Warren Buffett’s iconic letter to shareholders has been published on Berkshire Hathaway's website. The legendary chairman of Berkshire Hathaway has been writing this annual letter for more than 32 years. In it he summarizes the performance of the various businesses that make up the portfolio of his conglomerate. The Oracle of Omaha often gives insight on his decision making process, when making investments.
Of particular importance to me were his words on his reduction of stakes in Johnson and Johnson (JNJ), Procter and Gamble (PG) and Conoco Phillips (COP):
"On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits."
I speculated before that one reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%-15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time.
Buffett also spend several pages discussing derivatives and shortcomings of the Black Scholes option-pricing model.
Full Disclosure: Long JNJ, PG
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The bear market has brought many stocks to multi-year lows, pushing their current dividend yields to levels not seen for years. Some dividends got cut in the process, triggering further selloffs in stock prices, which somehow miraculously lead to almost the same current dividend yields. Multiplying the most recent quarterly or monthly dividend payments by 4 or 12 and then dividing the result by the amount of the stock price calculates current dividend yield.
For example if you purchased Bank of America (BAC) stock in September 2008 at $25.60, while the dividend was $0.64/quarter, the current dividend yield would have been 10%. After BAC cut its dividends by 50% to $0.32/quarter, if the stock was trading at $12.80 then the current dividend yield would have been 10% as well. Most investors who chase high yielding stocks blindly would tell you that in both situations BAC was a high yielding stock to consider. There is one difference however – the person that purchased BAC for $25.60 is worse off after the dividend cut, in comparison to the investor who purchased BAC stock at $12.80, since their dividend income is decreased in half.
Astute readers would realize that current yield does not matter much to a long-term dividend investor. What matters is that dividend payments get increased over time.
If an investor purchased stock in Bank of America in 2002 at $30/share, their current dividend yield would have been 4%. As Bank of America kept increasing its dividend payments from $0.30 to $0.64, the current yield on Bank of America was almost unchanged around 4%.
The yield on cost however, which is calculated by dividing the most recent annual dividend payment to the price that you paid for the shares that you own, has been increasing despite the current yield being unchanged.
An investor who purchased 100 shares at $30 in 2002 received $30 every quarter. The current yield and the yield on cost in this scenario were 4%. The amount received increased as the dividend payment was raised to $0.64/quarter in 2007, bringing the yield on cost to 8%. The current yield was almost 5% at the time when the dividend was increased and the stock was trading at $50.
When Bank of America cut its dividend payment to $0.32/share current yields were still in the vicinity of 10%. This affected only new investors however, since they were the ones who might generate a 10% annual return on their investment solely from the dividends received, provided that the payment was not cut again. The investor who purchased BAC stock back in 2002 saw their income fall by half, bringing their yield on cost to 4.3%.
In hindsight, selling after the first dividend cut and allocating the money into another dividend growth stock, could have been a good thing for the investor who purchased BAC stock in 2002. As we later learned, Bank of America cut its dividend payment per share once again to just one penny per quarter.
There are many dividend success stories however, where investor’s yield on cost is in the double or even triple digits. An investment in 3M (MMM) at the end of 1988 at $16 generated a current dividend yield as well as yield on cost of 4%. After 20 years of consistent dividend increases however, the annual dividend payment is increased to $2/share, making for a yield on cost of 12.5%. Check out my analysis of MMM.
Even if you purchased into an S&P 500 index fund in the late 1970’s, you would have seen our yield on cost increase from 5.20% to 26.20% currently.
I hope I have illustrated a point that high current yield is not what dividend growth investors should be looking at when they search for investment opportunities. The thing that matters is finding a solid non-cyclical company with a wide moat, which could increase its earnings over time. Increase in earnings power could lead to increase in dividends over time. As Dave Van Knapp put it in 10x10, the best dividend strategy is to achieve a balance between dividend growth and initial dividend yield.
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Yesterday Gannett slashed its quarterly dividends by 90% to $0.04/share. The company is responding to the recession in US and UK by reducing the payout to shareholders, which will save it close to $325 million/year. The new dividend is a cent and a half lower than its first dividend in 1967 of $0.054/share. The move comes about a month after company executives said they would meet to evaluate the dividend.
The most recent cut ended a streak of 39 consecutive dividend increases for this dividend aristocrat. I initiated a small position in Ganett back in May 2008. The first signs of trouble came in July when the company stopped increasing its dividends. Since it was well covered I just let dividends reinvest. As the market tanked I sold some covered calls, in order to recoup some of my investment back.
