The DIV-Net

Book Review : Benjamin Graham on Investing

2009-11-07T01:00:00.000-06:00

Reading an author 's early writing allows us to see juvenile attempts at expressing a message more fully developed in that author's later works. Having read through the Intelligent Investor and Security Analysis a few times, reading Benjamin Graham on Investing was an interesting opportunity to do just this.

Rodney Klein has put together a collection of early writings from Benjamin Graham pulled from a selection of shorter magazine articles by Graham dating from the period 1917-1927. Chapters include such topics as: Valuation of Great Northern Oil Certificates, and Is United Drug Cheap at 53?

What we see in these early works is an author struggling to find the right words to express a concept so eloquently birthed later in the Intelligent Investor. The readings are interesting, less in their content, but more in the way the magazine format forces Graham to be conscience in his message. With Security Analysis filling some 600 pages and the Intelligent investor some 500 more these short articles force Graham to compress and deliver in a format more akin to a university term paper than any of his other literary works.

The book serves another purpose, it shows Graham's principals in action. While his later works speak more to the principals of value investing here were see examples of Graham getting down to brass tax and applying some of the valuation techniques he actual used on a daily basis. If Security Analysis and The Intelligent Investor are the theory of value investing then this book brings us face to face with some practical analysis.

This book is an adequate read appropriate for those who are anxious to learn more about Graham and his early works. If you are looking for a fresh perspective on the issue you won't find much that isn't covered in later works though. This book doesn't quite hit the mark for the beginning reader as some of the context of the words are lost if the reader doesn't understand Graham's overall goals. All in all though a good weekend read if you want to see the father of value investing in action.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Grouping Dividends for Current Income

2009-11-06T03:49:00.000-06:00

Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could only be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.

Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.

In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.

Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.

I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.

I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.

Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).

Full Disclosure: Long T, KMR, MCD, O and WMT

- Six Dividend Stocks for current income
- Best Dividend Picks for 2009, 3Q update
- Emotionless Dividend Investing
- Dividends Stocks versus Fixed Income

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Kimberly-Clark : Stock Analysis for Dividend Portfolio

2009-11-05T05:30:00.001-06:00

Kimberly-Clark is a global health and hygiene company with operations in 37 countries. It’s products are sold in more than 150 countries. It has a well-known family care and personal care brands such as Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Poise, and Depend.

KMB is a dividend aristocrat and member of Mergent’s Broad Dividend Achievers index. I last reviewed KMB in February 2009 (without its 2008 results). At that point in time, it was high risk to dividend stocks. I have made an observation that its dividends would be under pressure. This 2009 dividend growth rate was only 3.4%, which is lower than its historical average of 9.4%. I am reviewing this again for risk to dividends.

Trend Analysis
This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The chart below shows these trends.

Revenue: Increasing trend in revenue with average growth of 4.6% (4% std. dev.)
Cash Flow from operations: The trend is relatively flat for last few years. The free cash flow is also flat for last few years.
EPS from continuing operation: The EPS also has a ‘relatively flat trend’ with average growth rate as 3.5% (10.84%). It has had negative EPS growth for three years out of past four years.
Dividend per share: Dividends per share are consistently growing for the last 10 years.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.43. This is in high risk category as per my risk scale. Reducing gross and operating margin, negative EPS growth rate, and increasing payout factor makes it a high risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

Dividend growth rate: The average dividend growth (9.4%) is higher than average EPS (3.5%). In addition, the EPS is less consistent compared dividends per share.
Duration of dividend growth: There is continuously growing trends in dividends per share. The 10 year average growth rate is 9.4% (4.6%). The latest dividend growth rate was only 3.4%.
4 year rolling dividend growth rate for past ten years: It is less than 10%.
Payout factor: Historically it has been less than 50%. However, since 2005 the payout factor has been above 50%.
Dividend cash flow vs. income from MMA: Here, I am analyzing how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.83% (b) MMA yield is 2.9%. Considering historical average growth rate of 9.4%, the stocks dividend cash flow at the end of 10 years is 2.2 times MMA income. If we consider my expected growth rate of 4.1%, then the dividend cash flow is 1.47 times MMA income.

Fair Value Calculation
This sections determine the what price should I pay to buy a given stock

Net present value (NPV) price based on 15 year DCF: $34.9
Average high yield price calculated based on past 10 years: $60.8
Pricing based on past 10 year relative price-to-earnings ratio. $48.9
Pricing based on price-to-earnings ratio of 12: $45.6
Graham number: $14.5

The range of fair value is calculated as $32.2 to $40.9.

Qualitative Analysis
The strength of KMB is that it has a diversified product portfolio with each business segment contributing 10% to 20% of the revenue. The flat revenue, EPS, and cash flow trends are the reflection of the fact that demand for its products (personal care, household items, etc.) are stable, albeit not growing. Putting this in context of business environment, KMB’s growth and profitability is under pressure from locally branding products.

Conclusion
In near term, the flexibility in payout factor and stability (or slow growth) in revenue/EPS provides room for maintaining the consistency is dividend. However, assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividends will be under pressure. The dividend growth rate will slow down. The stocks risk-to-dividend number is 2.43, which is high risk to dividends. In addition, the current pricing for KMB is significantly above my fair value that I would be willing to pay to buy this stock. I will not be initiating any new position. I will continue to watch KBM for changes in its fundamentals.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Earnings Revert To The Mean

2009-11-04T05:30:00.001-06:00

When calculating a company's P/E or projecting a company's earnings power, rather than using a company's current earnings, value investors prefer to use average earnings from several years past. Ben Graham has written about this idea, and we've also discussed how writedowns, asset sales, and other infrequent items can affect current earnings; but when using an average over several periods, one gets a much better idea of a company's earnings power.

