Johnson and Johnson Raises Dividend 6.5%

In recent days, almost everyone was expecting a dividend hike announcement from Johnson and Johnson (JNJ). Predicting an increase wasn't a tough call. JNJ had raised their dividend for 44 years in a row. What was a tough call was the amount of the hike. On April 23, they announced a 6.5% dividend increase. In these days of dividend cuts, I applaud JNJ's hike, but I thought it was a bit light. The estimates ranged from 6% to 9.5%. The consensus was in the 8% range. With earnings over the last twelve months having risen nearly 9.5%, I was hoping for an increase between 8% and 9.5%, say 8.5%. Thus, the increase of 6.5% was at first a bit disappointing. To find reasons why the hike was less than expected is not a tough task. The current administration seems bent on sticking their noses and fingers deeper and deeper into America's economic system. With the administration's talk of big changes to our current health-care reimbursement programs, JNJ may be signaling a new, less optimistic view of their long-term prospects. That notion is also born out by Wall Street analysts' 3-5 year forward earning estimates for JNJ, which are now at 8%. In these days of weak earnings reports, 8% long-term growth sounds exceptional, but in JNJ's case that is far lower than their last 5-year earnings growth rate of 11.5%. Indeed, current estimates project that 2009's earnings will be about flat with 2008. As I think about it, however, I believe JNJ is just being pragmatic. I think they are building in a cushion that will enable them to hike their dividend again in 2009 when earnings growth may be meager. I just can't be too pessimistic about a company that has done as many things right over the last 20 years as has JNJ. Furthermore, is it not remarkable that JNJ is currently selling at about 11 times trailing 12-month earnings. That is about half their 20-year average of 22x. Combine this low PE with a dividend yield of almost 4% and you have one of those old fashioned "value" stocks. Funny, I always thought JNJ was a growth stock. These metrics, however, would suggest that it is now being priced like a value stock. That seems odd especially when we consider it has a strong consumer brand (33% of sales) that is not encumbered by health-care pricing issues. In these days, it is very easy to beat up on any stock, but I have a very strong feeling that investors are underestimating JNJ's broad product line and worldwide clout. We own the stock. Please do not use this information for investment purposes. Please consult your own investment adviser.

Procter and Gamble -- Dividends Talk

Procter and Gamble announced late Tuesday that they were hiking their dividend by 10%. This increase was nearly twice what many analysts were estimating and offers important clues about PG's view of the current economy. Here's the reason: Dividends have been under attack over the last year as a result of the weak economy, but also because of many companies' need to conserve capital. For these reasons and others, the notion has developed that even companies with plenty of free cash flow like PG would use this opportunity to set their dividend growth rates on a lower track. PG's 10% dividend hike blows that idea away. Indeed, it is a message that I believe will be corroborated by many more companies. Companies that are committed to a dividend aren't going to change their ways very much. They will only do so if it is a matter of sound business practices or survival. PG could have raised their dividend by anything between 5% and 7% and most people would have been happy. In my judgment, by hiking the dividend 10%, PG is making a statement about their view of the unfolding economic landscape. In short, they believe the world hasn't changed as much as the headlines might suggest. They must believe their worldwide business is still on a double digit growth track, and that people won't abandon brand name products for cheaper private label offerings. Dividends are the most tangible link between a company and its long-term shareholders. We are going through a very difficult time in some industries, but wise companies will think twice before tampering too much with this link to their most patient and dedicated owners. Thank you Procter and Gamble for showing us your stuff.

We own the stock. This blog is for information purposes only. Please consult your own investment advisor.