With the most recent dividend cut I sold near yesterdays open. I see further deterioration in Gannet’s newspaper business. The company doesn’t seem like a value proposition either, given the large portions of goodwill on its assets side of the balance sheet.
This marks the third dividend cut for the year for a member of the dividend aristocrats. There have been 12 dividend increases so far in 2009 on the other hand.
The newspaper industry has been hit hard by increased online competition and the economic crisis. Traditional media companies have been left with declining sales and profits and have had to cope by reducing workforce and cutting or suspending dividends altogether.
Just a week ago the New Times (NYT) suspended its dividends, after reducing the quarterly payments from $0.23 to $0.06/share in November.
The McClatchy Company (MNI) is another example of a newspaper company in trouble. In September 2008 the quarterly dividend was cut in half to $0.09 in an effort to preserve cash. In January however, the company announced a suspension of its dividend payments.
Before the early 1990’s the newspaper industry was doing very well, earning monopoly like returns. Here’s an excrept from Berkshire Hathaway’s 1991 letter to shareholders, explaining why newspapers were a wide moat business in the past:
"The industry’s staggering returns could be simply explained. For most of the 20th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were theeasiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets.
The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest.
Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven."
The thing that is most important, as a dividend growth investor is that sectors and stocks come and go and not one thing is certain. One has to remain flexible and not concentrate his/her portfolio holdings in just a handful of stocks from similar sectors.
For example in 1989, the number of companies in the dividend aristocrats index was only 26. Only 7 of the original companies still remain in the index right now. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG. Even buy and hold investors should expect some turnover. The percentage of companies that remain in the index after 10 years is about 30%. There have been about 116 companies that have gone through the index for the 15-year period form 1989 to 2004.
In addition to that, one has to constantly look for new additions to their dividend portfolio, which could turn out well for them. Investors should never “get married” to a position. If the position does not perform as well as you expected, it is ok to sell, even if you are a buy and hold investor.
The best investment is always ahead of you, not behind you.
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With speculation that the government will either nationalize Bank of America and Citigroup or increase its stake in the banks, financial stocks have been hit pretty hard as of lately. With both banks trading in the single digits, investor confidence in their survival is pretty low.
Two other notable companies whose future appears uncertain are General Electric and General Motors. The common thing between the two is that they are both also members of Dow Industrials and S&P 500 and both are trading in the single digits.
Before we understand why does it matter that the four companies mentioned above trade in the single digits, it would be beneficial to understand how Dow Jones Industrials average is calculated.
The Dow Jones Industrial index is price-weighted. This gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative size or market capitalisation of the components. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index.
Thus at the current market price of GE, GM, BAC and C, these stocks account for 1.82% of the Dow Jones Index. Thus, if these stocks all went to zero, anyone who owns a Dow Jones Industrials linked ETF or mutual fund won’t care that much. Even if the whole financial system went bankrupt, and all the financial components of Dow Jones Industrials went to zero, the index would lose 4.17% of its value.
In comparison to S&P 500, which is a market cap weighted index, if Bank of America, Citigroup, General Electric and General Motors all went to zero, the effect would not be much different. These stocks account for 2.01% of the weight in the broader US stock market index.
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Yesterday JPMorgan Chase (JPM) cut its quarterly dividend by 87%, from $0.38 to $0.05. Chief Executive Jamie Dimon said the cut was a precaution to ensure that the company has financial flexibility if economic conditions worsen. The move will save the company about $5 billion annually.
Dimon said the dividend cut is not directly related to the Troubled Asset Relief Program, although it helps the company to maintain a strong capital position. JPMorgan, has received $25 billion in TARP money. JPMorgan has been deemed to be in the best financial shape of the other major banks.
The move is also supposed to save funds to repay the TARP money faster. JPMorgan Chase (JPM) also reaffirmed that it would be willing to increase dividends once economic conditions are more favorable.
Investors are now wondering which bank is next to cut its dividends. Some believe that Wells Fargo and US Bank, which received $25 billion and $6.6 billion respectively, are next in line for a dividend cut. With its current yield of over 16% however, most investors are expressing serious doubts about the sustainability of the current dividend payments.
Wells Fargo (WFC) is more likely to cut, as its acquisition of Wachovia would most certainly increase the need of the bank for cash. With a current yield of 12.5%, WFC seems like the lowest yielding financial stock out there. In the current tough credit environment however, I wouldn’t count on the safety of any financial dividend.