But there's another more subtle reason why "average earnings" is far more useful than current (or forward) earnings: in a free market, companies with undifferentiated products will tend to see their earnings naturally revert to the mean. This occurs because when profits are high, new competitors enter the market, old competitors ramp up production and customers seek out substitutes, until profits are driven to normal levels. When profits are low or negative, the weakest competitors are forced to close their doors and no new competitors enter the market, improving conditions for the companies that stick around.

Depending on the industry, this process will vary in the amount of time that passes between peaks (we discussed this process for the oil industry here). But Wall Street's obsession with current earnings (as discussed here by Ben Graham and David Dodd) provides opportunities to value investors when earnings are simply at the lower end of the cycle.

An important caveat is that one must be sure that earnings are low due to a cyclical effect, not a secular effect (the newspaper industry is often cited as an example of an industry in secular decline, thanks to the world wide web and other forms of media). Furthermore, one must only purchase the companies with little to no debt and low cost levels, as these are the companies that will survive the downturn. Adjustments must also be made for companies that have increased their book values substantially (either by retaining earnings, or issuing new shares); the earning power of such companies should be higher than they have been in the past, though this is not always the case.

The bottom line is, average earnings are a much more useful gauge of a company's earnings power than current or oft-cited expected future earnings, which are based on only one period and could be affected by infrequent items or the industry's current position in its business cycle.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Broker Options for Canadian Investors

2009-11-03T05:00:00.003-06:00

Compared to the mid-90's when I first started investing, the number of online stock brokers available to Canadian investors has gone up dramatically. Most importantly, the costs to invest online have gone down dramatically. I remember when I had to pay $29.95 per trade!! No there are a number of options available for the Canadian investor that can dramatically reduce costs.

The sad thing still is that many of the bank run brokerages still believe that it is ok to continue charging $29.95 per trade. Banks like Royal Bank and Bank of Montreal have special deals where you can get trades down to $9.95 but often there are a number of rules to get to this level. For example RBC Action Direct requires a portfolio value of $100,000 to get these lower commissions. So people with less money have to pay more and those with more less. Nice thinking RBC. Even with a portfolio that could get me the lower fees I don't out of principle.

So before you head out and select your broker, be sure to focus on costs. Most discount brokers offer exactly the same features and benefits and in my experience the same level of service. There is absolutely no reason to pay more for your trades!

Here are three low cost options for you as an dividend investor in Canada:

1. Questrade (disclosure: my broker)

Cheap $4.95 trades. Some people love Questrade, some hate them. I have never had any service complaints or issues with my account (knock on wood).

2. TradeFreedom

I have never used TradeFreedom but have heard good things. Lower commissions than the banks!

3. Interactive Brokers

Most complex broker and really intended for traders. No hand holding with these guys but probably the cheapest available (Max 0.5% of Trade Value plus exchange fees).

I know there are more out there - let me know the cheap ones in the comments section.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Johnson & Johnson (JNJ)

2009-11-02T05:30:00.001-06:00

Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). Below are some highlights from the above linked analysis:

Company Description: Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

JNJ is trading at a discount to 1.) and 3.) above. The stock is trading at a 5.3% discount to its calculated fair value of $62.33. JNJ earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

JNJ earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% and earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 47 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

JNJ earned a Star in this section for its NPV MMA Diff. of the $935. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If the stock grows its dividend at 7.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. JNJ earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: JNJ earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks JNJ as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $70.95 before JNJ's NPV MMA Differential fell to the $500 that I like to see for a stock with 47 years of consecutive dividend increases. At that price the stock would yield 2.72%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.7%. This dividend growth rate is less than the 7.5% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.00 which classifies it as a low risk stock.

As noted in the "10 Best U.S. Dividend Stocks", JNJ has a history of making good decisions and executing on them. The stock is currently trading below my buy price of $62.33 and it is one that I will continue to accumulate as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in JNJ (4.4% of my Income Portfolio). What are your thoughts on JNJ?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - November 1, 2009

2009-11-01T05:30:00.002-06:00

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

Dividends Value presented 3 High-Yield Telecom Dividend Stocks
The Dividend Guy presented A Dividend Yield Screen with High Growth
Dividend Growth Investor presented Five Dividend Stocks for long-term dividend growth
Barel Karsan presented How Efficient Is Management?
Dividend Tree presented Indian Economy – A Better Destination in Emerging Markets
moneygardener presented Rogers results look good
Stock Market Prognosticator presented Interesting Article
Disciplined Approach to Investing presented Bullish Sentiment At Lowest Level Since July 16th
Everyday Finance presented ETFs on the Move - Week Ended 25-Oct-2009
40percent 20years presented New Top List: Dividends Aristocrat!
Value Investing Pro presented Walter Schloss Collection
EPIC INVESTOR presented Professional Opinion-Givers Always Have Opinions
Jonathan Goldberg presented BKS, Plus Some News

There are some really good articles here, please take time and read a few of them.

