As the government tries to thaw the credit freeze, the next potential catastrophe is starting to heat up. I am beginning to see more and more written on the pending problem of underfunded pension plans. Unfortunately, this problem could have many faces and take a significant amount of time to sort out.

First, a short primer for those fortunate enough not to be involved in pension accounting. There are two basic types of company sponsored retirement plans - defined contributions (DC) and defined benefits (DB) plans. As the names imply, a DC plan defines what the company will contribute to the plan on behalf of the employee. An example of a DC plan is a 401(k) where the company will match the first 5% contributed by the employee. There is no guarantee of what the employee will get out of the plan. The DB plan in contrast defines the benefit the employee will receive upon retirement, such as a salary of 80% of his or her highest earnings year, weighted by years of service. In the DC plan the employee assumes the risk of under-performance, while in the DB plan the employer assumes the risk.

For DB plans, actuaries will look at the number of employees, their ages, their income and other factors to determine what the company's future liability will be. The actuaries will then look at the invested assets, estimate a future return and determine if the assets will be sufficient to cover the future liability. When the market is spiraling up, assets are usually greater than the liabilities and the company does not have to put any money in the plan, thus it does not have recognize an expense. But when the market is down, as it has been lately, the liability is greater than the assets on hand. This is referred to as underfunded, and over time the company has to come up with cash and recognize an expense.

One of the biggest pension plans in the world is General Motors (GM). A recent New York Times article looked at GM, which hasn't been doing so well lately, and the effect of its underfunded pension plan. As of last November the estimated shortfall in GM pension plan was $20 billion. So what happens if it fails?

If GM's pension plan collapses, the Pension Benefit Guaranty Corporation (PBGC) will pick up part of the tab. However, most of that shortfall would be made up by workers in the form of smaller benefits — not by GM or the PBGC. Unfortunately, this will likely set other pension funds into play. Since GM's plan is so large, its failure will result in the PBGC losing a big source of the premium revenue. But more importantly, other automakers such as Ford, Toyota and Honda will be looking to rid themselves of their DB plans to cut costs and stay stay competitive.

The Pension Protection Act (PPA) and IRS regulations impose restrictions on accelerated payments (e.g. lump sum distributions) when the funding level falls below 80%. This is not just a problem with companies in struggling industries. Tyler Durden in a March 7, 2009 article cites data from a Merrill Lynch Pension Database showing several well-known companies with a projected (data as of 10/22/08) funded status below 80%. Here is a sampling of some traditional dividend companies:

• Johnson & Johnson (JNJ) Deficit: $3.5 billion Funding Status: 70%
  
• Exxon (XOM) Deficit: $3.4 billion Funding Status: 69%
  
• Chevron (CVX) Deficit: $2.6 billion Funding Status: 69%
  
• General Dynamics (GD) Deficit: $2.3 billion Funding Status: 68%
  
• PepsiCo (PEP) Deficit: $1.8 billion Funding Status: 72%
  
• Kimberly-Clark (KMB) Deficit: $1.4 billion Funding Status: 72%
  
• Kraft Foods (KFT) Deficit: $1.1 billion Funding Status: 83%
  

Generations before us relied on defined benefit pension plans to ensure their lifestyle in retirement. Our generation may not have the same luxury. There is one thing this economic and financial downturn has taught us - there are no sure things in life. We must take responsibility for our financial future and mange it.

Full Disclosure: Long JNJ, CVX, PEP, KMB (my income holdings)


Related Articles:

• What’s Your Retirement Vision?
• Strategically Managing Your Dividend Portfolio In A Downturn
• Dividend Stocks in Today’s Market
• Who is Irving Kahn and Why Should We Listen to Him?
• Reaching Your 10-Year Investing Goal

Read More...

Summary only...

I hate to sell a stock. When I buy a stock, my intention is to hold it forever and enjoy its ever-growing dividend income. Unfortunately, it doesn't always work that way. Sometimes a stock changes and no longer fits in my income portfolio. It could be a company that cuts its dividend or in some cases freezes its dividend. Let's take a look at a two-step process designed to help us determine if we should sell a stock after a dividend freeze.

I. Does The Stock Still Meet Our Investment Criteria?

Dividend investing is about about building a reliable income stream that increases each year. When an investment stops raising its dividend it is no longer providing the future income growth required by my dividend portfolio. The stock may still be a good value, but my dividend portfolio’s primary objective is ever-increasing dividend income, not capital gains.

Obviously, the company's future prospects would play into a decision to keep or sell. Can the company raise its dividend, albeit late, and still preserve a year-over-year increase? Will the future earnings provide sufficient free cash flow to pay a dividend? What other obligations, such as debt, might absorb future cash flows? Is management committed to the dividend? Would you buy this stock today as an income investment? This step determines if the stock is a candidate for a sale.

II. Are There Better Alternatives Available?

Once the stock has been identified as a candidate for a sale, the question then becomes is there something out there that is better? Don't forget in determining the market value of a stock, the market considers any known "bad news" about about a company. So after the bad news is out and the company freezes the dividend, the price may drop and increase the effective yield on the stock. Yield on cost is not relevant when considering a sale.