US Bank (USB) might be more susceptible for a dividend cut, as its payout ratio is very high currently. Furthermore the bank failed to increase its dividend in December for the first time in over 3 decades. Other companies such as Bank of America (BAC) failed to raise their dividends just months before cutting their payments to shareholders.
Traditionally, bank stocks were one of the best dividend investments for shareholders. It seems that TARP essentially is bad news for dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for long-term investors is to diversify across sectors, no matter how great the dividend yields look.
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In a week that saw major US indexes fall to fresh multi year lows, there is a group of investors who still remain optimistic. No, this is not a scam touting penny stocks that would bring instant riches. It’s also not a post about some computerized technical analysis program that will turn stones into diamonds.
The strategy is called dividend growth investing, and it is the fundamental way of picking shareholder friendly stocks, which reward their owners with an increasing stream of dividend income. Some of the best dividend stocks are included in the Dividend Aristocrats index, which has outperformed the S&P 500 over the past 5, 3 and one years. Despite some setbacks in 2009 like the cuts from Pfizer (PFE) and State Street (STT), the number of solid companies increasing dividends keeps rising.
The Sherwin-Williams Company (SHW), which engages in the development, manufacture, distribution, and sale of paints, coatings, and related products, boosted its dividends for the thirty first consecutive year. The new dividend increase was rather modest, from 0.35 to 0.355/share and much smaller than the ten year average. Given the tough housing market however, I consider this dividend increase at a time when CEO’s are cutting dividends to preserve cash for projects that won’t yield much, a big dedication to long-term shareholders. The stock currently yields 3.10%. Check out my analysis of SHW.
Integrys Energy Group (TEG), which operates as a regulated electric and natural gas utility company in the United States and Canada, increased its quarterly dividends payment to $0.68/share, which marked the fifty first consecutive year of increased payouts. This utility company currently yields 7.00%.
Coca Cola (KO), which engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates and syrups worldwide, raised its quarterly dividend by 8% from $0.38 to $0.41 per common share. The company behind one of the worlds best known consumer brands has rewarded its shareholders with an uninterrupted streak of increased dividends for 47 years. One of Coke’s most prominent shareholders includes Warren Buffett, who owns 200 million shares his favorite soft drinks manufacturer. The stock currently yields 3.50%. Check out my analysis of Coke and Pepsi.
Abbott (ABT), which engages in the development, manufacture, and sale of health care products worldwide, increased the company's quarterly common dividend 11% to $0.40 per share. This marked the company’s 37th year of consecutive dividend increases. The stock currently yields 2.60%. Check out my analysis of ABT.
Albemarle Corporation (ALB) raised its quarterly dividend payments by 4.20% to $0.125/share. The company is a dividend achiever, which has increased its dividends for 14 consecutive years. The stock currently yields 2.40%.
ITT Corporation (ITT) raised its quarterly dividends by 22% to $0.2125/share. The stock currently yields 1.70%.
The Andersons, Inc. (ANDE) raised its quarterly dividends by 3% to 0.0875/share. The stock currently yields 2.40%.
Rogers Communications (RCI) increased the annual dividend rate from $1.00 to $1.16 per share. The stock currently yields 4.70%.
Comcast (CMCSA) raised their dividend 8% to $0.0675 per share quarterly. The stock currently yields 2.10%.
XTO Energy (XTO) increased its quarterly cash dividend by 4.20% to 12.5 cents per share. the stock currently yields 1.605.
Public Service Enterprise Group (PEG) announced a 3.1% increase in its quarterly dividend from $0.3225 to $0.3325 per share. This utility stock currently yields 4.50%.
Tim Hortons Inc.(THI) boosted its quarterly dividend by 11.1% to $0.10. The stock currently yields 1.30%.
Full Disclosure: Long SHW and KO
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- Taking Stock in Coca-Cola (KO): [more]
International Business Machines Corporation (IBM) develops and manufactures information technologies, including computer systems, software, networking systems, storage devices, and microelectronics worldwide. [more]
Berkshire Hathaway (BRK-A, BRK-B) published a glimpse of its stock portfolio holdings as of December 31,2008, on the SEC website. I have highlighted the largest changes in shares owned.