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Book Review: Corporate Financial Analysis

2009-10-30T20:24:00.014-05:00

I wish I had found this book years ago. Fundamental Analysis when done right requires a thorough understanding of every line item in every financial statement- what is it, what ratios use it, and most importantly, what does it tell you about the business you are trying to analyze.

I have read more than a few books on this subject, most take the approach of showing each line item of each statement and then providing an explanation of the ratios that use it and then how these ratios work. This approach of explanation has all the excitement of reading the dictionary and as a result when reading these books I often find myself staring off into nowhere or deciding that now is the perfect time to go out and clean those pesky rain gutters.

If you, like myself, learn better by doing then simply by seeing then Dr. Clauss's book Corporate Financial Analysis with Microsoft Excel is well worth picking up. In his unconventional approach he takes you step by step from the line items that make up the balance sheet, and income and cash flow statements all the way up to the creation of forecast models off of these same sheets.

Reading the book alone will gain you nothing- other than frustration. To truly get the value of the book requires that you take the financial statements of your favorite business and work with each chapter of Clauss's book. You will learn to create totals, ratios, and models- how to perform a true dissection of the business of your choice.

With all this positive said I do have one complaint about the book. I wish Clauss had provided a CD containing his examples and had provided an excel macro that can download the financial statements of a selected business off of Morningstar so the reader has a starting point. I understand why the statements are not included but many readers will likely be discouraged by the lack of a tool to download their favorite company's financial statements. This problem can be quickly remedied with a bit of searching on the internet. An excel macro that achieves this is fairly easy to find, I chose to stay true to the theme of the book of DIY (Do it Yourself) and write my own little macro.

Overall a great book and one that I would definitely recommend to anyone who learns by doing.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Forecasting Future Dividend Growth

2009-10-30T04:31:00.001-05:00

Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.

Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.

While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.

First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.

Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.

Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.

And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.

I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)

Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)

Full Disclosure: Long JNJ, PG, MCD, EMR and PEP

Relevant Articles:

- Should you sell after a dividend freeze?
- Yield on Cost Matters
- The Dividend Edge
- Dividend Investing vs Trading

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Waste Management - Stock Analysis for Dividend Growth

2009-10-29T05:30:00.005-05:00

Waste Management Inc. (WM) provides integrated waste management services in North America. The company is engaged in collection, transfer, recycling, disposal, and waste-to-energy services. WM is neither a dividend aristocrat nor a dividend achiever. In fact, WM has started showing some dividend growth trends in last five years. While I am presenting and showing data from last 10 years, I am only using last five years of dividend data. My objective here is to understand if WM has any potential to be a dividend achiever.

Trend Analysis
Since WM has recently started growing dividends, I am looking at trends for past 5 years of corporation’s revenue and profitability. The parameters should show consistently growth trends. The trend charts is shown in image below and for background reference I have plotted data for past 10 years.

Revenue: Overall stable and consistent revenue in last 5 years. The average revenue growth for last 5 years is 3.2% (with 3.1% std. dev). While it shows stability, it shows company facing growth challenges.
Cash Flows: Relatively increasing trend for operating cash flow. The corporation has a consistently higher operating cash flow, two times the net income or free cash flow.
EPS from continuing operation: In general, the EPS also has an increasing tread since year 2003 with average growth rate as 9.8% (17.5% std dev). Most of that growth is coming in 2004 and 2005. After that is more or less constant. With relatively flat revenues, the EPS growth is most likely coming from operational efficiencies and share buybacks.
Dividend per share: Dividends per share are consistently growing for the last 6 years, including the most recent 2009 dividend increase.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. The factors that are making it medium risk-to-dividends are increasing payout factor and high variability in EPS.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

Dividend growth rate: The average dividend growth (9.6%) is very much similar to average EPS (9.8%) growth rate. However, the EPS has a very high variability (sometimes negative growth).
Duration of dividend growth: Dividends have continuously grown for the last 5 years. Before 1998 in its pervious incarnation, before WM, the corporation has consistency paid dividends for more than 25 years. However, not a consistently growing dividends.
4 year rolling dividend growth rate for past ten years: No
Payout factor: In the recent past 5 years, it has been consistently less than 50%. This provides little flexibility and room to grow dividends.
Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.8%; and (b) MMA yield is 2.4%. Considering the average dividend growth rate of 9.6%, the stocks dividend cash flow at the end of 10 years is 2.9 times MMA income. If we assume my average expected growth rate of 3.2%, then the dividend cash flow is only 1.70 times MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

Net present value (NPV) price based on 15 year DCF: $15.35
Average high yield price calculated based on past 10 years: $39.8
Pricing based on past 10 year relative price-to-earnings ratio. $44.0
Pricing based on price-to-earnings ratio of 12: $26.1
Graham number: $9.9

The range of fair value is calculated as $19.1 to $26.7.

Qualitative Analysis
The strength of WM business is its well established distribution network and existing market share of approximately 30%. The closest competitor has half of that market share. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

This quantitative analysis shows that, in last 5 years WM has been able to bring in some level of stability in revenues, profitability, and operating margin. While the corporation is able to maintain consistent operating cash flow, it facing challenges in growing that cash flow. The EPS also has high volatility. Due to its low payout factor, corporation has been able to grow dividends for last 6 years.
Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its 5 year average.
The company expects to continue to maintain its cash flow.
The company plans to use its free cash flow for debt reduction, dividends, and share buyback.

