Linked here is a PDF copy of my analysis of BB&T Corporation (BBT) (alt1, alt.2). Below are some highlights from the above linked analysis:
Company Description: The BB&T Corporation operates as a holding company for Branch Banking and Trust Company that provides commercial banking and trust services for small and mid-size businesses, public agencies, local governments, and individuals in the United States.
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 and 4.) Graham Number. BBT is trading at a discount to all the above valuations. If I exclude the high and low valuation, and average the remaining two valuations, BBT is trading at an astounding 31.3% discount. A Star is added since BBT 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 and 5.) Payout 15% of avg. BBT earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1903 and has increased its quarterly cash dividend payments for 36 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. and 2.) Years to >MMA. BBT earned both Stars available in this section. With a 7.56% current yield, BBT is paying well in excess of the long-term average money market rate of 4.61%. BBT's NPV MMA Diff is $17,688.
Other: BBT is a member of the S&P 500, a Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. S&P commented that BBT has strong credit quality in its loan portfolio, and a good history of profitability. In a difficult operating environment, BBT has grown commercial and industrial lending, while maintaining acceptable credit quality and funding growth. BBT is exposed to the Florida housing market, but the company has said it has not made loans to the riskiest segments of the Florida housing market, such as condominium developments.
Conclusion: BBT earned a 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 4 Stars. This rates BBT as a 4 Star-Buy.
Last week after analysts speculated that BBT would cut its dividend, the company issued a statement reaffirming an earlier assertion that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008." Based on the above analysis, I would be comfortable adding to my BBT position, as my allocation and valuation allows.
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 owned shares of BBT (1.9% of my Income Portfolio).
What are your thoughts on BBT?
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Linked here is a PDF copy of my analysis of BB&T Corporation (BBT) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: The BB&T Corporation operates as a holding company for Branch Banking and Trust Company that provides commercial banking and trust services for small and mid-size businesses, public agencies, local governments, and individuals in the United States.
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 and 4.) Graham Number. BBT is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, BBT is trading at a 14.2% discount. BBT earns a Star for 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 and 5.) Payout 15% of avg. BBT earned Stars in 3.) and 4.) above. It has increased its dividend for 10+ years and its 1-year dividend rate growth exceeded its 5-year dividend growth rate.
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. and 2.) Years to >MMA. BBT earned both available Stars in this section. Its current yield of 5.62% is in excess of the high-yield MMA rate of 4.61% and the NPV MMA Diff. is impressive at $24,628.
Other: BBT is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. It has paid a cash dividend to shareholders every year since 1903 and has increased its quarterly cash dividend payments for 36 consecutive years.
Conclusion: BBT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of five Stars, which rates it as a 5-Star Strong Buy.
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 own shares of BBT (2.9% of my Income Portfolio).
What are your thoughts on BBT?
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Part of my kids' college fund is invested in Vanguard's S&P 500 Index Fund (VFINX). When I opened the October statement, I was mildly surprised to see the net asset value had fell below the September 1997 level when the account was first opened. Over the year I have become somewhat disenchanted with mutual funds, ETFs and CEFs due to their recent poor performance relative to my dividend investments.
So what would have happened if I had invested my kids' college fund following a dividend investing strategy? It is difficult to say exactly, but I can make some assumptions and see where it takes me.
Ground Rules
For simplicity, I will select five dividend stocks and purchase $1,000 in each and put $5,000 in VFINX using the closing price on September 30, 1997. Dividends will be held and reinvested on the last day of the year at the closing price. I will ignore commissions and taxes. Final valuation date is as of the end of November 2008, except for BAC (see below). Information was pulled from Yahoo Finance.
Stock Selection
This obviously is the most difficult portion and requires the most self-honesty. I will try to reason what stocks I would have purchased in 1997 without looking at their performance. Since it was for my kids' education, I intentionally avoided the more risky stocks, including REITs. Here are the five stocks I selected and my thoughts as to why:
One other stock I considered was General Electric (GE). However, in the late 90's I viewed it more as a growth stock. Let's build the spreadsheet and crunch some numbers.