Is This The Bottom? Part III

I think it is; I think it is. Maybe if I say it twice it will make it so. On March 20, I asked the "bottom" question for the first time. My reasons for asking were mainly technical in nature, although I said I believed the enormous under girding of the banking system by the Fed and other governmental agencies was starting to have an effect. I asked the "bottom" question again on March 26. This time I explained that my reasons for leaning to the affirmative were not only based on the technical action of stocks, but most importantly on the fundamentals. The last two weeks of March saw four economic releases for February housing data that were all better-than-expected. Good grief surely housing could not be turning, especially when home prices were still falling and defaults were still on the rise. But yes, new housing permits, new home sales, exiting home sales and pending home sales all turned higher in February and beat estimates by between 6% and 22%. I think yesterday's Wells Fargo pre-announcement of better-than-expected earnings validates the February housing data. It was clear from Wells Fargo's earnings pre-announcent that a big increase in mortgage originations was driving their good results. Now for some additional good news. I'm hearing anecdotal reports from realtors that I know around the country that March real estate readings in many of the most troubled areas of the country, such as Florida, California, and Arizona are turning up. In almost all cases the year over sales are up substantially, and the inventory of homes is shrinking. Home prices in all areas are still falling, but unit sales are increasing and walk-through business is growing rapidly. I have said many times before that real estate got us into this mess, and improvements in real estate will need to get us out. Increases in unit sales are good news for real estate and the economy, but we need for real estate prices to stabilize. That would seem to be many months off. However, the Fed's purchases of long-term Treasury bonds and mortgage backed securities has driven down 30-year mortgage rates to about 4.75%. That is proving to be a boon to refinancings as well as new buyers. My brother in Indianapolis says he has a number of buyers who are ready to buy, but they cannot sell their houses. That may not sound like good news, but it is. Just a few month ago, he said things were completely dead. The fall in mortgage rates is definitely putting more people in the market, and I'm hoping that one of them is interested in one of my brother's clients' homes, so a fortuitous chain reaction can begin. My sister-in-law in Arizona, says she has had more activity in the last few weeks than she has seen in months. It may seem early to call a bottom in the economy with only one month's data and a few anecdotes. Indeed, the good news may later be seen as false hope, but when you combine good data and anecdotes with the fact that stocks have staged a bona fide technical rally, the turn around appears to be sprouting legs.

Is This The Bottom? Part ll

Last week with the stock market having turned modestly higher, I asked if this turn could hold when so many other recent upturns have failed. I concluded that my answer was yes; not because the chart of the Dow Jones Industrial Average looked good, but because of the massive under girding of the economy by the various government programs that would shore up the banking industry, unfreeze consumer lending, and stimulate spending. I should have added something that I have been saying for months: the law of supply and demand. Sometimes I think the US media are the most economically illiterate people in the world. They simply have no idea of the power of the free market and the law of supply and demand. The free market (of course with proper regulation) is simply a marvel at setting price where the merchandise will sell. As we are all too familiar, the US has been in an incredible housing recession over the last two years, which has caused prices to fall by 25% and more in certain areas. Countless news media reports I have read have been saying that there was no end in sight. Prices and housing unit sales could only go lower. They were partly right. Prices are going lower, at least for a little while, but housing on a unit sales basis has had some very good news in recent days, and I believe it is one of the big reasons that the stock market has risen nearly 600 points since last Friday. Last week new building permits and housing starts were surprisingly strong, and this week new and existing home sales were much higher than expected. Home prices, indeed, have fallen and will continue to do so until excess inventory is worked off, but unit sales of homes appears to be turning up in many parts of the country. Importantly, if unit home sales have bottomed and are turning up, they will ultimately take home prices . . . and stock prices with them. I do not want to discount the good durable goods orders data this week, or the new program announced by Treasury Secretary Geithner to rid the banks of toxic loans. The latter particularly is vital to the health of the banks. Having said this, housing on a unit basis appears to be bottoming, and housing is the key to a sustained rally in stocks. The simple reason is this: housing got us into this mess, and I believe housing will have to get us out. As I write this, the market is pushing 8000 on the Dow. I would be a very surprised person if the recent upturn races right through 8000 and keeps going. If you look at the chart above, you will see that 8000 was an important level of support from October through November. There are plenty of sellers waiting at the 8000 level to sell out and get their money back. Thus, I would predict some back and forth sideways motion for a few weeks as we digest recent data and evaluate new housing statistics for a corroboration of the recent good news. If this is the bottom in housing unit sales, it has come the old fashion way: by prices falling to a point where the buyers were waiting, and the same goes for stocks. A bottom in housing unit sales would be welcomed news, but for a full turn around to begin in the economy, we need home prices to at least flatten out. That has not happened yet, so the stock market will remain on edge. But this was a very good week for stocks and lends credence to the notion that we have seen the bottom.

Is This The Bottom?

We spend most of our time looking at our various valuation models in search of stocks that are cheap. We do, however, watch the price trends of stocks and the major indices, especially in times like these when we believe prices have become so disconnected from valuations.

