Warren Buffett’s iconic letter to shareholders has been published on Berkshire Hathaway's website. The legendary chairman of Berkshire Hathaway has been writing this annual letter for more than 32 years. In it he summarizes the performance of the various businesses that make up the portfolio of his conglomerate. The Oracle of Omaha often gives insight on his decision making process, when making investments.
Of particular importance to me were his words on his reduction of stakes in Johnson and Johnson (JNJ),Procter and Gamble (PG) and Conoco Phillips (COP):
"On the plus side last year, we made purchases totaling $14.5 billion in fixed-income securities issued by Wrigley, Goldman Sachs and General Electric. We very much like these commitments, which carry high current yields that, in themselves, make the investments more than satisfactory. But in each of these three purchases, we also acquired a substantial equity participation as a bonus. To fund these large purchases, I had to sell portions of some holdings that I would have preferred to keep (primarily Johnson & Johnson, Procter & Gamble and ConocoPhillips). However, I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits."
I speculated before that one reason why he might be selling solid dividend stocks such as Johnson & Johnson and Procter and Gamble could be that they haven’t fallen as much as the broader market, which makes them ideal for Buffett to deploy the funds in other beaten down sectors. Another reason could be that he needs to raise as much cash as possible, in order to participate in other preferred stock or fixed income deals, where he could earn a 10%-15% annual dividend yield, with very favorable terms for his company. Ordinary investors do not however have the purchasing power to participate in such favorable deals at this time.
Buffett also spend several pages discussing derivatives and shortcomings of the Black Scholes option-pricing model.
Saturday, February 28, 2009
Monday, January 19, 2009
Six Dividend Stocks Raising the bar
The stock market averages keep responding in a way that shows investors are expecting the worst in terms of profitability for most major US and Global corporations. Some pundits are getting bullish, while others are getting increasingly bearish. The odds of both camps being correct are slim to none. With this confusing information, what are investors supposed to do?
My main recommendation for buy and hold investors is to ignore all the day to day chatter and forecasts, since noone can predict enough market movements in order to make money. The best course of action to take is to assume a long-term strategy of buying stocks that keep increasing their dividends even during the current uncertain economic and market conditions.
CVS Caremark Corporation (CVS) announced that its Board has approved a 10.5% increase in its quarterly dividends to $0.07625 per common share. CVS Caremark Corporation has consistently increased itsdividends since 2003. The stock currently yields 1.10%.
Cintas Corporation (CTAS) announced that its Board has approved a 2% increase in its annual dividends from $0.46 to $0.47 per common share. Cintas Corporation is a dividend achiever, which has consistently increased its dividends for 25 years. The stock currently yields 2.00%. Over the past 8 years the company has managed to double its dividends.
Enterprise GP Holdings L.P., (EPE), which is engaged in the ownership of general and limited partner interests of publicly traded partnerships engaged in the midstream energy industry and related businesses, announced that its Board has approved an increase in its quarterly dividend to $0.47 per unit. Enterprise GP Holdings L.P. has consistently paid and increased its dividends every single quarter since 2005. The partnership shares currently yield 9.20%.
Linear Technology (LLTC) announced that its Board has approved an increase in its quarterly dividend from $0.21 to $0.22 per common share in an effort to return value to shareholders. Linear Technology is adividend achiever, which has consistently increased its dividends since 1992. The dividend growth has been astounding, as LLTC has managed to double its dividend payments to shareholders every three years on average for the past 16 years. The stock currently yields 3.80%.
Monsanto Company (MON), announced that its Board has approved a 10% increase in its quarterly dividend from $0.24 to $0.265 per common share. Monsanto Company has consistently increased its dividends since 2001. In fact the new dividend payment represents a 489% increase in comparison to the first dividend payments in 2001 of $0.045/share. The stock currently yields 1.20%.
Family Dollar Stores, Inc. (FDO) announced that its Board has approved a 8% increase in its quarterly dividend from $0.125 to $0.135 per common share. Family Dollar Stores, Inc.is a dividend aristocrat that has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 1.80%.
LLTC looks like a promising dividend growth stock in order to gain some technology exposure in my dividend stock portfolio. I will add it to my list for further research. FDO looks promising in the current economic environment, however due to its low yield I would only consider initiating a position there on dips below $18.
My main recommendation for buy and hold investors is to ignore all the day to day chatter and forecasts, since noone can predict enough market movements in order to make money. The best course of action to take is to assume a long-term strategy of buying stocks that keep increasing their dividends even during the current uncertain economic and market conditions.
CVS Caremark Corporation (CVS) announced that its Board has approved a 10.5% increase in its quarterly dividends to $0.07625 per common share. CVS Caremark Corporation has consistently increased itsdividends since 2003. The stock currently yields 1.10%.