The current price and current yield are what you will receive and give up when selling a stock. With the cash received is there another stock that would be an "upgrade" from the one you are selling? What does its future prospects look like? Will the new stock replace the dividend income lost from the one sold? What does its debt and cash flow look like? Will it continue to grow its dividend in the future? Is it a more riskier stock?

If in answering these questions you determine the stock should be sold, then you pass step two. At this point, you should sell the stock that froze its dividend and purchase the one you identified in step two.

A Real-World Example

I am holding three stocks with frozen dividends. Last week I spent some time analyzing one of them - Home Depot (HD). Its quarterly dividend has been frozen at $0.225/share since November 2006. Let's run it through the two-step process and see what happens.

I. Does The Stock Still Meet Our Investment Criteria? - Home Depot (HD)

• Can the company raise its dividend, albeit late, and still preserve a year-over-year increase? No, the annual dividend was $0.90/share in 2007 and 2008.


• Will the future earnings provide sufficient free cash flow to pay a dividend? Not easily. HD's 2008 free cash flow was $2.2 billion while it dividend was $1.7 billion.


• What other obligations, such as debt, might absorb future cash flows? HD has been increasing its debt over the last several years. In 2006, HD's total debt was $4.1 billion. At the end of 2008, HD's debt has nearly tripled to $11.4 billon.


• Is management committed to the dividend? This is subjective, but given the above it will be hard to increase the dividend in the near-term.


• Would you buy this stock today as an income investment? Definitely not!
  

Based on Step I, HD is a candidate for a sale. Let's take it through step 2.

II. Are There Better Alternatives Available? - Home Depot (HD)

On the day I was evaluating HD, its current yield was 3.52%. Good, but not great when compared to companies with a similar yield and growing their dividends. So the question is, "If I sold HD, is there another stock that would be an upgrade?" Over the last several weeks I have looked at three companies the piqued my interest. Let's compare them to HD:

1. Genuine Parts Co. (GPC) - [Recent Analysis]

• What does its future prospects look like? The economic downturn has left GPC struggling in some areas, but its management has done an excellent job managing the company for cash.


• Will the new stock replace the dividend income lost from the one sold? With a current yield in excess of 4.5%, GPC could more than replace HD's lost income.


• What does its debt and cash flow look like? GPC ended 2008 with a low debt to capital of 17.7%. Its 2008 free cash flow of $425 million was down from the 2007 record level of $526 million, but with little debt, the $425 is more than adequate to cover the annual $252 million dividend.


• Is it a more riskier stock? With its strong balance sheet and cash flows, GPC is less risky.


• Will it continue to grow its dividend in the future? For the 53rd consecutive year, GPC raised its dividend in March 2009. It appears to have the financial ability to sustain increases going forward.
  

2. General Dynamics Corp. (GD) - [Recent Analysis]

• What does its future prospects look like? Much of GD's work is tied to long-term defense contracts. Its business jet segment has suffered some.


• Will the new stock replace the dividend income lost from the one sold? With a current yield of 3.27%, GD's income will be slightly less than HD's, but with a dividend growth rate of 11% it could surpass HD in one year.


• What does its debt and cash flow look like? GD ended 2008 with $3.1 billion in debt, up from the $2.8 billion in 2007. Its 2008 free cash flow of $2.6 billion was at a record level and is more than adequate to cover the annual $533 million dividend.


• Is it a more riskier stock? No, with its strong cash flows and debt to capital of 24%, GD is better positioned than HD to weather the downturn.


• Will it continue to grow its dividend in the future? No reason to believe it won't.
  

3. Abbott Laboratories (ABT) - [Recent Analysis]

• What does its future prospects look like? Like all pharmaceutical companies, ABT is facing challenges to their branded patents, drug development and regulatory issues. However, they have a good pipeline and have diversified their business, thus they appear to be in a better position than most of their peers. Near-term, the economic downturn should affect them less than HD.


• Will the new stock replace the dividend income lost from the one sold? With a current yield in excess of 3.6%, ABT will replace HD'd lost income.


• What does its debt and cash flow look like? At 40% ABT's debt to total capital is a little higher than the 35% I like to see. However, it is moving in the right direction. ABT ended 2008 with $11.4 billion in debt, down from the $12.2 billion in 2007. Its record 2008 free cash flow of $6.1 billion was up $2.5 billion from 2007, and is more than adequate to cover the annual $2.2 million dividend.


• Is it a more riskier stock? No. ABT with its strong cash flows should be able to pay its dividend and pay down debt with the cash left over. I consider ABT's near-term prospects better than HD's.


• Will it continue to grow its dividend in the future? No reason to believe it won't.
  

In answering the above questions, I was confident that either GD or ABT would be an excellent replacement for HD. Going into April, GPC was my favorite, but it was disqualified based on its valuation.

