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.

Clorox -- A Clean Company

Clorox has a plan for the growth of its business as well as a plan for the growth of its dividend. The combination should interest investors who want a stock offering both stock-price growth and rising income. There's an added bonus. This company looks like a company Warren Buffett would coonsider owning. However, from Buffett's perspective, the biggest shortcoming of Clorox is its level of debt. But the company has the power to reduce debt and increase equity.

Clorox Dividend Stock Analysis

by: Dividend Growth Investor April 08, 2011

The Clorox Company (CLX) manufactures, markets, and sells consumer products in the United States and around the world. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company is a dividend aristocrat. It has increased distributions every year for the last 33 years. The most recent dividend increase was in January, when the Board of Directors approved a 6.40% increase to 25 cents/share. The major competitors of Clorox include Procter & Gamble (PG), Colgate-Palmolive (CL) and Church & Dwight (CHD).

Over the past decade this dividend stock has delivered an annualized total return of 8.60%.

The company has delivered an impressive increase in EPS of 13.50% per year since 2001. Analysts expect Clorox to earn $3.95 per share in 2011, and $4.43 per share in 2012. This would be a nice increase from the $4.24/share the company earned in 2010. Meanwhile, the company has decreased the number of shares outstanding by 6.70% per year over the past decade through share buybacks, which have improved earnings per share growth.

In 2007 the company introduced its Centennial Strategy, which aims for double-digit annual growth in economic profit. A key driver of the strategy is to accelerate sales by growing existing brands, expanding into adjacent product categories, entering new sales channels and increasing penetration within existing countries. The company also anticipates using its strong cash flow to pursue growth opportunities and increase shareholder returns.

The company intends to deliver further growth through an ongoing focus on consumer megatrends. In addition, the company is targeting 2% sales growth through product innovation. The company projects sales growth of 3-5 percent, excluding acquisitions and expansion into new geographies through 2013. Last but not least, Clorox will target margin expansion and maximizing cash flow through a continued robust cost-saving program while sticking with recently made price increases.

Since 2003, the return on assets has largely remained above 11%. Return on assets is the best measure because stockholders equity was negative after a transaction in 2004in which Clorox exchanged its ownership in a subsidiary for approximately 29% of the company’s outstanding shares.

The annual dividend payment has increased by 10.10% per year since 2001, which is lower than the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every 7 years. If we look at historical data, going as far back as 1983, we see that Clorox has indeed managed to double its dividend every seven years on average.

Moreover, during the past decade the dividend payout has remained below 50% of net income. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Clorox is trading at 16.80 times earnings, yields 3.20% and has a sustainable dividend payout.

Bank Dividend Yields Soon to Beat CD Rates

Safety-minded investors have spent the last couple of years grumbling about bank CD rates, which have hovered slightly above ZERO percent since the bottom of our financial crisis. Investors will soon have an alternative to low CD rates if they're willing to get back into the stock market.

The Big Banks are about to increase their dividend payouts, and eventually those payouts will return to the levels of a few years ago. However, some smaller banks have never stopped offering high dividend yields. Consider First Niagara (symbol FNFG) with its dividend of well over 4%. Or New York Bancorp (NYB), which pays a higher rate. Or Hudson City (HCBK). All sound banks with great yields.

Moreover, these banks are possible takeover targets, though First Niagara is about to complete the acquisition of NewAlliance (NAL), a Connecticut bank with 88 branches.

Banks Are Poised to Pay Dividends After 3-Year Gap

Financial analysts say the nation’s largest banks are ready to begin restoring their dividends in the first half of the year, after a three-year pause to repair their damaged balance sheets. The reversal could put billions of dollars in the pockets of pension funds and retirees who had viewed bank shares as dependable sources of income.

Clues to how big a payout is in store could come as early as Friday, when JPMorgan Chase announces its 2010 financial performance, the first of many earnings reports to come over the next week from the likes of Bank of America, Citigroup, Goldman Sachs and Wells Fargo.

If the big banks deliver a second straight year of rising profits, as many analysts expect, the conditions would be in place for regulators to approve dividend increases by as early as March.

As the financial crisis worsened in 2008 and 2009, all but a handful of financial institutions cut their once-lucrative dividends to just pennies a share, hurting ordinary investors who had come to see them as sources of income. JPMorgan, for example, now has a dividend of 20 cents a share annually, down from $1.52 before the crisis.

