Linked here is a PDF copy of my detailed analysis of General Electric Company (GE) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: General Electric (GE) is a diversified technology, media and financial services company. With products and services ranging from engines, power generation, water processing to medical, financing, media and industrial products.
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. GE is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, GE is trading at an 8.2% discount. A Star is added since GE 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. GE earned one Star in this section for 3.) above. GE has paid a dividend since 1899 and has increased its dividend for the last 20+ 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. GE earned one Star in this section for 2.) above. If GE grows its dividend at 7.8% per year, it will only take 4 years to equal the long-term average money market rate of 4.61%. GE's NPV MMA Diff is less than the $10,000 I prefer. However, since GE is a Blue-Chip company with a long track record of success, I am comfortable with its NPV MMA Diff of $5,862.
Other: GE is a member of the S&P 500, an Aristocrat and an Achiever.
Conclusion: GE earned a Star in the Fair Value section, earned a Star in the Dividend Analytical Data section and earned a Star in the Dividend Income vs. MMA section for a net total of 3 Stars. This rates GE as a 3-Hold.
In April, GE shocked the U.S. stock market by reporting a 6% drop in first quarter earnings and slashed its 2008 earnings outlook. During its quarterly conference call, Chief Executive Jeff Immelt blamed the miss on Bear Stearns near bankruptcy. "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales," Immelt said.
"We are not counting on the business getting any better, vis-à-vis...the U.S. consumer," Immelt said. "We have actually allowed for a worsening of the U.S. consumer in our GE Money business. So I think that is the way to think about the U.S. and the U.S. economy."
After the announcement, GE was pummeled in the market, dropping nearly 13% to $32.05 in heavy trading. Since then it has continued to slide closing Friday at $30.02. GE is widely acknowledged as one of the best managed companies in the world. For long-term investors the circumstances provide a good opportunity to initiate or add to a current position. I added to my position in early May and will continue to add to it as my allocation and GE's valuation will allow.
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 GE (3.2% of my Income Portfolio).
What are your thoughts on GE?
Recent Stock Analyses:
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This is the third and final post in a series that began on Monday. If you haven't read the earlier posts you may want to take a look at them here:
- Intro: Coming Up on the D4L Channel...
- Post 1: Stock Analysis C
- Post 2: Stock Analysis GE
- Conclusion: Sometimes Things Aren't As They Appear
On Tuesday I posted a Stock Analysis on General Electric Company (GE). Based on that quantitative analysis GE was rated as a 0-Star Avoid stock, but last week I increased my position in GE.
What gives?
Sometimes things aren't as they appear!
A Quantitative Analysis inherently is driven by historical results. I never subjectively alter the inputs on my quantitative analyses posted on this site - they are what they are based on the historical results. This allows me to compare one company with another, knowing it is based on the companies historical performance. But what if something has happened that would change what the historical results are depicting? That is where the Qualitative Analysis comes into play.
By nature a Qualitative Analysis is more subjective and is the most difficult part of the overall evaluation process. The difference between Warren Buffet and me is his superior ability to perform qualitative analysis. Wikipedia describes it as follows: "Unlike quantitative research, qualitative research relies on reasons behind various aspects of behavior. Simply put, it investigates the why and how of decision making, as compared to what, where, and when of quantitative research." Let's look at the C and GE from a qualitative perspective.
Citi Corp (C):
As noted in the quantitative analysis, C has had an impressive past. However, from a qualitative standpoint we have to ask a few questions: How did they do what they did and will they be able to continue doing it in the future.
Historically, C through its financial services has generated substantial cash flow well beyond the operating needs of the business. C has chosen to return a portion of this cash flow to its shareholders in the form of dividends. Over the last 10 years its dividend growth rate has been an impressive 15%.
Now the more important question, will they be able to continue to perform the same way in the future? Obviously, there is not a definitive way to answer this question, but what observations can we make. I have watched C very closely over the past few months. I wanted to find a reason to buy it. However, as posts such as Financial Melt-down Continues and What's Up With Citi's (C) Payday Loan?, I could not find one. To the contrary, I became very concerned about their ability to sustain dividend growth into the future.
As shown in the quantitative analysis report, C's payout ratio had increased substantially in 2004 going from 32% to 49%. It then stayed in the mid-to high 40's in 2005 and 2006, while the dividend increase fell from a high of 57.1% in 2003 to around 10% in 2005 and 2006. This is much less than the 10-year average used in the quantitative analysis. Though a payout ratio of 49% and a dividend increase of 10% are not considered bad, both are moving in undesirable directions.