Conclusion
WM raised its annual dividend for 2009 from $1.08 to $1.16 per share. This increase shows corporation’s confidence in its free cash flow. For 2009, I believe this increase is ably supported by its cash flow. The stocks risk-to-dividend number is 2.00 (medium risk category). The current pricing of $30 is very close to my fair value range. I would be open to adding WM in my portfolio as long as my asset allocation allows. I expect WM to provide long term value and sustainable current dividends (and slow dividend growth).

Full Disclosure: No position at the time of this writing.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Housing Cycles

2009-10-28T05:30:00.000-05:00

It's common to hear that the housing industry is in a depression, and that this type of collapse is unprecedented in American history. When one looks at house prices, which we did here, one can see why. There was a huge run-up in prices, and a huge collapse as a result. Those who bought in at the height of the market are suffering now. But for the housing industry itself, the construction pattern is actually very familiar. Here's a look at US housing completions since 1968 (note that 2009 is an estimate through September):

The boom and bust phenomenon in housing construction is common throughout history! But it just hasn't happened for a while, which may have fooled people into thinking this is not a highly cyclical industry. Notice that for whatever reason (e.g. cheap credit, low supply due to the fact that there was no preceding boom), there was no bust in the last recession in 2002. But current reductions in construction have caused panic levels to soar, allowing investors the option to purchase assets at great discounts.

While the current low levels of construction are taking a big bite out of GDP, this is necessary in order for existing inventories to be absorbed. Once supplies have been sufficiently reduced, this industry will be back. When that is, is anybody's guess, but when the market is fearful, one can find companies in unfavoured industries that trade at discounts to their assets, which is what value investors try to do.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Why Being Defensive is Important

2009-10-27T05:00:00.000-05:00

As you know by now, on the Div-Net is often refer readers to videos put up on YouTube by Sound Investing TV. I have found these videos to be both entertaining (ok - at least not boring!) and have learned something new every time I watch a new one. The most recent video is about the importance of being defensive when putting together your portfolio as well as during ongoing maintenance.

Once again, interesting and informative.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Courier Corp. (CRRC)

2009-10-26T05:30:00.001-05:00

Linked here is a detailed quantitative analysis of Courier Corp. (CRRC). Below are some highlights from the above linked analysis:

Company Description: Courier Corporation publishes, prints and sells books. Founded in 1824, Courier has two lines of business: full-service book manufacturing and specialty publishing.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

CRRC is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 40.2% discount to its calculated fair value of $25.24. CRRC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

CRRC earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years and it earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1950 and has increased its dividend payments for 16 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

CRRC earned a Star in this section for its NPV MMA Diff. of the $56,158. This amount is in excess of the $1,900 target I look for in a stock that has increased dividends as long as CRRC has. The stock's current yield of 5.57% exceeds the 3.9% estimated 20-year average MMA rate.

Other: CRRC is a member of the Broad Dividend Achievers™ Index.

Conclusion: CRRC earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CRRC as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $45.05 before CRRC's NPV MMA Differential increased to the $1,900 that I like to see for a stock with 16 years of consecutive dividend increases. At that price the stock would yield 1.86%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,900 NPV MMA Differential, the calculated rate is 4.7%. This dividend growth rate is significantly less than the 15.0% used in this analysis, thus providing a margin of safety. CRRC has a risk rating of 1.50 which classifies it as a low risk stock.

In 2008, CRRC's EPS was a loss of $0.03/share. For the trailing twelve months the loss has expanded to $0.17/share. Although the stock is trading well below my buy price of $25.24, concerns about is current business prevents me buying. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CRRC (0.0% of my Income Portfolio). What are your thoughts on CRRC?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - October 25, 2009

2009-10-25T05:30:00.002-05:00

Dividends Value presented 8 Dividend Stocks With The Right Stuff
The Dividend Guy presented Top 100 Investment Lessons I Have Learned – Part 1
Dividend Growth Investor presented Is now the time to sell your dividend stocks?
Barel Karsan presented Understand These Biases
Dividend Tree presented Managing Trading Process for Income Generation
Buy Value presented Sample Mortgage Details
moneygardener presented Inter Pipeline raises distributions
Disciplined Approach to Investing presented Tax and Spend
Old School Value presented Investing Book Review: Quality of Earnings
Triaging My Way To Financial Success presented Value Stimulus: Procter & Gamble
Dividend Money presented Making A Case For Higher Commodity Prices
Everyday Finance presented Stocks Gone Wild - Until Apple Covered Call Crashes the Party
Value Investing Pro presented Joel Greenblatt Bloomberg 10-19-09
EPIC INVESTOR presented Current Opportunities for the Defensive Investor

There are some really good articles here, please take time and read a few of them.

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

The Best Trades could be the ones not entered

2009-10-23T04:19:00.001-05:00

I often analyze individual stocks on the dividend growth blog. Some if not most of the times however, after guiding readers through the company story I end up stating that the stock is either a hold or sometimes even a sell. This irritates most investors, who see the practice of reviewing a stock which results in a negative or neutral recommendation as a waste of their time.

I definitely understand the frustration for those readers. Most investors typically want to be told what to buy, when to buy it and how much they would make when selling. This strategy always works in get rich quick books, but it seldom generates any profit in the real world. The reason why so many investors lose money on a consistent basis is because they fail to educate themselves and instead end up following gurus which don’t even trade the ideas they are pitching to their followers.