Results
First let me say that there is nothing definitive you can draw from this analysis - the scope is much too narrow. However, there are some interesting items to consider that could lead to a deeper analysis. With that said, I was somewhat surprised at the results. It was not a good decade for any of the investments that I looked at. The ones I thought would perform well, did not. Here is a summary of the S&P and the five dividend stocks:S&P 500 (VFINX)
The dividend stocks earned more dividends than the S&P, but also lost more on invested capital. Overall, the return for the dividend stocks was a little over a quarter percentage point higher than the S&P 500. That somewhat surprised me; I expected it to be more. Looking at the individual stocks was quite interesting and not entirely what I expected:
Appreciation as a % of Invested Basis: -10.44%
Total Shareholder Return: 0.90%
Total Dividends Reinvested: $1,168.53
Dividend Stocks In Total
Appreciation as a % of Invested Basis: -13.10%
Total Shareholder Return: 1.25%
Total Dividends Reinvested: $1,609.95Johnson & Johnson (JNJ)
To be honest, I was surprised at how weak JNJ's and PG's performance were over the period. The entire performance of the group was carried by ED. With a -4.35% TSR, BAC actually held up better than I thought it would.
Appreciation as a % of Invested Basis: -0.12%
Total Shareholder Return: 1.47%
Total Dividends Reinvested: $177.96
Procter & Gamble Co. (PG)
Appreciation as a % of Invested Basis: -7.41%
Total Shareholder Return: 0.46%
Total Dividends Reinvested: $136.52
The Coca-Cola Company (KO)
Appreciation as a % of Invested Basis: -20.77%
Total Shareholder Return: -0.73%
Total Dividends Reinvested: $163.21
Bank of America (BAC)
Appreciation as a % of Invested Basis: -52.09%
Total Shareholder Return: -4.35%
Total Dividends Reinvested: $270.61
Consolidated Edison, Inc. (ED)
Appreciation as a % of Invested Basis: 6.61%
Total Shareholder Return: 6.33%
Total Dividends Reinvested: $861.66
What If..
One case I looked at was substituting BBT for BAC. BBT's performance was better than BAC's but not dramatically. Here are the combined results with BBT in place of BAC:Dividend Stocks In Total - BBT instead of BAC
Conclusion
Appreciation as a % of Invested Basis: -10.05 vs. -13.10%
Total Shareholder Return: 1.56% vs. 1.25%
Total Dividends Reinvested: $1,610.91 vs. $1,609.95
Contrary to my earlier statement, one valid conclusion can be drawn from this exercise. You should always analytically test your beliefs, because they may not holdup under the microscope.
If you want to see the spreadsheet I used to derive the above data, it is available on my Tools page as Div-Investing-vs-SandP.xls.
Full Disclosure: Long VFINX, PG, JNJ, KO, PEP, BBT and ED
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Kelly King, Chairman and CEO of BB&T (BBT), a large U.S. regional bank and vocal critic of the government's bank bailout plan, described its participation in the TARP program as "destructive." King went on to say “Our plan is to repay the TARP funds as soon as it is humanly possible. It creates excessive controls, it has a negative impact on our people and our strategies and it runs a great risk of politicizing the lending process, which is very unhealthy.”
On May 11th, BBT announced that it would sell $1.5 billion of stock and reduce its dividend by 68 percent so that it can repay a $3.1 billion investment. Goldman Sachs & Co (GS), JPMorgan (JPM) and Morgan Stanley (MS) are arranging the stock offering.
Having previously increased its dividend for 37 consecutive years, this is a tough pill for a once-proud Dividend Aristocrat to swallow. King said the decision marked "the worst day in my 37-year career," and pledged to increase the payout when he can. Like most dividend cutters, BBT's shares plummeted falling over 7.5% on the day of the announcement and another 7.5% on the following day.
BBT wasn't the only one running from the government's "help". Two other large U.S. banks that passed the government's "stress test" announced stock offerings on Monday to raise capital in order to repay their TARP debt. U.S. Bancorp (USB), the parent company of U.S. Bank, said Monday that it has launched a $2.5 million public offering of its common stock and Capital One Financial Corp. (COF) also announced a public offering of 56 million shares of its common stock.
As with all individual income stocks that cut their dividends, I immediately sold my entire position in BBT after reading the announcement.
Full Disclosure: No position in the aforementioned stocks. See a list of all my income holdings here.
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A recent article on The Motley Fool pointed out that now is the time that Baron Rothschild was referring to when he said, "Buy when blood is in the streets." It listed the following 5 ways to help you be a better investor during these difficult times:
The article concluded by saying:There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do.