Over all, the financial sector of the Standard & Poor’s 500-stock index paid out $51 billion in dividends in 2007. By 2010, that figure had shrunk to $19 billion.

“It’s a significant milestone,” said Gerard Cassidy, a veteran bank analyst at RBC Capital Markets. “The return of dividends signals that the banks are back, and the Federal Reserve wants to inspire confidence in the marketplace so that banks lend more.”

The financial industry has returned to health much faster than expected, helped by an alphabet soup of federal aid programs totaling more than $3 trillion, ultralow interest rates and a surging stock market.

Banks are expected to record $70 billion in profits in 2010, according to Foresight Analytics, a financial research firm. That would be up from $12.5 billion in 2009 but remains about half the level reached in 2006, before the housing market collapsed and the financial system almost came undone.

The earnings reports for the fourth quarter of 2010 are also likely to show that corporate and consumer lending is starting to come back while losses on bad loans are continuing to ease.

Wall Street’s trading businesses are expected to turn in a strong performance because of an increase in deal-making activity late in the year.

This week the Federal Reserve began another round of so-called stress tests of the nation’s 19 largest banks, evaluating their ability to remain financially healthy in the face of a still-anemic economic recovery and tough new regulations that will cut deeply into revenues. Unlike the first round of tests, the findings this time will not be made public.

Before approving a dividend increase, regulators must sign off on a bank’s stress test and conclude that the bank can meet the higher capital requirements put in place by new international agreements and the recent overhaul of financial regulations in the United States. They also must have fully repaid any federal bailout funds they accepted at the height of the crisis.

While the return of dividends will be welcomed by ordinary investors, it remains a delicate issue for the banks as well as regulators and politicians in Washington, said Chris Kotowski, a bank analyst with Oppenheimer.

Many voters are still angry about the government-led bailout that rescued banks after the collapse of Lehman Brothers in 2008. More recently, the return of bonuses on Wall Street has stirred outrage.

“It’s purely a matter of making it palatable to the public,” Mr. Kotowski said. “Banks are fully capable of doing it. But everyone’s afraid of headlines that say just two years after the bailout, the fat cats are getting dividends again.”

Partly as a result, he said, dividends will probably be restored in stages, and it could be take until the end of 2012 for them to return to historical norms.

For decades, shares of banks, along with utilities, were the favored choice of retirees and other conservative investors who looked forward to a steady payment each quarter.

That all changed when the financial crisis struck, forcing Citigroup to cut its dividend as it braced for a wave of huge losses tied to loan defaults.

Although the federal bailout program did not require banks to lower their dividends in most cases, regulators all but forced many banks into making cuts by insisting that they hold more capital in reserve to cushion against losses.

By the spring of 2009, several of the largest banks — including JPMorgan, Bank of America and Wells Fargo — cut their dividend to just pennies a share each quarter.

Just as the banks cut their dividends at different rates over the course of months, the timing of dividend increases will probably also vary widely across the industry. The strongest banks, including JPMorgan, State Street, U.S. Bancorp and Wells Fargo, should be in the first wave this spring, several analysts said.

For Bank of America and Citigroup, which continue to suffer steep losses on mortgages and consumer loans, the analysts said higher dividends probably would not come until later this year or early next year.

Several regional lenders, including Fifth Third Bank, KeyCorp, SunTrust and Regions Financial, are barred by regulators from raising their dividends. None of these banks have repaid their bailout money in full.

In particular, analysts and investors are eagerly anticipating what the chief executive of JPMorgan, Jamie Dimon, will say on the company’s earnings call on Friday, looking for any hint of the bank’s dividend plan. JPMorgan emerged from the financial crisis in far better shape than most of its rivals, and Mr. Dimon has been outspoken about his desire to raise his company’s payout.

“We’re going to be building up a lot of excess capital,” he said in a CNBC interview on Tuesday. “So, we would like to restart a dividend.”

Eventually, JPMorgan’s restored dividend could equal $1.50 a share annually, said Michael Scanlon, senior equity analyst with Manulife Asset Management in Boston. That would equal a yield of 3.3 percent based on its closing price of $44.45 on Thursday.

That would be up from 0.5 percent now. More important, it would catapult the yield on JPMorgan shares to far above the 2.26 percent yield on certificates of deposit, a popular vehicle for investors seeking income.

“It won’t come right out of the chute at that level,” Mr. Scanlon said. “But it’s definitely the end of a long drought.”