Cintas Corporation (CTAS) announced that its Board has approved a 2% increase in its annual dividends from $0.46 to $0.47 per common share. Cintas Corporation is a dividend achiever, which has consistently increased its dividends for 25 years. The stock currently yields 2.00%. Over the past 8 years the company has managed to double its dividends.
Enterprise GP Holdings L.P., (EPE), which is engaged in the ownership of general and limited partner interests of publicly traded partnerships engaged in the midstream energy industry and related businesses, announced that its Board has approved an increase in its quarterly dividend to $0.47 per unit. Enterprise GP Holdings L.P. has consistently paid and increased its dividends every single quarter since 2005. The partnership shares currently yield 9.20%.
Linear Technology (LLTC) announced that its Board has approved an increase in its quarterly dividend from $0.21 to $0.22 per common share in an effort to return value to shareholders. Linear Technology is adividend achiever, which has consistently increased its dividends since 1992. The dividend growth has been astounding, as LLTC has managed to double its dividend payments to shareholders every three years on average for the past 16 years. The stock currently yields 3.80%.
Monsanto Company (MON), announced that its Board has approved a 10% increase in its quarterly dividend from $0.24 to $0.265 per common share. Monsanto Company has consistently increased its dividends since 2001. In fact the new dividend payment represents a 489% increase in comparison to the first dividend payments in 2001 of $0.045/share. The stock currently yields 1.20%.
Family Dollar Stores, Inc. (FDO) announced that its Board has approved a 8% increase in its quarterly dividend from $0.125 to $0.135 per common share. Family Dollar Stores, Inc.is a dividend aristocrat that has consistently increased its dividends for thirty-three consecutive years. The stock currently yields 1.80%.
LLTC looks like a promising dividend growth stock in order to gain some technology exposure in my dividend stock portfolio. I will add it to my list for further research. FDO looks promising in the current economic environment, however due to its low yield I would only consider initiating a position there on dips below $18.
Wednesday, December 31, 2008
TARP is bad for dividend investors
TARP allows the United States Department of the Treasury to purchase nonliquid, difficult to value assets from banks and other financial institutions. TARP also allow the Treasury to purchase whole loans and make direct equity investments in banks themselves. The targeted assets are securities backed by mortgages, sometimes described by the government, media, and others as “troubled” or “toxic” assets.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:
Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)
There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.
There is some talk that a TARP funding to banks essentially marks the end of their dividends.
"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.
Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties." Source TARP Capital Purchase Program
What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.
Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.
Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.
As of November 12, 2008, $290 billion of the first $350 billion allotment funding TARP has been allocated, primarily to the Capital Purchase Program: $250 billion for bank equity infusions, and $40 billion for an equity infusion into insurer American International Group.[
The eight financial companies that were the first to have received TARP funds include:
Bank of America (BAC) (analysis)
Bank of New York Mellon Corp
Citigroup (C )
Goldman Sachs (GS)
JPMorgan Chase (JPM)
Morgan Stanley (MS)
State Street (STT)
Wells Fargo (WFC)
There were 44 other institutions that received TARP money, including USB, CMA, Northern Trust, Suntrust Banks, KeyCorp, RF, BB&T and others. Check out my analysis of USBank or my analysis of BB&T.
There is some talk that a TARP funding to banks essentially marks the end of their dividends.
"Restrictions on Dividends:
For as long as any Senior Preferred is outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the Senior Preferred, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Senior Preferred), nor may the QFI repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Senior
Preferred or common shares, unless (i) in the case of cumulative Senior Preferred all accrued and unpaid dividends for all past dividend periods on the Senior Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred the full dividend for the latest completed dividend period has been declared and paid in full.
Common dividends: The UST’s consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred is redeemed in whole or the UST has transferred all of the Senior Preferred to third parties." Source TARP Capital Purchase Program
What really showed me that TARP program is serious, is a recent statement from State Street last week, which announced that it wasn’t going to raise its dividends in compliance with the restrictions on dividend rate increases generally imposed on all participants in the U.S. Treasury's TARP Capital Purchase Program.
Before that State Street (STT) was the only dividend aristocrat which had consistently increased its dividends twice per year for almost 27 years in a row.
Traditionally, financial shares were one of the best yielding stocks in the marketplace. It seems that TARP essentially is bad news for any dividend investors, as it could result in further decreases to already lowered payments. The lesson to be learned for individual investors is to diversify across sectors, no matter how great the yields look.
Wednesday, November 26, 2008
Arbitrage Opportunities – CEG and ROH
With the stock market declines that hedge fund and mutual fund redemptions as well as the deleveraging on Wall Street have caused, investors are definitely wondering whether they would ever be able to reach their financial goals. The increasing volatility of the markets has certain stocks trading at multi year lows, despite strong fundamentals, pushing yields to multi-year highs.
