Posted by
4Life |
Friday, February 26, 2010
|
commentary
|
Last year I introduced the Stock Ideas list and it has proven to be immensely popular. The list consists of Dividend Aristocrats, US Broad Dividend Achievers and U.S. Dividend Champions. Duplications in the above lists are eliminated and stocks are crossed out when I learn that they have either cut their dividend or fail to raise it. Here are some highlights on this year's changes:
Dividend Aristocrats: Companies in the S&P 500 that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. As the name denotes, these are the best of the best – the blue blood stocks, including names like:
- Clorox Co (CLX) | Yield: 3.30%
- Coca-Cola Co (KO) | Yield: 2.90% | Analysis
- Emerson Electric (EMR)| Yield: 2.80% | Analysis
- Exxon Mobil (XOM)| Yield: 2.60%
- Johnson & Johnson (JNJ)| Yield: 3.10% | Analysis
- McDonald’s Corp (MCD)| Yield: 3.40% | Analysis
- Procter & Gamble (PG)| Yield: 2.80% | Analysis
- Wal-Mart Stores (WMT) | Yield: 2.00% | Analysis
US Broad Dividend Achievers: Is comprised of companies incorporated in the United States or its territories, trade on the NYSE, NASDAQ or AMEX, and have increased their annual regular dividend payments for the last ten or more consecutive years. Notable names on this list include:
- Chevron Corporation (CVX) | Yield: 3.70%
- Donaldson Company (DCI) | Yield: 1.10%
- McCormick & Co. (MKC) | Yield: 2.80%
- Nucor Corp. (NUE) | Yield: 3.20% | Analysis
- Raven Industries, Inc. (RAVN) | Yield: 1.90% | Analysis
The U.S. Dividend Champions: Is maintained by Dave Fish of MoneyPaper. The list is updated monthly and located at the The Drip Investing Resource Center. Like the Dividend Aristocrats above the Dividend Champions list looks for companies that have increased their dividend for at least 25 consecutive years. However, since S&P 500 membership is not a requirement, the list is larger than the Dividend Aristocrats list and also includes small-cap companies.
- Bowl America (BWL.A) | Yield: 4.50%
- Conn. Water Service (CTWS) | Yield: 4.00%
- Weyco Group Inc. (WEYS) | Yield: 2.70%
Needless to say, last year saw many companies fall off the list. Overall the number of constituents fell to 218 stocks in 2010 from 319 in 2009. What made last year so unusual were the numbers of big-name companies, some that had paid increasing dividends for decades, including:
- American International Group, Inc. (AIG)
- Bank of America Corporation (BAC)
- General Electric Co. (GE)
- The Home Depot, Inc. (HD)
- Johnson Controls Inc. (JCI)
- Pfizer Inc. (PFE)
- US Bancorp (USB)
The news wasn't all bad. Partially offsetting the 133 companies that fell off the list were 32 new companies joining Dividend Stock Ideas List. For the most part, these aren't household names, not yet at least, but here are some names we will likely be seeing in the future:
- Arrow Financial Corporation (AROW) | Yield: 3.90%
- Energy Transfer Partners L.P. (ETP) | Yield: 7.80%
- Federated Investors, Inc. (FII) | Yield: 3.70%
- Getty Realty Corp. (GTY) | Yield: 8.50%
- Hudson City Bancorp, Inc. (HCBK) | Yield: 4.60%
- Investors Real Estate Trust (IRET) | Yield: 7.80%
- NSTAR (NST) | Yield: 4.60%
- Northeast Utilities (NU) | Yield: 3.80%
- Plains All American Pipeline LP (PAA) | Yield: 6.80%
- Suburban Propane Partners LP (SPH) | Yield: 7.30%
You can see the entire Dividend Stock Idea List here. Remember, not every stock listed here is a great dividend investment, but virtually all great dividend investments are on this list.
Full Disclosure: Long CLX, KO, EMR, JNJ, MCD, PG, WMT, CVX, NUE. See a list of all my income holdings here.
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Friday, February 19, 2010
|
commentary
|
I am a firm believer that asset allocation plays a significant part in a portfolio's long-term results. Recently, I received a question asking if you could have a diversified portfolio of dividend stocks. It is an interesting question that deserves further examination.
