In Search Of New Dividends

12/3/2012


The dividend train is getting more crowded. So far this year, 305 companies in the S&P 500 Index have hiked their dividends, up from 295 in the same period a year ago and 137 three years ago.

And a steady stream of companies that haven't paid dividends are changing their tune. In the 10 months that ended in October, 55 U.S.-traded companies initiated or resumed a dividend payment, versus just 28 omissions.

That 1.96-to-1 ratio of resumptions to omissions is the highest for the 10-month period in at least eight years. In contrast, omissions outnumbered initiations or resumptions nearly 5-to-1 in 2009 and more than 8-to-1 in 2008. About 63% of S&P 1500 Index companies now pay a dividend, the highest percentage in more than 13 years. And the dividend-initiation trend shows no sign of slowing.

BUYS THAT DON'T PAY DIVIDENDS
It is difficult to gauge when a company will decide to initiate a dividend, as such a move depends more on management's will than anything else. But the six recommended stocks below all hold plenty of cash and generate sufficient cash flow to fund a dividend today and grow it over time.
Industry
Average
Yield
(%)
% Of Div.
Payers In
Industry
Cash (Millions)
Free Cash Flow
---- (Millions) ----
Company
(Price; Ticker)
Current
($)

% Of
Share
Price

Last 12
Months
($)
% Of
Net
Income
Industry
Alliance Data Sys.
($140; ADS)
1.0
51
1,262
14
1,009
249
IT Services
Bed Bath & Beyond
($59; BBBY)
1.0
57
909
7
899
89
Retail
DirecTV
($49; DTV)
1.7
67
2,421
8
2,462
90
Media
EMC ($25; EMC)
1.4
37
5,446
10
5,824
216
Computers 
Express Scripts
($52; ESRX)
0.5
33
1,296
3
2,429
221
Health Care
Google
($671; GOOG)
0.4
8
45,724
20
12,670
120
Internet
Notes: Industry data considers stocks in S&P 1500 Index.

Predicting dividend declarations is difficult, as the decision is a matter of management preference. Still, we took a look at our recommended lists, trying to select a few likely candidates for new dividend. Of our 35 recommended stocks, only six don't pay a dividend. All have the resources to pay one, but none of the six has signaled a change in dividend policy for the near term. And three of them have suggested a dividend is unlikely.

Three technology-services stocks in the S&P 1500 Index initiated quarterly dividends this year, and more than half of the industry now pays a dividend. Does this put pressure on Alliance Data Systems ($140; ADS) to declare its own payout? Apparently not. When asked in October about how the company plans to invest its cash, the CFO listed acquisitions, the repurchase of warrants, and increased stakes in joint ventures as top priorities, with no mention of a dividend.


Bed Bath & Beyond ($59; BBBY) has never paid a dividend. But more than half of specialty retailers do, including three smaller firms that have initiated or resumed dividends over the last 12 months. Given the stock's volatility and slowing growth (projected annual EPS growth of 11% over the next five years, versus 15% over the last five years), a dividend could boost the shares' appeal, though the company has provided no reason to expect one.


DirecTV's ($49; DTV) lack of a dividend stands out, as two-thirds of media stocks in the S&P 1500 pay out a portion of their earnings. But when asked about a dividend in November, the CEO said investors shouldn't expect one next year, as the company still considers buybacks the most efficient way to return cash to shareholders.


With Apple ($585; APPL) initiating a dividend this year, EMC ($25; EMC) is the largest firm in the computers & peripherals group (based on stock-market value) not to pay a dividend. EMC holds $5.45 billion ($2.46 per share) in cash and has generated $5.82 billion in free cash flow over the last four quarters. However, the company hasn't said anything about paying a dividend. And with fewer than 40% of the companies in its industry paying out, EMC may not feel much pressure to do so.


Express Scripts ($52; ESRX) generated $2.43 billion in free cash flow over the last four quarters, nearly six times the amount needed to fund a dividend yielding 1% annually. But in the wake of a disappointing quarter, we aren't holding our breath. Just one-third of stocks in the health-care providers & services group pay a dividend, and the industry average yield is just 0.5%.


Internet titan Google ($671; GOOG) has taken plenty of heat over its lack of a dividend. Critics argue that Google holds nearly $46 billion in cash (20% of its share price) and generates more than $3 billion in free cash flow per quarter. But when asked in the spring how he would respond to Apple's dividend announcement, CEO Larry Page said, "I think Apple has more cash than we do," adding that the company had nothing to announce.


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