Source: Why You Should Fear the Future
Disclosure : Long BBT and GE
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Compound interest is what occurs when interest previously earned is added to the principle and is considered when calculating future interest - i.e. earning interest on interest. So, what's more powerful than compound interest? Compound dividends! Compound dividends are like compound interest on steroids - you are not only earning on reinvested dividends, but the dividend rate is increasing.
Here are several big-name companies compounding their dividends by raising their cash distributions to shareholders:
LLY was reviewed on 7/7/2008. However, I currently rate it as a 5 Star-Strong Buy. BBT was reviewed on 3/3/2008 with a 5-Star Strong Buy. It currently has a 4-Star Buy rating.
After running the remaining companies through my D4L-PreScreen.xls model, the Dividend Achiever T with a NPV of MMA Differential of $8,911 is one that I have on my watch list. WMI with a NPV of MMA Differential of $5,991, BA with a NPV of MMA Differential of $18,730 and ITT with a NPV of MMA Differential of $17,946 are ones worthy of additional consideration. None of the other companies' NPV of MMA Differentials were close enough to warrant a more complete evaluation.
Disclosure: Long LLY, BBT.
(Photo: Steve Woods)
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Over the last year the financial industry has taken a beating. Many banks have failed while others have taken drastic measures to preserve their future. The markets have recognized the turmoil this and punished bank stocks. Historically, financials are some of the most consistent and highest yielding stocks. As such, they are a cornerstone of most dividend/income portfolios. In my personal portfolio, I held six bank stocks at the beginning of the year. Year-to-date through October 31st, I had earned positive returns on two of them:
2. U.S. Bancorp (USB) - October YTD Return 0.8%U.S. Bancorp was formed through the February 2001 merger of Minneapolis-based U.S. Bancorp and Milwaukee-based Firstar Corp. With almost 2,500 branches throughout the U.S., we view USB as well diversified geographically. USB has a strong market share in many of the areas it competes in. Its low-cost model, geographic and product diversity, large existing customer base, and scale give it a competitive advantage over many of its peers.
Yield: 6.18%
Last Dividend Increase: January 2008 ($0.40 to $0.425)
Buy Below Price: $24.52
Current Price: $27.51
Last Reviewed: 12/27/07
1. BB&T Corporation (BBT) - October YTD Return 19.7%BB&T Corp has a large presence in its home state of North Carolina, as well as in Virginia, with additional offices in Georgia, South Carolina, the District of Columbia, and seven other states. The company exhibits strong credit quality of its loan portfolio, high net interest margin, high loan loss reserves and a long history of profitability.
Since the end of October the market has continued to exhibit a high degree of volatility. As of November 10, 2008 only BBT remains in positive return territory. Be sure of one thing, there will be winners that emerge at the end of this financial crisis. There is also a great deal of risk associated with financials, so do your homework before making any buy/sell decisions.
Yield: 6.10%
Last Dividend Increase: August 2008 ($0.46 to $0.47)
Buy Below Price: $35.79
Current Price: $30.81
Last Reviewed: 6/23/08
Disclosure: Long USB and BBT.
(Photo: Adrian van Leen)
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The decrease in RY related to currency conversion from Canadian dollars to U.S. dollars. You can't fault the company for that. Year over year, I still anticipate RY's dividend will increase on a U.S. dollar basis.
Once again it is the first Saturday of the month, so it is time for a goals/progress update. My dividend portfolio continued to improve in August after the June collapse. Annualized dividend income has increased every month since I began tracking it in November 2007. I am still concerned about some stocks reducing their dividend. However, since I am well ahead of my 2008 goal it is unlikely I will fall below it. Now onto the numbers.
My goals were defined in this December 1, 2007 Investing Goals post. Below is an updated version of the table found in the original post.Description Dividend
Income
AnnualizedYield
on Cost2027 Goal 110,000 20.00% 2017 Goal 30,000 10.00% 2008 Goal 4,000 4.90% Dec/2007 3,054 5.00% Purchases YTD 2,221 0.24% Div. Changes YTD 56 0.08% Sales YTD (120) 0.06% August/2008 5,211 5.38% Purchases 299 0.07% Div. Changes 0 0.00% Sales 0 0.00% July/2008 4,912 5.31%
The above information covers the current month and year-to-date through the current month.
