Dont panic, dividend seekers

8/11/2008


The credit crunch, shaky economy, and deteriorating profit outlook have taken a bite out of corporate dividends.

In the first six months of 2008, 180 of the roughly 7,000 companies tracked by Standard & Poor’s decreased or omitted their dividend, compared to just 37 in the first half of 2007. The June quarter was particularly ugly, as 97 companies decreased or eliminated their dividends — the worst showing since 1990.

Not all of the news is negative, however. Through June 30, 1,053 of the stocks followed by S&P increased or initiated their dividends. The Forecasts has historically been fond of stocks with dividend growth, and many of the companies we cover are boosting payouts. For investors seeking dividend growers with a long history of payout hikes, the four reviewed below look particularly attractive.

General Dynamics ($91; NYSE: GD), a defense and aerospace manufacturer, is delivering strong growth in all its business segments. About two-thirds of sales come from the U.S. government, with the remainder from foreign governments and purchasers of private business jets. General Dynamics is benefiting from strong demand for tanks, combat vehicles, and tactical communications systems, and the need to replace and upgrade equipment. Demand for private jets has also been robust as corporate travelers and wealthy individuals seek to avoid the aggravation of flying commercial airlines.

June-quarter per-share earnings rose 19% to $1.51, $0.07 above the consensus on 11% revenue growth. Efficiency improvements have operating margins on the rise. The funded backlog grew nearly 13% from the March quarter to the June quarter. At roughly $45 billion, funded backlog represents more than 150% of annual revenue.

General Dynamics has increased its dividend in each of the last 11 years, growing the payout at an annualized rate of 12%, including a 21% increase in March.  General Dynamics, yielding 1.5%, is a Buy and a Long-Term Buy.


IBM ($128; NYSE: IBM) is sharing its robust cash flow ($18 billion over the last 12 months) with stockholders. The tech titan has raised its quarterly dividend 13 years in a row and nearly tripled the payout over the last five years. An aggressive stock-buyback program has also reduced shares outstanding in each of the last 13 years. IBM plans $12 billion in buybacks this year as part of a $15 billion stock-repurchase plan authorized in February.

In the June quarter, operating cash flow increased 24% to $4.3 billion, and the company ended the quarter with about $9.8 billion in cash. IBM reported strong June-quarter results despite difficult economic conditions in the U.S. Excluding currency gains, the Americas region posted revenue growth of 6% in the quarter. Sales in the Europe and Middle East region rose 7%, with Asia-Pacific up 6%. The troubled U.S. financial sector accounts for less than 8% of total sales, and much of that is recurring revenue.

Strong foreign exposure — 63% of 2007 revenue — and an increasing presence in fast-growing emerging markets are driving growth. Consensus estimates project per-share-profit growth of 24% in 2008 and 11% in 2009. IBM is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson ($70; NYSE: JNJ), which has raised its dividend in each of the last 46 years, in April increased its quarterly payment 11% to $0.46 per share. The company’s long history of dividend increases has been supported by steady profit growth and strong finances, and the company has the wherewithal to continue raising the payout.

A diverse business mix includes pharmaceuticals, medical devices, and consumer products. J&J is geographically diverse as well, generating about 47% of sales abroad. Patent expirations have stunted growth in the pharmaceutical segment, but J&J boasts a strong product pipeline, with several potential blockbuster drugs in late-stage development. The other two divisions — medical devices and consumer products — have been performing well. Consumer-products growth stems from strong sales of over-the-counter drugs, particularly the allergy treatment Zyrtec.

Consensus estimates for 2008 and 2009 have been trending upward over the last month and project per-share-profit growth of 8% this year and 5% next year — conservative figures in our view. Johnson & Johnson, trading at a reasonable 16 times expected 2008 earnings and yielding 2.6%, is a Buy and a Long-Term Buy.


Wal-Mart Stores ($60; NYSE: WMT) increased its annual dividend by 8% this year to $0.95 per share, representing a payout of more than $3.6 billion in dividends to shareholders in fiscal 2009 ending January. Wal-Mart has increased its dividend every year since first declaring one in 1974.