The chart at the right (click to enlarge) shows the Dow Jones Industrial Average (DJIA) for the last twelve months. You will note that we are also showing two moving averages: a 200 day (dark line) and a 50 day (light line).

The 50-day moving average, in our minds, is the key technical indicator that most traders are watching. With the benefit of hindsight, the reason is simple: the 50-day moving average has been a key level of resistance for the overall market since last June.

Look at price movement of the DJIA during May of last year. It was at this point that the DJIA fell through its 50-day moving average. The chart also shows the market's feeble attempt to climb back above the 50-day moving average in late May and again in early June.

The market then fell sharply before attempting to make a bottom in mid-July. At that time, it turned higher and made a valiant attempt to pierce the 50-day moving average during August and September. Unfortunately, the DJIA failed in its attempt to get through the 50-day and once again it sold off sharply in October.

After the sharp sell off, the market appeared to find a bottom in November and December at around the 8000 level on the DJIA. But again its attempt to meaningfully pierce the 50-day moving average in December and January ran into sellers, who once again drove stock prices into a free fall that finally reached the 6600 level on the DJIA.

The DJIA is now attempting at least its fourth try in the last year at getting out from under the selling pressure that has come each time the market has tried to get through the 50-day moving average. The chart shows that the recent rally has once again brought us very close to the 50-day moving average. The actual level is near 7500.

We think the odds have dramatically improved that a bottom is near for these reasons. Chart reading is not an exercise in quantifying valuation. It is an exercise in measuring emotions, particularly at its extremes. In our judgment, the DJIA has kept breaking below its 50-day moving average at critical levels because of negative momentum, but also because the majority of investors did not believe the Fed and the US Government were doing enough to deal with the credit crisis. There are now at least three major programs that either are now or soon will be in place to deal with the capital of the banks, the freezing up of consumer and corporate loans, and the real estate fiasco. The latest plan was the announcement this week by the Federal Reserve. Fed chief Ben Bernanke announced that the Fed will buy up to a trillion dollars of US government bonds, mortgage agency notes, and mortgage backed securities. These purchases should push not only mortgage rates lower, but also interest costs for corporation. Combine all this with the bailout of the Auto industry and the stimulus plan and the US government has now gone a long way toward putting a floor under the economy and we believe under the stock market, as well. In light of this massive undergirding of the economy, we believe that the probabilities for upticks in both economic growth and corporate profits have grown for the latter part of 2009. If this is the case, the odds that a decisive bottom in the Dow Jones is near have increased. This argument is augmented by the fact that stocks are down over 50% from their highs. Indeed, one could say that we are floating in a sea of value. All we need is some sort of good news to propel stocks to much higher levels. If the market is able to fight its way through the 50-day moving average many of the persistent sellers of the last year will become buyers and add staying power to the beginnings of a new bull market.

More on Rising Dividend Research

A few weeks ago I discussed a column from Gene Marcial of "BusinessWeek" extolling the virtues of rising dividend investing. Mr. Marcial cited a research report from the Ned Davis Company, a well respected investment research firm, that showed that rising dividend stocks had outperformed other general investment styles from 1972 through 2008. I wanted to add a bit to that earlier piece because a friend of mine sent me a copy of the summary of the whole report. The following are the annual rates of returns for various types of dividend-oriented investment styles over the last 36 years.

1. 8.6% Dividend Growers & Initiators -- Companies that have raised their dividends for at least five consecutive years.
2. 7.6% All Dividend-Paying Stocks
3. 6.0% Dividend Payers with No Change in Dividends
4. -0.3% Dividend Cutters or Eliminators
5. 0.2% Non-Dividend Paying Stocks
6. 5.9% S&P Geometric Equal-Weighted Total Return Index

The table makes some powerful statements about stock performance over the last 36 years:

1. In general dividends matter
2. Consistently rising dividends matter most of all
3. Non-Dividend Payers, which would include a lot of tech stocks, have had a lot of ups and downs, but after 36 years are about where they started.
4. Dividend Cutters or Eliminators are to be avoided

The above returns were based on a monthly equal-weighted geometric average of total returns of S&P 500 component stocks, with components reconstituted monthly.

With all the news of companies that are cutting their dividends, you might think that a rising dividend strategy might have become obsolete. That is far from the truth. There are many high quality companies that are increasing their dividends year after year and, yet, still possess a low dividend payout ratio.

I'll have more to say about additional rising dividend companies in the weeks and months ahead.

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.