Dividend Growth Tougher To Find
The dividend has become something of an endangered species, with numerous blue-chip companies making deep cuts to the payout or scrapping it altogether.
According to Standard & Poor’s, 46 S&P 500 companies have announced dividend cuts so far this year. The cuts represent a total decline of $42 billion in lost annualized dividends for 2009, more than the amount of cuts in all of 2008.
Rather than raise dividends, companies are shoring up balance sheets and piling up cash like sandbags to keep from washing away. Excluding financials, S&P 500 companies held 4% more cash in the most recent quarter than they did in the same period last year despite a decline in operating cash flow over the last 12 months.
Consider dividends as a component of personal income. Personal dividend income — cash payments made by corporations to U.S. residents — has declined sequentially in every month from June 2008 through February 2009, sinking 9% in that period.
Growth turned negative last July, and those declines could persist for some time. Against that backdrop, companies that raise their dividends deliver a particularly strong statement about confidence in their financial strength or business prospects.
Airgas ($37; ARG) has hiked its dividend every year since the payout’s inception in 2003. While Airgas shares are down sharply from 2008 highs, the company’s operating momentum has held up well despite the recession. In the nine months ended December, sales rose nearly 15%, though growth slowed to 7% in the December quarter.
The consolidation of a highly fragmented industry should continue to benefit Airgas, which relies on an aggressive acquisition strategy. In fiscal 2009 ended March, Airgas purchased at least 13 companies, adding more than $200 million in annual sales.
On March 23, Airgas trimmed per-share-profit guidance for fiscal 2009 ended March, citing low sales across most segments, particularly manufacturing. Airgas still expects 15% to 16% profit growth for the fiscal year. The news led Wall Street to lower estimates for fiscal 2010 as well, with earnings per share now expected to decline 8%. However, since the announcement, Airgas shares have surged 12%, roughly double the gain made by the S&P 500 Index. The strong share-price action could suggest increased confidence that Airgas’ cost-cutting efforts will offset low volumes. Airgas is slated to report earnings for the March quarter and fiscal 2009 on May 5. Airgas is a Buy.
Questar ($31; STR) generates about 30% of its revenue from a natural-gas utility serving Utah, Wyoming, and Idaho. The other 70% comes from energy exploration, production, marketing, and pipelines. The company has raised its quarterly dividend in each of the last 30 years.
Lower natural-gas prices caused Questar to slash 2009 profit guidance in February, though the company’s hedging activities and regulated utility make it less sensitive to energy prices than many competitors. The company now expects per-share profits to fall by at least 32% this year. Questar also reduced earlier forecasts for 2009 production. The new production strategy involves drilling fewer wells, but the company still expects 5% to 9% production growth this year. Questar, yielding 1.6%, is a Long-Term Buy.
Sigma-Aldrich ($38; SIAL) sells chemicals to research labs, universities, and industrial companies. While Wall Street is slashing earnings projections for many industrial and materials companies, Sigma’s 2009 consensus estimate has edged higher over the last month. According to the consensus, after roughly flat profits this year, per-share earnings should bounce 10% in 2010. With 65% of sales coming from foreign markets, currency losses could cause revenue to decline this year. But operating margins should widen as Sigma improves the efficiency of its supply chain.
Considering Sigma’s positive outlook, the shares seem reasonably valued at 14 times expected 2009 earnings. The company has grown sales, cash flow, and earnings in each of the past six years In February, Sigma raised its quarterly dividend 12% to $0.145 per share, marking the 18th consecutive annual increase. Sigma-Aldrich is a Long-Term Buy.
Many of United Technologies’ ($45; UTX) businesses — aircraft engines, heating and air-conditioning equipment, elevators, helicopters, and electronic controls — face weakening demand as a result of the global slowdown. Revenue rose nearly 8% in 2008 but dipped 1% during the December quarter. The consensus projects pressures to continue this year, with sales expected to fall 7% and per-share profits expected to drop 14% before recovering with a 6% gain in 2010.
United Technologies shares trade at less than 11 times the modest 2009 consensus profit estimate, a 29% discount to the three-year average forward valuation of 15. Moreover, the company holds leading positions in several cyclical markets and should benefit from a global recovery.
Downturn notwithstanding, United Technologies continues to share the wealth with stockholders. The company has set aside $1 billion for share repurchases this year after lowering its share count by 4% last year. At current prices, $1 billion could repurchase about 2.3% of shares outstanding. United Technologies has also raised its dividend every year since 1994. Cash flow consistently exceeds net income, and dividend hikes should continue. United Technologies, yielding 3.4%, is a Buy and a Long-Term Buy.
One of only two stocks in the Dow Jones Industrial Average that generated a positive return in 2008, Wal-Mart Stores ($52; WMT) has been a bright spot in a mostly dismal retail sector. The discount giant’s February same-store sales rose 5.1% in the U.S. excluding gasoline, twice the consensus estimate, while the other 32 retailers tracked by the Retail Metrics Index delivered an aggregated same-store-sales decline of 4.1%. The discounter expects 1% to 3% growth in same-store sales in March and April.
During the downturn, Wal-Mart’s reputation as a discounter is attracting more affluent customers for big-ticket purchases, such as electronics, that provide higher profit margins than consumables. This consumer shift could help Wal-Mart reach its growth target for per-share profits in fiscal 2010 ending January. The retailer expects profit growth of 1% to 5% in a sector expected to contract this year.
Wal-Mart has increased its dividend every year since the first payout in 1974. In March, the company raised the quarterly payout 15% to $0.2725 per share. Wal-Mart, yielding 2.1%, is a Long-Term Buy.