Dividends Value » GCI

When To Sell A Dividend Stock *

D4L — Wed, 25 Aug 2010 07:30:47 +0000

As a long-term buy-and-hold investor, most of my evaluation efforts are aimed at determining when to buy a stock. Sometimes it is necessary to sell a stock and we need to be equally adept at identifying those times. I have stated on numerous occasions that I have one hard and fast sell rule for my individual dividend stocks: When an individual stock held as a dividend investment lowers its dividend, immediately sell it. However, there are other times it makes sense to sell. Consider these:

Significant Price Run-up Distorting Dividend Fundamentals

When you buy a dividend stock at a depressed level it will eventually return to its norm. However, at its normal level the dividend fundamentals could be so bad that you would be better off putting the money to work somewhere else. For this evaluation, my primary indicator is the NPV MMA Differential. When this metric goes negative, it in effect is saying you are better off putting the into a money market account for the next 20 years. When this occurs I look for a way to exit the position and retrieve my original investment, leaving the portion attributable to capital appreciation. Examples of stocks that I hold with these characteristics (or close to it) are:

Dividend Freeze Leading to Poor Dividend Fundamentals

When a company fails to raise its dividend (dividend freeze), the dividend fundamentals quickly deteriorate if its yield is low. It is easier to be patient when the yield is higher and the stock is still earning its way. However, as dividend growth investors, ultimately we expect our dividends to grow: Below are several stocks that failed to raise their dividends at the expected time:

Historical Performance Is Not Indicative Of Expected Results

Sometimes historical results are indicating the stock is a good investment, but something just doesn’t seem right. In situations like this there is probably a reason for the uneasiness and it is in our best interest to understand why we feel that way. Usually we know something that is not reflected in the financials.

This recently occurred with my AFLAC Inc. (AFL) position. I had been closely watching AFL since the time it first failed to raise its dividend. For a stock with a yield as low as AFL, dividend growth is paramount for its long-term success. My model’s calculated dividend growth rate was higher than what I expected going forward, at least for the near term. Its annual dividend growth has been declining since 2008, with 2010 growth only 3.6% (considering 2 dividends at $0.28 and two at $0.30). This was the only single digit increase in the last 10 years. When considering AFL’s most recent increase, the NPV MMA differential is under-performing its target. AFL has a large exposure to hybrid bonds (particularly European banks) and exposure to European sovereign debt. This makes them more risky than many other Financial Services companies. I have been looking to reallocate a portion of my financial Financial Services holdings (currently in excess of 10%) and I considered AFL one of my weaker financial stocks, so I sold it.

Substantial Change In The Business

Sometimes the world changes and what you were selling yesterday at a premium you can’t give away today. This phenomenon has been played out since the beginning of time. Rock gathers were replace with club makers who were replaced with spear makers who were replaced with arrow makers who were replaced with musket makers who were replaced with rifle makers, and so on. We see this happening today with the print media. Companies like Courier Corporation (CRRC) that publishes, prints and sells books, and Gannett Co., Inc. (GCI) an international media company that owns USA Today have struggled recently as people have moved from print media to online. Both companies were unable to continue the string of consecutive dividend increases.

Other times a catastrophe will shake a company to it very foundation. This has been most evident with the recent oil disaster in the Gulf. BP (BP) was not prepared for a situation like it faced. As the damage claims mounted, investors lost confidence in management to stop the oil flow and began to sell off the stock. A dividend cut soon followed.

Buy-And-Hold Not Buy-And-Forget

All investors need to be vigilant and keep a close watch on their investments. There are few certainties in an uncertain world. Things change and adjustments must be made. Buy-and-hold is a successful investment strategy; buy-and-forget is a recipe for disaster.

Full Disclosure: Long MMM, EMR, GPC, ITW, PAYX, LLY, PGN, TEG. See a list of all my income holdings here.

(Photo: sanja gjenero)

The 2010 Dividend Aristocrats *

D4L — Wed, 16 Dec 2009 10:30:02 +0000

The S&P 500 Dividend Aristocrats is the most prestigious list of dividend stocks. The Dividend Aristocrats index is designed to measure the performance of S&P 500 constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. This index is a member of the S&P Dividend Aristocrats index series.

Dividend Aristocrats constituents exhibit the following characteristics:

Underlying Indices – S&P 500
Weighting – Equally weighted; Constituents re-weighted quarterly
Reconstitution – Reviewed annually in December

Among others, Dividend Aristocrats include these highly recognizable names, with years of consecutive dividend increases shown:

Clorox Co (CLX) – 32 years
Coca-Cola Co (KO) – 47 years – [Analysis]
Exxon (XOM) – 27 years
Johnson & Johnson (JNJ) – 47 years – [Analysis]
McDonald’s Corp (MCD) – 33 years – [Analysis]
Procter & Gamble (PG) – 53 years – [Analysis]
Wal-Mart Stores (WMT) -35 years – [Analysis]

Members may be deleted during the December rebalance if calendar-year dividends did not increase from the previous year, or intra-year if the stock is removed from the underlying S&P 500.