In the last quarter of 2008 Warren Buffett kept adding to his Burlington Northern (BNI) position by purchasing well over 6 million shares for Berkshire’s account. He also added to his positions in Ingersoll- Rand (IR), NRG Energy (NRG), and Eaton (ETN). He initiated positions in Constellation Energy Group (CEG) using his Midamerican subsidiary and in Nalco (NLC).
Buffett was not only buying American however. He was selling as well. Berkshire cut its stake in Johnson & Johnson (JNJ) by half to 28 million shares. Other notable decreases included Procter & Gamble (PG), US Bancorp (USB), Conoco-Phillips (COP) and Carmax (KMX). Berkshire also disposed of all of its Anheuser-Busch stock, which was tendered at $70/share after the merger with InBev. The holdings in other financial stocks such as Wells Fargo (WFC), American Express (AXP), Moody's (MCO) and Bank of America (BAC) were mainly unchanged for the quarter.
The value of Berkshire’s portfolio dropped to $51.87 billion from $69.89 billion at the end of third quarter 2008. Even the Oracle of Omaha is not immune to market corrections, especially now that his asset base is so huge. Berkshire Hathaway shares dropped by 26% in the last quarter of 2008, compared with a 21.5% drop for the broad S&P 500 index. So far this year both S&P 500 and Berkshire Hathaway stock are down between 12.20% and 13% each respectively.
Given the changes in Berkshire Hathaway’s portfolio, I would not recommend acting similarly in your personal investments, based solely on following Buffett’s moves. One reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%- 15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time. His list of fixed income or preferred stock investments range from Goldman Sachs, General Electric, USG, Swiss Re, Harley Davidson and Tiffany’s. [more]
Warren Buffett is on the move again by purchasing $250 million worth of debt from Tiffany’s. Half of the debt will mature in 2017, while the rest will mature in 2019.
Tiffany said the proceeds of the Notes will be used to refinance existing indebtedness and for general corporate purposes. Unlike Berkshire’s investments in General Electric and Goldman Sachs, these notes do not have warrants attached to them.
This is another one of the legendary Wizard of Omaha investments in high profile companies. His list of fixed income or preferred stock investments range from Goldman Sachs, General Electric, USG, Swiss Re and Harley Davidson. In his article "Buying American", Buying American, Buffett expressed his bullishness on the future of US economy and stock market. Once again however, it’s always good to read between the lines, as Buffett’s Berkshire Hathaway doesn’t seem to have purchased any common stock in the above-mentioned names. His holding company has rather gained preferential terms with the companies that received “Berkshire Hathaway Troubled Assets Relief Program”, as his name carries a very good premium. After the closing bell, Berkshire will file its portfolio "snapshot" taken at the end of the quarter, on December 31.
I would not be investing in Tiffany’s based off Buffett’s fixed income play there; the company does appear to have a good presence in the luxury goods market. The current crisis hasn’t missed this jewelry retailer, which warned last month that its same-store sales for the holiday season fell 24 percent as sales slowed in its domestic stores.
It would be interesting to note if TIF would keep its dividend payment. Other similar Berkshire investments such as Harley Davidson cut their dividend payments just days after announcing Buffett’s investment in their fixed income notes. General electric on the other hand has not announced any cuts, although many investors believe that the dividend is on the chopping block.
Full Disclosure: None
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Dividends have historically provided 40% of average annual total return performance to investors. Some researchers have found that it was re-invested dividends that contribute to the majority of total long-term returns for investors. Jeremy Siegel is one of those researchers who has found that the compounding effect of re-investing dividends has accounted for 97% of total returns in the US stock market since 1871. Add in dividend growth as an additional compounding component, and investors could achieve very decent total returns over time. While most investors are running away scared from dividend stocks, fearing that more cuts lie ahead, the true dividend investors keep getting their checks in the mail. They know that by investing in non-cyclical names, there is a smaller chance of dividend cuts. Furthermore, by spreading their bets among as many dividend stocks across all sectors and industries as possible, dividend cuts do not affect their lifestyle that much.
Several companies rewarded their long-term shareholders with news of dividend increases last week.
Robert Half International (RHI) announced that its Board has approved a one-cent increase in its quarterly dividend from $0.11 to $0.12 per share. Robert Half International has consistently increased its dividends since 2004. The stock currently yields 2.70%.
Progress Energy (PGN) announced that its Board has approved an increase in its quarterly dividend from $0.615 to $0.62 per common share. Progress Energy is a dividend achiever, which has consistently increased its dividends for twenty one consecutive years. The 4stock currently yields 6.70%.