In June, the retail giant reduced its forecast for capital spending in fiscal 2009 — it now expects to spend $13 billion to $14 billion, down from a previous range of $13.5 billion to $15.2 billion and below the $14.9 billion spent in fiscal 2008. Wal-Mart plans to open fewer new supercenter stores in the U.S. to reduce cannibalization and improve sales at existing locations.

Much of Wal-Mart’s investment is earmarked for bolstering its international presence. Foreign sales represented 24% of total revenue in fiscal 2008, up from 5% a decade ago. International revenue increased 18%, well above the 6% growth seen in the U.S. Wal-Mart plans to boost spending in such mature foreign markets as the U.K. and Japan and such emerging markets as Brazil, China, and India. Wal-Mart, yielding 1.6%, is a Long-Term Buy.

MONITORED STOCKS WITH DIVIDEND INCREASES IN LAST SIX MONTHS
———— Annual Dividend ————
Company (Price; Ticker)
New
($)
Old
($)
Increase
(%)
Div.
Yield
(%)
Payout
Ratio *
(%)
Payment Dates
Industry
Advice
Allstate ($47; ALL)
1.64
1.52
8
3.5
28
Jan, Apr, Jul, Oct
Property & Casualty Insur.
Neutral
American Int’l Group ($30; AIG)
0.88
0.80
10
2.9
191
Mar, Jun, Sep, Dec
Multiline Insurance
Neutral
Ameriprise ($44; AMP)
0.68
0.60
13
1.6
17
Feb, May, Aug, Nov
Asset Management
Neutral
Assurant ($60; AIZ)
0.56
0.48
17
0.9
9
Mar, Jun, Sep, Dec
Multiline Insurance
Neutral
Best Buy ($41; BBY)
0.56
0.52
8
1.4
17
Feb, May, Aug, Nov
Electronics Retail 
Neutral
BP ($60; BP)
3.36
3.25
4
5.6
42
Mar, Jun, Sep, Dec
Integrated Oil & Gas
Neutral
Bunge ($92; BG)
0.70
0.68
3
0.8
8
Mar, Jun, Sep, Dec
Agriculture
Neutral
Burlington Northern ($103; BNI)
1.60
1.28
25
1.6
24
Feb, May, Aug, Nov
Railroads
Neutral
Canadian Nat'l Rail. ($54; CNI) e
0.91
0.87
5
1.7
27
Mar, Jun, Sep, Dec
Railroads
Neutral
Cardinal Health ($56; CAH)
0.56
0.48
17
1.0
15
Jan, Apr, Jul, Oct
Health-Care Distributors
Neutral
Caterpillar ($68; CAT)
1.68
1.44
17
2.5
30
Feb, May, Aug, Nov
Construction & Farm Equip.
Neutral
CBS ($16; CBS)
1.08
1.00
8
6.5
56
Jan, Apr, Jul, Oct
Broadcasting/Cable TV
Neutral
Chevron ($82; CVX)
2.60
2.32
12
3.2
29
Mar, Jun, Sep, Dec
Integrated Oil & Gas
Buy †
Colgate-Palmolive ($76; CL)
1.60
1.44
11
2.1
46
Feb, May, Aug, Nov
Household Products
Neutral
Cooper Industries ($43; CBE)
0.92
0.88
5
2.1
28
Jan, Apr, Jul, Oct
Electrical Components
Buy †
Costco Wholesale ($65; COST)
0.64
0.58
10
1.0
22
Feb, May, Aug, Nov
Super Centers
Neutral
CVS Caremark ($38; CVS)
0.28
0.24
15
0.7
14
Jan, Apr, Jul, Oct
Drugstores
Neutral
Deere ($67; DE)
1.12
1.00
12
1.7
24
Jan, Apr, Jul, Oct
Construction & Farm Equip.
Neutral
Delphi Financial Group ($26; DFG)
0.40
0.36
11
1.6
14
Mar, Jun, Sep, Dec
Life & Health Insurance
Neutral
Duke Energy ($18; DUK)
0.92