The value of a stock analysis is that it should give investors ideas about what they want to see in a stock, versus what they don’t want to see in a stock. A prime example is my analysis of Paychex (PAYX), which is overvalued relative to its competitor Automatic Data Processing (ADP). In addition to being overvalued, Paychex currently distributed most of its earnings out as dividends, which is clearly unsustainable in the long run. Thus, the relatively higher dividends yield of 4% on PAYX versus 3.3% for ADP is not enough to compensate the risk of a potential dividend cut.

Another reason why a neutral stock analysis is beneficial is that it provides investors with some insight into a company which could be temporarily overpriced. Since entry price matters to some extent, it would be unwise to pay top dollar for stocks, when there are companies with similar characteristics that are priced attractively. An investor, who does his or her homework early in the game, would be well prepared from reading the analysis to enter a position on dips, should the stock fall on general market weakness or on negative news.

The urge for constant action and the inability to wait for the best entry setups might be the difference between making money and losing money in the long run. Jesse Livermore, a famous trader from the 1920’s is known for his saying that “The big money is made by sitting, not thinking. Men who can both be right and sit tight are uncommon”

I completely agree with this assertion. Investors who purchased stocks in the late 1990’s when dividend yields were at their lowest have suffered inferior returns over the past decade. Other investors who finally saw some gains in their portfolios in 2009 might have been quick to take a profit too early, thus missing out on the majority of the rally off the March 2009 lows.

Even if you purchased great stocks such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) while their yields were at multi year lows, you would have seen no capital growth at best, although your dividend income would be higher than it was a decade ago.

At the end of the day what truly matters is that investors develop a sound strategy that fits their personality and go with it. The strategy should incorporate entry and exit rules, diversification and hopefully some sort of position sizing methods such as dollar cost averaging.

Full Disclosure: Long ADP, JNJ and PG

-Paychex (PAYX) Dividend Stock Analysis
-Automatic Data Processing (ADP) Dividend Stock Analysis
-Emotionless Dividend Investing
-Are High Dividend Stocks worth it?

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Kellogg Company– Stock Analysis for Dividend Portfolio

2009-10-22T05:30:00.001-05:00

Kellogg Company (K) is a leading producer of ready-to-eat cereal, and also sells convenience foods such as cookies, crackers, cereal bars, fruit snacks, and frozen waffles.

For starter, K is neither a Dividend Aristocrat nor member of Broad Dividend Achiever. This is primarily because it had flat dividends between 2001 and 2004. However, it has paid consistent and stable dividends (without cutting) since 1985. The most recent dividend increase was in August 2009. My objective here is to analyze if how it rates on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 9 years of company’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

Revenue: In general, a growing trend since 2002. The average revenue growth for last 9 years has been approximately 7.3%. The company raised the year 2009 revenue estimate.
Cash Flows: Overall, a very slow and anemic increasing trend of free cash flow and operating cash flow. FCF is more or less similar to net income, but 2008 FCF was 80% of net income.
EPS from continuing operation: In general, it had an increasing trend from 2001 onwards. It has raised its EPS estimate for full year 2009.
Dividends per share: On ten year basis an anemic dividend growth. It remained constant between 2001 and 1004.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.86. This is a medium risk category as per my 3-point risk scale. The slow EPS growth rate and relatively reduced gross margins is making this as medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

Dividend growth rate: The average dividend growth of 4.1% (stdev. 3.1%) is less than average EPS growth rate of 11.9% (stdev. 15%).
Duration of dividend growth: Dividends have never been cut since 1985. However, they have remained constant between 2001 and 2004.
4 year rolling dividend growth rate for past ten years: Less than 10%.
Payout factor: It has been less than 50% since 2004.
Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.04%; and (b) MMA yield is 2.9%. With my projected dividend growth of 4.1%, the dividend cash flow is 1.16 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $29.77 (i.e. yield 4.8%)

Fair Value Calculation
This section determines what price I should pay to buy a given stock

Net present value (NPV) price based on 15 year DCF: $35.1
Average high yield price calculated based on past 10 years: $43.2
Pricing based on past 10 year relative price-to-earnings ratio. $37.6
Pricing based on price-to-earnings ratio of 12: $33.0
Graham number: $24.5

The range of fair value is calculated as $30.3 to $37.2.

Qualitative Analysis
Kellogg Company was incorporated in 1922. It paid consistently growing dividends from 1985 to 2001. The acquisition of Keebler Foods Co halted this growth and dividends remained flat until 2001. The dividends have started growing back again since 2005 onwards.

Its revenue is pretty much focuses in North America which contributes 66% of the revenue. Europe has 20%, Latin America 8%, and Asia Pacific as 6%.
It continues to have stable gross and operating margins. It generates relatively stable (albeit not growing) operating and free cash flows.
As with any branded consumer staples, Kellogg faces risk from private label products.
Kellogg expects to continue increase EPS by the combination of operating cost discipline, share buy backs, and moderate sales based growth.

Conclusion
Kellogg is stable and slow growth company. It is expected to continue to have a good cash flow over next few years. It is not typical dividend growth company where dividends grow in excess of 10%. However, one can expect K to provide stability of dividends in the portfolio. On relative basis to its peers, it is a conservative company with controlled balance sheet which provides room for growth through acquisitions and/or growth of its various brands. The stock’s current risk-to-dividend rating is 1.86 (medium risk). The current pricing of $50.17 is above my buy range. However, I would be open to adding to my existing position when it is near to my buy range and my allocation allows the additions.