I had pegged GPC as a stock to purchase in April. I opted to defer a month and wait until their earnings release on April 16th. Last week GPC reported 11% lower sales and 28% lower income. So why did their stock jump nearly 10% that day? First, they beat analysts prediction by $0.07/share. Secondly, and more importantly to me, they increased free cash flow by $10.6 million, or 8.6%. Management judiciously managed working capital and watched capital spending - signs of good management. Unfortunately, after its run-up, GPC's stock price was was trading well in excess of my buy price of $31.06. For now, I will leave GPC on my watch list.

Taking into account all the above, I sold HD and purchased ABT.

Full Disclosure: Long ABT


Related Articles:

• Should You Sell A Dividend Stock After A Dividend Freeze?
• What To Do With A Dividend Freeze?
• Early Warning Signs of a Dividend Cut
• 21 Suggestions for Success
• Measuring Dividend Stocks Investment Risk Profile

Read More...

Summary only...

Have you ever noticed those that most vehemently attack a buy-and-hold strategy really don't understand how buy-and-hold works? The confuse a buy-and-hold strategy with day-trading with a longer duration.

Case in point, the Forbes article Buy-And-Hold In Disrepute by Robert Lenzner. He tries to tie the buy-and-hold strategy to a risky BRIC (Brazil, Russia, India and China) investment:

They lost even more in Russia and other emerging markets--to the tune of 70% or more--if they bought into the "BRIC" investing concept promoted hard by Goldman Sachs (GS) in the early part of the decade. You needed to buy and sell, not buy and hold. If you bought and held, you had the pleasure of the run-up followed by the pain of the collapse.

A true implementation of buy-and-hold would include a reasonable asset allocation framework in which emerging markets would never command anything more than a small percentage of total invested assets. Since, the people investing their hard-earned money should not be responsible in any way, who can we blame Mr. Lenzner?

The truth is that the public was badly served by its investment advisers, like Alliance Bernstein, or their big public mutual funds, which stayed 100% invested all through the lead-up to the worst financial crisis since the 1930s. They took little or no money off the table. They never called your Aunt Sadie to advise her to take profits in 2006 and 2007 before the bottom dropped out.

So, the brilliant investment advisers should immediately sell as the investment peaks, then buy back in as it hits bottom? I thought we were talking about buy-and-hold. This sounds a lot like market timing.

Investors beware: You have to watch over your money like hawks, read your monthly statements and ask questions. You must be active, not passive, when dealing with commoditized investment firms..

Finally, we agree on something. Maybe I should stop reading on a high note.

Were you told to sell your General Electric (GE) or your Citigroup (C) before they became single-digit stocks? Many value-oriented funds were buying Fannie Mae (FNM) months before it became Uncle Sam's property.

No, but then again we should take personal responsibility for our market losses. Actually, the article would have been a lot better if it was titled "Professional Money Managers In Disrepute" and the unneeded references to buy-and-hold were omitted. But then again mentioning (or taking shots at) buy-and-hold and Buffett (I spared you from that remark) helps with the search engines and garners clicks.

Full Disclosure: No position in the aforementioned securities, but I did lose money in GE and C, in which I take full responsibility.


Related Articles:

• Dividends Under Attack, Again…
• Passing the Torch - Part 1 of 2
• In Dividend Investing, Cash Is King
• When Is A Lot of Cash A Bad Thing?
• Searching the World For The Best Dividend Stocks

Read More...

Summary only...

This article originally appeared on The DIV-Net April 13, 2009.

Linked here is a detailed quantitative analysis of Abbott Laboratories (ABT). Below are some highlights from the above linked analysis:

Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
   
2. 20-Year DCF Price
   
3. Avg. P/E Price
   
4. Graham Number
   

ABT is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, ABT is trading at a slight premium. ABT 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:

1. Rolling 4-yr Div. > 15%
   
2. Dividend Growth Rate
   
3. Years of Div. Growth
   
4. 1-Yr. > 5-Yr Growth
   
5. Payout 15% of avg.
   

ABT earned two Stars in this section for 3.) and 4.) above. ABT has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 37 consecutive years. Its one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

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:

1. NPV MMA Diff.
   
2. Years to > MMA

ABT earned both of the available Stars in this section. The NPV MMA Diff. of the $9,495 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as ABT has. ABT's current yield of 3.63% exceeds the 3.17% estimated 20-year average MMA rate.

Other: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. ABT has a relatively strong product pipeline, with possible significant launches in both the medical device and pharmaceutical areas. The company is financially sound, with a strong balance sheet, excellent return on capital employed and a relatively low dividend payout ratio. In 2008, operating revenues consisted of pharmaceuticals 57%, nutritionals 17%, diagnostics 11%, vascular 8% and other products 7%. In total, foreign sales accounted for 52% of all 2008 sales.

Like all pharmaceutical companies, ABT is facing challenges to their branded patents, drug development and regulatory issues. However, they appear to be in a better position than most of their peers. Other risks include lower-than-expected Humira sales, new generic competition to Synthroid and Biaxin and pipeline disappointments.

Conclusion: ABT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks ABT as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $65.25 before ABT's NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 2.45%.

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 3.2%. This dividend growth rate is significantly below the 8.4% used in this analysis, thus providing a margin of safety. ABT has a risk rating of 1.50 which classifies it as a medium risk stock.