In this market turmoil, I believe that sticking to fundamentally sound strategies such as value investing ordividend growth investing is the way to escape the day to day volatility. I also believe that learning more about value investing is essential, as the market will present many once in a lifetime opportunities for investors.
One value investing strategy is merger arbitrage. In my previous post related to CEG merger, I outlined the basic idea behind this strategy. I still believe that CEG deal will close by the middle of 2009. At current prices and if the stock keeps its 8% current yield, enterprising investors could make about 18%.
Furthermore I have kept my eyes open for other arbitrage opportunities. Rohm and Haas (ROH) is another merger arbitrage play to consider. In July, Dow Chemical announced that it was considering acquiring ROH for $78/share in cash. You could check my analysis of ROH here.
On October 29 the shareholders of ROH approved the deal. Furthermore the Hass family, which owns over one third of Rohm-Haas, is a strong supporter of the deal, as it seeks to unload their position.
The merger is expected to close in early 2009, pending regulatory approvals, and the agreement provides that Rohm and Haas Company will retain its name and Philadelphia Headquarters.
An earlier article by Jimmy Lathrop listed some of the risks that could prevent this arbitrage opportunity to work out. The strongest reason in my opinion is this one:
1. There is a chance that the credit crisis could slow or scuttle the deal. Even though Warren Buffett arranged part of the financing to include sale of equity interests with Berkshire Hathaway (BRK.A) as well as the Kuwait Investment Authority, the main underwriters to pay the shareholders of Rohm and Haas Company will come through a loan provided by Citigroup (C), Morgan Stanley (MS) and Merrill Lynch (MER). To put things mildly, there is significant uncertainty as to whether one, two or all three of these banks who signed this agreement on July 10, 2008, will be a functioning entity on January 15, 2009.
I believe that ROH is a buy at these levels as long as the deal does not get derailed. Furthermore the stock is paying 41cents/quarter in dividends, which is a decent payment while you are waiting for the deal to close.
In this market turmoil, I believe that sticking to fundamentally sound strategies such as value investing ordividend growth investing is the way to escape the day to day volatility. I also believe that learning more about value investing is essential, as the market will present many once in a lifetime opportunities for investors.
One value investing strategy is merger arbitrage. In my previous post related to CEG merger, I outlined the basic idea behind this strategy. I still believe that CEG deal will close by the middle of 2009. At current prices and if the stock keeps its 8% current yield, enterprising investors could make about 18%.
Furthermore I have kept my eyes open for other arbitrage opportunities. Rohm and Haas (ROH) is another merger arbitrage play to consider. In July, Dow Chemical announced that it was considering acquiring ROH for $78/share in cash. You could check my analysis of ROH here.
On October 29 the shareholders of ROH approved the deal. Furthermore the Hass family, which owns over one third of Rohm-Haas, is a strong supporter of the deal, as it seeks to unload their position.
The merger is expected to close in early 2009, pending regulatory approvals, and the agreement provides that Rohm and Haas Company will retain its name and Philadelphia Headquarters.
An earlier article by Jimmy Lathrop listed some of the risks that could prevent this arbitrage opportunity to work out. The strongest reason in my opinion is this one:
1. There is a chance that the credit crisis could slow or scuttle the deal. Even though Warren Buffett arranged part of the financing to include sale of equity interests with Berkshire Hathaway (BRK.A) as well as the Kuwait Investment Authority, the main underwriters to pay the shareholders of Rohm and Haas Company will come through a loan provided by Citigroup (C), Morgan Stanley (MS) and Merrill Lynch (MER). To put things mildly, there is significant uncertainty as to whether one, two or all three of these banks who signed this agreement on July 10, 2008, will be a functioning entity on January 15, 2009.
I believe that ROH is a buy at these levels as long as the deal does not get derailed. Furthermore the stock is paying 41cents/quarter in dividends, which is a decent payment while you are waiting for the deal to close.
Thursday, October 30, 2008
Nucor Corporation (NUE) Dividend Stock Analysis
Nucor Corporation and its subsidiaries engage in the manufacture and sale of steel and steel products in North America. It operates in two segments, Steel Mills and Steel Products.
Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.
Nucor Corporation is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 34 consecutive years. From the end of 1998 up until October 2008 this dividend growth stock has delivered an annual average total return of 14.70 % to its shareholders. This year however the stock is down about 40% as the commodity boom seems to have dried up the demand for materials, including steel, across the globe.
At the same time company has managed to deliver an 24.20% average annual increase in its EPS since 1998.
