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A New Breed of Dividend Paying Companies?



April 07, 2007 – Comments (1)

Historical analysis is clear, very clear, and very strong.  Dividend paying companies recovered faster and overall suffered far less losses through stock market "corrections."

 Some of the reasons for this are pretty clear to me.  In general, an investor searching for a dividend paying company is looking for the best rate of return in the form of a dividend.  It precludes many investors from ever buying into a company with bubble P/E valuations.

 In general, to pay say a 3% dividend the company is likely to be retaining about half the earnings, so the company is likely to have eps in the range of 6%, which would give a P/E of about 17.  I suspect if the P/E ratios of dividend paying companies was compared to the P/E of the stock market as a whole, they would be much lower.  At the end of a crash, they continue to prove they have strong earnings.

 But, that's just my theory as to why dividend stocks have typically come through a crash and recovered fairly well.

 And so, in accordance with my theory, I was shocked with what I found looking at  Chemtura, (CEM).  They pay a dividend and have a dividend yield of 1.7%.

 But, when you start tearing into their financial reports you find they had a loss of 91c per share on operations for 2006.  They had a one time only gain of 20c/share from the sale of a business, but that's the kind of thing sharp investors look for to evaluate the true status of operations.  One time gains can not be repeated.

  Sales from 2005 to 2006 declined by $200 million, from $3.9 billion to $3.7 billion, and with another 12% price increase over last year's 20% price increase on Organotin intermediates, well, there could be more contraction of sales. 

 They lost over $200 million for 2006, yet they pay a dividend?  They have done some debt restructuring, which will be good, but how is paying out $48 million in dividends a good thing when a company owes over a billion, with long term notes due in 2016 at 6.95%.  That $48 million they paid out in dividends will cost $119 million to pay back on the notes in 2016.  The yield of 1.7% is far less than the interest the company is paying on seniors' notes.

 The message about the relative safety of dividend stocks compared to others has gone out to the market in general.  The Motley Fool regulary promotes this idea in their news letters and in many articles it publishes.  "Invest in dividend stocks, your money is far safer."

Chemtura is a company with 3 year in a row losses and as such, it doesn't even have a P/E, but it pays a dividend.  There is nothing about this company that fits with my theory about why dividend paying companies are safer investments than those that do not.

 Indeed, imho, this company has the appearance of taking the focus away from serious problems and creating the appearance that all is well by paying a dividend and leading investor astray due to belief systems that have developed around dividend stocks.

 Bottom line, this stock does not fit my theory of why dividend stocks have done well, and it has enormous challenges to overcome.

 Chemtura, an investment or craps shoot?   I say a smoke and mirrors craps shoot.

1 Comments – Post Your Own

#1) On April 30, 2007 at 10:20 PM, ikkyu2 (98.16) wrote:

I have never understood the idea of taking on debt to pay a dividend.  And by that I mean that every dollar paid out in a dividend would be better paid out to service debt.
One dividend payer I have picked up recently is OLN corporation.  They have no debt.  Their business is in 2 segments, chlor-alkali (electrolysis of salts, basically) and ammunition.
Ammunition is in strong demand lately, and OLN's chlor-alkali business benefits from the proximity of a hydroelectric power plant, unlike most chlor-alkali operations that run off piped natural gas to generate the gargantuan amounts of energy required to electrolyze salts into their component elements.  Because of that, they're financially healthy but their core business *can't* grow.  Which is just what I want in a dividend payor, especially as natural gas prices climb up and up, giving them a competitive advantage in their market.

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