Insurance companies make money using a very simple formula: They collect premiums from customers, then invest the premiums while waiting for the claims to come in. Hopefully, the claims will be less than the investment value, thus providing a profit for the company. This industry relies heavily on actuaries. These are people who compute premium rates based on probabilities using statistical records based giving consideration to risks and other factors. A bad assumption here could lead to a premium that is too low resulting in an ultimate loss.
If you have ever filed a claim with an insurance company, you know what an onerous task it is to get money out of them. Looking at the claims portion of the equation, it is easy to under why they want to minimize claims paid. Each dollar they don't pay you and each additional day they hold unto dollars they do pay you, is additional investment income for the company.
During an extended bull market, it is easy to take for granted that the investment portion of the formula will be positive. However, a lesson the insurance industry recently had to relearn was that the stock market does not always go up. The collapse of American International Group, Inc. (AIG) in September from ill-chosen investments was a dramatic event for those invested in the industry.
Manulife Financial Corp. (MFC), North America's largest insurance company, also has struggled as a result of the declining equity markets. The Company has reported huge losses in excess of one billion Canadian dollars in the fourth quarter of 2008 and the first quarter of 2009. Much of which can be attributed to increasing reserves to cover long-term segregated fund and annuity guarantees. Segregated funds are popular investments similar to mutual funds but contain insurance contracts that limit risk for the investors.
Recently the sharp market rebound has provided relief to insurers such as MFC who had to set aside cash for guarantees on performance-based products. The increase in the market will also give the insurers a chance to rebuild capital and shuffle reserves.
Below are some insurers you may want to keep an eye on in the upcoming weeks, along with some company specific risks:AFLAC Inc. (AFL) - Yield: 3.04% - Analysis
Consider the risks before investing, but also keep in mind the best values come when a company is distressed.
AFL may be overexposed to the financial service sector as a result of its holdings of European bank hybrid bonds. However, the company should not suffer significant losses from its hybrid portfolio.
Manulife Financial Corp. (MFC) - Yield: 3.73%
On Friday June 19th after the market closed, it was reported that MFC received an enforcement notice from the Ontario Securities Commission (OSC) relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The preliminary conclusion of OSC staff is that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products.
MetLife, Inc. (MET) - Yield: 2.17%
MET's risks are more of the general nature. They include a further decline in the equity markets coupled with need for additional capital and asbestos-related liability claims.
Prudential Financial, Inc. (PRU) - Yield: 1.33%
PRU's risks include currency conversion, new guaranteed minimum benefits, acquisition integration and a further sharp decline in the equity markets.
Sun Life Financial Inc. (SLF) - Yield: 3.66%
A large portion of SLF's fixed income portfolio is concentrated in the financial sector and rated BBB or below carries a higher risk of investment loss. As with the others, SLF also is susceptible a further decline in the equity markets.
Full Disclosure: Long AFL, MFC. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net July 20, 2009.
Company Description: The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
PG is trading at a discount to 1.), 2.) and 3.) above. Since PG's tangible book value is not meaningful, a Graham number can not be calculated. PG is trading at a 15.2% discount to its calculated fair value of $65.98. PG earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
PG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company earned a Star as a result of its most recent Debt to Total Capital being less than 45%. It also earned a Star for having an acceptable score in at least two of the four Key Metrics measured. PG has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 53 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:
PG earned a Star in this section for its NPV MMA Diff. of the $1,964. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. If the company grows its dividend at 10.9% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.82%. PG earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Product demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors. PG has historically delivered consistent sales and earnings growth near the high end of its peer group, and I see no reason for this to change over the next several years. The company continues to benefit from the Gillette acquisition and from growth prospects in new markets and categories. It is well positioned to benefit from growth of household and personal care products in developing countries. Risks include heightened competition, unfavorable currency translation, higher commodity costs, higher promotional spending and low consumer acceptance of new products.
Conclusion: PG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks PG as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $87.72 before PG's NPV MMA Differential fell to the $500 that I like to see for a stock with 53 consecutive years of dividend increases. At that price the stock would yield 1.87%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.6%. This dividend growth rate is well below the 10.9% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.25 which classifies it as a low risk stock.