As for my portfolio, I consider asset allocation only when looking at my holdings in total. It would be much too difficult to maintain a good allocation within individual portfolios (income, growth, 401(k), Roth IRA, etc.), while trying to maintain my overall allocation. However, an investor could build a degree of allocation into a portfolio of dividend income securities. Consider the following:
Business Services Sector
- Automatic Data Processing Inc. (ADP)
Yield: 3.33% | Style: Large Growth | Analysis
- C H Robinson Worldwide Inc. (CHRW)
Yield: 1.86% | Style: Large Growth
- Expeditors International of Washington Inc. (EXPD)
Yield: 1.16% | Style: Mid Growth
Consumer Goods Sector
- Clorox Company (CLX)
Yield: 3.23% | Style: Mid Core
- Coca-Cola Company (KO)
Yield: 3.04% | Style: Large Growth | Analysis
- Procter & Gamble Company (PG)
Yield: 2.85% | Style: Large Core | Analysis
Consumer Services Sector
- Genuine Parts Company (GPC)
Yield: 4.19% | Style: Mid Value | Analysis
- Sysco Corporation (SYY)
Yield: 3.56% | Style: Large Core | Analysis
- McDonald's Corporation (MCD)
Yield: 3.22% | Style: Large Core | Analysis
Energy Sector
- BP Plc ADR (BP)
Yield: 6.15% | Style: Large Value
- Chevron Corporation (CVX)
Yield: 3.75% | Style: Large Value
- ExxonMobil Corporation (XOM)
Yield: 2.56% | Style: Large Value
Financial Services Sector
- Harleysville Group Inc. (HGIC)
Yield: 3.90% | Style: Small Value | Analysis
- Chubb Corporation (CB)
Yield: 2.85% | Style: Large Value | Analysis
- Aflac Inc. (AFL)
Yield: 2.38% | Style: Large Core | Analysis
Hardware Sector
- Diebold Incorporated (DBD)
Yield: 3.67% | Style: Small Value
- Linear Technology (LLTC)
Yield: 3.23% | Style: Mid Core
- Raven Industries Inc. (RAVN)
Yield: 1.90% | Style: Small Growth | Analysis
Health Care Sector
- Meridian Bioscience Inc. (VIVO)
Yield: 3.27% | Style: Small Growth
- Johnson & Johnson (JNJ)
Yield: 3.08% | Style: Large Core | Analysis
- Cardinal Health Inc. (CAH)
Yield: 2.10% | Style: Large Core | Analysis
Industrial Materials Sector
- Nucor Corp. (NUE)
Yield: 3.40% | Style: Large Core | Analysis
- Emerson Electric Co. (EMR)
Yield: 2.90% | Style: Large Core | Analysis
- 3M Company (MMM)
Yield: 2.58% | Style: Large Core
Media Sector
- McGraw-Hill Companies Inc. (MHP)
Yield: 2.63% | Style: Large Core
Pharmaceuticals Sector
- Eli Lilly & Company (LLY)
Yield: 5.77% | Style: Large Value
- Abbott Laboratories (ABT)
Yield: 2.97% | Style: Large Growth | Analysis
Real Estate Sector
- Essex Property Trust (ESS)
Yield: 5.14% | Style: Mid Core
- Corporate Office Properties Trust Inc. (OFC)
Yield: 4.29% | Style: Mid Core
- Federal Realty Investment Trust (FRT)
Yield: 4.06% | Style: Mid Core
Telecommunications Sector
- CenturyLink Inc. (CTL)
Yield: 8.10% | Style: Large Value
- AT&T Inc. (T)
Yield: 6.54% | Style: Large Value | Analysis
Utilities Sector
- Integrys Energy Group Inc. (TEG)
Yield: 6.61% | Style: Mid Value
- Consolidated Edison Company (ED)
Yield: 5.59% | Style: Large Value
- MGE Energy Inc. (MGEE)
Yield: 4.45% | Style: Small Core
Bonds
- Vanguard Short-Term Bond ETF (BSV)
Yield: 2.74% | Style: Short-Term Bond
- Vanguard Intermediate-Term Bond ETF (BIV)
Yield: 4.32% | Style: Intermediate-Term Bond
- Vanguard Long-Term Bond ETF (BLV)
Yield: 5.16% | Style: Long-Term Bond
Needless to say, the above will not provide a perfect allocation, but it goes a long way to provide diversity in a portfolio focused only on income securities. In my personal portfolio, I buy the best available dividend securities and use my other investments to balance my asset allocation.
Full Disclosure: Long ABT, ADP, AFL, BIV, BLV, BP, CLX, CTL, CVX, ED, EMR, GPC, HGIC, JNJ, KO, LLY, MCD, MMM, NUE, PG, SYY, T, TEG. See a list of all my income holdings here.
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Friday, January 29, 2010
|
commentary
|
Over the last couple of years we have seen companies fail to raise their dividend, cut their dividend and some even decided to stop paying their dividend. In some cases their financials did not warrant the change. One way to weed these out is to look for companies with a dividend culture. Below are 10 companies that have paid a dividend for over 100 years and have increased their dividend for at least 20 years. They are presented here in descending rank of how long they have paid a dividend:
#10 Chubb Corp. (CB) One of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.