ABT was last reviewed on ABT on July 14, 2008 with0-Star Avoid rating due primarily to its valuation. At the time ABT was trading at $56.43. Since that time I have watched ABT for the right time to initiate a position, and it is currently very close to my buy price of $42.53, and is within range when I add a 5% quality premium to the buy price. 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 ABT (0.0% of my Income Portfolio).

What are your thoughts on ABT?


Related Articles:

• Stock Analysis: Progress Energy, Inc. [PGN]
  
• Stock Analysis: General Dynamics Corp. [GD]
  
• Stock Analysis: Genuine Parts Co. [GPC]
  
• Stock Analysis: Automatic Data Processing Inc. [ADP]
  
• More Stock Analyses

Read More...

Summary only...

Any investor that understands the merits of asset allocation also understands the importance of including an international allocation in their portfolio. The concept is that in "normal" times there is always a market somewhere in the world rallying. To meet my set international allocation, I have focused on the following four areas of my overall portfolio:

I. International Fund in my 401(k)

This International Equity Index Fund seeks to match the performance of the MSCI EAFE Index which consists of approximately 1,200 stocks in 21 developed market countries outside of North and South America, and represents approximately 85% of the total market capitalization in those countries. When compared to other options in my 401(k), I have been generally pleased with this funds performance over time. YTD Return: (-7.2%)

II. International Exchange Traded Funds (ETF) Within My Asset Allocation Portfolio

The international component on my asset allocation portfolio is in iShares MSCI EAFE (EFA). EFA seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the European, Australasian and Far Eastern markets, as measured by the MSCI EAFE Index. This fund is tracking the same index as my 401(k) above, but with somewhat better results. YTD Return: (-5.1%)

III. Individual International Dividend Stocks

It was my desire to have international representation within my income investments, so I first looked to identify good non-U.S. dividend individual stocks that had an ADR trading on the New York Stock Exchange. To identify these stocks I used the International Dividend Achievers™ list. To become eligible for inclusion, a company must be incorporated outside of the United States. The companies must be have an American Depository Receipt or common stock trading on NYSE, NASDAQ or AMEX. Companies must have paid increasing regular annual dividends for five or more consecutive years. What I found is that most companies outside the U.S. follow a different dividend model. Here are some of the differences:

• Many Foreign Companies Pay Dividends Based on a Percent of Earnings
  This produces a very erratic cash stream. Consider Unilever plc (UL). Its ADR paid $0.353 in Nov/07, $0.668 in May/08 and $0.33 in Nov/08.
  
• Many Foreign Companies Only Pay Dividends Annually
  I need more feedback than this. I would hate to wait a full year before learning a company plans to slash its dividend. Examples of annual dividends include Shenandoah Telecommunications Co. (SHEN), Siemens AG (SI) and Stryker Corp. (SYK).
  
• Most Foreign Companies Pay Dividends in Their Local Currency
  Most Canadian companies pay quarterly consistent dividends, similar to companies in the U.S. However, they pay the dividends in Canadian dollars, so the currency risk is with the U.S. investor. There is probably much less fluctuation between the U.S. and Canadian dollars than most other currencies. However, it exists. Consider the last five dividends on Canadian National Railway Company (CNI): Mar/08 $0.223, June/08 $0.225, Sep/08 $0.217, Dec/08 $0.189 and Mar/09 $0.200. The quarterly dividend dropped 10% from Mar/08 to Mar/09 in U.S. Dollars while it increased its dividend 10% over the same period in Canadian dollars.
  

I am sure there are more, but one exception to all the above is BP plc (BP). BP's ADR has paid a consistent quarterly dividend denominated in U.S. dollars.

IV. International Income ETFs and Income Closed-End Funds (CEFs)

One thought was that a market basket of international stocks in either an ETF or CEF would help mitigate some of the issues above. Many of these created problems of their own. Some such as Alpine Total Dynamic Dividend Fund (AOD) has the option to invest in the U.S. also and when things turned ugly, they brought the cash home. Other funds such as Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) and PowerShares International Dividend Achievers Portfolio (PID) have not performed well as dividend investments. Each has cut its dividend, with PID cutting multiple times. I now question the wisdom of ETFs and CEFs inclusion in an income portfolio, but that is a different discussion.

Conclusion

After much consideration, I have concluded that income investing and international securities don't mix very well for all the reasons listed above. Going forward, my primary focus will be on U.S. equities for my dividend income portfolio. I will use my 401(k) and my Asset Allocation Portfolio to ensure an adequate international allocation. As for the securities that I currently hold, I will individually evaluate the appropriateness of them remaining in my portfolio. Consistent with this methodology, I will remove most International Achievers from the Stock Ideas page, leaving only those that I own on have identified as being an excellent income investment.

Full Disclosure: Long EFA, CNI, BP, AOD, ETO, PID


Related Articles:

• International ETF Dividend Investing
• Which International Income ETF to Buy?
• Dividend Stocks: The Good, The Bad and The Ugly
• The First Steps To Investing
• My Holdings As A % Of Market Value And Income

Read More...

Summary only...