Click here for a Detailed Historical Progress Update Table.
For the month, annualized dividend income increased $299, and Yield on Cost (YOC) increased 0.07%. These changes were driven by new purchases and dividend changes (no sales in August). Let's examine each of the these categories:
Purchases: The $299 increase in annual dividend income and 0.07% increase in YOC related to the following purchases (yield at the time of purchase):
The ETO and BBT purchases increased my YOC, while the GE purchase lowered it. As noted in earlier updates, I expect for most months YOC to drop since most new investments will yield less than my current YOC, and dividend increases will not be sufficient to offset it.
Dividend Changes: The $0 net change in annual dividend income and 0.00% net change in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):
The next monthly progress update will be on Saturday, October 4th.
(Photo: sanja gjenero)
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It is good to periodically take a look at your holdings and the various sectors that you are invested in. My single largest sector is financials. It currently makes up 11% of my total investment portfolio. I like to limit any individual sector to 10%, thus I am slightly over-allocated. I am currently invested in six banks. I will be very surprised if I can make the same statement on December 31, 2008. Then again, I have been surprised several times over the last 18 months. At time of this writing, I owned BAC, BBT, MTB, RY, STI and USB.
Bank stocks make up a significant piece of my financials. For most of the year I held these banking stocks:Bank of America Corporation (BAC) -20.9%
The percentages above represent my year-to-date return (through 6/4/2008) for the period I held the stock. Not a pretty picture, for the most part. USB has been the lone bright spot.
BB&T Corporation (BBT) -2.5%
M&T Bank Corporation (MTB) +3.7%
Royal Bank of Canada (RY) -0.9%
SunTrust Banks, Inc. (STI) -20.1%
U.S. Bancorp (USB) +7.9%
Wachovia Corporation (WB) -30.7% -Sold 4/15/2008
In my article "Time is My Friend", I noted that I have too many bank stocks at six (seven with WB in my IRA). It was my desire reduce my bank holdings down to three to four stocks. Later the same month in my "State of the Dividend Address", I identified STI and MTB as my two weakest banks and moved them to "On The Shelf". I opted to wait and let the weakest bank stocks identify themselves over time before selling.
Fast forward to about a month and WB cuts its dividend. As per my policy, I immediately sell the stock. One down. Recently, MTB chose to leave its dividend flat at $0.70 and placed one foot in the grave. In an earlier stock analysis of BAC, I speculated it too would hold its dividend flat in September. As for the others:
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Each month the Wealth, Money & Life Network chooses a topic for that month's theme. Since our members are a diverse group, the selected topic is usually broad, allowing each of us an opportunity to address it from our perspective. This month, Missed Opportunities was selected as our topic.
When most people hear the phrase "missed opportunities" they tend to reflect on past events and what could have been. By nature I am forward looking, so "missed opportunities" for me is the present and the future.
At some point in the future will we look back on our actions today and refer to them as our greatest missed opportunity? There is a lot of fear today. Fuel prices have soared driving up the prices of everything that is transported. The economy is slowing and some fear that they may lose their jobs. Many are posturing themselves in a defensive stance, moving money out of equities into cash and bonds. With that, consider the following stocks (data as of mid-day 8/27/08):
AFLAC Inc (AFL): Its average P/E and dividend yield between 1998 and 2007 was 18.8 and 0.95%, respectively. It is currently trading with a P/E of 14.8 and a dividend yield of 1.79%.
BB&T Corporation (BBT): Its average P/E and dividend yield between 1998 and 2007 was 15.8 and 3.30%, respectively. It is currently trading with a P/E of 9.1 and a dividend yield of 6.66%.
Consolidated Edison, Inc. (ED): Its average P/E and dividend yield between 1998 and 2007 was 14.5 and 5.47%, respectively. It is currently trading with a P/E of 10.0 and a dividend yield of 5.69%.
General Electric (GE): Its average P/E and dividend yield between 1998 and 2007 was 25.4 and 2.24%, respectively. It is currently trading with a P/E of 13.2 and a dividend yield of 4.39%.
Johnson & Johnson (JNJ): Its average P/E and dividend yield between 1998 and 2007 was 23.9 and 1.77%, respectively. It is currently trading with a P/E of 17.1 and a dividend yield of 2.60%.