When it comes to dividend stocks, PG is one of the very few elite companies. It is a well-managed company with a very strong balance sheet. PG has weathered the economic downturn quite well and continues to raise its dividend at a rate close to its 10-year average. I will continue to add to my position when PG is trading below its buy price of $65.98 and as my allocation allows. 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 PG (3.6% of my Income Portfolio).
What are your thoughts on PG?
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For your reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
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The buy-and-hold investment strategy has taken a lot of abuse since the market turned down. But this isn't the first time it has happened. It seems that each time the market cycles down, the same group of naysayers come out proclaim buy-and-hold as dead and attack it most visible proponents like Warren Buffett, John Bogle and Jeremy Siegel. Eventually, the market turns, the naysayers disappear and the buy-and-hold investors make a lot of money.
In an earlier article, I noted that Jason Zweig had called into question the validity of data used in Jeremy Siegel's book "Stocks for the Long Run". Given the recent market declines and credibility questions, has Mr. Siegel abandoned his long-held beliefs in "buy-and-hold" and "stocks for the long run?"
To the contrary, Mr. Siegel in a recent MSN Money article was very adamant about his position. Below are some of the relevant points he made:
I have long been an advocate of selecting Dividend stocks using a Value based approach (hence the name of my site DividendsValue.com). Over time, low priced, quality stocks that pay an increasing dividend will out-perform their competition. Here are several of those stocks pulled from my Dashboard:
Automatic Data Processing Inc. (ADP) - Analysis
Automatic Data Processing Inc. is one of the world's largest independent computing services companies, provides a broad range of data processing services.
Dover Corp. (DOV) (ADP) - Analysis
Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.
Emerson Electric Co. (EMR) (ADP) - Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
Johnson & Johnson (JNJ) - Analysis
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.
United Technologies Corp. (UTX) - Analysis
United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Even in investing, fads come and go, but quality will always endure. When the chips are down, go for the blue ones.
Full Disclosure: Long EMR, JNJ, UTX. See a list of all my income holdings here.
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Recently, Kiplinger published an article looking at a successful market timer and contrasting it with a buy and hold strategy. Below are some key bullets from the article:
As I mentioned above, not all personalities are suited for each type of investing. It could be financially deadly for a compulsive personality to engage in day-trading. At some point the line is crossed between investing and gambling. Like the compulsive gambler, a compulsive day-trader could go broke trying to "win" back their losses.
Buy And Hold Dividend Stocks
Personally, I prefer an investing strategy that requires less daily attention. As a long-term, value-based, dividend income investor, daily market gyrations are just irrelevant noise in the system. Below are five dividend stocks you can buy, hold and sleep at night:
Ultimately, each investor must define what works best for him or her, and have the conviction to stick with it during the good times and the bad. Often the good times are preceed with some very dark days, and if you quit too soon you might just the good time.
Full Disclosure: Long ABT, EMR, JNJ, MMM, UTX. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net July 13, 2009.
Company Description: Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
DOV is trading at a discount to 1.), 2.) and 3.) above. Since DOV's tangible book value is not meaningful, a Graham number can not be calculated. DOV is trading at a 14.9% discount to its calculated fair value of $37.06. DOV earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
DOV earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. DOV earned a Star as a result of its most recent Debt to Total Capital being less than 45%. DOV earned a Star for having an acceptable score in at least two of the four Key Metrics measured. DOV has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 54 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:
DOV earned a Star in this section for its NPV MMA Diff. of the $934. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as DOV has. If DOV grows its dividend at 8.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. DOV earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Other: DOV is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. DOV enhanced its ability to generate strong free cash flows by discontinuing 20 low-margin, capital-intensive businesses over the past couple of years, and replacing them with 17 new high-margin/steady-growth operations. The company still has ample growth and cost opportunities. Risks include weaker global, industrial, energy and electronics markets; along with value-diminishing acquisitions.
Conclusion: DOV earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks DOV as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $37.65 before DOV's NPV MMA Differential fell to the $500 that I like to see for a stock with 54 consecutive years of dividend increases. At that price the stock would yield 2.66%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.3%. This dividend growth rate is below the 8.0% used in this analysis, thus providing a margin of safety. DOV has a risk rating of 2.00 which classifies it as a medium risk stock.