Last week we looked at confidence in your investing process and noted that true confidence comes from knowledge and experience. Knowing how your investing process works is important in gaining confidence, but real comfort only comes from having been there before and experiencing the gains after coming out of a downturn. Although experiencing tough times first hand, creates lasting memories it certainly is not pleasurable. Today we have the opportunity to learn from the experiences of someone who has lived through many downturns and profited from it.

Irving Kahn has made a career of finding solid but beaten-down stocks by poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. He has seen it all, bull markets, bear markets, recessions, recoveries and, unlike most of us, he’s also seen the Great Depression. Born on December 19, 1905, Kahn worked as a stock analyst and brokerage clerk on Wall Street in the 1930s.

Kahn learned from the best. He served as the second teaching assistant to Benjamin Graham at the Columbia Business School. When asked about the Great Depression, he noted that the problem after the Depression was not so much the lack of money to invest but rather “knowing how to use it without losing it. There were too many bargains.” A bargain isn’t a sure thing, and Kahn will only buy investments he deemed “riskless.” Kahn hasn’t deviated from that philosophy over the decades.

Since 1978, Kahn has served as Chairman of The Kahn Brothers Group Inc. The company is a money manager and Registered Investment Advisor. It's principals manage over $550 million of institutional and private funds. The firm provides money management and brokerage services through its affiliated broker-dealer, Kahn Brothers LLC, which is a member of the New York Stock Exchange. At 103 years old he still shows up five days a week to hunt for overlooked companies with good businesses and little debt that are trading for less than the value of their assets. He is quoted as saying: "I'm at the stage in life where I get a lot of pleasure out of finding a cheap stock," adding that his research still pushes him to work evenings and weekends.

Kahn does not believe we are headed for a repeat of the 1930s when people “felt so helpless.” As an investor who has seen dozens of economic downturns, Kahn plainly says this is just part of the natural cycle of the market. “Investors have no reason to feel bearish. True value investors are glad the markets are down.”

Then, like now, there will be companies that survive and eventually thrive. Consider these stocks that not only survived the 1929 crash, but went on to reach new highs within two years:

• Archer-Daniels Midland (ADM) - Yield: 2.18%
  
• Coca-Cola (KO) - Yield: 3.71%
  
• U.S. Steel (X) - Yield: 2.18%
  
• Deere and Co. (DE) - Yield: 3.03%
  
• Macy's (M) (Formerly Federated Department Stores) - Yield: 4.38%
  

Unfortunately, we all couldn't be trained by Benjamin Graham and absorb the deep rooted confidence he had in his investing philosophy, but through knowledge, time and experience we can build the needed confidence in our own investing process. Abby Joseph Cohen, a partner and chief U.S. investment strategist at Goldman, Sachs & Co. during the Squawk Financial Summit aired that on CNBC March 24 said, "There hasn't been a recession yet that hasn't ended." Value investors like Kahn, Buffett and others are betting this one won't be any different. My money is with them.

Full Disclosure: Long KO

References:
- Stock Pros Who Survived the Depression
- Wikipedia
- Kahn Brothers Group, Inc.
- The Stocks That Survived 1929


Related Articles:

• Who is Ben Grossbaum and Why Should We Listen to Him?
• Dividend Stocks: The Good, The Bad and The Ugly
• In Dividend Investing, Cash Is King
  
• Winners Never Quit and Quitters Never Win
• Yield on Cost: Measuring for Success

Read More...

Summary only...

This article originally appeared on The DIV-Net April 6, 2009.

Linked here is a detailed quantitative analysis of Progress Energy, Inc. (PGN). Below are some highlights from the above linked analysis:

Company Description: Progress Energy, Inc. is a diversified energy company that owns two electric utilities serving approximately 3.1 million customers in North Carolina, South Carolina, and Florida.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
   
2. 20-Year DCF Price
   
3. Avg. P/E Price
   
4. Graham Number
   

PGN is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, PGN is trading at a slight discount. PGN 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:

1. Rolling 4-yr Div. > 15%
   
2. Dividend Growth Rate
   
3. Years of Div. Growth
   
4. 1-Yr. > 5-Yr Growth
   
5. Payout 15% of avg.
   

PGN earned one Star in this section for 3.) above. PGN has paid a cash dividend to shareholders every year since 1937 and has increased its dividend payments for 21 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:

1. NPV MMA Diff.
   
2. Years to > MMA
   

PGN earned both of the available Stars in this section. The NPV MMA Diff. of the $10,999 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as PGN has. PGN's current yield of 6.91% exceeds the 3.17% estimated 20-year average MMA rate.

Other: PGN is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Having discontinued the higher risk synthetic fuel business, PGN can now focus on its regulated utilities business in the Carolinas and Florida, which should enjoy above average customer growth and generally supportive regulatory environment. Going forward, the company's primary focus is on the end-use and wholesale electricity markets in its service region. Risks include unfavorable regulatory rulings and a deeper than anticipated residential decline in Florida.

Conclusion: PGN 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 PGN as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $42.81 before PGN's NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 5.88%.