Diebold (DBD) announced that its Board has approved a 4% increase in its quarterly dividend from $0.25 to $0.26 per common share. Dieboldis adividend champion which has consistently increased its dividends for fifty-six consecutive years. The stock currently yields 4.00%.
Sigma-Aldrich (SIAL) announced an 11.50% increase in its quarterly dividend from $0.13 to $0.145 per common share. Sigma-Aldrich is a dividend aristocrat, which has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 1.40%.
3M (MMM) announced that its Board has approved a 2% increase in its quarterly dividend from $0.50 to $0.51 per common share. 3M is a dividend aristocrat, which has consistently increased its dividends for fifty-one consecutive years. The stock currently yields 4.00%.
Northeast Utilities (NU) announced that its Board has approved an 11.70% increase in its quarterly dividend from $0.2125 to $0.2375 per share. Northeast Utilities has consistently increased its dividends since 2001. The stock currently yields 4.00%.
Honeywell (HON) announced an increase in its quarterly dividend from $0.275 to $0.30 per share. Honeywell has consistently increased its dividends since 2005. The stock currently yields 3.40%.
FPL Group, Inc (FPL) announced a 6.20% increase in its quarterly dividend from $0.445 to $0.4725 per share. FPL Group, Inc is a dividend achiever has consisently increased its dividends since 1995. The stock currently yields 3.50%.
Full Disclosure: Long MMM
- Why do I like Dividend Aristocrats?
- Dividend Aristocrats List for 2009
- My Dividend Growth Plan - Diversification
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Microsoft Corporation provides software products for computing devices worldwide.
Microsoft is a major component of the S&P 500, Dow Industrials and Nasdaq 100 indexes. Microsoft has been consistently increasing its dividends since 2003. From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 3.90 % to its shareholders.
10 Year Chart
At the same time company has managed to deliver a 11.30% average annual increase in its EPS since 1999. [more]
During the 1982-2000 secular bull market, investors were looking for quick capital gains in hot growth sectors. Dividend stocks were viewed as something that is appealing to older investors. As stock prices rose to the stratosphere dividend yields on the S&P 500 fell to as low as 1%, which left long-term investors with a smaller cushion against market declines.
With the 2003 lowering of taxation on dividends, income-producing companies have been in vogue with investors. There are many reasons why dividend stocks are superior to non-dividend stocks.
One reason is that most stocks rise and fall on average at the same pace as the market. Stocks that pay dividends however, offer an extra incentive to hold on to them during tough times.
Another reason to hold on is that most dividend stocks represent mature companies with stable business models that generate much more in earnings than what could be re-invested back into in the business. Slower growth companies will generally experience much lower drops in share prices in comparison to hot growth sectors.
Furthermore the quarterly dividend payment will provide investors with a relatively safe cushion against bear market declines, as most companies keep sending their dividend checks monthly or quarterly to shareholders. During market declines it is very tough to generate any capital gains. The dividend is the only item that increases investors total returns during severe corrections.
Most corporations that pay a portion of their profits to investors prove that earnings are real, and not a result of the manipulation of GAAP rules. More important is the fact that once management has set a dividend policy of a stable or a rising dividend payment, only an unforeseen event or a major fiasco in the company’s business model will derail that commitment. Unlike share buybacks, which could be canceled quietly, a dividend cut or suspension will most likely anger stockholders. When a company commits to paying a dividend, management is much more careful with approving projects that might not yield a sufficient return on investment.
Most investors have heard the headlines in 2008, which included major dividend cuts from companies such as Bank of America, Citigroup and a plethora of other financial stocks. The majority of dividend cuts however, have been concentrated in the financial sector. Even during recessions, most corporations keep their dividends either unchanged or slightly higher. The current recession is no exception so far.
Even during bear markets, dividends have a much lower volatility in comparison to stock prices. [more]
(This article originally appeared on The DIV-Net January 23, 2009.)
The Procter & Gamble Company (P&G), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care.
Procter & Gamble is a dividend aristocrat as well as a component of the S&P 500 index. One of its most prominent investors includes the legendary Warren Buffett. Procter & Gamble has been increasing its dividends for the past 52 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 3.10 % to its shareholders.
10 Year Chart
At the same time company has managed to deliver a 12.10% average annual increase in its EPS since 1999.