Full Disclosure: Long on K.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Earnings Revert To The Mean

2009-10-21T05:30:00.000-05:00

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

What a Company Needs to be a Dividend Aristocrat

2009-10-20T05:00:00.001-05:00

As dividend investors, we know how big a deal it is for a company to be part of the elite dividend aristocrat list. To get on this list, a dividend stock must have increased its dividend for a total of 25 consecutive years. Of course, it isn't an infallible list of companies, but an investor could do a lot worse by further investigating companies that make it to the list.

That being said, a company does not simply just make the dividend aristocrat list by increasing dividends for 25 years in a row. There are a number of other factors that S&P must see for the company to make it to the list. What are those items? Let's take a look.

According to the most recent Dividend Aristocrat fact sheet (pdf), these are the criteria a company must exhibit to make it onto the list:

Universe. Companies must be a member of the S&P 500.
Financial Viability. Companies must have increased dividends every year for at least 25 consecutive years.
Size. Companies must have a float adjusted market capitalization of at least US$ 3 billion as of the rebalancing reference date.
Liquidity. Companies must have an average trading volume of at least US$ 5 million for the six-months prior to the rebalancing reference date.
Reconstitution. Index constituents are reviewed annually each December.
Stock Diversification. At each rebalancing, the minimum number of constituent stocks should be 40.
Sector Diversification. Classification, using the Global Industry Classification Standard (GICS®)1, should not result in constituent stocks in a particular GICS sector accounting for more than a 30% weight in the index.

As you can see there are some volume and size limitations on stocks that meet the criteria. Dividend Aristocrats are big companies. However, even with these criteria it is not enough to just go and guy any stock that is on the list. Be sure to further research each stock before buying any of them.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Abbott Laboratories (ABT)

2009-10-19T05:30:00.002-05:00

Linked here is a detailed quantitative analysis of Abbott Laboratories (ABT). Below are some highlights from the above linked analysis:

Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

ABT is trading at a discount to 1.) and 3.) above. The stock is trading at a 21.9% premium to its calculated fair value of $42.18. ABT did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

ABT earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years and another Star was earned as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 37 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

ABT earned a Star in this section for its NPV MMA Diff. of the $1,066. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. If ABT grows its dividend at 8.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. ABT earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Other: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: ABT did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ABT as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $64.54 before ABT's NPV MMA Differential decreased to the $500 minimum that I like to see for a stock with 37 years of consecutive dividend increases. At that price the stock would yield 2.48%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.2%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a slight margin of safety. ABT has a risk rating of 1.50 which classifies it as a low risk stock.

I consider ABT as one of the best pharmaceutical companies. The company has a relatively strong product pipeline, with potentially significant launches in both the medical device and pharmaceutical areas pending. The stock is trading at a 20%+ premium to its buy price of $42.18, so I will patiently wait for market pullbacks before adding to my position. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in ABT (1.3% of my Income Portfolio). What are your thoughts on ABT?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - October 18, 2009

2009-10-18T05:30:00.002-05:00

Dividends Value presented High-Yield Dividend Stocks: A Safer Approach
The Dividend Guy presented How I Invest in Emerging Markets
Dividend Growth Investor presented Debt coverage for sustainable dividends
Barel Karsan presented Borrowing To Buy Stocks
Dividend Tree presented Investing in ETF – Know What You are Investing In
Buy Value presented Abbott Labratories Review
moneygardener presented bought ADP
Disciplined Approach to Investing presented Investors Sentiment Turns Bullish
Old School Value presented Value Investor’s Guide to Handling Volatility
Everyday Finance presented How to Lose 90% in an ETF Fast
Value Investing Pro presented presented 9 John Wooden Quotes for Value Investors
EPIC INVESTOR presented Digging Up For Coal -- NRP vs ARLP

There are some really good articles here, please take time and read a few of them.

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Blackberry... Ick

2009-10-17T01:00:00.000-05:00

I hate blackberry, not the company, just the device. In the world of finance and business the blackberry has become a mandatory device. While access to individuals has certainly increased as a result of this device, I am constantly challenged by the poor quality of communication one often receives from people using it.

Blackberry = low quality communication

An actual example of a message sent to a blackberry user:

Bob the 14K form for dividend contributions, does it have all of the customer info? I have the customer coming to the office in an hour. Hope Anne and the family are well, are you still planning on getting away this weekend?

Response from Bob, a blackberry user:

Anne is well, yep we r going up to the cabin this weekend.

What Bob has failed to do is answer all of the questions in the initial email, or even focus in on the key question. Sure he was likely in a meeting or undergoing some other distraction at the time, but upon pressing send on his reply he feels that the communication is terminated and there are no other items he needs to examine- which is hardly the case. As I was not at my desk to receive the response a further 2 hours went by before I could touch base again with Bob to get the answer to my initial question- ultimately defeating any benefit garnered by the blackberry.

How to Communicate with Blackberry Users

Over time I have learned how best to communicate with blackberry users. There are two simple rules:

Ask one question per email.
Always lead with an easy question.

Asking one question per email is fairly obvious. In a world of distractions you want to make your message simple and straight forward. A blackberry user may be in the course of multiple activities so may forget your initial question, disregard it, loose it during scrolling, or be interrupted while they are reading your precious message.

