Rising Dividends Stocks in a Time of Falling Dividends

There has been lots of news lately about the number of companies that are cutting their dividends to preserve capital. In many cases, we believe these cuts make good economic sense when considering that capital and cash are kings and so hard to come by in the current economy. In spite of this, however, not all dividend news is bad. In fact in selected industry sectors there is a lot of good news. Those sectors with the most dividend hikes are in what we call the "essential services" sectors such as consumer staples, energy, health-care, and utilities. Companies in these sectors produce products that we use everyday. In most cases, we don't have to borrow money to buy them, and, in many respects, these companies and products have been woven into the fabric of our lives. In recent weeks eight of the companies that we follow have hiked their dividends. In the consumer staples sector Coke raised it dividend 8%, Sysco 9%, and Colgate surprised us with a 10% increase. In the energy sector, Kinder Morgan Energy Partners recently hiked its dividend on a year over year basis by 11%. In the health-care sector, Abbott Labs raised its dividend a greater-than-expected 11%, and FPL Group, a utility, also surprised us with a 6% increase. In addition to these companies in the essential services sector, there were two additional recent hikes among our holdings. Financial giant Chubb raised its dividend over 6%, and Praxair in the materials sector raised its dividend nearly 7%. You probably did not hear much about these hikes and that makes them even more significant. In this environment, dividend hikes are not being rewarded. Thus, these companies are raising their dividends for two very solid reasons: 1. Their earnings are growing and they are confident enough in their prospects, even in a slow economy, that they feel free to increase their dividends; 2. Almost all of the companies mentioned here have long histories of increasing their dividends. It is in their cultures. These are the kinds of companies we prize. They are in solid businesses that produce free cash flows from which they can pay dividends if they choose; they possess a track record of having been willing to share their financial successes with their shareholders; and they are confident enough with the unfolding events of the day to raise their dividends, even if no one cares but their shareholders. I'll keep you posted on other companies that are hiking their dividends. We own all of the companies mentioned here. Please do not use this blog for investment decisions. It is for information only.

Rising Dividends Matter: Mr. Marcial Makes His Case . . . And Ours

“Follow the Juicy Dividends.” That’s what “Businessweek” columnist Gene Marcial advocates in his February 23 “Inside Wall Street” column (Sorry I can’t find the link). In the article he points out that investing for dividends alone has not shown to be a superior investment strategy. He cites research from the Ned Davis organization that shows that it’s not just dividends; it’s rising dividends that matter. In this regard, we are in complete agreement with the article. Our research and experience over the years has convinced us that rising dividends from financially strong companies is not only a winning combination in the good times, but a solid bulwark in tough times like those we are going through now. Of course rising dividend stocks fall in the bad times, but they don’t go down as much, and they are among the first to recover. Mr. Marcial cites Ned Davis research that every investor should note: “. . . companies that have increased dividends for at least five years beat the market in every year from 1972 to 2008." During that time, the dividend growers produced a total rate of return of 8.9% while the S&P 500 Index grew by only 6.2%. As an aside, companies that maintained a fairly steady dividend grew at 6.3%. Rising Dividends matter and the key to success is not just focusing on companies that pay dividends, but on companies that have a history of increasing their dividends. The final filter is to analyse current financial results to assure that future dividend hikes are probable. There will always be surprises, but if you can keep the companies that stop increasing their dividends to a minimum, your portfolio will still do well.

Exxon Is Still a Tiger

Oil prices are trying to find a bottom along with stocks. Yet, the big international oil stocks, while down, have been doing much better than the overall market on a relative basis. Exxon is down about 11% over the past 12 months compared to the S&P 500, which is down almost 37%. The relative strength in the oils might not make sense at first until you consider that they make money in three ways: exploration and development, refining, and marketing. Therefore, while oil prices are very low it makes their so-called downstream businesses, refining and marketing, more profitable. Miles driven for the US and many world countries fell during most of 2008, as prices spiked to near $4.00 per gallon. This put pressure on the downstream portion of big oil's profits. So even though earnings for Exxon and Chevron were very good, they were held back by poor results in refining and marketing because drivers bought less gasoline. For the next couple of years the situation will be reversed. Crude prices and profits will stay low, but refining and marketing profits will perform much better. Above is a Dividend Valuation Chart for Exxon. It shows that the price is buried deep into its value bar. This in itself is not unusual; most of the stocks we own and follow are selling well under their valuations based on the long-term relationship between dividends, interest rates, and price. The things that makes Exxon stick out in these markets are its strong balance sheet, it huge free cash flow, and it's long string of dividend hikes and share buybacks. All of these taken together make Exxon a particularly interesting stock in these very troubled times. We own the stock and have for many years. Please do not make any investment decisions based on this information. Please consult your own investment advisor.