The ROE has increased from 13% range in 1998 to 30% by 2007.
Annual dividend payments have increased by an average of 39.70% annually over the past 10 years, which is much higher than the growth in EPS. Nucor’s last quarterly payment of $0.52/share consisted of $0.32 of regular dividend and $0.20/share in supplemental dividends.
A 40% growth in dividends translates into the dividend payment doubling almost every 2 years. If we look at historical data, going as far back as 1973, NUE has actually managed to double its dividend payment every four years on average. The last major dividend raise was between 2005 and 2006 when dividends increased by a whooping 475% in one year, helped by increased demand for metals worldwide. After this major move total dividends paid have actually decreased by 15% mainly because of a decrease in the supplemental dividends.
If we invested $100,000 in NUE on December 31, 1998 we would have bought 9249 shares (Adjusted for two 2:1 stock splits in 2004 and 2006). In March 1999 your quarterly dividend income would have been $300. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $5806 by September 2008. For a period of 10 years, your quarterly dividend income would have increased sixteen times. If you reinvested it however, your quarterly dividend income would have increased over nineteen times!
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.
Investors should proceed with caution in the future as such dividend growth rates are definitely unsustainable given the recent collapse in commodities prices and talk about deflation and depression.
The dividend payout has slowly increased from upper twenties to high forties over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
I think that NUE is attractively valued with its low price/earnings multiple of 5, a not too high DPR, as well as an above average dividend yield at 5.90% (3.80% if you only count the base dividend). The current dividend yield is way above average for this stock which could compensate for the lower expected growth in company’s fundamentals or even be a warning sign that Nucor’s dividend is in danger.
I do believe that NUE is an attractive buy candidate on dips below $32, since it adds some further diversification exposure to a dividend growth portfolio. Since Nucors main business, steel is a highly cyclical business I would proceed in purchasing NUE stock cautiously. Over the next few years I wouldn’t be surprised if this stock retraces all of its gains during the 2003- 2007 bull market and ends up below $20/share.
This post appeared on 114th Edition of the Festival of Stocks.
Wednesday, October 1, 2008
Chevron Corporation (CVX) Dividend Stock Analysis
Chevron Corporation operates as an integrated energy company worldwide. The company’s organized into several segments including Petroleum operations, chemical operations coal mining, power generation,insurance, and real estate activities.
Chevron is a dividend achiever as well as a component of the S&P 500 and Dow Jones Industrials indexes. It has been increasing its dividends for the past 20 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 11.10 % to its shareholders. The stock has lost about four percent of its value so far in 2008.
Chevron is a dividend achiever as well as a component of the S&P 500 and Dow Jones Industrials indexes. It has been increasing its dividends for the past 20 consecutive years. From the end of 1999 up until September 2008 this dividend stock has delivered an annual average total return of 11.10 % to its shareholders. The stock has lost about four percent of its value so far in 2008.
At the same time company has managed to deliver a 27.00% average annual increase in its EPS since 1999, supported by the commodities bull market of the past decade.
The ROE fluctuated between 5% and 35%. The past couple of years have been characterized by higher returns on equity. 
Annual dividend payments have increased over the past 10 years by an average of 7.10% annually, which is much lower than the growth in EPS. Using the rule of 72 a 7% growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1988, CVX has indeed managed to double its dividendpayment every ten years on average. 
It’s interesting to note that both XOMand CVX have not kept pace with the EPS increases by raising their dividends accordingly. Instead those oil behemoths have decided to make stock buybacks, which are not as reliable as dividend payments over the long run. I think that CVX and XOM management probably have not increased dividends as fast as earnings because they consider the current commodities boom to be of short term nature.
If we invested $100,000 in CVX on December 31, 1998 we would have been able to purchase 2411 shares (Adjusted for a 2:1 stock split in 2004). In February 1999 your quarterly dividend income would have been $735. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $2115 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 113%. If you reinvested it though, your quarterly dividend income would have increased by 188%.
If we invested $100,000 in CVX on December 31, 1998 we would have been able to purchase 2411 shares (Adjusted for a 2:1 stock split in 2004). In February 1999 your quarterly dividend income would have been $735. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $2115 by August 2008. For a period of 10 years, your quarterly dividend income would have increased by 113%. If you reinvested it though, your quarterly dividend income would have increased by 188%.
The dividend payout has remained below 50% after 2003. Before that the payout had followed the wide fluctuations in earnings rising above 100% on several occasions. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
CVX does look attractively valued with its low price/earnings multiple of 9, low DPR as well as attractive yield at 3%. If I had to choose between XOMand CVX, the latter would be the obvious candidate for me. I will look forward to entering a position into thisstock on dips.
Disclosure: I do not own shares of CVX
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