DOV is a well-managed company with a strong balance sheet. Near-term the economic downturn will present challenges, but the company's management has done all the right things for long-term success. DOV should announce a dividend increase in August, I will likely wait until then before considering initiating a position. It is trading well below its buy price of $37.06. 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 DOV (0.0% of my Income Portfolio).
What are your thoughts on DOV?
Related Articles:
________________________________________________________________
For your reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
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If I am achieving my goal of creating an ever-increasing income from dividend investment, I would not drastically change my investing strategy if I were to under-perform the S&P. However, the opposite isn't true. If I were not consistently growing dividend income, but nearly always beating the S&P, it would be time for me to totally rethink my strategy.
A person that tries to please everyone, usually ends up pleasing no one. In the same vien, trying to achieve your goals and desires may lead you to achieving neither. Consider the following dividend stocks and S&P 500 return YTD through June 30:
Note, my returns may be different than your due to additional share purchases.
So far this year each of the above companies have under-performed the S&P. Yet, I consider each of these stocks one of my top-shelf dividend stocks. Last year in the face of a significant downturn, MCD and WMT posted gains. I will continue to hold any dividend stock as long as it continues to increase dividends at a respectable pace, irrespective of its performance against the S&P.
My goal is to generate an ever-increasing income stream from dividends. As noted in Saturday's Progress Report, I have done this in the last 18 of 19 months. My desire is to beat the S&P 500 over time. I beat it by double digits last year. I am trailing slightly this year, but over the last 18 months I am still up. In the end, I will not sell a great dividend stock for under-performing the S&P.
Full Disclosure: Long VFINX, JNJ, MCD, PG, WMT. See a list of all my income holdings here.
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Recently I read a couple of articles in Yahoo Finance and The Wall Street Journal looking at bonds both from a historical perspective and future prospects. Here are some key points from the articles:
What does this mean for the income investor? At the macro level, not much. Our investing strategy should not be swayed by the latest headlines. Headlines are designed to incite two emotions - fear and greed. Acting on these emotions will often lead you to do just the opposite of what you should be doing.
Should We Give Up On Stocks?
Not hardly. Consider what it took for bonds performance to "equal" equities. A decline in the world's economy and equities not been seen since the Great Depression, coupled with a bond rally driven by the lowest interest rates in generations. In short, equities fell to the level that bonds ascended to. Both stretching what was previously considered "normal."Should We Give Up On Bonds?
Conventional wisdom would tell you that bonds have only one direction to go, down. However, if you have followed your asset allocation model, you are likely close to where you need to be allocation-wise and if bonds begin to fall, it will create opportunities to buy at lower prices with higher yields. If you are not fully allocated, like many of us, a planned and steady movement over time will allow you to enjoy the effects of dollar-cost-averaging.
Currently, I am under allocated in bonds and it is my plan to steadily purchase bonds each month until my allocation is in line. To do otherwise would be a form of market-timing, which is contrary to my investing strategy. My bond preference is for intermediate and longer-term issues. Here are some bond funds that I have either purchased or am considering:
iShares Barclays Aggregate Bond (AGG) - Yield: 4.28%
The Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the United States investment grade securities markets as defined by the Barclays Capital U.S. Aggregate Index.
Vanguard Long-Term Bond ETF (BLV) - Yield: 5.37%
The Fund seeks to match the investment performance of the Barclays Capital Mutual Fund Long Government/Corporate Index.
Vanguard Intermediate-Term Bond ETF (BIV) - Yield: 4.55%
The Fund seeks to track the performance of the Barclays Capital 5-10 year Government/Credit Index. This index includes U.S. Government, investment-grade corporate, and international dollar-denominated bonds with maturities between 5 and 10 years.
iShares iBoxx $ Invest Grade Corp Bond (LQD) - Yield: 5.49%
The Fund seeks investment results that correspond generally to the price and yield performance of a segment of the U.S. investment grade corporate bond market as defined by the GS $ InvesTop Index.
iShares Barclays 20+ Year Treas Bond (TLT) - Yield: 4.11%
The Fund seeks investment results that correspond generally to the price and yield performance of the long-term sector of the U.S. Treasury market as defined by the Barclays Capital 20+ Year Treasury Index.
Longer term bonds could see significant price declines as interest rates rise to, or exceed, historical norms. Before making any investment decision you should consult your financial adviser and understand the risks involved.