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 -1.7%. This negative dividend growth rate is below the 0.8% used in this analysis, thus providing a margin of safety. PGN has a risk rating of 1.75 which classifies it as a medium risk stock.

Although PGN is quantitatively rated as a buy and it is trading below my buy price of $37.00, I have concerns about its dividend in the near-term. The company has experienced the adverse impact of the current economic recession while remaining intent on enhancing operational excellence, strengthening financial flexibility and growth.

In 2007 and 2008, PGN's free cash flow per share was negative as a result of lower operating cash flows and higher capital spending. After seeing $2.3 billion of capital expenditures in 2008, PGN plans to spend approximately $6.3 billion over the next three years from 2009 through 2011, with about $2 billion spent in each year. 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 was long in PGN (3.0% of my Income Portfolio).

What are your thoughts on PGN?

Related Articles:

• Stock Analysis: General Dynamics Corp. [GD]
  
• Stock Analysis: Genuine Parts Co. [GPC]
  
• Stock Analysis: Automatic Data Processing Inc. [ADP]
  
• Stock Analysis: Parker Hannifin Corp [PH]
  
• More Stock Analyses

Read More...

Summary only...

Are you confident and secure in your investing process? It appears many people are not. From the famed Canadian dividend investor Derek Foster who sold all his dividend investments in February to co-workers who have moved to the sidelines waiting on the bottom, many investors are abandoning their process.

I have read that most investors will lose money in the stock market over their lifetime. It is not that the market is a bad place to invest your money, but left unchecked the psychology of the market will lead you to do just the opposite of what you should to be doing. The great investors know this. Consider Warren Buffett's famous quote, 'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful'. How do we overcome our natural instincts to sell when we should be buying?

First, we must follow a process we are 100% confident in. Doubt is the gateway to destructive behavior. Many approaches have proven successful over time. I have chosen income investing, primarily through individual dividend stocks. How do we become so confident in a process that we are willing to trust our life's savings to as the world crumbles around us?

Confidence comes from knowledge and experience. We must study our approach and understand the process that it is following. It is easy for me to watch stock prices crater knowing that it is not only providing an excellent entry point for future capital appreciation, but also higher current yields that will grow each year as the companies continue to raise their dividends. Knowing how it works is good, but comfort in the process comes from having been there before and experiencing the gains after coming out of a downturn.

Finally, the most important step is selecting great investments. For me, those are good solid dividend companies that have a proven track record of increasing their dividends and the financial ability to continue doing so in the future. Here are seven companies that have increased dividends for more than 30 consecutive years for your consideration:

• McDonald’s Corp (MCD) - 32 Years - Yield: 3.61%
  
• Wal-Mart Stores Inc. (WMT) - 35 Years - Yield: 2.08%
  
• PepsiCo Inc. (PEP) - 36 Years - Yield: 3.25%
  
• Sysco Corp. (SYY) - 38 Years - Yield: 4.30%
  
• Johnson & Johnson (JNJ) - 47 Years - Yield: 3.58%
  
• 3M Company (MMM) - 51 Years - Yield: 4.02%
  
• Procter & Gamble Co. (PG) - 52 Years - Yield: 3.29%
  

Each of the above companies has a proven business model that has not only got them though the good times, but more importantly seen them through tough economic times. Sure, some companies that have been cornerstones for decades may slip, that's part of investing, but there are always great companies ready to step in and fill the void. It is easy to be confident and secure when you invest in the best dividend stocks in the world!

Full Disclosure: Long MCD,WMT, PEP, SYY, JNJ, MMM, PG


Related Articles:

• Refining Risk Measurement Of Dividend Stocks
• Dividend Stocks: The Good, The Bad and The Ugly
• Low-Debt Dividend Stocks
• The Best Dividend Stocks In The World
• Measuring Dividend Stocks Investment Risk Profile

Read More...

Summary only...

In a recent article looking at early warning signs of a dividend cut, two companies concerned me over their potential for a future dividend cut: Nucor Corp. (NUE) and Caterpillar Inc. (CAT). The economic downturn lowered demand for the companies products which has resulted in sharply lower earnings. It is interesting to contrast their responses to the slowdown. In short, the actions taken couldn't have been more different.

CAT's global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn eroded demand for heavy equipment. In an effort to align sales and production with plummeting demand, CAT notified an additional 2,454 workers in three states that they were losing their jobs. CAT was already feeling the cash squeeze.

A line worker at NUE's plant in Darlington, S.C. sent John J. Ferriola, the company's chief operating officer, a note that simply said "Thank you for caring about me and my family." NUE's top management have received hundreds of similar cards and e-mails from their staff of 22,000. If you think this is different and somewhat odd, it is for other companies, but not NUE.

NUE is one of the few remaining steel companies in the U.S. to remain competitive in its industry. It has streamlined and decentralized its management. There are only four layers of management. Senior executives do not have company cars, dining rooms, executive parking spaces or corporate jets. Everyone from the janitors to the CEO has the same basic but generous benefits plan. NUE’s employee relations philosophy is simple and effective:

• Employees should have the opportunity to earn according their productivity.
  
• If employees do their job well today, they should have a job tomorrow.
  