I decided to run an alternate scenario on C. Dropping the dividend and earnings growth rate to zero in 2008 and 2009 and then increasing to 10% thereafter, the DCF value for C dropped from $62.39 to $36.72. This is getting much closer to the $28.24 1/4/07 closing price. Are these revised assumptions reasonable? I don't know, but they are more reasonable than what quantitative analysis report was calculating based on historical information.
As a shareholder of C (I hold a small stake in my IRA), I hope they recover and perform well in the future. As a value play C may have be a good add. However, from a income perspective, current indications are a flat to lower dividend in the near-term, and that is what I base decisions on in my dividend income portfolio.
General Electric Company (GE):
GE is one of those boring predictable companies that finds its way into most every dividend investor's portfolio. GE is a well managed, well run company and has been that way for decades. When it falters, it always recovers and comes back stronger. I like owning GE because it offsets some of my more risky investments, but I will not buy it at just any price.
Until recently, not only was GE a 0-Star Avoid stock, it also had a negative NPV when compared to a money market account (MMA). I will not by a stock when its quantitative analysis indicates its income will under perform a MMA. No matter how stable a company is, it will not be safer than a federally insured MMA. So why did I buy GE?
Like C, GE has been able to generate substantial cash flow beyond the operating needs of the business and has returned this cash flow to its share holders in the form of dividends. However, at 8.7% its historical dividend growth rate is about half of C's. Its current payout ratio of 52% is only slightly higher than its 10-year average of 48%. Given GE's global and diverse earnings streams, I believe it will be able to maintain and grow its dividend in the near term and over the long term.
Since the quantitative analysis of GE is driven by historical results, I will not be able to fully update GE until they publish Q4/07 results. However, for my alternate scenario I held everything flat in 2007 with 2006 except I updated the 2007 dividend to actual. This change dropped the calculated premium from 32.8% to 15.2%, increased the NPV of the MMA Differential from $2,781/thousand to $4,019/thousand and dropped the years needed to reach the MMA earning level from 10 to 9.
As a long-term dividend investor, I am more focused on the dividend analytical data and earnings than I am on the relative price of the security, particularly when it is a security such as GE that I have little concern of having to sell in the future. For these true "blue-chip" stocks, my barrier to entry is lower. Ironically, even with a lower barrier to enter, it is often more difficult to find an entry point for true blue-chip companies since everyone is trying to get in. When the opportunity presents itself, I move quickly.
Conclusion:
In summary, the key take away is that the quantitative analyses that I post are not the final answer. Since a quantitative analysis focuses on past performance, it indicates as to whether or not the company has performed in a manner that would be a good fit in a dividend focused portfolio. If the answer to that question is yes, then you move to the next step of qualitative analysis. Here you look to answer the difficult questions of what will the company do in the future and will it be enough to warrant its purchase?
As I tell my kids, if it were easy they wouldn't call it a job and pay people to do it. Mr . Buffet, you have my utmost respect.
Full Disclosure: At the time of this writing, I own shares of C in my IRA and GE in my dividend portfolio.
What qualitative analysis do you perform before buying a stock?
This post is the last in a three part series. [Intro], [First Post], [Second Post]
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Linked here is a PDF copy of my detailed analysis of General Electric Company (GE) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: General Electric Company (GE) is a diversified industrial corporation.
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. Of the four valuations listed above, GE is only trading at a discount to 3.) Avg. P/E Price. If I exclude the high and low valuation, and average the remaining two valuations, GE is trading at a 32.8% premium. A Star is deducted due to the high premium.
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. GE only earned one Star in this section for 3.) above - it has grown dividends for at least 10 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. GE did not earn any Stars in this section. It will take 10 years before GE's dividend earnings are equal to that of a MMA earning 5.11%.
Other: GE has long been considered one of the best managed companies in the U.S.
Conclusion: GE earned no Stars in the Fair Value section, a net of zero Stars in the Dividend Analytical Data section and had no Stars in the Dividend Income vs. MMA section for a net total of Zero Stars, which rates it as a 0-Star Avoid stock. This looks like a pretty clear cut decision on what to do with this stock, at least it was for me. I added to my position in GE last week! I will explain why in the third post in this series.
Disclaimer: As always this is only my opinion and you should not rely on it. 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 GE.
What are your thoughs on GE?
