Dividends Bounce Back

10/10/2011


Sixteen members of the S&P 500 Index raised dividends in September, the most for that month in more than seven years. The upswing reflects broader trends, as the number of positive dividend actions for the year is on pace to reach its highest level since 2007.

Nevertheless, the S&P 500's dividend payments are not expected to return to prerecession levels until 2013. It's not that companies are short on cash. Rather, caution remains the prevailing theme; some want to hoard cash in case the financial system siezes up, while others don't want to have to cut payouts in the event of another downturn. Excluding financials, S&P 500 companies are sitting on nearly $1.14 trillion in cash, up 13% from a year ago. At the same time, long-term debt has risen nearly 7% as companies have taken advantage of low yields in the corporate bond market.

In a brutal year for stocks of all stripes, S&P 500 dividend payers have performed somewhat better than nonpayers, producing a negative average total return of 11%, versus a negative 16% for the rest. Dividends provide investors a cash cushion, a tangible dose of reliability that many crave in turbulent times.

Income investors have long embraced the telecommunications and utilities sectors for their rich dividend yields. But the table below illustrates other sweet spots as well. For instance, dividend-paying stocks in the consumer-staples sector average a yield of 3%, and 18% of these dividend payers yield more than 4%.

SECTOR SNAPSHOT FOR S&P 500 DIVIDEND PAYERS
Dividend Yield
% Of Dividend Payers
Sector
(No. Of Dividend Payers)
Average
(%)
Median
(%)
High
(%)
Low
(%)
Yielding
More
Than 2%
(%)
Yielding
More
Than 4%
(%)
Avg. Div.
Payout
Ratio
(%)
Cons. Discretionary (58)
2.3
2.1
5.7
0.6
59
5
32
Consumer Staples (40)
3.0
3.2
6.2
0.6
78
18
44
Energy (33)
1.6
1.2
4.2
0.1
30
6
20
Financials (73)
2.7
2.5
6.2
0.2
71
15
32
Health Care (27)
2.2
1.7
5.3
0.1
48
15
24
Industrials (57)
2.6
2.1
4.8
0.1
67
11
33
Materials (29)
2.5
2.2
4.6
0.9
66
17
34
Technology (36)
2.2
2.1
4.8
0.1
53
8
26
Telecom Services (5)
8.6
9.0
13.3
5.5
100
100
90
Utilities (31)
4.5
4.4
5.9
2.6
100
77
62
S&P 500 (389)
2.7
2.5
13.3
0.1
65
18
34

However, we urge investors to take more into consideration than yield alone. We favor dividend payers with the potential for dividend growth in the years ahead.

The table below lists 38 A-rated stocks that have raised dividends in the last year, most of which have a history of hiking the payout. Two are reviewed below.

Microsoft ($25; MSFT) announced a 25% dividend hike last month, more than double its three-year growth rate. The new dividend gives the stock a 3.2% yield, well above the 2.2% average for the technology sector. Microsoft also pledged to continue its share-repurchase program, set to expire next September. Still authorized to repurchase $12.2 billion, Microsoft could shrink its share count by 6% in the next year.

Some investors clamor for yet more dividend growth, which Microsoft appears capable of delivering, given its modest payout ratio, consistent cash generation, and strong balance sheet. For the 12 months ended June, free cash flow rose 11% to $19.46 billion, lifting cash assets to $52.77 billion. Net cash equals $4.79 per share, nearly 20% of Microsoft's stock price. Moreover, Microsoft's triple-A credit rating means it can borrow on the cheap.

Under a new patent-licensing agreement, Microsoft stands to collect between $3 and $10 for each Samsung device that runs on Google's ($502; GOOG) Android operating system, analysts say. That deal could augment annual earnings per share anywhere from $0.02 to $0.09 and revenue by about $450 million. Microsoft earned $2.69 per share on $69.94 billion in sales last year. The stock trades at less than nine times estimated current-year earnings, 25% below its peer-group median. Microsoft is a Buy and a Long-Term Buy.


Comcast ($21; CMCSa) has increased annual free cash flow by 12% or more in five consecutive years. Boosted by its 51% stake in NBC Universal, Comcast generated $4.01 billion of free cash flow in the first half of 2011, up 47%. Comcast is stashing away excess cash delivered by the NBC Universal unit for the opportunity to buy the rest of the business from General Electric ($15; GE) by 2017.

Cash produced by Comcast's cable business is earmarked for dividends and share repurchases. In the past three years, Comcast's quarterly dividend has grown at a 22% rate, while buybacks have reduced the share count by 6%. The payout ratio of 32% falls in line with Comcast's sector average, suggesting that the company has flexibility to keep boosting the dividend. For the September quarter, Wall Street targets per-share earnings of $0.40, up 29% on 50% revenue growth. Strong growth should continue into 2012, with Comcast expected to grow per-share earnings 20% and revenue 8%. Comcast is a Long-Term Buy.