• Employees have a right to be treated fairly. The company listens to employees through crew meetings, department meetings, shop dinners and employee surveys.
  
• Employees must have an avenue of appeal if they believe they have been treated unfairly. This complaint procedure allows employees to carry their complaints to the President of the company.
  

NUE backs up its philosophy with a unique pay-for-performance compensation system. Employees earn money based on their individual productivity. While employees are paid a lower than industry average hourly rate, they qualify for an exceptional performance bonus if they exceed hourly quotas. Employees see a direct correlation between what they do and their paychecks a major incentive, and a key strength of the program. In fact, this program prompts such high performance that employees were refusing to take time off so the company had to begin forcing them to take time off.

As a result of the downturn, NUE is keeping employees busy rewriting safety manuals, looking for cost savings, and getting ahead on maintenance. Work that used to be done by contractors, such as making special parts, mowing the lawns, and even cleaning the bathrooms, is now handled by NUE staff. Cleaning the bathrooms was an employee suggestion.

You can’t beat the herd by following the herd. For better or worse, NUE has chosen the high-road with its employees. I suspect NUE is equally thoughtful toward its shareholders. Last month I sold CAT, but I am still proud to be a NUE shareholder.

Full Disclosure: Long NUE

References:
- How Nucor Steel Rewards Performance and Productivity
- Pain, But No Layoffs at Nucor

Related Articles:

• Stock Analysis: Nucor Corp (NUE)
• John D. Rockefeller Quotes
• Rev-up Your Portfolio With Asset Allocation
• The Will to Win
• Dividends - The Capitalist’s Ideal

Read More...

Summary only...

With the dramatic market declines over the last 18 months, most dividend stocks appear to be fairly priced on a historic basis. However, when you consider the record number of dividend cuts and near-term prospects, many of the lower valuations are justified. So how do you sort through the massive Dividend Stock list to find the companies worthy of consideration?

One method is to use a stock screen to focus on the stocks with characteristics that we are looking for. Let's put together a stock screen with the following criteria:

• S&P Index Membership = True : Dividend Aristocrats Are Part of the S&P
  
• Debt to Equity Ratio = Low As Possible : Less debt means more cash available for dividends
  
• Payout: Latest Fiscal Year <= 50 : Leave a little headroom
  
• Current Dividend Yield >= 3 : In today's world 3% yield is a reasonable floor
  
• P/E Ratio: Current >=0 : Profitable companies need only to apply
  
• 5-Year Dividend Growth >= 5 : Long-term, growing dividends is where we will come out ahead
  
• Annual EPS Growth Rate >= 5 : Need to grow earnings to keep growing dividends
  
• Return on Invested Capital >= 10 : This keeps the shareholders happy
  

Entering the above in the MSN Money Stock Screener (works only with Internet Explorer), returns the following 25 companies:

Sym	Company Name	Yield	Payout	Debt to Eq.
CVX	Chevron Corp	3.71	21.6	0.10
JNJ	Johnson & Johnson	3.48	38.8	0.28
VFC	VF Corp	4.00	42.3	0.34
MRO	Marathon Oil Corp	3.48	19.3	0.34
GD	General Dynamics Corp	3.53	22.2	0.40
NUE	Nucor Corp	3.41	32.3	0.42
CBE	Cooper Industries Ltd	3.62	28.4	0.47
ITW	Illinois Tool Works Inc	3.83	38.2	0.48
HAS	Hasbro Inc	3.17	36.4	0.52
DOV	Dover Corp	3.61	24.3	0.55
SYY	Sysco Corp	4.02	46.4	0.60
EMR	Emerson Electric Co	4.46	38.3	0.63
ABT	Abbott Laboratories	3.45	47.1	0.65
ROK	Rockwell Automation Inc	4.67	29.5	0.67
PG	Procter & Gamble Co	3.28	37.6	0.67
MMM	3M Co	4.00	40.4	0.68
UTX	United Technologies Corp	3.39	25.8	0.72
SUN	Sunoco Inc	4.16	17.8	0.76
MCD	McDonald's Corp	3.57	42.3	0.76
HON	Honeywell International Inc	3.98	29.2	1.17
LMT	Lockheed Martin Corp	3.14	22.9	1.33
JWN	Nordstrom Inc	3.60	34.4	2.08
IFF	International Flavors and Fragrances Inc	3.16	33.1	2.19
AVP	Avon Products Inc	4.18	39.0	3.69
K	Kellogg Co	3.62	43.1	3.77

The next step is to pick through the list an eliminate companies that are not Aristocrats or Achievers. In addition, I also eliminated one company that was on the list, but failed to raise its dividend over the last 12 months and I eliminated one company whose debt-to-equity ratio was in excess of 1.00. This left us with 14 companies.