This post is the second in a three part series. [First Post]
Recent Stock Analyses:
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General Electric Company (NYSE:GE) is getting out of the banking business. Even though GE has been headed in this direction for some time, the decision still feels a little shocking. After all, it’s the end of an era. And considering the cash windfall that will come with the deal, it’s also very good news for anyone holding GE stock. The financial crisis makes it hard to remember what a superstar GE Capital used to be. Indeed, long before the crisis — back in the Jack Welch days when GE was the biggest, most admired company on the planet, and GE stock was among the most desired — GE Capital was known as the company’s secret weapon. It was the main engine of profits and allowed General Electric to beat Wall Street estimates like clockwork.
GE Capital went from secret weapon to big, honking albatross, and it clearly no longer has a place in an industrial company that wants to focus on things like jet engines, power turbines and medical devices. The finance unit is much smaller since before the financial crisis, and yet it’s still the nation’s seventh-largest bank by assets. With so many assets under its care, GE Capital was designated a “systemically important financial institution,” which means its regulatory burdens are even more strenuous in these days of especially tight federal oversight.GE Capital still accounts for about half of GE’s profits, but influential shareholders and company management have come to realize that the risk and regulatory stresses are simply not worth it.
Source: InvestorPlace
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I am certainly not the first to recognize the power of buying good dividend stocks when they are down. The 'Dogs of the Dow' is probably the most popular implementation of this strategy. Michael O’Higgins popularized this strategy in his book, Beating the Dow (1991 and 2000). In O’Higgins' implementation he invests in the 10 highest yielding securities in the Dow Jones Industrial Average (Dow), and rebalances annually. He back-tested the strategy by looking at the 26-year period from 1973 to 1998. During that period the 'Dogs of the Dow' outperformed the Dow, earning 17.9% annually versus 13.0% for the Dow.
Granted the 'Dogs of the Dow' strategy is not a traditional buy and hold dividend investing strategy, but it does emphasize the power of dividends when combined with good solid companies. For a more traditional dividend investing example let's look at one of my favorite companies, General Electric (GE), and consider these facts:
2000 $60.50 $0.57 0.9%
2003 $32.42 $0.77 2.4%
2008 $34.33 $1.24 3.6%
For 2000 and 2003 above, Price represents GE's high stock price for the year. For 2008 Price is GE's closing price on 3/17/2008. For all three years, Divi. is the annual dividend paid per share and Yield is Divi./Price.
I included 2000 above since that was the year GE's stock hit its 10-year high at $60.50. The current yield of 3.6% on 3/17/2008 is four times the 0.9% in 2000 at the stock's high. GE was an excellent company in 2000, as it is today, but now the dividend is quadruple the 2000 level.
What if you purchased GE 5 years ago at 2003's high of $32.42? You would have purchased it when the yield was a decent 2.4%, but you would have only seen 5.9% share appreciation (in absolute terms). However, the Yield On Cost (YOC) goes from 2.4% in 2003 to very respectable 3.8% in 2008, slightly above 2008 current yield of 3.6%. This increase was a result of GE increasing its dividend 10% on average from 2000-2008. Hypothetically, if GE were to increase its dividend 10% a year for the next 10 years the dividend would be $3.22 in 2018, with a YOC of 9.4% on shares purchased in 2008. Not bad for top tier company.
It is easy to see why a down market does not depress me. There's gold in them-there hills!
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GE continues to make progress in fixing up GE Capital and restoring it to a positive contributor to the corporation. The company has continued to pare down the balance sheet at GE Capital. While provisions ticked up a bit, it does not seem so long now, before GE Capital can contribute meaningful dividends back to the company again.
Even in resetting expectations for lower margins, GE stock still looks relatively attractive. It pays a decent dividend and is cheaper, on a cash flow basis, than a simple look at the P/E or EV/EBITDA ratios would suggest. General Electric is not going to make anyone rich quickly, but patient investors can still play an attractive turnaround story that should gradually morph into a solid dividend growth name.
Read more: http://stocks.investopedia.com/stock-analysis/2011/GE-Still-On-A-Road-To-Recovery-GE-BRK-A-SI-EMR-DHR-DOV-HON-SPW-PHG1026.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+stockinvesting+%28Investopedia%3A+Headlines%29#ixzz1c4pUB400
Source: Investopedia
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Is General Electric (GE) the next major company to cut its dividend after holding it flat for a period of time? Last year, in a public statement GE CEO Jeff Immelt said that GE would hold its dividend flat through 2009. Recently, there has been mounting pressure on the company that may make that promise difficult to keep.
Last month, Standard & Poor’s (S&P) lowered its outlook on General Electric’s debt ratings to “negative”. S&P said there was at least a one-in-three chance it would cut GE’s grade from triple-A within the next two years. A rating cut would raise the company’s borrowing costs, diminishing a key advantage GE Capital has had over its competitors.