On December 4th, S&P announced changes to the Dividend Aristocrats Index. Standard & Poor’s will perform the annual reconstitution of the S&P 500 Dividend Aristocrats Index after the close of trading on Friday, December 18, 2009.

The following stocks will be added to the Dividend Aristocrats:

Brown-Forman Corporation (BF.B)
Cintas Corp. (CTAS)

The following stocks will be dropped from the Dividend Aristocrats:

Avery Dennison Corporation (AVY)
BB&T Corp. (BBT)
Gannett Co., Inc. (GCI)
General Electric Co. (GE)
Johnson Controls Inc. (JCI)
Legg Mason Inc. (LM)
M&T Bank Corp. (MTB)
Pfizer Inc. (PFE)
State Street Corp. (STT)
US Bancorp (USB)

As the number of drops vs. adds indicates, the last two years were difficult for dividend stocks, but that is not necessarily a bad thing. During good times it is easy for companies to increase dividends, and many companies were added to the index. It is during times of adversity that we learn who the real aristocrats are.

Full Disclosure: Long CLX, KO, JNJ, MCD, PG, WMT. See a list of all my income holdings here.

(Photo Credit)

Early Warning Signs of a Dividend Cut *

D4L — Wed, 25 Mar 2009 10:30:51 +0000

It seems each week another dividend Aristocrat, Achiever or Champion cuts its dividend after increasing it for 10 or more years. In most cases the companies’ investors were not surprised because they saw the early warning signs that indicated a dividend cut was imminent. Here are three signs that a company is heading toward a dividend cut:

I. Change In Business Conditions

An abrupt or permanent shift in a company’s business model as a result of business conditions could lead to a dividend cut. Over the last 18 months or so, virtually all businesses have experienced an adverse change in business conditions. However, the pertinent question is to what degree?

Consider Gannett Co. (GCI) who publishes 90 daily U.S. newspapers, nearly 1,000 non-daily publications in the U.S., and close to 300 U.K. titles. With the mass adoption of the internet, traditional news outlets such as newspapers are experiencing a slow death. GCI cut its dividend earlier this year after several years of declining earnings.

Pfizer’s (PFE) recent dividend cut would fall in this category. After years of unsuccessful attempts to get approval of a “blockbuster” drug, the cash rich company sought a merger partner with a good drug pipeline. In anticipation of it proposed combination with Wyeth, PFE cut its dividend.

II. Dividend Yield Above Historic and Industry Norms

A dividend yield that is higher than average and/or higher than others in the industry are indications, not all is well with the company. The market is adjusting to compensate for the higher risk of holding the company. When dividend yields start creeping up, it is time to start evaluating if the company can continue to pay its dividend.

Consider Bank of America Corp. (BAC). Between 2000 and 2007 the company’s dividend yield hovered in the 3%-4% range. In 2008, the dividend yield ranged from around 5% to the teens prior to its dividend cut. The same situation occurred with General Electric (GE) over the same period. GE’s dividend yield from 2000-2007 normally were in the range of 1.5%-3.5%. However, in 2008 they the dividend yield than doubled as investors lost confidence in the company. Eventually, BAC and GE cut their dividends.

III. Diminishing Cash Available to Pay Dividends

Ultimately, the ability of a company to pay its dividend is determined by its cash position – both cash on its balance sheet and its ability to generate cash flow. All the companies above had one thing in common – a deterioration of cash flow available for paying dividends.

After GCI’s free cash flow peaked in 2004 at $1.3 billion, it slipped over the next four years to $852 million in 2008. Though GE’s free cash flow was increasing, the company was taking on significant debt. GE’s debt increased from $201 billion in 2000 to $524 billion in 2008 and it could no longer afford its dividend.

A Look Ahead

Unfortunately, there will be more dividend cuts in the coming days. Two companies currently on my radar are Nucor Corp. (NUE) and Caterpillar Inc. (CAT).

On March 17th, NUE warned of a first quarter loss as the slumping economy sapped demand for the metal forcing it to cut output. “The economy has fallen off a cliff — and there is no visibility as to the timing of the recovery,” Nucor Chairman, Chief Executive and President Dan DiMicco said in a statement. NUE’s free cash flows through 2008 had been strong and it ended 2008 with $920 million net debt (debt less cash) vs. $879 million in 2007. NUE is ok for now, but I look forward to reading their Q1 earnings release.

Last week CAT announced that its global machinery sales fell 27 percent in February, the third straight month of declines as the economic downturn has eroded demand for heavy equipment. In a separate announcement the company said it had notified an additional 2,454 workers in three states that they were losing their jobs as the company continues to try to bring production in line with plummeting demand. CAT’s financial position is not as strong as NUE. Its free cash flow in 2008 was less than half of 2007 and it ended 2008 with no cash and $33 billion in debt vs. $27 billion net debt in 2007. This is another quarterly earnings release that I look forward to reading.

The above three items will help you determine which companies are at risk of cutting their dividends. Cash is king, so pay special attention to free cash flows and debt levels.

Full Disclosure: Long CAT and NUE.