Paid since: 1902 | Consecutive increases: 45 | Yield: 2.92%
#9 PPG (PPG) is a leading manufacturer of coatings and resins, flat and fiber glass, and industrial and specialty chemicals.
Paid since: 1899 | Consecutive increases: 36 | Yield: 3.55%
#8 Colgate-Palmolive Company (CL) is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products.
Paid since: 1895 | Consecutive increases: 45 | Yield: 2.13%
#7 The Coca-Cola Company (KO) is the world's largest soft drink company. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide.
Paid since: 1893 | Consecutive increases: 47 | Yield: 3.02% | [Analysis]
#6 The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
Paid since: 1891 | Consecutive increases: 53 | Yield: 2.92% | [Analysis]
#5 UGI Corp. (UGI) operates propane distribution, gas and electric utility, energy marketing and related businesses through subsidiaries.
Paid since: 1885 | Consecutive increases: 23 | Yield: 3.20%
#4 Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States serving parts of New York, New Jersey and Pennsylvania.
Paid since: 1885 | Consecutive increases: 36 | Yield: 5.42%
#3 Eli Lilly and Company (LLY) discovers, develops, manufactures and sells prescription drugs that offers a wide range of treatments for neurological disorders, diabetes, cancer, and other conditions. The company also sells animal health products.
Paid since: 1885 | Consecutive increases: 42 | Yield: 5.52% | [Analysis]
#2 Exxon Mobil Corp. (XOM) is engaged in the exploration, production, and sale of crude oil, natural gas, petroleum products and petrochemicals. XOM is the world's largest publicly owned integrated oil company.
Paid since: 1882 | Consecutive increases: 27 | Yield: 2.51%
#1 Stanley Works (SWK) is a worldwide producer of tools, hardware and specialty hardware for home improvement, consumer, industrial and professional use.
Paid since: 1877 | Consecutive increases: 42 | Yield: 2.44%
A strong dividend culture is a great place to start looking, but before buying we must also consider other factors such as: dividend fundamentals, ability to cover their dividend and fair value.
Full Disclosure: Long KO, PG, ED, LLY. See a list of all my income holdings here.
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Friday, December 18, 2009
|
commentary
|
The S&P 500 Dividend Aristocrats is the most prestigious list of dividend stocks. The Dividend Aristocrats index is designed to measure the performance of S&P 500 constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. This index is a member of the S&P Dividend Aristocrats index series.
Dividend Aristocrats constituents exhibit the following characteristics:
- Underlying Indices – S&P 500
- Weighting – Equally weighted; Constituents re-weighted quarterly
- Reconstitution – Reviewed annually in December
Among others, Dividend Aristocrats include these highly recognizable names, with years of consecutive dividend increases shown:
- Clorox Co (CLX) - 32 years
- Coca-Cola Co (KO) - 47 years - [Analysis]
- Exxon (XOM) - 27 years
- Johnson & Johnson (JNJ) - 47 years - [Analysis]
- McDonald’s Corp (MCD) - 33 years - [Analysis]
- Procter & Gamble (PG) - 53 years - [Analysis]
- Wal-Mart Stores (WMT) -35 years - [Analysis]
Members may be deleted during the December rebalance if calendar-year dividends did not increase from the previous year, or intra-year if the stock is removed from the underlying S&P 500.
On December 4th, S&P announced changes to the Dividend Aristocrats Index. Standard & Poor’s will perform the annual reconstitution of the S&P 500 Dividend Aristocrats Index after the close of trading on Friday, December 18, 2009.
The following stocks will be added to the Dividend Aristocrats:
- Brown-Forman Corporation (BF.B)
- Cintas Corp. (CTAS)
The following stocks will be dropped from the Dividend Aristocrats:
- Avery Dennison Corporation (AVY)
- BB&T Corp. (BBT)
- Gannett Co., Inc. (GCI)
- General Electric Co. (GE)
- Johnson Controls Inc. (JCI)
- Legg Mason Inc. (LM)
- M&T Bank Corp. (MTB)
- Pfizer Inc. (PFE)
- State Street Corp. (STT)
- US Bancorp (USB)
As the number of drops vs. adds indicates, the last two years were difficult for dividend stocks, but that is not necessarily a bad thing. During good times it is easy for companies to increase dividends, and many companies were added to the index. It is during times of adversity that we learn who the real aristocrats are.
Full Disclosure: Long CLX, KO, JNJ, MCD, PG, WMT. See a list of all my income holdings here.
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Sunday, October 18, 2009
|
commentary
|
I am a firm believer in keeping things simple. However, you can simplify things to the point they no longer have value. In my opinion, a lot of the commonly used financial metrics can be very misleading unless you understand what is behind them. I would put EBIT, EBITDA and Dividend Payout in this category. As an investor in dividend stocks, I see Dividend Payout used a lot, so let's take a closer look at it.