Low debt is good, but it is even better when the company is generating significant free cash flows. To further trim the list, I only kept the companies where 2008 free cash flows were the highest over the last 10 years. This left the following 7 companies, listed in ascending order based on their free cash flow compound growth rate (CAGR) from 1999-2008:

Emerson Electric Co (EMR) - FCF CAGR: 9.5%
EMR primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors. (Analysis)

Sysco Corp (SYY) - FCF CAGR: 10.1%
SYY is the largest U.S. marketer and distributor of foodservice products. (Analysis)

Dover Corp (DOV) - FCF CAGR: 10.4%
DOV manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment. (Analysis)

United Technologies Corp (UTX) - FCF CAGR: 14.1%
This aerospace-industrial conglomerate's portfolio includes Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators, and Carrier air conditioners, among other products. (Analysis)

General Dynamics Corp (GD) - FCF CAGR: 16.4%
GD is the world's sixth largest military contractor and also one of the world's biggest makers of corporate jets. (Analysis)

McDonald's Corp. (MCD) - FCF CAGR: 19.5%
MCD is the largest fast-food restaurant company in the world, with about 32,000 restaurants in 118 countries. (Analysis)

Procter & Gamble Co (PG) - FCF CAGR: 21.3%
PG is a leading consumer products company markets household and personal care products in more than 180 countries. (Analysis)

The above are certainly not buy recommendations, but a good list of candidates worthy of additional analysis. When the market isn't giving you any breaks, a great way to manage risk is to focus on low-debt blue chip dividend stocks.

Full Disclosure: Long SYY, UTX, MCD, PG

(Photo: Steve Woods)

Related Articles:

• Ten Dividend Stocks With 50+ Years of Consecutive Increases
• Refining Risk Measurement Of Dividend Stocks
• Dividend Stocks: The Good, The Bad and The Ugly
• The Best Dividend Stocks In The World
• Dividend Stocks in Today’s Market

Read More...

Summary only...

For many investors, the glass is always half full. Even in the darkest of times, they always see the bottom just around the corner and it really doesn't take much good news to get them into the buying mood. The month of March provided those investors with a lot to celebrate, and they did!

The Dow was up 87 points in March, but even more surprising was just how long it had been since the Dow finished in the black. You have to go all the way back to August 2008 to find the last time the Dow finished up. It wasn't just the Dow that saw large increases, the Standard & Poor's 500 Index finished March with its largest gain since October 2002, while the The Nasdaq was up 11.4% recording its best month since November 2002.

The good news carried into April with the release of better than expected housing news. The National Association of Realtors (NAR) reported pending home sales rose a seasonally adjusted 2.1% in February. Economists expected the pending sales to remain unchanged. The NAR report, considered to be a leading indicator, is based on the number of contracts signed for sales for existing homes. "The sharp decline in prices is helping to improve affordability. There are small signs that the housing market is moving toward stability." Joseph Brusuelas, a director at Moody's Economy.com, told Bloomberg News.

The manufacturing sector, to a lesser degree, joined the party. The Institute of Supply Management's manufacturing index was 36.3 in March, up slightly from the reading of 35.8 in February. In addition, construction spending fell 0.9% in February, less than the 1.9% drop economists had expected.

So, how did the dividend stocks fare? Quite well, with some of the more beaten down names making a robust recovery. Here are 10 dividend stocks along with their double-digit March performance:

• Royal Bank of Canada (RY) - Up 19.2% - Yield: 5.50%
  
• Intel Corporation (INTC) - Up 18.0% - Yield: 3.72% (Analysis)
  
• Paychex Inc. (PAYX) - Up 16.4% - Yield: 4.83% (Analysis)
  
• AFLAC Inc. (AFL) - Up 15.5% - Yield: 5.79%
  
• Eli Lilly and Co. (LLY) - Up 13.7% - Yield: 5.87%
  
• Nucor Corp (NUE) - Up 13.4% - Yield: 3.67% (Analysis)
  
• Illinois Tool Works Inc. (ITW) - Up 11.0% - Yield: 4.02% (Analysis)
  
• Chevron Corporation (CVX) - Up 10.8% - Yield: 3.87%
  
• Manulife Financial Corp. (MFC) - Up 10.3% - Yield: 7.38% (Analysis)
  
• Commercial Net Lease Realty, Inc. (NNN) - Up 10.2% - Yield: 9.47%
  

It is not surprising that most of the above stocks are ones that have recently suffered the most. This highlights what all successful investors know - when stocks are down, that is your opportunity to buy them on sale, sometimes at a discount.

Finally, with this much good news, surely someone would call a bottom, and that is just what MSN Money author Tim Middleton did (sort of) in his article "Dig in: Market won't get much worse". He said "We may not have seen the absolute bottom of the bear market, but we're close enough that we can be comfortable having a lot of our money in stocks. The rally has confirmed the optimistic bent of my portfolio, and I'm going to stay this course. I expect it to blossom with the spring."

Full Disclosure: Long in all the aforementioned stocks.

References:
- Surprising data on housing, manufacturing
- Dow up 87, sees first monthly gain since August
- Dig in: Market won't get much worse

(Photo Credit)


Related Articles:

• The Will to Win
• What Would Warren Buffett Do?
• Who is Ben Grossbaum and Why Should We Listen to Him?
• Yield on Cost: Measuring for Success
• My Top 3 Investing Mistakes

Read More...

Summary only...