In a further tightening of the noose, Sterne Agee analyst Nick Heymann said the company likely faces a serious decision - sustain the dividend or the AAA rating. Heymann thought a rating change would not come until the first-quarter or second-quarter financial results are released in April and July, respectively.
Only a precious few companies still carry the AAA debt rating. They include Berkshire Hathaway Inc. (BRK.A), Exxon Mobil Corp (XOM), Johnson & Johnson (JNJ) and Pfizer Inc. (PFE).
For those of us who include dividends from GE stock in our retirement plan, we may want to reexamine our retirement vision.
Disclosure: Long GE, JNJ, PFE.
(Photo: Steve Woods)
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General Electric (NYSE:GE) is one of the most unloved blue chip stocks. Almost anywhere you read a GE article on the internet, commentators are quick to rip into CEO Jeff Immelt, the company's poor capital allocation decisions, the dividend cut during the financial crisis, the bureaucracy, the lack of capital returned to shareholders, the company's deceptive PR efforts, and more. And why not - there is plenty to be frustrated about if you are or were a long-term GE shareholder. Since Immelt took over the role of CEO from Welch in 2001, GE's total shareholder return (includes dividends) is a whopping 0%. Without dividends, the stock is down more than 35% compared to the near doubling of the rest of the industrial sector.
GE receives a lot of flak and skepticism from the investor community. The last 15 years have been greatly disappointing for shareholders, but the current negativity, coupled with GE's intact competitive advantages and structural transformation, create an appealing long-term investment opportunity today. Within three years, higher-quality industrial operations could account for 90%+ of earnings (up from < 60% today), Immelt could be retired (a welcome change for many investors), the dividend could be growing at a 10% annual clip (5-10%+ annual EPS growth; implied 2018 EPS payout ratio < 55%), lucrative service revenue will become even more lucrative (continued software / predictive maintenance advancements), and maybe, just maybe, sentiment around the stock will start to improve. With a 3.6% dividend yield and a reasonable P/E multiple, GE's stock appears to be an attractive investment opportunity for long-term dividend investors and is in our Top 20 Dividend Stocks list.
Source: Seeking Alpha
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After selling off its financial arm, GE Capital, General Electric is poised to once again become one of the best dividend growth stocks around. For the better part of a century, General Electric was the king of all dividend stocks. It returned money to shareholders every quarter since 1899, and increased its payout for 32 years in a row, making it one of the S&P 500’s “Dividend Aristocrats.”
Although GE said Friday that it does not plan to raise its dividend until after 2016 (it aims to complete the sale of GE Capital over the next two years), the company is expressing an almost unprecedented amount of shareholder friendliness. The $90 billion it intends to return to investors includes a $50 billion stock buyback that ties Apple (AAPL) for the biggest share repurchase ever.GE said in its a statement that it is already working with regulators to remove the yoke of GE Capital’s designation as systemically importnt.
Source: Fortune
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GE's announcement of a 17% dividend hike on top of their 20% hike earlier this year was the topic of lively discussion at our investment policy meeting on Monday. We all agreed that on the surface the news was good for GE and stocks in general, but several committee members voiced a surprising concern.
We were surprised and delighted by GE's second dividend hike, and because GE is so large and so broadly diversified across the US economy, we believe many other companies may also be experiencing better-than-expected results. The surprising concern that arose in our discussions was the possible negative implications of the dividend news. Two of us voiced the concern that because Jeffrey Immelt, GE CEO, has become so unpopular among many investors and analysts, the dividend hikes may only be his attempt to win favor with his constituents. This line of thinking didn't go far because one of the committee members reminded us that CEOs don't dictate dividend policy. That authority belongs to the board of directors.
Source: Rising Dividend Investing
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When the Dow Jones Industrial Index was created it contained only 12 companies. One of these original companies was General Electric (NYSE: GE), and today GE is the only company to have been continuously included in the index over its entire history. During that time GE has grown to be one of the largest and most profitable companies in the world. While GE's financial arm nearly led to catastrophe during the financial crisis of 2008-2009, the company has scaled down this division to reduce risk. In 2006 half of GE's profits came from the financial division while it’s now closer to a third.
Both Honeywell and 3M avoided cutting their dividends due to the financial crisis, although Honeywell failed to increase it on a couple of occasions over the past decade. Honeywell's dividend has grown at an annualized rate of 8.22% over the past decade while 3M's dividend saw slower growth of 6.67%. With yields around 2.3% for both companies this slow growth makes Honeywell and 3M look unattractive from a dividend perspective.