Lowe's Companies, Inc. (LOW): Its average P/E and dividend yield between 1998 and 2007 was 22.0 and 0.37%, respectively. It is currently trading with a P/E of 14.0 and a dividend yield of 1.38%.
Sysco Corp (SYY): Its average P/E and dividend yield between 1998 and 2007 was 26.4 and 1.48%, respectively. It is currently trading with a P/E of 17.4 and a dividend yield of 2.79%.
By most measures, many blue-chip stocks are trading at a historical discount. Are you going to buy now or pay full-price or a premium price later? Unlike the perpetual going-out-of-business sale at the local furniture store, this sale will end suddenly and without warning.
Full Disclosure: Long in AFL, BBT, ED, GE, JNJ and SYY.
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When the government wants to spend pork, but not call it pork they rebrand it as an "investment" in our future. Such is the case with the Troubled Asset Relief Program (TARP). So, as taxpayers and "investors" how have we fared with our "investment" and how does TARP fit into our dividend portfolios?
In a report issued last Friday, the Congressional Budget Office (CBO) concluded that the Treasury lost more than 25% of the $247 billion it spent as of Dec. 31 bailing out banks, according to a report released on Friday.
The CBO used a modified Black-Scholes option pricing model to value the TARP assets. The calculation was based on the present value of the dividends banks are required to pay taxpayers on the warrants issued in exchange for the funds received. The present value of the warrants was only $183 billion at December 31st, resulting in the Treasury providing a “subsidy” to the banks of $64 billion.
Terms of the TARP agreement require banks to pay back 5% annually in dividends for the first five years, and 9% after that if taxpayers haven’t been repaid. The warrants expire in 10 years. Last Thursday, Lawrence Summers, President-elect Barack Obama’s chief economic advisor, promised that the incoming administration would take steps to improve returns on TARP funds for taxpayers, in part by limiting dividend payouts to shareholders.
Prominent financial companies participating in TARP include:
Some institutions, such as Bank of America, have returned to the trough to feed again off TARP funds. As dividend investors, we must carefully consider whether or not banks participating in the TARP program should be included in our income portfolios.
Full Disclosure: Long BBT, USB
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It is good to periodically review the make-up of your portfolio and determine if it is meeting your expectations and is properly allocated. I've determined that I have too many bank stocks. There are currently six, in my dividend portfolio. If I want to limit my dividend stock portfolio to 25 equities, six bank stocks are too many. Three to four banks are appropriate for my portfolio. I have decided the weakest of the six must go. So who will be asked to leave. Let's compare based on March 6, 2008 closing data:
| Description | BAC | BBT | MTB | RY | STI | USB |
| NPV MMA Diff. | 98,490 | 28,293 | 34,311 | 304,230 | 8,812 | 76,113 |
| Yield | 6.82% | 5.91% | 3.56% | 4.18% | 5.46% | 5.35% |
| Div. Growth | 12.4% | 9.5% | 15.6% | 20.0% | 5.5% | 14.1% |
| (Disc.)/Prem. | -15.9% | -17.8% | -20.2 | -17.2 | -2.9% | -4.2% |
| Stars | 4 | 5 | 5 | 5 | 2 | 4 |
STI may seem like a logical choice for dropping due to its low rating. However, the low rating is due to its most recently announced dividend increase to $0.77/share, which lowered its growth rate to 5.5% from 10%. I suspect most of the other banks will significantly lower their growth rate. Let's consider what happens if the dividend growth rate drops to 5%, and 10% for those above 10%:
BAC:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $47,993
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $14,803
BBT:
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $9,963
MTB:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $7,395
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $835
RY:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $12,104
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $2,853
USB:
- Dropping the dividend growth rate to 10% drops the NPV MMA Diff. to $12,104
- Dropping the dividend growth rate to 5% drops the NPV MMA Diff. to $2,853
Based on the above, it appears that STI and MTB are the weak links. However, when I reviewed the cash flow statements MTB and STI's were the strongest. At the beginning of this week and this post, I had full intentions of selling a bank stock. But after this limited review, I have opted to wait. I am confident that one will slip and fall behind the others, and when it does I will ponce on it like a lion and cast it from my portfolio. Sometimes the best move is no move at all. In time the appropriate stocks to divest will begin to reveal themselves. Time is my friend.
