Tuesday, April 12, 2011

Cash Crops -- Growing Dividends

10 Dividend Lions Roaring Now

A quick check suggests the stock market has left the recession in the dust. With the S&P 500 doubling in just 23 months, its quickest 100% rise ever, investors are giddy about growth prospects. Perhaps even better news than the growth opportunities is the strong return to dividends. Banks are allowed to increase payouts again and powerhouse firms are ready to return their cash hoards. Can’t you hear it? Today, the dividend lion rears its head and roars.

It seems like it would be hard for the most actively traded stock to tip-toe around the strong recovery, but that’s exactly what Citigroup (C) appears to be doing. After plummeting from $55 a share in 2007 to $1 in 2009, this global financial services company has only risen to about $4.50 since. The good news is that C will soon return to those middle-double digit prices seen before the recession; the bad news is it's going to do it by using a 10 for 1 reverse stock split. After the split, a tiny, better-than-nothing $0.01 dividend will be reinstated. Management says the real dividend returns will come in 2012. Okay, so not quite a roar yet, but with the upcoming 1% payout ratio, the dividend lion at least looks to wake up in the future.

JP Morgan Chase (JPM) quickly took advantage of allowable dividend increases by bumping its quarterly mark up to $0.25 from $0.05. This actually isn’t that far off from the pre-recession $0.38 quarterly payout. Add in the 5% payout ratio and the outlook for this financial powerhouse appears to be promising. The 2.1% current yield isn’t that attractive, but then again the $8 Billion common share buyback should be factored in to the shareholder value equation. Some might not be keen on the near 50% increase in CEO Jamie Dimon’s compensation during 2010 -- but to be fair, his year-to-year base salary did not change, just his stock option incentives.

From 1984 until 2008, Wells Fargo (WFC) enjoyed a stable history of increasing dividends. Then 2009 happened and its dividend was frozen at $0.05 per share. But confidence is up and payouts are on the rise. This banking giant makes up nearly 18% of Warren Buffett’s Berkshire Hathaway (BRK.B) portfolio, and Buffett himself predicted a substantial dividend increase this year. True to form, WFC issued a special dividend of $0.07 this March in addition to its $0.05 quarterly payout. It still lags greatly from the pre-recession $0.34 a quarter, but a tiny 9% payout ratio suggest returning more value to shareholders is on the way.

AT&T (T) is not a bank, but it is a “dividend champion,” having increased its payout for 27 straight years. With a current yield of 5.6% it certainly deserves to be mentioned in any dividend conversation. It went ex-dividend on April 6, so it is a bit late to catch this quarter’s payout. Still, this telecommunications company shows a bit of everything: High yield, sustainability (51% payout ratio) and growth opportunities if its bid for T-Mobile goes through. The 5% average five-year growth rate isn’t overly impressive, but you don’t need too much appreciation on top of the high yield. The current yield has dropped as of late, but if history turns out to be the map to the future, there shouldn’t be much concern.

Excited about telecommunication companies and high yields, but don’t think the AT&T deal will go through? You could always move down the list to Frontier Communications (FTR). FTR makes waves with its 9.3% current yield. Further, it has showed consistency in the past by paying the same $0.25 quarterly dividend for 23 quarters from 2004 to 2010.

Those saying it is too good to be true might be on to something though, as FTR’s 100%-plus payout ratio proved unsustainable. A dividend cut followed last September, dropping the per-share payment to $0.75 a year. Still, because it yields about three percentage points more than AT&T and Verizon (VZ), it might be worth a look.

Sure, banks are recovering and communications are flaunting big yields, but how about those recent gas prices? And if we’re talking gas, we need to be talking about the $425 Billion market cap of mega giant Exxon Mobile (XOM).

XOM, like T, is also a “dividend champion,” having not only paid but also increased its dividend for 28 straight years. The 2% current yield doesn’t do much for income investors, but the 28% payout ratio and near 9% five-year average dividend growth rate appear promising. XOM has been very consistent with its payout increases, so look for another increase this May. Additionally, the increase announcement has not yet taken place, so investors can benefit in two ways: First from the increase in yield on cost and second on the potential upside to positive news. Or if you just want to ride the gas wave to growth, forget the dividend history and go with XOM anyway.

If we’re talking about mega giants, we might as well throw in International Business Machines (IBM). The 1.6% current yield and near 52-week high price don’t do much in the way of saying, “Hey, I’m a dividend value” -- but hold on.

IBM is a member of the “dividend contender” list, having increased its payouts for 15 straight years. In recent years, this machine-turned-service company has not been hesitant in returning value to shareholders. In the last five years, IBM has grown dividends at an average rate of 26% each year. Factor in the 23% payout ratio and dividend investors can clearly see where future payouts will be coming from. Still not satisfied? IBM has been more than consistent with its increase announcements as well. Look for a 10% increase in your yield on cost if you buy in before the expected April 26 dividend increase announcement.

Speaking of dividend increase announcements, let’s take a look at Procter & Gamble (PG). PG is a powerhouse on the “dividend champion” scene, having increased its payouts for 54 straight years.

The 3.1% current yield is reasonable, but might get even better in the next month. PG looks to mirror IBM with an expected 10% increase to yield on cost. In the last four years, increase announcements have come on either the second Tuesday or the third Monday of April. Let’s call it April 18, the third Monday of April. The 53% payout ratio appears to be in line for this consistent consumer goods company. A near 12% average five-year dividend growth rate, coupled with the expected upcoming dividend increase announcement, make PG a play that everyone can see.

Avon Products Inc. (AVP): Small, but only when compared to IBM and XOM, this $12 Billion beauty product manufacturer comes in with a current yield of 3.4%.

AVP has increased its dividend for 22 straight years and can become a “dividend champion” in just three more. This New York-based firm has a notable Fortune 500 female CEO and an apparently sustainable 66% payout ratio. Perhaps a slight concern would be the decreasing dividend growth rate, nearing a 6% average over the last five years. Still, any growth on the current yield is icing for this strong niche company.

AVP products can’t be found in Wal-Mart Stores (WMT), but pretty much everything else can. WMT has been on the “dividend champion” list for quite some time now, having increased its dividend payouts for 37 straight years.

Interestingly, this low price superstore plays as a rich man’s favorite with Buffett and Bill Gates holding substantial stakes. Earlier in the year, the 2.3% yield might have spooked income investors, but a recent increase has lead to a much more acceptable 2.8% current yield. The low 33% payout ratio says "how do you do" to future sustainability, but more impressive is the recent dividend growth rates. In the last five years, payouts have increased by an average of over 15%. If we see that over the next five years, your yield on cost would double.

Dividends are coming back across the board; to be sure, this is just a sampling.

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