Source: Motley Fool
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I. Change In Business Conditions
An abrupt or permanent shift in a company's business model as a result of business conditions could lead to a dividend cut. Over the last 18 months or so, virtually all businesses have experienced an adverse change in business conditions. However, the pertinent question is to what degree?Consider Gannett Co. (GCI) who publishes 90 daily U.S. newspapers, nearly 1,000 non-daily publications in the U.S., and close to 300 U.K. titles. With the mass adoption of the internet, traditional news outlets such as newspapers are experiencing a slow death. GCI cut its dividend earlier this year after several years of declining earnings.
Pfizer's (PFE) recent dividend cut would fall in this category. After years of unsuccessful attempts to get approval of a "blockbuster" drug, the cash rich company sought a merger partner with a good drug pipeline. In anticipation of it proposed combination with Wyeth, PFE cut its dividend.
II. Dividend Yield Above Historic and Industry Norms
A dividend yield that is higher than average and/or higher than others in the industry are indications, not all is well with the company. The market is adjusting to compensate for the higher risk of holding the company. When dividend yields start creeping up, it is time to start evaluating if the company can continue to pay its dividend.Consider Bank of America Corp. (BAC). Between 2000 and 2007 the company's dividend yield hovered in the 3%-4% range. In 2008, the dividend yield ranged from around 5% to the teens prior to its dividend cut. The same situation occurred with General Electric (GE) over the same period. GE's dividend yield from 2000-2007 normally were in the range of 1.5%-3.5%. However, in 2008 they the dividend yield than doubled as investors lost confidence in the company. Eventually, BAC and GE cut their dividends.
III. Diminishing Cash Available to Pay Dividends
Ultimately, the ability of a company to pay its dividend is determined by its cash position - both cash on its balance sheet and its ability to generate cash flow. All the companies above had one thing in common - a deterioration of cash flow available for paying dividends.After GCI's free cash flow peaked in 2004 at $1.3 billion, it slipped over the next four years to $852 million in 2008. Though GE's free cash flow was increasing, the company was taking on significant debt. GE's debt increased from $201 billion in 2000 to $524 billion in 2008 and it could no longer afford its dividend.
A Look Ahead
Unfortunately, there will be more dividend cuts in the coming days. Two companies currently on my radar are Nucor Corp. (NUE) and Caterpillar Inc. (CAT).On March 17th, NUE warned of a first quarter loss as the slumping economy sapped demand for the metal forcing it to cut output. "The economy has fallen off a cliff -- and there is no visibility as to the timing of the recovery," Nucor Chairman, Chief Executive and President Dan DiMicco said in a statement. NUE's free cash flows through 2008 had been strong and it ended 2008 with $920 million net debt (debt less cash) vs. $879 million in 2007. NUE is ok for now, but I look forward to reading their Q1 earnings release.
Last week CAT announced that its global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn has eroded demand for heavy equipment. In a separate announcement the company said it had notified an additional 2,454 workers in three states that they were losing their jobs as the company continues to try to bring production in line with plummeting demand. CAT's financial position is not as strong as NUE. Its free cash flow in 2008 was less than half of 2007 and it ended 2008 with no cash and $33 billion in debt vs. $27 billion net debt in 2007. This is another quarterly earnings release that I look forward to reading.
The above three items will help you determine which companies are at risk of cutting their dividends. Cash is king, so pay special attention to free cash flows and debt levels.
Full Disclosure: Long CAT and NUE.
(Photo Credit)
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Below is a guest post by Sarah Scrafford.
Corporate ownership and private enterprise have been the buzzwords of developed economies for quite some time. Privatization has been a positive trigger for rallying stock markets all over the world. It was the sign that heralded the readiness of a corporate entity to meet the harsh and demanding needs of the private investor. But what makes a public company a headline stealer? It’s either the fact that the company has made castles in the air real for a multitude or, at the other end of the spectrum, because it has shattered the dreams of millions.
What is the factor that people use to differentiate between one good “investor-friendly” company and another? Great investors have long known that the only real sign of a great company or business is the amount of cash it can generate year after year. For the common investor, a rough estimate of this is the cash dividends that he/she receives on account of owning company stock - the higher the dividend, higher the return on his investment. But what makes a good company a great one?
Let’s look at two famous ones - GE and AT&T. Both companies have maintained the enviable and stellar record of never having missed a year in paying dividends. The icing on the cake for the investors in these two enterprises is that the dividends have been on the upward trend, continuously increasing from start to now. But the difference between these two and other companies lies not in the amount of dividends paid, but in the “Dividend Decision” itself.