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When investors purchase their initial position in a stock, it is usually after their most rigorous research. Once a stock is in their portfolio, some investors relax on the research for subsequent purchases. Each and every time you purchase a stock, you should run it through the same process as if you were buying it for the first time.
Case in point, my income portfolio currently consist of 8 ETFs and 27 individual stocks. Of the 27 individual stocks, only 7 of them would I consider purchasing today based on their valuation. They are listed below along with their buy below price and other information as of 9/12/2008:
AFLAC Inc (AFL) - Yield: 1.65%
Buy Below: $66.75
9/12 Close: $58.60
NPV MMA Diff: $13,075
Concern: The above data assumes a very aggressive dividend growth rate of 20%. With a low yield of 1.65%, AFL needs the high growth rate to be viable. From 1998-2007 the dividend growth rate averaged 22.3% with a low of 11.8% in 2001 to a high of 45.5% in 2007. Another concern is AFL's currency exposure in Japan, where roughly 75% of the company's earnings are derived.
BB&T Corporation (BBT) - Yield: 5.72%
Buy Below: $35.79
9/12 Close: $34.05
NPV MMA Diff: $10,573
Concern: BBT's exposure to the banking industry's current issues with funding and credit quality.
BP Plc (BP) - Yield: 6.29%
Buy Below: $83.28
9/12 Close: $54.79
NPV MMA Diff: $34,463
Concern: Failure to come to an understanding with Russia over its operations in the region (TNK-BP), inability to diversify away from Russia and terrorism could adversely affect BP's future performance.
General Electric (GE) - Yield: 4.40%
Buy Below: $32.69
9/12 Close: $26.75
NPV MMA Diff: $8,103
Concern: Slower-than-expected global economic growth, as well as manufacturing and regulatory problems and the potential for higher delinquency rates in GE's financial services segment.
Paychex Inc (PAYX) - Yield: 3.65%
Buy Below: $49.88
9/12 Close: $34.01
NPV MMA Diff: $149,426
Concern: The highly competitive nature of the outsourcing industry as well as the threat of new entrants into the human resources segment could pose problems for PAYX in the future.
Pfizer Inc. (PFE) - Yield: 6.96%
Buy Below: $27.72
9/12 Close: $18.62
NPV MMA Diff: $56,099
Concern: Patent expirations and pipeline uncertainties could cause PFE significant problems in the future if left unresolved.
Royal Bank of Canada (RY) - Yield: 3.99%
Buy Below: $49.08
9/12 Close: $46.46
NPV MMA Diff: $250,334
Concern: A further weakening of the Canadian economy, which grew at only 0.3% in the June quarter, a prolonged housing-related downturn in the United States economy, and unexpected sharp currency fluctuations.
The buy below price is the minimum of the Mid-2 (as described in Fair Value Data) and price needed to generate the minimum NPV MMA Diff. (as described in Measure What's Important). As always, you will need to do your own research and reach your on conclusion as to appropriateness of adding any of these securities to your portfolio.
Disclosure: Long in all the aforementioned securities.
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It seems lately that the headlines are dominated by companies dropping their dividends such as Fifth Third (FITB) from $0.44 to $0.15, KeyCorp's (KEY) Board expressed its intention to reduce its dividend 50% to an annualized dividend of $0.75/share, FairPoint Communications (FRP) lowering their dividend 35% and Crystal River Capital (CRZ) cutting its dividend from $0.68 to $0.30. Not all the news is bad.
Consider the following companies that recently announced double-digit dividend increases:
Unfortunately, after running these companies through my [D4L-PreScreen.xls] model none of them warranted additional consideration. CAT was the closest with a NPV of MMA Differential of (621) .
On June 19, 2008, BB&T Corporation (BBT) stated that the company's capital levels remain strong and management anticipates "some increase in the cash dividend during 2008."
And finally, sometimes good news is found in maintaining the status quo. According to Bloomberg, Bank of America's (BAC) CEO told Oppenheimer analyst Meredith Whitney the company's dividend was safe. With an effective yield between 8% and 9%, and trading less than book value, BAC could end up as one of the great steals of 2008. Time will tell.
At the time of this writing, I owned BAC and BBT.