Full Disclosure: Long AGG, BLV, LQD. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net July 6, 2009.
Company Description: Chubb Corp. is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
CB is trading at a discount to 1.) and 4.) above. CB is trading at a 10.1% discount to its calculated fair value of $43.18. CB earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
CB earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. CB earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CB earned a Star for having an acceptable score in at least two of the four Key Metrics measured. CB has paid a cash dividend to shareholders every year since 1902 and has increased its dividend payments for 45 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:
CB earned a Star in this section for its NPV MMA Diff. of the $739. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CB has. If CB grows its dividend at 6.1% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. CB earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: CB is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. CB is a well-managed company that has exhibited sound capital and risk management practices and offers an attractive mix of products. Given its strong balance sheet, CB should command a premium compared to its peers. Risks include a prolonged economic slowdown, competitive pricing pressures and exposure to catastrophe and professional liability claims.
Conclusion: CB earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CB as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $43.18 before CB's NPV MMA Differential fell to the $500 that I like to see for a stock with 45 consecutive years of dividend increases. At that price the stock would yield 3.24%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.0%. This dividend growth rate is below the 6.1% used in this analysis, thus providing a margin of safety. CB has a risk rating of 1.75 which classifies it as a medium risk stock.
If I were not over-allocated in the financial services sector, CB would be a stock I would give strong consideration to. It is trading below its buy price of $43.18 and its 3.61% dividend yield would provide excellent near-term cash flow. My one concern is that free cash flow per share peaked in 2004 and has been on a steady decline ever since. 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 CB (0.0% of my Income Portfolio).
What are your thoughts on CB?
Related Articles:
________________________________________________________________
For your reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.
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I would not say the old model was broke, but it had too many moving parts. It usually got to the right answer, but not always in a logical manner. Sometimes the model did not get to the right answer and I would have to manually override it. So, what's new in the updated model?
I. Five and Only Five Stars
In the old model a stock could end up with more than five stars or less than zero Stars, based on an elaborate system of adding and subtracting of Stars. In designing the new model, I eliminated the situations where a Star was deducted and focused on the four most important characteristics of a good dividend stock, each was worth a Star. I then rolled four lesser characteristics into the fifth Star. The following will now earn a Star:
II. A Sliding NPV MMA Diff Target
Previously there were three targets: $2,500 for companies that have raised dividends for 25 or more years, $7,500 for those between 10 and 25 years and $10,000 for those less than 10 years. This created cliffs. For example a company that has raised its dividend for 24 years had a target of $7,500 this year, then it would go to $2,500 after the next increase. In the new model, I use annual dividends, not cumulative so the numbers are smaller. Also, I implemented a sliding target based on the number of consecutive dividend increases going from a low of $500 (for 30 or more years) to a high of $3,500 (for no increases). Each year increase moves the scale by $100 between the low and high values above.
III. Other Relevant Information
In addition to the above, I added other relevant information for the readers consideration, such as the Risk Rating.
The end result is a more streamlined model focusing on what is important when identifying stocks that could be great dividend investments. One additional benefits is that the new Star calculations can occur on the fly. Thus, I can always see an up to date Star rating on my dashboard for each of the stocks I follow. At the time of this writing, the following stocks rated as 5-Star Strong Buys:
The ability to see updated ratings and key metrics on the 86 stocks that I currently follow allows me to more closely gauge the best time to buy (or sell). I have incorporated this into the D4L-Dashboard.
Full Disclosure: Long AFL, JNJ, MCD, NUE, PAYX, PG, SYY, UTX. See a list of all my income holdings here.
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This month I will turn 47. That means I am a few years past the mid-point of my career. It seems that with each birthday, I think about and plan for retirement a little more. I have long since resolved that social security will not provide for my needs in retirement (nor was it ever intended to). I am one of an ever-shrinking group that is still covered by a defined benefit pension plan. So, how should a pension fund figure into my retirement?
A recent CNN Money article asked the question, 'Can you count on those monthly pension checks from your former employer?' and provided the following five things you need to know:
Up until the Delta pension ran into problems, I (naively) assumed what I was owed from my company's pension plan was an automatic entitlement. However, events over the last five years have shown that when things go wrong, you may only receive a small portion of what was promised in glossy HR pamphlet.
