Tuesday, February 12, 2008

Dividends Talk, Here's What We Think They're Saying

I believe dividends talk. They may speak softly or be ignored altogether, but they talk just the same. I have often noted that the voice of the dividend is the most important voice to listen to because it represents the considered opinions of a company's board of directors. In this way dividends speak as much about the future as the past.

Most of us do not invest in the actual US economy. It has recently become a parlor game of sorts to bet on whether or not the US economy is in recession. I don’t think it matters much whether the US has an official recession in the coming year or not. I think it's clear that our economy will slow, and the assumption could easily be made that earnings and dividend growth will also slow in the year ahead.

Here is where an important distinction needs to be made. We live in a global economy. Indeed the stocks we invest in derive nearly 60% of their revenues and earnings outside the United States. Thus, there is no hardwired relationship between our US economy and the earnings and dividends of most major US corporations. It is not a direct route from a weak US economy to a weak US stock market. Indeed, Wall Street analysts are currently estimating mid double-digit earnings growth for US stocks in 2008.

I am going to start a new feature I’ll call "Dividends Talk." Dividends Talk will report periodically on important dividend increases and decreases. I will not try to analyze all companies; I'll leave that to S&P and others. I’ll just show a short list of recent dividend actions and analyze the growth trends, or lack of them.

The table at the right (click to enlarge) shows 10 dividend actions of large corporations that occured in the last two weeks. There were no dividend cuts and 10 dividend hikes. The growth rate of each hike can be found in the eighth column.
I have compared the company's most recent dividend hike to an average of its 3 and 5 years growth rates, which can be seen in column 7 (I'm doing this to eliminate any huge increases that would skew the data). The actual data for the 3 and 5 year averages is shown in the previous two columns.

The bottom line: Of these 10 companies the average dividend increase is 15.2%, just slightly higher than their 3-5 year average of 14.7%. With double-digit dividend increases of this magnitude, these companies sure don't think their businesses are facing hard times.
I'll be keeping a cumulative running average of this year's hikes versus the 3-5 year average. This will give us a strong clue how US companies are faring compared to the last 3-5 years, which was a time of strong dividend growth.

I believe dividend growth will remain strong in 2008, which would indicate that large US companies may well be doing better than the US economy. Again, the reason is simple: Most US companies are active players in the global economy, and, the softness in the US economy will be more than offset by the strength of the global economy.

From the table above, I believe there are three companies of note: Aflac (AFL), Praxair (PX), and Prologis (PLD). AFLAC and Praxair continue with their remarkable 25% dividend hikes. Both of these companies are very international, and their global business strategies are paying off with no signs of letting up.

I have highlighted the third company in yellow: Prologis. Prologis is a logistics company that is involved in every phase of the movement of the merchandise of international trade. The company is organized as a REIT, thus their dividend hike of 12.5% for 2008, up from an average of a 6.7% over the last 3-5 years is quite impressive. PLD's dividend hike speaks volumes about the global economy. The global economy does not have the subprime mortgage issues we have and it is growing, in some cases two or three times as fast as the US's.

When these three companies are taken together, they suggest that the global economy is alive and well. This will be a major help to American companies with international exposure. It's a big world out there, and many of these companies have been there for a long time, and it's paying off.
We own or have owned almost all of these stocks. We will not concentrate only on stocks we own. It just so happened that this week most of the actions were among companies we own and follow.

I'll update the running list in a week or so.