Dividend payout is expressed as a percentage and is calculated by dividing annual dividend per share by annual earnings per share (EPS). This tells the investor what percentage of earning the company is paying out as a dividend. At first blush this may seem to make a lot of sense, but it suffers from the following potential problems:
I. Earnings Does Not Equal Cash
As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what's behind the numbers. Accounting pronouncements such as SFAS No. 143 "Accounting for Asset Retirement Obligations" (ARO) requires a company to recognize expenses today for cash payments that may not occur for decades or even centuries. Applying "fair value" principles allowed under GAAP financial institutions (and others) can mark to market debt on their books and create non-cash income or expense, depending on the direction of interest rates. Many point to mark to market accounting as one of the major contributors to the 2008 financial melt-down.
II. Quality of Earnings
Would you rather the company you are invested in to increase its earnings by 1.) increasing sales and holding cost down or 2.) sell a fully depreciated plant. Obviously, you would rather have the former since it has the possibility of being duplicated over and over. You can only sell a specific asset once. In addition to cash and non-cash earnings, a statement of earnings also contains operating and non-operating earnings.
A Better Dividend Payout Calculation
A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. As you can see from the above discussion, a payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business.
What the investor is really wanting to know is what percentage of cash is the company paying as a percentage of cash generated from running the business. The irony here is that operating cash is readily available on the Statement Of Cash Flows in the Operating section. This section focuses on the cash generated by running the business. It excludes cash generated by selling pieces of the business - these are shown in the investing section. It also excludes cash generated from selling stock or issuing debt - these are shown in the financing section.
In calculating a payout ratio, I prefer Free Cash Flow over Operating Cash Flow. Free Cash Flow is simply Operating Cash Flow less normal capital expenditures (normally the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out.
The formula for Free Cash Flow Payout is simply Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there. So how do the two ratios compare?
Needless to say, the variances are all over the place. In many companies I looked at the traditional dividend payout ratio was within 10 percentage points higher than a free cash flow payout. This means the GAAP earnings was lower than the calculated Free Cash Flow. Here are some example of this situation:- Chubb Corp (CB) - Traditional: 28% - FCF Payout: 21% - Analysis
- Clorox Company (CLX) - Traditional: 50% - FCF Payout: 50%
- Emerson Electric Co. (EMR) - Traditional: 53% - FCF Payout: 45% - Analysis
- Family Dollar Stores Inc. (FDO) - Traditional: 25% - FCF Payout: 22%
- Hormel Foods Corp. (HRL) - Traditional: 34% - FCF Payout: 33%
- International Business Machines (IBM) - Traditional: 23% - FCF Payout: 18%
- 3M Co. (MMM) - Traditional: 50% - FCF Payout: 45% - Analysis
- Microsoft Corp. (MSFT) - Traditional: 32% - FCF Payout: 29%
- SYSCO Corporation (SYY) - Traditional: 52% - FCF Payout: 48% - Analysis
- United Technologies Corp. (UTX) - Traditional: 35% - FCF Payout: 30% - Analysis
Sometime the gap is much larger. This could have resulted from significant non-cash charges on the income statement. Companies with large gaps include:
- Aflac Incorporated (AFL) - Traditional: 44% - FCF Payout: 10% - Analysis
- CenturyLink Inc. (CTL) - Traditional: 87% - FCF Payout: 46%
- Diebold Inc (DBD) - Traditional: 74% - FCF Payout: 30%
- Illinois ToolWorks Inc. (ITW) - Traditional: 76% - FCF Payout: 31% - Analysis
- Leggett & Platt Inc. (LEG) - Traditional: 262% - FCF Payout: 34% - Analysis
- Nucor Corporation (NUE) - Traditional: 88% - FCF Payout: 29% - Analysis
- Pitney Bowes Inc. (PBI) - Traditional: 73% - FCF Payout: 38%
- PPG Inds Inc (PPG) - Traditional: 158% - FCF Payout: 48%
- RLI Corp (RLI) - Traditional: 158% - FCF Payout: 48% - Analysis
- RPM International Inc (RPM) - Traditional: 84% - FCF Payout: 49% - Analysis
- AT&T Inc. (T) - Traditional: 81% - FCF Payout: 49%
Sometimes the gap is not only large, but goes the other way. This is potentially the most dangerous since focusing on the traditional dividend payout may lead you to believe the dividend is covered better than it actually is. Examples of this situation would include:
- Air Products and Chemicals Inc. (APD) - Traditional: 56% - FCF Payout: 172%
- Franklin Resources Inc. (BEN) - Traditional: 23% - FCF Payout: 48%
- BP Plc (BP) - Traditional: 50% - FCF Payout: 114% - Analysis
- Lowe's Companies, Inc. (LOW) - Traditional: 27% - FCF Payout: 57% - Analysis
- Exxon Mobil Corp (XOM) - Traditional: 27% - FCF Payout: 54%
Although Free Cash Flow Payout is a better payout ratio than the traditional dividend ratio, the investor should look at both and understand the differences. Taking an expense for impairing goodwill is much different than recognizing an expense for losing a lawsuit. The former will not directly involve cash out the door, but the latter will if the company loses on appeal.