The second component, leading with an easy question, is something I have learned slowly over the years. If you sent a hard question as your first communication you risk having your intended recipient pretend they had not read your message and therefore defer your question until a later time. By starting with an easy question you allow them to provide you with a quick response. This quick response acknowledges that they are present. To not respond to the follow up question you intend to send immediately once you receive their response would then be quite rude so you have in effect forced them to focus.

Try the rules out and hopefully you will have success getting the answers you need and avoid banging your head against the wall.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Role of Exchange Traded Funds in Investor's Portfolio

2009-10-16T05:30:00.001-05:00

In last five years or so, Exchange Traded Funds (ETFs) have grown in numbers and it asset values. In my view, ETF is another form of investing vehicle available (among many others) to investing or trading community. The major attraction for ETF has been low cost expenses and fees in comparison to mutual funds and ability in trade during market hours. Like any other investing vehicles, I believe ETFs are good vehicles depending upon how/why an individual investor uses in its portfolio. The simplicity with which you can buy and sell an ETF makes it even more difficult to understand how it is structured, what are its constituents, etc., So before you buy an ETF you much understand why you want to buy it and what role it plays in your portfolio. Broad market exposure and access to alternative assets are two important roles ETF can play in your portfolios.

Broad Exposure: ETFs are very good investment vehicle for hedging against broad market performance, broad industry sector, broader country exposure, or any particular asset class. When investing in ETF, investors need to make sure that it represents its intended objective. Many ETFs just invest in few bunch of stocks and expect only those small number of stocks to provide broader exposure. In my viewpoint, ETFs for broad exposure should consist of more than 250 or 300 stocks.

Access to Alternative Assets: This is one the significant benefits depending upon how the ETF is constructed. E.g. ETFs based funds for leverages, currencies, commodities, futures, etc are being made available. However, I believe that such ETFs are high risk opportunities. I am not advocating the use of such assets, but merely pointing the fact that such asset classes were not available earlier. Whichever theme one chooses, I believe the asset in ETFs should be basket of stocks or businesses dealing in those particular domains.

ETFs can play these two roles successfully if investors are investing for long haul and understand their structure.

Time Horizon: Investment in ETFs should be for long haul. The time horizon should be in the order 10 years, 15 years, or even more. The true benefit of investing ETF is derived when investing for long term. One of the methods to invest in ETF is dollar cost averaging over a period of time. There is a school of thought that investors should buy when an ETF is below intrinsic value or relative PE is less than one. In my view for individual investor, it is next to impossible or futile to go into this exercise. Keep it simple, and hence buy and/or continue to add when it is below 200 day and 365 day moving average.

ETF Structure: Understand what an ETF consists of, e.g. common stocks, futures, options, leverages, etc. Many ETFs are closed end funds with high expenses, many provide dividends that include return of capital, many provide short term gains distributions (tax implications), many consist of only 30 or 40 stocks based on capitalization, etc. In addition, investors need to more careful for ETF focusing on emerging markets. Many funds just invest in ADR/GDR/ADS, which is locally available in US and still charge high fees, many only have less than 100 stocks, etc.

If your strategically, ETFs can provide the strengthen investors portfolio and help in asset allocation. At this point in time, I believe ETFs are the best investment vehicles to get exposure to emerging markets. Investors do not need to worry about identifying countries or individual companies in emerging countries. They not only provide individual investors a means to invest, but also a mechanism to buy and sell easily during trading hours.

What role does ETF play your portfolio?

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Is now the time to sell your dividend stocks?

2009-10-15T05:30:00.000-05:00

The strong bullish move off of March 2009 lows has lifted many stocks, thus creating large unrealized paper gains for many dividend investors. While prices have enjoyed a steep run-up, dividend yields, which move inversely to prices, have declined in the process. Many dividend investors are now wondering if they should simply lock in their gains in stocks which are not yielding that much relative to others.

As a dividend investor, one of the items in my entry criteria is to require at least a 3% initial yield when purchasing a stock. Back in the first half of 2009, there were plenty of good quality dividend stocks that fit these criteria. Nowadays even some of my favorites such as PepsiCo (PEP) and Aflac (AFL) are yielding a little less than 3%. Now that those holdings are yielding less than my entry yield criteria, the question is whether I should hold on to them, or switch to stocks with higher current yields. If I were to do this, I would instantly increase my dividend income. If I didn’t however, that wouldn’t really hurt my income either.

First, the reason why I won’t do this is because I am a long term investor. I buy stocks and plan to hold on to them for the long run, or until a company cuts dividends. Over time I expect that a dividend grower would deliver a solid yield on cost. In other words if I purchased Johnson & Johnson (JNJ) at $50 in March, my yield on the original investment would have been 3.68%. After the company raised its annual dividend however to $1.96/year, my yield on cost increased to 3.92%. If JNJ raises distributions at 6% annually for the next 12 years, my yield on cost would double to 8%. More often than not however, the current yield on Johnson & Johnson (JNJ) would remain between 2% and 3% over the next decade. That is, if Johnson and Johnson pay a $4 dividend in one decade, and the stock yields 2%, the stock price would be $200. Most dividend yield chasers would be ignoring the stock simply because the yield is too low. At that moment however, my yield on cost would be 8%, and I wouldn’t care as much about the current yield, except when reinvesting distributions.