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Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the banking industry offer the most promising dividends. When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. But extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
I usually like to look at long-term dividend growth rates, but the banking industry has suffered so much upheaval in recent years that those growth rates are negative, and sharply so, for many big banks. The industry seems to be getting its act together, though, and many dividends are rising. I've compiled some of the major dividend-paying players in the banking industry, ranked according to their dividend yields: BB&T (BBT), PNC Financial Services (PNC), US Bancorp (USB), Wells Fargo (WFC) and KeyCorp (KEY).
Source: Motley Fool
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MMM earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1916 and has increased its quarterly cash dividend payments for 50 consecutive years. MMM earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. In effect, if you invested equal amounts in a MMA earning of an average of 4.61% for 20 years and MMM stock with a dividend yield of 2.88% and growing at 4.2% annually, you would have $1,556 less in MMM stock per $1,000 invested. Other: MMM is a member of the S&P 500, is an Achiever and an Aristocrat. S&P noted that historically the company provides stable earnings and dividends. MMM enjoys a leading position in many of the end markets that it serves, a strong balance sheet with a relatively low amount of debt, and free cash flow that has averaged about 95% of net income over the past 10 years. Conclusion: MMM earned a Star in the Fair Value section, earned a net zero Stars in the Dividend Analytical Data section and earned no Stars in the Dividend Income vs. MMA section for a net total of 1 Star. This rates MMM as a 1 Star-Very Weak stock. 
Linked here is a PDF copy of my analysis of 3M Co (MMM) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: 3M Co. is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
MMM is trading at a discount to all except 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, MMM is trading at a 19.3% discount. A Star is added since MMM 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:
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:
Using my [D4L-PreScreen.xls] model I determined the dividend growth rate would have to average 9.8% for MMM to generate a NPV of MMA Differential of $3,000 that I look for from a company that is both an Achiever and an Aristocrat. With the current dividend and an estimated growth rate of 4.2%, the share price would have to be $44.54 before I would consider initiating a position in MMM.
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 do not own shares of MMM (0.0% of my Income Portfolio).
What are your thoughts on MMM?
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Linked here is a PDF copy of my detailed analysis of Pfizer Inc. (PFE) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Pfizer, Inc. engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals in the United States, Europe, Canada, Asia, and Latin America.
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 and 4.) Graham Number. PFE is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, PFE is trading at a 16.7% discount. PFE earns a Star for 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 and 5.) Payout 15% of avg. PFE earned a Star in 3.) above. It has increased its dividend for 10+ years. However, a Star is deducted because the current dividend payout of 96% exceeds 10-year average of 77% by more than 15 points.
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. and 2.) Years to >MMA. PFE earned both available Stars in this section. Its current yield of 6.04% is in excess of the high-yield MMA rate of 4.61% and its NPV MMA Diff. is $37,063.
Other: PFE is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. It has increased its quarterly cash dividend payments for 41 consecutive years. PFE recently raised its dividend 10%.
Conclusion: PFE earned one Star in the Fair Value section, a net of zero Stars in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of three Stars, which rates it as a 3 Star-Hold.
PFE is at a cross-road. Earnings have declined somewhat as key drugs come off patent. Its Lipitor patent expires in 2010. Lipitor accounts for about a fourth PFE's sales. PFE has not introduced a "home-run" drug for sometime. However, the near-term (~2 years) outlook is good. I continue to add PFE in modest amounts as my allocation and PFE's valuation allows .
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 own shares of PFE (2.4% of my Income Portfolio).
What are your thoughts on PFE?
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Dividend stocks can be the foundation of a great retirement portfolio. Not only do the payments put money in your pocket, which can help hedge against any dips in the stock market, but they're usually a sign of a financially sound company. Dividends also give investors a painless opportunity to reinvest in a stock, thus compounding gains over time.
However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- we can get a good bead on whether a company has room to increase its dividend. Ideally, we like to see healthy payout ratios between 50% and 75%. Here are three income stocks with payout ratios currently below 50% that could potentially double their dividends: BB&T Corp. (NYSE:BBT), Metaldyne Performance Group (NYSE:MPG) and American Water Works (NYSE:AWK).
Source: Motley Fool
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Linked here is a PDF copy of my detailed analysis of BP Plc (BP) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: This supermajor integrated oil company (formerly BP Amoco p.l.c.) is the world's second largest publicly owned oil company and the fourth largest U.S. refiner.