The markets remained nervous last week as several companies such as State Street, Macy’s and Motorola cut or eliminated their dividend payments. Of those three, seasoned dividend investors should only be concerned with State Street’s dividend cut. During economic downturns it is normal for cyclical industries to cut or eliminate their dividends. Companies with strong competitive advantages, as well as solid consumer brands should keep and even increase their dividends. The companies whose dividend cuts are concerning are the ones which have raised them for more than 10 or 25 years, which represent the so called dividend achievers and dividend aristocrats. This week brought two raises by dividend aristocrats as well as three notable raises from dividend achievers.
General Electric kept reassuring investors that it had sufficient cash flows to pay its dividend and that its AAA rating won’t be lost anytime soon. Over the past few months, anytime GE reassures investors about the stability of its current dividend payment, the news hits the wires and the trading in the common shares gets pretty volatile. The diversified global infrastructure, finance and media company has taken steps to strengthen its cash flow situation by raising almost two thirds of its required long-term funding for 2009, and reducing GE Capital Services commercial paper by 28 billion to 60 billion today.
Avon Products (AVP), which engages in the manufacture and marketing of beauty and related products worldwide, announced that its Board has approved a 5% increase in its quarterly dividend from $0.20 to $0.21 per common share. Avon Products is a dividend achiever, which has consistently increased its dividends for twenty consecutive years. The stock currently yields 3.70%.
Ross Stores (ROST), which operates two chains of off-price retail apparel and home accessories stores in the United States, announced that its Board has approved a 16% increase in its quarterly dividend to $0.11 per common share. Ross Stores is a dividend achiever, which has consistently increased its dividends for over fifteen consecutive years. Since 1994 this retailer has managed to double its dividend payments every three and a half years on average. The stock currently yields 1.40%.
Pitney Bowes (PBI) which provides mail processing equipment and integrated mail solutions in the United States and internationally, announced that its Board has approved a 4% increase in its annual dividend from $1.40 to $1.44 per common share. Pitney Bowes is a dividend aristocrat, which has consistently increased its dividends for twenty-seven consecutive years. The stock currently yields 6.00%.
Archer Daniels Midland (ADM), which procures, transports, stores, processes, and merchandises agricultural commodities and products, announced that its Board has approved a one cent boost in its quarterly dividend to $0.14 per share. Archer Daniels Midland is a dividend aristocrat, which has consistently increased its dividends for thirty-four consecutive years. The stock currently yields 2.00%. Check out my analysis of ADM here.
HCP (HCP), a real estate investment trust that invests in health care-related properties and provides mortgage financing on health care facilities, announced that its Board has approved an increase in its quarterly dividend from $0.455 to $0.46 per share. HCP is a dividend achiever, which has consistently increased its dividends for over twenty consecutive years. The stock currently yields 7.40%.
J.B. Hunt Transport Services, (JBHT) announced that its Board has approved a 10% increase in its quarterly dividend from $0.10 to $0.11 per share. J.B. Hunt Transport Services has consistently increased its dividends since 2004. The stock currently yields 1.70%.
L-3 Communications (LLL) announced that its Board has approved a 17% increase in its quarterly dividend from $0.30 to $0.35 per common share. L-3 Communications has consistently increased its dividends since 2004. The stock currently yields 2.70%. L3 Communications provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; and aircraft modernization and maintenance, and government services primarily in the United States.
Full Disclosure: Long ADM and GE
- Archer Daniels Midland (ADM) Dividend Stock Analysis
- Dividend Aristocrats List for 2009
- My take on State Street’s dividend cut
- Bad Start of the Week for Retail Investors [more]
Last week, the board of State Street (STT) announced that they would be cutting the quarterly dividend from $0.24/share to $0.01/share. STT joined the ranks of other financial institutions such as Bank of America (BAC) and Citigroup (C) with in this move to bolster liquidity. After reading this announcement I immediately sold all of my STT holdings. I also plan on removing the stock from my Best Dividend Stocks for the long run list.
The reason why I purchased STT in the first place was the fact that it was the only dividend aristocrat that had a long history of consistent dividend increases. In fact for the past 27 years STT had been increasing its dividends twice a year, which is the only dividend aristocrat to do so. Asides from the growing dividend, I also liked the fact that the company was engaged in Investment Servicing and Investment Management. STT also has managed to deliver an 11.20% average annual increase in its EPS between 1998 and 2007. In addition to that, the dividend was adequately covered, with the dividend payout ratio never exceeding 30% over the past decade.