Full Disclosure: Long CLX, EMR, MMM, SYY, UTX, AFL, CTL, ITW, NUE, BP. See a list of all my income holdings here.
(Photo Credit)
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Thursday, October 01, 2009
|
analysis
|
A good system continues to improve itself. 
I maintain an extensive database with a minimum of 10 years of information on each of the 110+ stocks that I track. This data is gathered from various sources deemed reliable. Most data is generic and can be pulled from various sites. That is except some S&P risk and quality information (RQ).
Gauging the relative risk of one stock compared to another is important when deciding which stock to buy or how much to weight a stock within your portfolio. Recently, during a scheduled site maintenance event on my broker's site, S&P reports were temporarily unavailable. This made me question if I really wanted to rely on propriety financial information that was not readily available from multiple sources. Ultimately, I decided it was not a good thing. To remedy this situation, the RQ portion of my risk calculation was modified as such:
For the Risk portion, I opted to focus on consecutive dividend increases. The logic here is the longer a company raises its divided, the more committed it is to dividend increases and is less likely to stop unless dire financial circumstances dictate it. Instead of relying on S&P's Qualitative Risk Assessment (Low, Medium and High) to assign a risk rating, I will now use the following to assign the A, B or C risk rating:
- A Risk Rating is assigned to companies that have increased their dividends for greater than 25 years.
- B Risk Rating is assigned to companies that have increased their dividends for 15-25 years.
- C Risk Rating is assigned to companies that have increased their dividends for less than 15 years.
As for the Quality portion, I decided on use the company's financial quality by focusing on Free Cash Flow payout and Debt to Total Capital. Instead of using S&P's Quality Ranking (A+, A, A, B+, B, B-, C, D and Not Ranked) to assign a quality rating, I will now use the following to assign the 1, 2 or 3 quality rating:
- 1 Quality Rating is assigned to companies if their Free Cash Flow Payout % is less than 60% and if their Debt to Total Capital is less than 45%.
- 2 Quality Rating is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is less than 100%.
- 3 Quality Rating is assigned to companies if the sum of their Free Cash Flow Payout % plus their Debt to Total Capital is greater than 100%.
Making this change to the 110+ companies I track. Here is what I found:
- Overall the new method produces lower risk scores.
- The overall risk rating on my income portfolio went from 1.78 (medium) to 1.68 (medium).
- High risk stocks went from 7 stocks to 4 stocks.
- Medium risk stocks went from 77 stocks to 54 stocks.
- Low risk stocks went from 27 stocks to 53 stocks.
Excellent, low risk stocks evaluate the same under both systems. For example, the following three companies had a perfect 1.00 score under both systems:While 60 companies improved their position, 19 companies ratings slipped under the new system. Below are some of the more notable changes:- Pepsico Inc. (PEP) went from a 1.00 (low) to 1.25 (low) - Analysis
- United Technologies Corp. (UTX) went from a 1.25 (low) to 1.50 (low) - Analysis
- Exxon Mobil Corp. (XOM) went from 1.50 (low) to 1.75 (medium)
- Colgate Palmolive Co. (CL) went from 1.50 (low) to 1.75 (medium)
- International Business Machines (IBM) went from 1.75 (medium) to 2.00 (medium)
The RQ portion of the risk rating is 50% of the calculation. The remaining two pieces are Current Price vs. Calculated Price and Dividend Yield. These are unchanged and their part of the risk rating calculation is discussed in Refining Risk Measurement Of Dividend Stocks.
Full Disclosure: Long JNJ, PEP, PG, UTX, WMT. See a list of all my income holdings here.
(Photo: sean carpenter)
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Thursday, April 30, 2009
|
commentary
|
As the government tries to thaw the credit freeze, the next potential catastrophe is starting to heat up. I am beginning to see more and more written on the pending problem of underfunded pension plans. Unfortunately, this problem could have many faces and take a significant amount of time to sort out.
First, a short primer for those fortunate enough not to be involved in pension accounting. There are two basic types of company sponsored retirement plans - defined contributions (DC) and defined benefits (DB) plans. As the names imply, a DC plan defines what the company will contribute to the plan on behalf of the employee. An example of a DC plan is a 401(k) where the company will match the first 5% contributed by the employee. There is no guarantee of what the employee will get out of the plan. The DB plan in contrast defines the benefit the employee will receive upon retirement, such as a salary of 80% of his or her highest earnings year, weighted by years of service. In the DC plan the employee assumes the risk of under-performance, while in the DB plan the employer assumes the risk.