The big question is - how much of the company’s cash earnings should be distributed as dividends? AT&T has always paid out more than 60 percent of its per share earnings and GE has sent out at least 35 percent year after year. Now the question arises - why don’t other companies follow the path that these two have chosen?
Classic theories state that the dividend decision taken by the Board of Directors takes into account all investment opportunities and then allocates capital to a place where it will hopefully earn a better return than it would if it were paid out as dividends. In simpler terms, it means that the company will pay out dividends only if it cannot find a new project or opportunity which would offer higher returns than cash invested elsewhere.
GE as a corporation operates in an industry where innovation can bring about or create a brilliant new chance to rake in the dollars. While AT&T pays out more because, in an aging industry where growth rates are nearing lower single digits, it cannot invest the money it generates to deliver better returns, GE can afford to retain its earnings and invest so that the pace of creating shareholder value is higher than the average alternative.
Coke and Warren Buffett have been in a similar marriage since 1988. Coke has an excellent record, just like GE and AT&T. But why did Buffet make more money than everyone else? In 1988, he bought Coke at an average of $4.75 per share. Today, the cash dividends alone amount to $1.52 per share. That's a cash return of 32 percent every year. And as long as Coke increases its dividend payout, Buffett only becomes richer and richer, at an increased pace.
To put it in a nutshell, if the stock markets didn’t exist, the only way an investor could earn from an investment is through dividends. It has thus become of utmost importance to find save haven in dividend-paying companies during the markets’ troubled times.
Sarah Scrafford is an industry critic, as well as a regular contributor on the subject of entrepreneurial finance. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com.
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You may think your greatest wealth building asset is the Chevron (CVX) stock you purchased 3 years ago. Even though your brilliant purchase has appreciated over 50% in the last 3 years in the face of a bear market, it is not your greatest wealth building asset.
Traditionalist would say your home is your greatest wealth building asset. This is getting closer, but it is not your greatest wealth building asset.
Others would say your income is your greatest wealth building asset. Thought there is a lot of truth to the statement, it is still not your greatest wealth building asset.
So, what is your greatest wealth building asset? Everyone is born with it. Few realize its importance until they lose most of it. The asset is so valuable it can't be bought. Your most valuable wealth building asset is time.
As a value/dividend investor, I have learned that time can cure many mistakes and provide enormous investment leverage. Consider these stocks:
Johnson & Johnson (JNJ): Let's say on August 25, 1987 you purchased 1,529 shares of JNJ at $6.539/share or about $10,000 worth. This was JNJ's closing high for 1987. By December 31, 1987, your investment was only worth $7,156 - a 28% drop. It wouldn't be until June 9, 1989 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $103,238 at the July 21, 2008 mid-day price of $67.52. This is about a 12% compound annual return, excluding dividends.
General Electric (GE): Same scenario, on August 20, 1987 you purchased 1,821 shares of GE at $5.49/share or about $10,000 worth. This was GE's closing high for 1987. By December 31, 1987, your investment was only worth $6,696 - a 33% drop. It wouldn't be until January 2, 1990 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $50,638 at the July 21, 2008 mid-day price of $27.80. This is about an 8% compound annual return, excluding dividends.
Bank of America (BAC): You know the drill. On August 25, 1987 you purchased 1,397 shares of BAC at $7.156/share or about $10,000 worth. This was BAC's closing high for 1987. By December 31, 1987, your investment was only worth $6,025 - a 40% drop. It wouldn't be until August 5, 1988 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don't recommend), it would have been worth $40,960 at the July 21, 2008 mid-day price of $29.32. This is about an 7% compound annual return, excluding dividends, for a stock that is currently battered and beaten.
In all three examples above, the stock was purchased at its high before the 1987 crash/panic. Some recovered more quickly than others, but all recovered. The key is to buy good-solid companies, and be prepared to hold them through the good and the bad. All three of the companies above are S&P Dividend Aristocrats, or companies that have increased their dividends in each of the last 25 years. How long should you plan on holding a stock? That's easy, To Infinity and Beyond!
At the time of this writing, I owned JNJ, GE and BAC.
(Photo: peter mueller)
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General Electric Company (NYSE:GE) has been named as the ”Top Dividend Stock of the Dow,” according to Dividend Channel, which published its most recent DividendRank report. The report noted that among the components of the Dow Jones Industrial Average, GE shares displayed both attractive valuation metrics and strong profitability metrics. For example, the recent GE share price of $24.89 represents a price-to-book ratio of 1.9 and an annual dividend yield of 3.7% — by comparison, the average dividend-paying stock in the Dow yields 2.6% and trades at a price-to-book ratio of 4.6.
