Dividend Growth, Time, And Cherry Picking
February 24, 2010
– Comments (26) |
RELATED TICKERS: PEP
, CVX
, CLX
It was embarassing. In response to a debate about the value of dividend growth, I used PG as an example of how long-term, persistent dividend growth benefits a long term dividend investor. I wanted to go back an even 20 years, so I went to Yahoo!Finance and looked up the price of PG at the close of Feb 1990. Using that share price as a starting point, I then scrolled back up through PG's history and determined there had since Feb 1990 been 3 share splits. Those 100 shares bought for $6388 had over time become 800 shares paying $1408 in dividends annually today, for a yield on cost of 22%.
I missed something. I was accused of picking 52-week lows to support my point. I went back and looked. Sure enough, going back to exactly 20 years from the end of this month, landed me right smack dab on the 52-week low. The 52-week high for PG, on the other hand, was around $120. Quite a bit higher than $63.88. I felt like an idiot. But let's look again.
This is obviously a worst-case result for buying PG in 1990. The high was almost twice the price of the low. So a person buying PG for $120 a share in 1990 would, if they had held it, be collecting $1408 in dividends today...a yield on cost of 11%. In the meantime, his 100 shares he paid $12,000 for had split 3 times, becoming 800 shares worth over $48,000 today.
Worst-case results of purchasing shares in a well-run company that possesses strong competitive advantages that persistently raises dividends every year, year in and year out....doesn't seem all that bad.
So I decided to do some cherry-picking on purpose. No need to be embarassed this time, though.
In June 1990 PEP hit a 4-year high of $77.62. So in Jun 1990 100 shares of PEP cost $7762 and paid $20 in dividends.
In Sep1990 those 100 shares became 300 shares after a 3:1 split. Now those 300 shares paid $60 in dividends.
In may 1996 those 300 shares became 600 shares after another share split, now paying $276 in dividends.
Today those 600 shares pay $1080 a year in dividends. The shares are worth $37,034 now. So those 100 shares that cost $7762 in June 1990 have become 600 shares paying $1080 a year in dividends today. In spite of buying at the 4-year high in June of 1990, this represents a yield on cost of 13.9%.
In July 1990 Clorox hit a 3-year high of $43.88. So in June 1990 100 shares of CLX cost $4388 and paid $36 in dividends.
In Sep 1997 those 100 shares of CLX became 200 shares, paying $128 in dividends.
In Aug1999 those 200 shares of CLX became 400 shares paying $320 in dividends.
Today those 400 shares with an initial cost basis of $4388 are paying $800 in dividends and are worth $24,400. In spite of buying at the 3-year high in July 1990, that's a yield on cost of 18.2%.
I couldn't use any 1990 prices for Kimberly-Clark. I wanted horrible high worst-case prices. So I had to go forward to Dec 1991. That's when Kimberly-Clark hit a 3-year high of $82.07. So 100 shares of KMB cost $8207 in Dec 1991, and paid $82 in dividends.
In Jan 1992 those 100 shares of KMB became 200 shares, now paying $164 in dividends.
In Mar 1997 those 200 shares became 400 shares, paying $384 in dividends.
Today those those 400 shares of KMB with an initial cost of $8207 are paying $960 a year in dividends and are worth $24,220. In spite of buying KMB at its 3-year high in Dec 1991, that's a yield on cost of 11.69%.
When Chevron hit $79.37 in July 1990, it was an all-time high. So 100 shares of CVX in July 1990 cost $7937 and paid $77.50 in dividends.
In June 1994 those 100 shares of CVX became 200 shares, paying $184.80 in dividends.
In Sep 2004 those 200 shares of CVX became 400 shares, paying $640 in dividends.
Today those 400 shares of CVX that initially cost $7937 in July 1990 are worth $28,904 and paying $1,088 in dividends. That's a yield on cost of 13.7% in spite of buying CVX at what was then its all-time high in JUly 1990.
There. Anybody for some more cherry-picking? These are easy to look up. The fact is, persistent dividend growth and time took these purchases at market highs and 20 years or less later, they're still providing yields on cost of upwards of 11%...not to mention the growth in value. And if you go back and look, hey! Would you have bought all your shares at these prices? If you're like me, and invest periodically, you would also have made many of your purchases during the parts of 1990 and 1991 that the prices were way lower, too. These numbers are assuming worst case lump-sum purchases at the most horrible of times. Further, they're assuming no reinvestment of dividends.
The fact is, the very things a well-read dividend investor looks closely at to assure him/herself that a dividend is secure and the company's rock-solid financially and the payout isn't too high, leaving a payout margin of safety so that the company can probably make it through 1 or 2 bad years and still maintain the dividend, are the very same things that make a company strong financially. The compound annual growth rate of revenues, cash from operations, capex, free cash flow, net margin, debt coverage, are all important to any dividend investor. We want stability and security - a dividend is only as good as the company's ability to maintain it and regularly increase it. Return on equity should be broken down and examined component by component using the DuPont system of analysis. Also, we like to believe a company we want to hold for the long term has a significant moat, or durable competitive advantage.
When properly researched, an investment in a company that maintains and grows its dividend annually will probably turn out to be a good investment. People don't buy at the very worst times on purpose anywhere but on paper to prove a point.
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