Therefore it is important to distinguish between yield on cost, and current yield. If you purchase a stock whose dividend payment increases over time, chances are that your yield on cost would be increasing. Thus, even if the current yield drops to 2%, one should not consider selling. Another example in this situation is Aflac (AFL), which could have been purchased around $12 at its lows in March, yielding about 10%. Despite the fact that the stock is up over 300% since that point and yielding 2.4% currently, this investment would still be yielding 10% on cost to the investor who bought at the time.

Second, you have to take into account the dividend yield and dividend growth characteristics in addition to evaluating the sustainability of the dividend. If you purchased Procter & Gamble (PG), at prices between $45 and $50, your yield on cost is somewhere between 3.50% and 3.90%, despite the fact that the stock currently yields 3.10%. The ten year dividend growth rate for this Cincinnati based manufacturer of consumer goods is 10.60%. Using the rule of 72, the company would double your yield on cost in 7 years. In addition to that the dividend payment is adequately covered from current earnings and cash flows per share.
Let’s assume that you decided to sell your Procter & Gamble (PG) stock today for a higher yielding company such as AT & T (T), which currently yields 6.30%. While you would essentially double your dividend income overnight, you would have to note that AT&T (T) has grown its distributions by 5.3% annually over the past decade. In addition to that, the payout ratio of the telecom company is approaching 80%, which puts the sustainability of the distribution in danger. Last but not least, by switching from Procter & Gamble (PG) into AT&T (T) would lead to your portfolio being overweight to the telecommunications sector and underweight the consumer staples sector.

At the end of the day it is important to understand that investing is more art than science. Thus, while a strategy might look good on paper, does not mean that it would stand the tests of the battle. It is also a balancing act between several known and unknown variables, such as dividend yield, dividend growth, dividend payout, diversification and dollar cost averaging. If your portfolio consists mainly of high yielding securities, there is a very high probability that the dividend payouts on your investments is high, which increases the likelihoods for a dividend cut, and the opportunities for income growth are limited. It is important to view stocks as ownership portions of businesses, and thus concentrate on selecting only those which the investor believes to have solid fundamentals over time.

Two such companies include Johnson & Johnson (JNJ) and Procter & Gamble (PG). Both companies are leaders in their own markets, and possess strong economic moats.

The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row. (analysis)

Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has raised distributions for 47 consecutive years. (analysis)

Both companies offer not only great dividend growth potential, but also strong capital gains potential as well for the enterprising long term investor. While investing in the short run is mostly affected by strong emotions such as fear and greed, long term dividend investing is all about evaluating long term business trends and then positioning accordingly.

Full Disclosure: Long AFL, JNJ, PEP, PG and T

Relevant Articles:

- Emotionless Dividend Investing
- Procter & Gamble (PG) Dividend Stock Analysis
- Johnson & Johnson (JNJ) Dividend Stock Analysis
- Should you re-invest your dividends?

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What Does The Index Really Tell You?

2009-10-14T05:30:00.000-05:00

We looked here at the Dow Jones Industrial Average, and saw why it's not a great measure of US stock performance, despite being a favourite index when it comes to media coverage. The S&P 500 is a much better barometer for the health of US stocks, though an understanding of its calculation methodology is important in order to understand the limits to its usefulness.

The S&P 500 is essentially a market-value weighted index*, meaning a company's influence on the index is proportional to its size. This much different than how the Dow Jones Industrial Average is calculated. Also unlike the Dow, the 500 stocks that comprise the index are chosen such that the index proportionally represents the economy's various industries. As such, the S&P 500 is not just the 500 largest companies. One interesting note is that despite being larger than almost every company in the index, Berkshire Hathaway is not a component of the S&P 500.

What does this mean for you? Basically if you invest in an index fund that mimics the S&P 500, most of your money is invested in the largest companies, thanks to the index's market-value weighting*. For example, the top 10 companies of the S&P 500 make up 20% of its value!

If you're a value investor like we are, and find more value in small companies than in large (for reasons discussed here), the S&P 500 neither looks like a good place to invest, nor does it provide a decent basis against which to compare one's returns, as it rises and falls with the largest companies.

While the S&P 500 is a useful indicator of the perceived health of the US economy, its usefulness as an investing and comparison tool is limited.

(*)Since 2005, this is not entirely true; Standard and Poors switched to only counting shares in its index that are available for public trading (as opposed to all outstanding shares).

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Stock Analysis: Wal-Mart Stores, Inc. (WMT)

2009-10-12T05:30:00.001-05:00

Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

WMT is trading at a discount to 1.) and 3.) above. The stock is trading at a 7.9% premium to its calculated fair value of $46.31. WMT did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

WMT earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 35 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

WMT earned a Star in this section for its NPV MMA Diff. of the $922. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.3% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Other: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: WMT did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks WMT as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $59.68 before WMT's NPV MMA Differential increased to the $500 that I like to see for a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.83%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 9.6%. This dividend growth rate is less than the 11.3% used in this analysis, thus providing a slight margin of safety. WMT has a risk rating of 1.00 which classifies it as a low risk stock.

WMT is a quality company with a sound strategic plan. At 2.18%, WMT's dividend is lower than I prefer. However, given the quality of the company, I try to purchase some shares each year during a pullback. Its currently trading at a 8% premium to its buy price of $46.31. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in WMT (2.4% of my Income Portfolio). What are your thoughts on WMT?

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