0.88
5
5.2
68
Mar, Jun, Sep, Dec
Electric Utilities
Neutral
Exxon Mobil ($78; XOM)
1.60
1.40
14
2.0
21
Mar, Jun, Sep, Dec
Integrated Oil & Gas
LT Buy
FedEx ($84; FDX)
0.44
0.40
10
0.5
8
Jan, Apr, Jul, Oct
Air Freight
Neutral
General Dynamics ($91; GD)
1.40
1.16
21
1.5
26
Feb, May, Aug, Nov
Aerospace/Defense
Buy †
General Mills ($66; GIS)
1.72
1.60
7
2.6
48
Jan, Apr, Jul, Oct
Packaged Food
Neutral
Harley-Davidson ($40; HOG)
1.32
1.20
10
3.3
35
Mar, Jun, Sep, Dec
Motorcycles
Neutral
Heinz ($51; HNZ)
1.66
1.52
9
3.2
63
Jan, Apr, Jul, Oct
Packaged Food
Neutral
IBM ($128; IBM)
2.00
1.60
25
1.6
26
Mar, Jun, Sep, Dec
Computer Hardware
Focus Buy †
Intel ($23; INTC)
0.56
0.51
10
2.4
48
Mar, Jun, Sep, Dec
Semiconductors
Neutral
Johnson & Johnson ($70; JNJ)
1.84
1.66
11
2.6
43
Mar, Jun, Sep, Dec
Drugs
Buy †
Kellogg ($54; K)
1.36
1.24
10
2.5
45
Mar, Jun, Sep, Dec
Food — Packaged
Neutral
Kimberly-Clark ($61; KMB)
2.32
2.12
9
3.8
54
Jan, Apr, Jul, Oct
Household Products
Neutral
Kimco Realty ($37; KIM)
1.76
1.60
10
4.8
73
Jan, Apr, Jul, Oct
REITs
Neutral
Lowe’s ($21; LOW)
0.34
0.32
6
1.6
19
Jan, Apr, Jul, Oct
Home-Improvement Retail
Neutral
Marriott International ($27; MAR)
0.35
0.30
17
1.3
19
Jan, Apr, Jul, Oct
Hotels
Neutral
Medtronic ($54; MDT)
0.75
0.50
50
1.4
29
Jan, Apr, Jul, Oct
Health-Care Equip.
Neutral
Monsanto ($107; MON)
0.96
0.70
37
0.9
27
Jan, Apr, Jul, Oct
Agricultural
Neutral
Norfolk Southern ($73; NSC)
1.28
1.16
10
1.8
32
Mar, Jun, Sep, Dec
Railroads
Neutral
Paychex ($34; PAYX)
1.24
1.20
3
3.7
79
Feb, May, Aug, Nov
Data Processing
Neutral
PepsiCo ($69; PEP)
1.70
1.50
13
2.5
50
Mar, Jun, Sep, Dec
Beverages
Buy †
Procter & Gamble ($68; PG)
1.60
1.40
14
2.4
47
Feb, May, Aug, Nov
Household Products
Neutral
Qualcomm ($56; QCOM)
0.64
0.56
14
1.1
30
Mar, Jun, Sep, Dec
Telecom Equipment
Focus Buy †
Safeway ($28; SWY)
0.33
0.28
20
1.2
16
Jan, Apr, Jul, Oct
Food
Neutral
Target ($48; TGT)
0.64
0.56
14
1.3
19
Mar, Jun, Sep, Dec
General Merchandise
Neutral
TJX ($35; TJX)
0.44
0.36
22
1.2
22
Feb, May, Aug, Nov
Apparel Retail
Neutral
Tyco International ($44; TYC)
0.60
0.35
71
1.4
24
Jan, Apr, Jul, Oct
Industrial Conglomerates
Neutral
Union Pacific ($82; UNP)
1.08
0.88
23
1.3
28
Jan, Apr, Jul, Oct
Railroads
Neutral
Valero Energy ($32; VLO)
0.60
0.48
25
1.9
9
Mar, Jun, Sep, Dec
Refining & Marketing
Neutral
Walgreen ($35; WAG)
0.45
0.38
18
1.3
21
Mar, Jun, Sep, Dec
Drugstores
LT Buy
Wal-Mart Stores ($60; WMT)
0.95
0.88
8
1.6
30
Mar, Jun, Sep, Dec
Super Centers
LT Buy
Wells Fargo ($32; WFC)
1.36
1.24
10
4.3
53
Mar, Jun, Sep, Dec
Banks
LT Buy
† Also a Long-Term Buy.    e Estimated; dividend paid in Canadian dollars.    * Indicated dividend divided by trailing earnings.

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