The report also cited the strong quarterly dividend history at General Electric, and favorable long-term multi-year growth rates in key fundamental data points. The report stated: ”Dividend investors approaching investing from a value standpoint are generally most interested in researching the strongest most profitable companies, that also happen to be trading at an attractive valuation. That’s what we aim to find using our proprietary DividendRank formula, which ranks the coverage universe based upon our various criteria for both profitability and valuation, to generate a list of the top most ‘interesting’ stocks, meant for investors as a source of ideas that merit further research.”
Source: InvestorPlace
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It's not that most companies have done anything wrong when preparing their Statement of Earnings, but under Generally Accepted Accounting Principles (GAAP) a lot of the entries have nothing to do with today's operations. Given this, I generally avoid most earnings related metrics (e.g. EBIT, EBITDA, payout ratio, etc.) Instead I focus on cash-based metrics, such as these:
Free Cash Flow - This has many definitions, but the one I use is operating cash flow less capital expenditures. Capital expenditures are deducted since you can't run a business for any period of time without expending some level of capital. These two numbers are easily located on the Statement of Cash Flows. This is the best snapshot of what cash the business has generated from "normal" operations and is available for dividends, debt, acquisitions and purchases of treasury stock.
Cash Flow Per Diluted Share - GAAP Earnings Per Share (EPS) has the same short-comings as GAAP earnings. When looking at EPS numbers I prefer a cash-based number. Cash Flow Per Diluted Share is calculated by taking the Free Cash Flow from above and dividing it by diluted shares outstanding (available on the Statement of Earnings).
Cash Payout Ratio - Dividend investors love payout ratios (dividends per share/EPS). Given my concerns with GAAP earnings and EPS, I once again prefer a cash-based version. The Cash Payout Ratio is calculated by dividing dividends per share by Cash Flow Per Diluted Share. Care should be taken when interpreting this ratio. For example, sometimes a high ratio with low debt is better than a low ratio with high debt.
Debt to Total Capital - Total capital is the sum of debt plus shareholders equity (both available on the Balance Sheet - don't forget the debt classified as short-term). Businesses are generally funded in one of two ways, equity or debt. Normally debt is more expensive than equity, while additional equity can potentially dilute current shareholders over the long-term. I consider a good balance to be 35% debt and 65% equity. I see the upper end for debt as 50% and then there needs to be a good reason for being there.
Cash Return on Capital Employed - This is simply Free Cash Flow divided by Total Capital (both are defined above). Again, I prefer using a cash number in the numerator. A lot of investors look at return on assets and return on equity. Each are flawed beyond their GAAP numerator. Return on assets ignores the liabilities side of the balance sheet, while return on equity ignores the debt component of capital.
Using 2008 data from Morningstar, let's run the numbers on a couple of companies and see what we find:Genuine Parts Co. (GPC)
Free Cash Flow: $425.3 million
Cash Flow Per Diluted Share: $2.63 (425.3/162)
Cash Payout Ratio: 59% ($1.56/$2.63)
Debt to Total Capital: 18% (500/(500+2,324.3))
Cash Return on Capital Employed: 15% ($425.3/(500+2,324.3))General Electric Company (GE)
Based on the above, GE started out strong with a low cash payout ratio, while GPC's appeared to be on the high side. However, GPC has very little debt so it can afford to pay a richer dividend unlike GE. GPC is doing a much better job than GE in earning a return on its invested capital. Having low debt and generating a 15% return in a year like 2008, will turn some heads. As with any metric, these should not be considered in isolation. Also, you should look at multiple years, consider projections and review the scheduled debt payments in the footnotes.
Free Cash Flow: $32,591.0
Cash Flow Per Diluted Share: $3.23 (32,591.0
Cash Payout Ratio: 38% ($1.24/$3.23)
Debt to Total Capital: 83% (523,762/(523,762+104,665)
Cash Return on Capital Employed: 5% ($32,591.0/(523,762+104,665))
To succeed as a dividend investor, you must find companies that can sustain and grow dividends by focusing on their ability to generate cash. You can fake earnings, but you can't fake cash.
Full Disclosure: No position in any of the aforementioned securities.
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When looking for the best dividend stocks to buy, investors tend to focus on stocks with mammoth yields or companies with lots of sex appeal. The best dividend stock is one that goes up over time in addition to protecting your capital and providing a fair yield, and a company that will consistently raise its distributions over time. That description fits GE stock to a T.