For DB plans, actuaries will look at the number of employees, their ages, their income and other factors to determine what the company's future liability will be. The actuaries will then look at the invested assets, estimate a future return and determine if the assets will be sufficient to cover the future liability. When the market is spiraling up, assets are usually greater than the liabilities and the company does not have to put any money in the plan, thus it does not have recognize an expense. But when the market is down, as it has been lately, the liability is greater than the assets on hand. This is referred to as underfunded, and over time the company has to come up with cash and recognize an expense.
One of the biggest pension plans in the world is General Motors (GM). A recent New York Times article looked at GM, which hasn't been doing so well lately, and the effect of its underfunded pension plan. As of last November the estimated shortfall in GM pension plan was $20 billion. So what happens if it fails?
If GM's pension plan collapses, the Pension Benefit Guaranty Corporation (PBGC) will pick up part of the tab. However, most of that shortfall would be made up by workers in the form of smaller benefits — not by GM or the PBGC. Unfortunately, this will likely set other pension funds into play. Since GM's plan is so large, its failure will result in the PBGC losing a big source of the premium revenue. But more importantly, other automakers such as Ford, Toyota and Honda will be looking to rid themselves of their DB plans to cut costs and stay stay competitive.
The Pension Protection Act (PPA) and IRS regulations impose restrictions on accelerated payments (e.g. lump sum distributions) when the funding level falls below 80%. This is not just a problem with companies in struggling industries. Tyler Durden in a March 7, 2009 article cites data from a Merrill Lynch Pension Database showing several well-known companies with a projected (data as of 10/22/08) funded status below 80%. Here is a sampling of some traditional dividend companies:- Johnson & Johnson (JNJ) Deficit: $3.5 billion Funding Status: 70%
- Exxon (XOM) Deficit: $3.4 billion Funding Status: 69%
- Chevron (CVX) Deficit: $2.6 billion Funding Status: 69%
- General Dynamics (GD) Deficit: $2.3 billion Funding Status: 68%
- PepsiCo (PEP) Deficit: $1.8 billion Funding Status: 72%
- Kimberly-Clark (KMB) Deficit: $1.4 billion Funding Status: 72%
- Kraft Foods (KFT) Deficit: $1.1 billion Funding Status: 83%
Generations before us relied on defined benefit pension plans to ensure their lifestyle in retirement. Our generation may not have the same luxury. There is one thing this economic and financial downturn has taught us - there are no sure things in life. We must take responsibility for our financial future and mange it.
Full Disclosure: Long JNJ, CVX, PEP, KMB (my income holdings)
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Friday, January 09, 2009
|
commentary
|
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)
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Tuesday, December 23, 2008
|
commentary
|
I always enjoy this time of year. The Christmas music, decorations, family gatherings, holiday plays and stock picks. Stock picks? Yes, 'tis the season for stock predictions! Virtually every financial writer will pen an article selecting his or her top picks for the upcoming year. I enjoy reading them and the logic behind them. As a long-term buy and hold investor, generally most aren't useful for me; nevertheless, I enjoy reading them. Here are some excerpts and picks from several of the experts:
In Jubak's Journal, Jim Jubak believes the markets will recover before the larger economy does. He provides 5 picks for the beginning of the year and 5 for later, with lots of caveats. His 5 best stocks for the first half of 2009:
- Deere (DE) - a farm machine producer that tracks the price of agricultural commodities.
- Enbridge (ENB) - a natural-gas and oil pipeline company that has a 3.8% yield.
- ExxonMobil (XOM) - the world's best integrated oil company for the current environment. [reviewed July 7, 2008]
- Flowserve (FLS) - It makes pumps and valves for moving everything from water to oil and has a yield of 2%.
- Rayonier (RYN) - a producer of wood products and an owner of timberland. Yield: 7.2%.
His 5 best stocks for the second half of 2009:
- Goldcorp (GG) - the world's low-cost producer of gold.
- Google (GOOG) - the dominant Internet search company just gets more dominant.
- HSBC (HBC) - the best banking franchise left standing in Asia.
- Petrobras (PBR) - The Brazilian national oil company has dozens of new fields under development. It was added to Jubak's Picks on Aug. 26, 2008.
- Thompson Creek Metals (TC) - the second-largest private producer of molybdenum in the world.
In their normal fun and frivolous way the Motley Fool picks The Best Stocks for the Year Ahead. Here are six of them:
- Yum! Brands (YUM) - a quick service restaurant with over 35,000 units in more than 100 countries and territories.
