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My thoughts on Barron's 20 Best Dividend Plays for 2009

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February 15, 2009 – Comments (6)

I'm sort of old school in that I actually like to get a paper copy of Barron's rather than just subscribe to it electronically.  When I walked out to the end of my driveway in my pajamas to pick up my copy of Barron's on Saturday morning the first thing about it that caught my eye was this small teaser at the top of the cover "20 Stocks With Safe Dividends over 4%."  Wow, I thought that's right up my alley.

Here's a link to the piece for anyone who subscribes to the electronic version of Barron's:

The 20 Best Dividend Plays for 2009

While I definitely do not agree with all of Barron's selections for the list, the article is interesting and informative.  What I liked best about it is that it contains all of the payout ratios for the companies that were mentioned.  This is an absolutely essential number to look at when buying a stock for its dividend.  

For those who aren't familiar with the metric, a company's payout ratio essentially measures its ability to cover its dividend payout with its earnings.  It is a simple calculation: the total annual dividend divided by total annual earnings.  The trick with the payout ratio is to use the correct earnings number.  Like the old saying goes, garbage in...garbage out.  Barron's uses analysts' consensus earnings estimate for 2009 for the bottom half of the equation.  The main problem that I have with doing this is I believe that in many cases analysts are still way too optimistic about what companies will earn this year.  Having said this, the payout ratio that was used in the article is still somewhat useful from the stand point that the companies have low ratios are much more likely to be able to cover their payouts than the companies that have high ones.  Just don't treat the number as gospel.

Now that all of this is out of the way, on to my thoughts about the specific companies mentioned:

Ones that I like:

Reynolds American (RAI): Yield 8.7%, estimated '09 payout ratio 72%, forward '09 P/E 8.3

Altria (MO): 7.7%, 74.4%, 9.6

Lorillard (LO): 5.7%, 68.3%, 12

The tobacco stocks are interesting plays.  I like them and I own Big Mo and Philip Morris International in the real world, but there is only so much exposure that one should have to this sector.  At least in the U.S. cigarettes sales consistently fall every single year.  That means that in order to increase earnings the companies that produce them either have to raise prices or steal market share from competitors.  Neither of these things is all that easy to do, particularly in a recession.  Add to this the dramatic increase in the cigarette tax that's coming and the potential for lawsuits and there's definitely a lot of risk here.  I think that some exposure to the sector is warranted, but not too much.

AT&T (T): 6.7%, 82%, 12.1

Verizon (VZ): 6.2%, 73.3%, 11.9

Next we have the phone companies.  I like both T & VZ and am long both in CAPS, but not in the real world.  Their payout ratios are a little on the high side.  I can easily see analysts' '09 earnings projections for these companies being wrong and their ratios climbing dangerously close to 100%.  Of these two companies, I personally give the edge to Verizon for its work with Fios and slightly better valuation.

Bristol-Myers Squibb (BMY): 5.5%, 63.9%, 11.6

I am long BMY in CAPS as well and I have at the top of my real world watch list of things to buy.  The reason I have not pulled the trigger on it yet is that I am very afraid that the overall market will eventually fall right through the lows that it set late last year, sucking almost everything with it.  I have no doubt that BMW will be a relative outperform to the S&P 500, but I have a feeling that we may see better prices in the future.

Still, there's a ton to like about this company.  It has tons of cash and it is in a great sector for a recession.

 

Ones that I don't like:

International Game Technology (IGT): 5.9%, 56.9%, 9.6

IGT is very attractively priced at this point and its payout ratio is pretty reasonable.  The problem with this stock is that contrary to conventional wisdom that casinos are recession resistant, they are getting absolutely crushed this time around.  When a company's main clients aren't making any money it is going to have a severely negative impact upon them.

Here's an anecdote about how bad things have gotten on Vegas.  I have a friend who went to Planet Hollywood a few weeks ago.  Not that long ago, this hotel was super hot and it could charge whatever it wanted for rooms.  My how times have changed.  My friend got a room for $75 AND they gave him a $50 meal voucher PLUS a $25 gambling match.  That's right, he essentially got the room for free.  Casinos are in a world of hurt and they won't be buying anything new that they don't absolutely have to right now, including IGT's products.

Embarq (EQ): 7.8%, 56.2%, 7.2

Another telecom that has a lower payout ratio and P/E than T & VZ.  I also like the fact that it is a spin-off.  The problem is that it is a spin-off from one of the worst run companies in the world, Sprint Nextel (S).  The problem I have with EQ is its MASSIVE debt level.  I won't touch anything that has a lot of debt with a 20 foot pole in today's environment. I don't like its exposure to land lines either.

Meredith Corp (MDP): 5.9%, 44.3%, 7.5%

Here's another attractively valued company, in terms of its payout and price-to-earnings ratio.  The problem with it is the industry that it is in, publishing.  Print media was already a dying dinosaur before the recession caused ad revenue to fall off of a cliff.  The company's major magazines include Better Homes and Gardens, Family Circle, and Ladies' Home Journal.  Need I say any more?  No thanks.

PPG Industries (PPG): 5.7%, 64.6%, 11.3

PPG has an outstanding history of paying out a solid dividend and regularly increasing it.  I am just staying very, very far away from common stock in the chemical sector right now.  I did make a small play on some Dow Chemical senior debt with a crazy yield recently, but that's way up the capital ladder from common stock.   PPG has way too much exposure to the things that the recession is hammering, particularly the auto sector.

Wow, look at the time.  I could go on and on, but it's time to have some fun with the family.  Hopefully I will pick up where I left off tonight after I put the kids to bed.

Talk to you soon,

Deej

6 Comments – Post Your Own

#1) On February 15, 2009 at 11:17 AM, abitare (80.88) wrote:

Good write up.

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#2) On February 15, 2009 at 12:07 PM, nuf2bdangrus (< 20) wrote:

I like PM as a tobacco play over MO, growing sales, less litigation risk, and when the dollar weakens, it will improve earnings.

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#3) On February 15, 2009 at 12:32 PM, killeru (< 20) wrote:

Looks like, to me, a head & shoulders pattern (IGT) over the last two months, that has already broken through to the downside.  ??

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#4) On February 15, 2009 at 12:46 PM, ContraryDude (33.67) wrote:

I like the Smart Money article better.  Based on their list of top 5 dividend stocks for this market, I just added BP and VODafone (who own 45% of VZ).

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#5) On February 16, 2009 at 12:42 AM, ajm101 (32.98) wrote:

I can't give you a better reason not to invest in tobacco stocks that the signal the market is giving you right now.

Like T and VZ though.

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#6) On February 16, 2009 at 10:57 AM, wolfhounds (29.38) wrote:

Why is earnings being used as the metric to measure a company's ability to pay it's dividend? Haven't we all learned that the E in P/E, whether actual or analysts estimates, is a GAAP measure which does not calculate cash generated. And that is the only measure of importance, especially in this economy. Dividends as a percentage of FCF is important also because earnings can be manipulated (massaged) and cash is in the bank.

I would like Barron's to rewrite that article using 2008 actual and 2009 estimated FCF to determine the best dividend stocks. I will bet that companies high depreciation and other non cash charges to earning, with relatively stable businesses, will rise to the top.

 

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