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 and 4.) Graham Number. BP is trading at a discount to all but 4.) above. If I exclude the high and low valuation, and average the remaining two valuations, BP is trading at a 26.3% discount. BP earns a Star for 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 and 5.) Payout 15% of avg. BP earned a Star in 4.) above. It's one year dividend growth exceeded its 5-year growth rate. This could indicate the dividend 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. and 2.) Years to >MMA. BP earned both available Stars in this section. Its current yield of 5.40% is in excess of the high-yield MMA rate of 4.61% and its NPV MMA Diff. is $22,113.
Other: BP is NOT an S&P 500 Dividend Aristocrat or a member of The Broad Dividend Achievers™ Index. It has increased its quarterly cash dividend payments for 8 consecutive years.
Conclusion: BP earned one Star in the Fair Value section, one Star in the Dividend Analytical Data section and two Stars in the Dividend Income vs. MMA section for a total of four Stars, which rates it as a 4 Star-Buy.
For some time now I have been looking for a suitable energy company to add to my dividend income portfolio. The numbers have not worked for the companies reviewed up to this point. Though not perfect, BP's numbers have been the best so far. BP's primary blemish is a dividend cut of 20% in 2000 after a 26% dividend increase in 1999. One other concern is the 10-year average historic payout ratio is 60%. However, the last four years payout rate have been reasonable in the 30's. I will continue to perform a qualitative assessment of BP, but early indications are pointing toward a possible April purchase.
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 do not own shares of BP (0.0% of my Income Portfolio).
What are your thoughts on BP?
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Have you ever read something then paused and said well that's stating the obvious? Then upon further reflection realize what is obvious to you may not be obvious to others. This happened to me recently as I was scanning some retirement headlines.
I came across Kimberly Palmer's article titled "The Future of Social Security: Not Good". My first response was 'No duh!' After giving it more thought, I came to the conclusion that my reaction is probably in the minority.
I suspect most people believe that the U.S. government will not let Social Security fail. This is the same government that deemed certain large companies 'too big to fail' and dragged other unwilling participants into the fray. BB&T's (BBT) Chairman and CEO, Kelly King has been very outspoken on how the government has managed the TARP debacle. And now the government is 'helping' the auto industry. Watch out Detroit!
The U.S. government has become too big and too 'helpful' to the detriment of its citizens. The government should spend more time providing for the common defense and less time promoting the general Welfare (pun intended).
So, what are your retirement plans? Are you going to rely on the government to print your social security check and the money backing it up, or will you choose to take charge of your future and prepare for it? As it is with most things in life, those that prepare for retirement will find more success than those that don't. It is really not that hard when you start young. Here are three simple steps:
Number 3. on first blush may seem complicated, but it doesn't have to be. For those that don't want to make investing their hobby, they can focus on a few good funds like Vanguard's S&P Index Fund (VFINX) and Vanguard's Long-Term Bond ETF (BLV).
For those a little more adventurous, a strategy based on an article by Richard Jenkins titled “A simple ETF strategy for beginning investors“ has been quite effective over time. Don’t let the “beginning investors” term scare you away. The goal of this portfolio is to provide diversification over a broad allocation of stocks and bonds by holding five ETFs: iShares Lehman Aggregate Bond Fund (AGG), iShares MSCI EAFE FD (EFA), Vanguard Total Stock Market ETF (VTI), iShares DJ Real Estate Index (IYR) and iShares DJ Basic Materials (IYM).
For those comfortable in selecting and holding individual stocks, there is nothing like Dividend Stocks to provide a growing income into the future. Dividend stocks found in many dividend investors' portfolios include companies such as: McDonald's Corp. (MCD) [analysis], Johnson & Johnson (JNJ) [analysis] and The Coca-Cola Company (KO) [analysis].
Finally, you can choose not to prepare. In June 2008, I wrote about a retirement-age couple that would never retire because they chose to life five on the edge and always spent a little more than they made. Over the last year the noose has continued to tighten on Bill and Jackie (not their real names). Due to the economy and health issues work has been hard to come by. Their house is one step away from foreclosure and on the market with no buyer in sight. Bill needs surgery and the family continues to grow weary of providing for them.
Life is a choice. You can choose how you live, but you cannot choose the consequences of how you live.
Full Disclosure: Long AGG, BLV, EFA, IYM, JNJ, KO, MCD, VFINX, VTI. See a list of all my income holdings here.
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