- PepsiCo (PEP) - a global snack and beverage company. [reviewed May 26, 2008]
- Coca-Cola (KO) - a manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups. [reviewed October 22, 2008]
- Philip Morris International (PM) - an international tobacco company.
- Kinder Morgan Energy Partners (KMP) - a pipeline transportation ad energy storage company in North America.
- Enterprise Products Partners (EPD) - a North American midstream energy company.
Fortune magazine in their The best stocks for 2009 article points out the silver lining of the market meltdown: Equities are cheaper than they've been in years. They predict that these ten prospects will flourish during 2009:
- Altria (MO) - is the holding company of Philip Morris USA Inc. (PM USA) and John Middleton, Inc., which are engaged in the manufacture and sale of cigarettes and other tobacco products.
- Annaly (NLY) - a real estate investment trust (REIT) that owns and manages a portfolio of mortgage-backed securities.
- Dell (DELL) - a technology company, which offers a range of product categories, including desktop personal computer.
- Devon Energy (DVN) - an independent energy company engaged primarily in oil and gas exploration, development and production.
- Diamond Offshore (DO) - provides contract drilling services to the energy industry worldwide.
- Fluor (FLR) - a holding company that, through its subsidiaries, provides engineering, procurement and construction management.
- Johnson & Johnson (JNJ) - is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. [reviewed October 29, 2008]
- Medco Health Solutions (MHS) - a pharmacy benefit manager.
- Pfizer (PFE) - a research-based, global pharmaceutical company. [reviewed March 17, 2008]
- Potash Corp. (POT) - an integrated fertilizer and related industrial and feed products company.
Finally, Selena Maranjian at the Motley Fool picks a single best stock in the article Best Stock for 2009: Johnson & Johnson. The article points out several important facts about JNJ: - 75 consecutive years of sales increases.
- 24 consecutive years of adjusted earnings increases.
- 46 consecutive years of dividend increases.
In addition, the stock had a 10-year 140% total return for investors, compared to a 51% total return for the S&P 500.
We are all looking for the perfect stock. Over the years I have evaluated several of the above stocks as potential dividend investments, most did not pan out. Dividend investors are looking for stocks that will perform well over the long run, not just 2009. Of the stocks mentioned above, I am actively buying JNJ, KO and PEP.
Full Disclosure: Long JNJ, KO, PEP and PFE
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Sunday, October 12, 2008
|
commentary
|
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:
- Be afraid -- be very afraid - Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy. In today's environment a case can be made not to buy virtually any company. Consider General Electric (GE), a company that increased its dividend for 32 consecutive years, but chose not to increase it in 2008.
- Avoid black boxes - Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all. Buffett has invested in Goldman Sachs (GS) . However, if you don't understand what GS does, you are better off looking elsewhere for an investment.
- Invest only money that you don't need soon - Assume that the near-term market will remain volatile -- even after it smoothes out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
- Ease in - And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls. I have had the "pleasure" of purchasing BB&T (BBT) as it declined over the last year. My first block was purchased at $41.27 (July/2007), then $34.07 (November 2007) and finally $30.56 (August/2008). BBT can be purchased now at around $28.
- Buy at a discount - Make sure you're buying shares that are actually cheap. Many companies are trading at prices far lower than they were a year ago -- but that doesn't mean they're cheap. One year ago Exxon (XOM) was trading at over $90. Friday, it closed at $62.36. My buy below price is $40.93. From my perspective, XOM is still very expensive.
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
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Tuesday, September 09, 2008
|
commentary
|
There have always been companies that stand head-and-shoulders above their peers and the competition. They are loved by their shareholders, hated by the competition and known by all. Who are these companies and how can I find the next great company? All the great companies have something in common. Let's look at a few of them:
In the July/August 2008 Conference Board's article Doing God's Work, it described how a bunch of ex-academics and technicians were working on the Macintosh project that had little chance of success until Steve Jobs took over. Jobs convinced them that they were creating something revolutionary. For three years the team worked like slaves with Jobs screaming at them. He kept morale up by telling them they had a higher calling, that they were doing God's work. Andy Hertzfeld, one of the lead programmers, said "The goal was never to beat the competition, or to make a lot of money; it was to do the greatest thing possible, or even a little greater." Ultimately, the Macintosh helped propel Apple Computer (AAPL) into the forefront of personal computing.
From childhood William H. (Bill) Gates was hard working, ambitious, intelligent and competitive. Gates used these characteristics to build Microsoft (MSFT) into an international behemoth. The company is oft the target of criticism and accusations of anti-competitive business practices. Under Gates leadership the company took a me against the world attitude and prevailed.