Mr. Geithner Giveth and Then Taketh Away

On November 21, 2008, President-elect Obama announced that Timothy Geithner would be his Treasury Secretary. On that day, the Dow Jones rallied almost 500 points. I wrote a blog that day saying “Thank You Mr. Geithner,” in which I explained the reasons I believed that the market had rallied so sharply. Simply put, Mr. Geithner, in his role as President of the New York Fed, had been a part of everything that had taken place with regards to fixing the broken U.S. credit system. He was, thus, an experienced hand, and even though most of us did not know much about him, he had a solid pedigree and the obvious support of Ben Bernanke, the Chairman of the Federal Reserve. I didn’t say it then, but my thinking was that the troubles in the banks and the economy needed action right away and a completely new face in the position would delay action too long. Today Mr. Geithner introduced his long- awaited plan and the Dow Jones gave back most of the 500 points (-380) that it rose on the day of the announcement of his appointment. The reason is simple. Mr. Geithner’s plan was long on concepts but very short on details. He explained over and over in various television interviews and testimony before Congress that few of the details had been worked out. He was working on it, but little was set in stone. Today the stock markets were looking for clarity and details from a guy they thought had worked on the banking crisis as long as anyone and was ready to define his plan. When the markets heard more concepts and very few details, it expressed its great disappointment by selling off. His plan did deal with the big issues such as additional capital support for solvent banks, additional programs for freeing up lending to consumers, and a mechanism to create a public-private program to buy toxic loans from banks. Given his long involvement in this issue, he may, indeed, have in mind much more specific action than his announcement today included. To give him the benefit of the doubt, he may honestly be open to the ideas of others, and held back his specific thinking in order to encourage experts from all sides of the debate to contribute their ideas. However, the market clearly was looking for his leadership today, and didn’t get it. Secretary Geithner has the opportunity over the next days and weeks to demonstrate leadership and deliver a final plan in full detail that can reverse today’s market losses – and more. Let’s hope he does, and soon.

Of Hockey Sticks and Spoons

I don't believe I have ever seen so many of the nine major stock market sectors with such similar chart patterns, something resembling a hockey stick -- down and sideways. Except for the the Financials, which are still trending lower, six of the remaining eight sectors, Basic Materials, Energy, Industrials, Staples, Tech, and Cyclicals, all are following this hockey stick formation to a greater or lesser degree. The two remaining sectors Utilities, and Health-care appear to have turned the corner and are attempting to form something resembling a spoon bottom. Between the two, however, the one that looks like it has put in the most convincing bottom and is already in an uptrend is Health-care. The chart above is the daily graph over the last year of the Health-care ishare (XLV). For our discussion here, I am using it as a proxy for the industry. The chart shows a very believable bottom was formed during October and November and the sector has made an impressive series of higher highs and higher lows since then. XLV appears to be ready to move above the January 2009 highs, which could give it clear sailing back toward the breakdown in October. Health-care's solid performance might make sense at first because of its defensive nature. However, when you take into consideration that none of us knows what the new Administration has in store for the sector, its strength is a bit of a surprise.

What Health-care has going for it is solid earnings growth. For companies reporting thus far, fourth quarter earnings have averaged over 6%. Compare this growth with the near 15% earnings loss for the average stock in the S&P 500, and the sector's performance begins to make more sense. I would add that dividend action in the group has also, on balance, been good.

I like both the Health-care and Utility sectors. In addition, we see great values in the Consumer Staples. In our minds, the greatest companies on earth are experiencing a 40% off sale, its hard not to be nibbling.

This blog is for information purposes only, please consult your own financial advisor. Clients and employees of DCM own stocks in the sectors I have discussed here.