? Here a few reasons:
- They are generally less volatile than the market as a whole (low beta)
- Their products are something that people continue to need and use no matter what the economy is doing, thus
- Their dividends tend to be more stable and secure
Utilities would be the perfect dividend income investment, except for one thing - they tend to have low dividend growth rates. As such, you wouldn't want a whole portfolio of utilities and you need to be very selective in which utilities are added, and when they are purchased. In my personal allocation, utilities are limited to a maximum of 10% of my portfolio (currently, they make up 3.7% of my total investment portfolio).
In addition to the regular buy criteria, I look for a higher yield when buying utilities, generally greater than 5.5%, but I really prefer around 6%. This eliminates many utilities, but there are still several from my Stock Ideas page that might be worth an additional look. Here is a list of all the utilities that have paid a dividend for more than 25 years and have a yield of 5.5% or greater:
Vectren Corp. (VVC) - 6.23% Yield
This energy holding company, headquartered in Evansville, IN, provides natural gas and electric energy to more than one million customers in Indiana and Ohio. It also offers energy related products and services to customers throughout the Midwest and Southeast. It has increased its dividend for 49 consecutive years. It last increased its dividend in November 2008.
Consolidated Edison (ED) - 6.29% yield
This electric and gas utility holding company serves parts of New York, New Jersey and Pennsylvania. With its February 2009 dividend increase, ED has now increased its dividend for the last 36 consecutive years. (most recent analysis)
Otter Tail Corp. (OTTR) - 6.35% yield
The company produces, distributes and sells electric energy in Minnesota, North Dakota and South Dakota and has interests in health services, manufacturing and other businesses. OTTR missed is normal dividend increase in February 2009. Instead, the company left its dividend flat with 2008. The last time OTTR increased its dividend was February 2008.
Integrys Energy Group (TEG) - 7.27% yield
This utility holding company serves about 485,000 regulated electric and 1,674,000 regulated gas customers. The company also operates an unregulated energy supply and services business. With its February 2009 dividend increase, TEG has now increased its dividend for the last 51 consecutive years. (most recent analysis)
Black Hills Corp. (BKH) - 7.48% yield
This diversified South Dakota-based holding company encompasses electric utility and integrated energy businesses. With its February 2009 dividend increase, BHK has now increased its dividend for the last 40 consecutive years. Prior to this last increase, the company went five quarter with no increase dating back to November 2007.
Of the five utilities listed above, I would not consider OTTR until the future dividend direction can be determined. BKH's late increase is a little concerning, but I could not disqualify it at this time. I own and am currently purchasing TEG and ED as their valuations and my allocations allow.
Finally, looking at current and some historic returns over shorter periods of time, certain utilities have done quite well. Remember, there is a reason the widows and orphans own them.
Full disclosure: Long ED, TEG
Related Articles:
Read More...
Summary only...
Posted by
D4L |
Sunday, March 01, 2009
|
carnival
|
Each Sunday I highlight the Carnivals I participated in over the past week, along with any notable articles that I came across. For those readers not familiar with carnivals, it's where personal finance bloggers submit their best articles of the week with one blog serving as the host. The entries are separated into various categories such as Investing, Credit, Debt, Budgeting, Frugality, Wealth Building, Money Management, Financial Planning, Insurance, Taxes, The Economy, Real Estate, et. al.
Below are the carnivals that I participated in this week, along with a link to my article:Articles I enjoyed reading included (in no particular order):
The DIV-Net Featured ArticlesArticles From DIV-Net MembersThe Wealth, Money & Life Network Featured ArticlesOther ArticlesThere are some really good articles here, please take time and read a few of them.
(Photo: Sachin Ghodke)
Read More...
Summary only...