Lest you think this is a recent phenomenon, in 1870 John D. Rockefeller incorporated Standard Oil in Ohio with capital of $1 million. In response to laws limiting the scale of corporations, Rockefeller developed innovative ways of organizing, to effectively manage their fast growing enterprise. In 1911 as a result of public outcry, the Supreme Court of the United States ruled that Standard Oil must be dissolved and split into 34 companies. Some of the resulting companies names are very familiar: Exxon (XOM), Mobil (now part of Exxon), Chevron (CVX), Amoco (now part of BP), ARCO (now part of Sunco), Conoco (COP), Marathon Oil Company (MRO), Pennzoil (now part of Shell).
Thomas Alva Edison, "The Wizard of Menlo Park", was an incredible visionary and inventor. He was also an extremely driven individual. There are stories of him working virtually non-stop for weeks on end. Edison would keep a cot in his lab for taking short naps during the night. Eventually, Edison founded 14 companies, including General Electric (GE).
What will be the next great company? Obviously, I don't have a definitive answer (and if I did I probably would be too busy mortgaging the house to have time to share it). One thing I can say about the next great company, it will be run by a passionate leader that is a visionary who demands excellence from his employees and more so from himself. This leader and his company is out there somewhere, we just have to find him (or her).
Disclosure: Long in BP and GE
Related Articles:
Read More...
Summary only...
Posted by
4Life |
Wednesday, August 20, 2008
|
analysis
|
Linked here is a PDF copy of my detailed analysis of Chevron Corporation (CVX) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Chevron Corporation (formerly ChevronTexaco) is a global integrated oil company that has interests in exploration, production, refining and marketing, and petrochemicals.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
CVX is trading at a discount to 2.), 3.) and 4.) above. If I exclude the high and low valuation and average the remaining two, CVX is trading at a slight discount. CVX earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
CVX earned one Star in this section for 3.) above. CVX has paid a cash dividend to shareholders every year since 1912 and has increased its dividend payments for 21 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
CVX earned no Stars in this section. The NPV MMA Diff. of the $1,082 is below the $7,500 minimum I look for in a stock that has increased dividends as long as CVX has. If CVX grows its dividend at 7.5% per year, it will take 11 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%. The 11 years is more than the 10 years maximum I like to see.
Other: CVX is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The oil and gas industry in which CVX operates is both cyclical and capital-intensive. CVX's diversified and strong business profile help to partially mitigate this environment. The 2001 Texaco merger has helped improve CVX's returns and earnings stability. CVX's three-year (2004-2006) reserve replacement rate was good but below the peer average while associated costs were above the peer average..
Conclusion: CVX earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of two Stars. This quantitatively ranks CVX as a 2 Star-Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $57.57 before CVX's NPV MMA Diff. increases to the $7,500 NPV MMA Diff. I like to see. At that price CVX would yield 4.39%. From a value standpoint, CVX maybe worth a second look. It closed on 8/15/2008 below its Graham Number.
As a potential dividend investment, CVX shows much more promise than Exxon (XOM). While XOM is an Aristocrat and thus has a lower NPV MMA Diff. target, XOM's calculated value is negative. CVX will need to increase dividends for 4 more years before it is eligible to be become an Aristocrat.
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 had no position in CVX (0.0% of my Income Portfolio).
What are your thoughts on CVX?
Recent Stock Analyses:
Read More...
Summary only...
Posted by
4Life |
Wednesday, July 23, 2008
|
analysis
|
Linked here is a PDF copy of my detailed analysis of PPG Industries, Inc. (PPG) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: PPG is a leading manufacturer of coatings and resins, flat and fiber glass, and industrial and specialty chemicals.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
PPG is trading at a discount to 3.) and 4.) above. If I exclude the high and low valuation and average the remaining two, PPG is trading at a 8.7% discount. PPG earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
PPG earned one Star in this section for 3.) above. PPG has paid a cash dividend to shareholders every year since 1899 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:
- NPV MMA Diff.
- Years to >MMA.
PPG 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 PPG stock with a dividend yield of 3.41% and growing at 2.0% annually, you would end up with $1,424 less in PPG dividend earnings per $1,000 invested.
Other: PPG is both an S&P 500 Dividend Aristocrat and a member of The Broad Dividend Achievers™ Index. The company has a diversified business mix and large market shares in key products. However, commodity chemicals business and auto supply business are highly cyclical in nature. The SigmaKalon purchase expanded PPG's coatings business, while the planned sale of the auto glass businesses would reduce its exposure to the domestic auto market.
Conclusion: PPG earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of one Star. This quantitatively rates PPG as a 1 Star-Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $39.62, or its dividend growth rate would have to increase to 7.8%, before PPG obtained the $3,000 NPV MMA Diff. I like to see. I don't see either happening in the near-term, so PPG won't be getting an invitation to join my portfolio.
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 PPG (0.0% of my Income Portfolio).
What are your thoughts on PPG?
Recent Stock Analyses:
Read More...
Summary only...