By law, company plans must have on hand most of the money promised to employees. This wasn't an problem until the market turned down.
You're not necessarily on the hook for the plan's underfunding. Employers must cover their plans' deficits.
If the plan is less than 80% funded, you won't have the option of taking the benefit as a full lump-sum payment. And if your plan is less than 60% funded, your company may be forced to freeze it
A company "can dip into cash reserves to fund its pension," but if there are no reserves, the firm must cut costs, which may mean layoffs. So, ironically, your pension may be safe at the expense of your job.
While you're fairly safe on benefits accrued, don't count on future ones. Your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you've earned in your pension.
Looking at number 5. above, "you ought to have a backup plan", I would go one step further and say, "You ought to have a primary plan." My retirement plan relies primarily on what I have invested and control, such as my 401(k), IRA and taxable portfolio. I realize that will likely get something out of my pension plan even if a 'worse case scenario' occurs, so I count that portion. As for social security, I don't even consider it in my retirement plan. If I receive anything from social security, I will just treat it as a bonus.
To achieve my retirement goals, I am investing with a defined asset allocation model looks at all my investments in total. In retirement, your portfolio shifts from an investing mode to an income mode by either selling appreciated (hopefully) assets and/or withdrawing dividends for living expenses. My plan is to build an ever-increasing income stream from bonds and dividend stocks such as:
As the old adage goes, 'Everyone has a plan - failing to plan is planning to fail.' Retirement planning does not have to be complicated, but not doing it will complicate your retirement.
Full Disclosure: Long ABT, GPC, PG. See a list of all my income holdings here.
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The D4L-Dashboard is my first premium service. For each stock that I track, I gather a significant amount of information - currently about 500 cells per stock. With the number of securities tracked approaching 100, this is just too much information to quickly and efficiently digest. So I developed a color coded dashboard that allows me to quickly absorb the information.
The dashboard includes a significant amount of information on all 86 stocks that I currently follow, including buy price, Star rating, risk rating, and much more. For the stocks that I own, the report shows the amount I own as a percentage of my income portfolio and annual dividend income. Also, included is weekly commentary on what I am planning to buy, have bought and changes in the status of tracked stocks.
Even though I provide free detailed stock analysis on many dividend companies, the amount of preparation needed limits me to one analysis per week and I won't review that company again for at least six months. As we have all learned, things change quickly in the market. A strong buy three weeks ago may not still be a strong buy today.
The D4L-Dashboard allows You to See What I See.
For more information on the D4L-Dashboard, including a sample report, pricing and subscription information, please see the Overview and Subscribe page. The premium section can always be accessed via the Premium menu option on the top-right of the menu bar above.
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This article originally appeared on The DIV-Net June 29, 2009.
Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
UTX is trading at a discount to 1.), 2.) and 3.) above. Since UTX's tangible book value is not meaningful, a Graham number can not be calculated. UTX is trading at a 29.5% discount to its calculated fair value of $73.14. UTX earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
UTX earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. UTX earned a Star as a result of its most recent Debt to Total Capital being less than 45%. UTX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. UTX has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 17 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:
UTX earned a Star in this section for its NPV MMA Diff. of the $6,624. This amount is in excess of the $1,800 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. UTX earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Over the last ten years, UTX has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with 38% debt to total capital and an excellent free cash flow payout of 29%. UTX should benefit from large backlogs at Airbus and Boeing, moderate demand for global infrastructure, and strong demand for military helicopters. Future risks could include a prolonged downturn in U.S. residential housing market, slowing of growth in commercial construction markets, and prolonged global recession.
Conclusion: UTX earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks UTX as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $82.70 before UTX's NPV MMA Differential fell to the $1,800 that I like to see for a stock with 17 consecutive years of dividend increases. At that price the stock would yield 1.86%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. UTX has a risk rating of 1.50 which classifies it as a low risk stock.
UTX is trading below its buy price of $73.14 and its 2.99% dividend yield is consistent with the 3.00% minimum that I am currently looking for. I would be very comfortable adding to my position at this price as my allocation allows. 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.
As noted above, this is the first week of using my updated analysis model, so you will see some problems or error, be sure to let me know.
Full Disclosure: At the time of this writing, I was long in UTX (3.2% of my Income Portfolio).
What are your thoughts on UTX?
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