Some investors can’t get past the pain of a recession-era dividend cut from General Electric, and the fact that even now, GE stock is paying less in quarterly dividends than it was in 2008 before the financial crisis. But here are a few big reasons you should consider an investment in General Electric stock right now: Strong GE Earnings, GE Is Restructuring to Cut Costs, Long-Term Energy Opportunity, Attractive Valuation, Real Assets and Dividend Potential.
Source: InvestorPlace
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Recently, I was asked on another blog what are the top 5 income stocks that I like? It was an fascinating question that I quickly answered. I thought it would be interesting to expand on my answer here. It is important to note these picks will change over time (maybe even by the time the market opens on Monday) and are based on how I define "like". These are the ones I listed:
1. ACAS - High and growing dividend yield. How can you not like a company that has a double-digit current yield and has raised it's dividend on average 7.7% over the last 5-years? ACAS is planning, and publicly stated, its intentions to increase its dividend 4 times in 2008.
2. AFL - Low yield, strong dividend growth. A traditional dividend play. ALF's dividend increase has averaged 22.3% over the last 10-years; 28.7% over the last 5-years. Plus my kids love the duck commercials.
3. GE - Moderate growing yield. I was once asked if I were limited to buying only one stock for the rest of my life, what would it be? GE was my answer. Over the decades I think GE has been one of the best, if not the best, managed companies. They just execute and win. They are quick to cut their losses and move one when something does not work. With a current yield of 3+%, it is a great place to park cash.
4. RY - Moderate growing yield. I am still getting to know this Canadian bank - the more I learn, the more I like it. It has been unfairly punished for the U.S. banking debacle. With a current yield of 4+% and a 10-year average dividend growth rate of 19.7% (on the U.S. ADR), I am buying all that my allocation will allow.
5. JNJ - Low yield, strong div growth. Another traditional dividend play. JNJ's 10-year dividend growth rate is 14.6%; 15.8% for the last 5 years. This is a stock I have tried to buy for a long time and 2007's market decline finally provided me the opportunity. I will continue to buy as long as my window of opportunity is open.
Disclaimer: Material presented here is for informational purposes only and is based solely on my opinion. 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 all the above-mentioned stocks.
What are your 5 favorite stocks?
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Morningstar's dividend-stock guru Jeremy Glaser, editor of its DividendInvestor newsletter, recommends General Electric, Chevron and Southern for your portfolio. General Electric Co.: "This is a very straightforward dividend-value proposition," he tells Morningstar.com. "The stock has been yielding over 3 percent for some time now. That's half again or more than you can get from the market overall." GE's yield totaled 3.5 percent Friday. GE's businesses are "world-class," Peters says.
Chevron Corp.: While other companies such as ExxonMobil have been seeking to maximize cash flow and then devoting it to share buybacks or hoarding it, Chevron is putting its money back into operations, Peters says. "It has been really lucky with the drill bit. Now they have this vast opportunity to go out and develop." Southern Co.: "Traditionally it has been really the go-to name in regulated utilities," Peters says. "It's very large with substantial operations in four states. Even more importantly, they've had terrific regulatory relations in those states. Regulators allow them to earn higher returns than most utilities get.
Source: Newsmax
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The big news this week has been Bank of America's (BAC) dividend cut and the continued financial meltdown. On Wednesday, Merrill Lynch lowered their 2008 profit forecast on General Electric Co. (GE) to $1.96 and cut its price target to $23. Murmurings on the street are that GE could join BAC and cut its dividend, which is currently over 5% - high by historical standards.
Even when the sky appears to be at its darkest, there are those still stand tall! Albeit, their numbers are not what we have seen in past weeks, but here are a few select companies that recently raised their cash dividends:
After running these companies through my D4L-PreScreen.xls model, TK with a NPV of MMA Differential of $32,960 and a dividend yield of 5.60% could warrant an additional look.
Yesterday, I reviewed United Technologies Corp (UTX) and it earned a 4 Star-Buy rating. This review was performed prior to the dividend increase. The increase will only strengthen the rating. As part of the announcement, CEO Louis Chenevert said:"In today's tough economic environment, UTX's balanced portfolio, global footprint, and seasoned executive team continue to deliver solid results. This dividend increase, consistent with our pattern over many years, reflects our confidence in sustained earnings growth. UTC's liquidity and free cash flow remain strong."
None of the others achieved the necessary NPV of MMA Differential to justify a full evaluation.
Disclosure: Long GE.
(Photo: Steve Woods)
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