As a result of the dividend cut and the other moves, State Street revised its previously reported 2008 earnings to $4.30 per share from $3.89, which also boosts return on shareholder equity. The steps were taken as part of a plan to strengthen State Street's tangible common equity ratio, which is a measure used to compare the bank's capital adequacy with its goodwill and other intangible assets. 2009 earnings are expected to be between about $4.94 and $4.71 per share. It also eliminated bonuses for its top five executives for 2008 and roughly halved incentive compensation for the rest of the company.
I did see the situation at State Street worsening, after it received TARP money and especially after it announced no intention to increase dividends for the time being after reporting lower than expected quarterly results last quarter. This has put the dividend aristocrat on a danger list to be kicked out of the prominent dividend index. S&P would most probably remove this financial company from the elite group of dividend companies pretty soon.
Despite the warning signs however, I still believed that the dividend would not be cut, because it was very well covered. I strongly doubt that STT management believes in their ability to deliver 2009 earnings, exactly because of the dividend cut. If it were really convinced that 4.71 to 4.94/share was achievable in 2009, then paying out a measly 0.96/share wouldn’t have changed anything that much.
This is my second dividend cut in my portfolio since the start of the financial crisis. In the meantime I will be inspecting more closely any financial related holdings in my portfolio and assessing the risk of further dividend cuts in the future. I will also look for other companies to replace STT in my dividend portfolio.
Full Disclosure: None
- TARP is bad for dividend investors
- Dividend Aristocrats in danger
- State Street Corporation (STT) Dividend Stock Analysis.
- Best Dividends Stocks for the Long Run
- Dividend Cuts - the worst nightmare for dividend investors [more]
There are two extreme camps of Altria’s (MO) future prospects. One of the camps is the bullish one which claims that Altria is a near monopoly, which has a 50.40% of the US cigarettes market and has nothing else to do with its cash than to distribute it back to shareholders in the form of dividends or share buybacks.
Given the fact that MO is not a growth company, the stock is spotting a P/E of 11 and a generous dividend yield of 7.8%. Some of Altria’s biggest fans also like to add that the company has increased its dividends for 42 consecutive years. Given the fact that 97% of stocks returns since 1871 have come from reinvested dividends, it is not surprise that this dividend growth tobacco stock was the best performer in the S&P 500 for the 50-year period from 1957 to 2007.
Even though tobacco sales are decreasing, most cigarette manufacturers could afford to offset sales declines by boosting price tags for its products. Since advertising tobacco products is illegal in the US, it would be almost impossible for newcomers to compete against Altria and erode its market share.
Another important asset that the US based Altria owns is a 28.5% interest in UK based SAB Miller, which is not only one of the largest brewers in the world, but also one of the largest bottlers of Coca Cola products worldwide. Altria’s stake is worth about 4.26 billion dollars per the company’s balance sheet as of 12/31/2008.
The Altria bears cite several reasons why one should not own stock in this tobacco giant. First of all the Altria that was the best performer in the S&P 500 is much different than todays Altria. The company spun out Kraft Foods in 2007 and Phillip Morris International in 2008. Without the growth of the international tobacco markets in the emerging market economies where Phillip Morris International has a dominant role and a lower probability of lawsuits, Altria is stuck with the US market, which is in a decline.
Another reason that Altria bears cite is that the integration of UST might cause liquidity problems for the tobacco conglomerate. Historically, the stocks stop increasing their payments to shareholders because they are saddled with debt after acquisitions in their field. Altria financed its UST acquisition by a bridge loan for 4.3 billion as well as a 6.8 bln in loans with maturities varying from 18 months to 30 years and coupons ranging from 7.125% to 9.95%. Altria intends to access the public debt market in 2009 to refinance the bridge loan borrowings with long-term debt.
Another risk for Altria is litigation, that could potentially wipe out the whole company. Since tobacco is a heavily taxed product however, a complete ban on its use will be detrimental for state and federal budgets.
The company recently announced its 4Q 2008 results, where its earnings per share from continuing operations were $1.48, unchanged versus 2007.
Given the current economic environment, Altria is suspending its $4.0 billion 2008-2010 share repurchase program, $1.2 billion of which was completed in 2008. Altria believes it is in the best interest of shareholders to preserve financial flexibility while it completes the financing of the UST transaction. This change gives Altria the opportunity to monitor economic impacts on its business and protect its investment grade credit rating. During 2009, Altria intends to focus on earnings per share growth and continuing its strong dividend policy. The company recognizes the importance of share repurchases to investors and intends to evaluate them again in early 2010.