DIVIDEND RAISERS
All 38 of the A-rated companies below have raised their dividend in the last year, and most have a history of regular hikes. Stocks recommended for purchase are presented in bold.
3-Year
Annual.
Div.
Growth
(%)
Estimated
-- Current-Year --
Company (Price; Ticker)
Div.
($)
Yield
(%)
Last
Increase
(%)
Div.
Payout
Ratio
(%)
EPS
($)
Change
(%)
Quadrix
Overall
Score
Dividend Schedule
Abbott Laboratories ($51; ABT)
1.92
3.8
9
10
44
4.64
11
94
Feb, May,
Aug, Nov
Accenture ($54; ACN)
1.35
2.5
50
29
40
3.82
12
92
May, Nov
Altera ($32; ALTR)
0.32
1.0
33
12
12
2.52
1
79
Mar, Jun,
Sep, Dec
AmerisourceBergen ($36; ABC)
0.46
1.3
15
42
18
2.55
18
82
Mar, Jun,
Sep, Dec
Applied Materials ($10; AMAT)
0.32
3.1
14
7
22
1.29
25
97
Mar, Jun,
Sep, Dec
Baxter International ($54; BAX)
1.24
2.3
7
16
30
4.31
8
84
Jan, Apr,
Jul, Oct
BlackRock ($148; BLK)
5.50
3.7
38
18
45
12.37
13
82
Mar, Jun,
Sep, Dec
Bristol-Myers Squibb ($32; BMY)
1.32
4.1
3
3
60
2.27
5
80
Feb, May,
Aug, Nov
CF Industries ($124; CF)
1.60
1.3
300
19
11
21.26
164
100
Feb, May,
Aug, Nov
Chevron ($91; CVX)
3.12
3.4
8
7
27
13.45
41
97
Mar, Jun,
Sep, Dec
Comcast ($21; CMCSa)
0.45
2.1
19
22
31
1.62
23
94
Jan, Apr,
Jul, Oct
ConocoPhillips ($62; COP)
2.64
4.2
20
11
37
8.27
40
82
Mar, Jun,
Sep, Dec
Covidien ($43; COV) e
0.90
2.1
13
18
24
3.92
16
96
Feb, May,
Aug, Nov
CSX ($19; CSX)
0.48
2.5
38
21
31
1.72
27
79
Mar, Jun,
Sep, Dec
Dover ($47; DOV)
1.26
2.7
15
11
31
4.50
30
77
Mar, Jun,
Sep, Dec
Exxon Mobil ($73; XOM)
1.88
2.6
7
7
25
8.59
38
92
Mar, Jun,
Sep, Dec
Freeport-McMoRan ($32; FCX)
1.00
3.1
67
34
17
5.50
18
96
Feb, May,
Aug, Nov
General Dynamics ($57; GD)
1.88
3.3
12
12
27
7.19
5
94
Feb, May,
Aug, Nov
Hewlett-Packard ($23; HPQ)
0.48
2.1
50
4
10
4.83
5
67
Jan, Apr,
Jul, Oct
IBM ($175; IBM)
3.00
1.7
15
17
24
13.30
15
79
Mar, Jun,
Sep, Dec
Intel ($21; INTC)
0.84
4.0
16
11
37
2.38
16
98
Mar, Jun,
Sep, Dec
J.P. Morgan Chase ($30; JPM)
1.00
3.3
400
(36)
21
4.72
19
68
Feb, May,
Aug, Nov
McDonald's ($86; MCD)
2.80
3.2
15
2
57
5.20
13
61
Mar, Jun,
Sep, Dec
McKesson ($69; MCK)
0.80
1.2
11
44
16
5.97
23
71
Jan, Apr,
Jul, Oct
Microsoft ($25; MSFT)
0.80
3.2
25
12
30
2.86
6
98
Mar, Jun,
Sep, Dec
Newmont Mining ($61; NEM)
1.20
2.0
50
18
29
4.87
27
94
Mar, Jun,
Sep, Dec
Norfolk Southern ($62; NSC)
1.72
2.8
8
11
38
5.13
28
84
Mar, Jun,
Sep, Dec
Oracle ($29; ORCL)
0.24
0.8
20
NA
11
2.42
9
97
Feb, May,
Aug, Nov
Philip Morris Int'l ($63; PM)
3.08
4.9
20
24
70
4.76
23
80
Jan, Apr,
Jul, Oct
Qualcomm ($49; QCOM)
0.86
1.7
13
11
28
3.17
29
82
Mar, Jun,
Sep, Dec
Rogers Commun. ($33; RCI) e
1.45
4.4
11
28
47
3.12
5
93
Jan, Apr,
Jul, Oct
St. Jude Medical ($35; STJ)
0.84
2.4
NA
NA
27
3.29
9
71
Jan, Apr,
Jul, Oct
Target ($49; TGT)
1.20
2.4
20
21
29
4.21
9
83
Mar, Jun,
Sep, Dec
Union Pacific ($83; UNP)
1.90
2.3
25
22
32
6.52
18
80
Jan, Apr,
Jul, Oct
UnitedHealth Group ($43; UNH)
0.65
1.5
30
162
14
4.37
4
91
Mar, Jun,
Sep, Dec
Walgreen ($33; WAG)
0.90
2.7
29
23
34
2.91
10
70
Mar, Jun,
Sep, Dec
Wal-Mart Stores ($53; WMT)
1.46
2.8
20
13
34
4.49
10
82
Jan, Apr,
Jul, Oct
WellPoint ($63; WLP)
1.00
1.6
NA
NA
14
7.04
4
90
Mar, Jun,
Sep, Dec
e Dividend and yield estimated.    Note: Quadrix scores are percentile ranks, with 100 the best.

 


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