I am bullish on Altria but only if one holds one share of Phillip Morris international for every MO share that they own. Altria has been successful in integrating very well companies it has acquired, so UST’s acquisition should be beneficial to shareholders. Furthermore tobacco companies are generally immune from economic fluctuations since smoking is a habit that is difficult to stop. It could be argued that during recessionary environments more people start smoking and less get the courage to quit.
One could always snap tobacco shares on the cheap, as many investors fear that an adverse litigation could potentially wipe out cigarette manufacturers. If this happen however, many states will lose billions in revenues from tobacco giants like Altria.
The high dividend payout is definitely a warning sign, which would hurt the growth of future dividend increases. If the company decides to go one step further after suspending stock buyback program until 2010 and cuts its dividends I will be the first one to head for the exits.
Full Disclosure: Long MO and PM
- Historical changes of the S&P Dividend Aristocrats
- When to sell my dividend stocks?
- Why dividends matter?
- Dividend Cuts - the worst nightmare for dividend investors. [more]
Shares of Harley Davidson, which is a dividend achiever, got a big boost last week, after legendary investor Warren Buffett snapped half of the company’s $600 million in bonds that will be issued. The bonds will mature in 2014 and carry an annual interest rate of 15%.
Warren Buffett made similar investments in fixed income equivalents (preferred stock) in General Electric and Goldman Sachs, both of which carried a 10% interest rate. Unlike GE and GS’s investments however, the 300 million-bond position that Buffett’s Berkshire Hathaway (BRK.a) is taking won’t come with a warrant to purchase some of Harley Davidson’s stock.
The money will help Harley Davidson in its three-part strategy that it issued in January, after losses in its finance unit led to a 58% drop in 4Q earnings. The strategy includes investing in the Harley-Davidson brand, getting a leaner cost structure as well as securing additional funding for its finance unit, which makes loans to dealers and customers.
The investment in Harley by Warren Buffett led to a huge increase in HOG stock, as it provided a huge dose of support for the brand. Investor’s shouldn’t get too excited about this deal however by purchasing Harley-Davidson stock. Buffett is definitely getting a sweet deal in Harley’s effort to capitalize on his name and get enough cash to sustain the company through the tough times. If Buffett believed that Harley’s stock is undervalued he would have purchased the stock directly. Since he is only purchasing bonds, without any warrants that would convert the bonds into equity, it definitely looks that he doesn’t believe Harley is undervalued enough for him to take an equity position. For ordinary investors however, getting in on a deal with similar terms is close to impossible.
In 2008 Buffett took perpetual preferred stock positions in General Electric and Goldman Sachs, for $3 billion and $5 billion respectively. According to the deal with Goldman, which was announced on September 23, the preferred stock has a dividend of 10 percent and is callable at any time at a 10 percent premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $5 billion of common stock with a strike price of $115 per share, which is exercisable at any time for a five-year term.
According to the deal with General Electric, which was announced on October 1, the perpetual preferred stock has a dividend of 10% and is callable after three years at a 10% premium. Berkshire Hathaway (BRK.a) also received warrants to purchase $3 billion of common stock with a strike price of $22.25 per share, which is exercisable at any time for a five-year term.
Investors who mistakenly believed that these investments in General Electric and Goldman Sachs could be replicated by purchasing the common stock have lost a lot of money in the process. GE shares lost almost half of their value, while GS stock lost roughly one third.
Several pundits have also expressed concerns that Buffett suffered major losses on his investments in General Electric and Goldman Sachs. This delusion comes from confusing option strike prices with actual purchase prices. The options to purchase GE and GS stock give Buffett the right, but not the obligation to acquire shares in both companies at $22.25 and $115 per share respectively by 2013. In the meantime he is being paid $800 million/year in dividends.
As a dividend and value stock, Harley Davidson does appear undervalued. The dividend is well covered and the P/E is only at 5. This reflects investors’ worries that the downward EPS trend from 2006 record earnings of $3.94/share might continue over the next few years.
It will be interesting to see how the company copes with the uncertain economic climate. Harley Davidson is a great american brand, with a loyal customer base, which is most probably why Buffett bought 300 million in bonds in the first place. Since the company’s products are discretionary however, its target audience might delay purchases of new bikes for the time being.
Full Disclaimer: Long GE stock
- Analysis of General Electric
- Warren Buffett – The Ultimate Dividend Investor
- Berkshire Hathaway Portfolio Changes for the quarter
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