My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

Which integrated oil majors will become high dividend stocks?

Total_balance_sheet_2006_2010

Today's new about the US government planning to sell 2 million barrels of oil per day for 30 day from the strategic oil reserve got me thinking about which oil majors are high dividend stocks?  The answer is none.  But some itegrated oil majors are close in the 4-5% dividend yield range.  A significant stock market correction could make some of the high dividend stocks yielding over 6%.
 
Exxon Mobil (XOM) yields 2.40%
Cheveron (CVX) yields 3.14%
Royal Dutch Shell (RDS) yields 4.90%
Total (TOT) yields 5.76%
BP (BP) yields 3.95%
Petroleo Brasilero (PBR) yields 4.47%
Conoco Phillips (COP) yields 3.62%
 
If the US government is temporarily successful at increasing the US domestic supply of oil, then oil prices should fall in the short term.  This in turn will drive the oil stocks lower.  That will drive oil stock dividend yields higher and it might possibly provide some attractive buying opportunities for price appreciation once the effects of the governments actions wear off.
 
I'm going to start by examining the highest dividend stock on this short list: Total (TOT).
 
Total (TOT)
Market price: $54.70
Shares: 2.35 billion
Dividend: $1.61 semi annual
Dividen yield: 5.76%
Recent EPS: $7.60
Dividend payout ratio: 84.7% (that sort of high, but tolerable)
 
Earning power: $4.64 average earnings over five years @ 2.35 billion shares
(Earnings adjusted for changes in capitalization - slight increase in shares)
          EPS      Net inc.          Adj. EPS
2006   $5.09     $11,788 M     $5.01
2007   $5.80     $13,181 M     $5.61
2008   $4.71     $10,590 M     $4.51
2009   $3.78     $8,447 M       $3.59
2010   $4.71     $10,571 M     $4.50
Five year average adjusted earnings = $4.64 per share
Market price is at 11.78 times average earnings.  Total appears to be value priced right now.
Value territory starts at or below 12 times average earnings = $55.68
Speculative pricing is at or above 20 times average earnings = $92.80
 
Balance sheet strength:
Book value per share: $27.84
Price to book value ratio: 1.964 (good)
Current ratio: 1.40 (over 2.0 is good)
Quick ratio: 0.87 (over 1.0 is good)
 
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3 So-called High Dividend Stocks The Dumb Money Is Buying. You can do better.

Benzinga staff writer, Jonathan Chen, wrote an article on what he called “3 High Dividend Stocks The Smart Money Is Buying”.  His three stocks were Philip Morris International Inc. (PM), Pfizer (PFE), and Johnson & Johnson (JNJ).

These aren’t high dividend stocks.  I believe that high dividend stocks begin above 6% yield because they should be higher than bonds because common stocks are subordinate to bonds for claims on the company’s assets in the event of a liquidation.  Also, the long term rate of price inflation is much higher than the 2-3% that the Federal Reserve reports as part of its CPI numbers.  These stocks are barely yielding over 3 percent.  I would consider these stocks moderate dividend stocks.  PFE had to half its dividend in 2009, so it isn’t a great dividend grower.  JNJ is the best dividend grower of the bunch.

These stocks are not cheap.  They are closer to speculative pricing of 20 times average earnings than value territory below 12 times average earnings.

            Philip Morris is trading at 18.5 times its five year average earnings.

            Pfizer is trading at 18.24 times its five year average earnings.

            Johnson & Johnson is trading at 15.14 times its five year average earnings.

So, when should you buy these so-called high dividend stocks?  Buy them when they are values below 12 times average earnings.  The yields will be higher then also.  Then next stock market crash in reaction to the fiscal and monetary insanity of the US government and Federal Reserve will drive the prices of these stocks lower.  Buy them on sale (low); sell them when everyone thinks the market will continue up forever (high).  The smart money should be selling these stocks now if they bought them back in 2009-2010.

Consider buying Philip Morris under $44.04 per share.  PM traded below $44.00 in June 2010.

Consider buying Pfizer under $13.44 per share.  PFE traded below $13.44 in May 2009, but is has been down in the $14.00’s several times since then.

Consider buying Johnson & Johnson under $52.68 per share.  JNJ traded below $52.68 in May 2009.

Philip Morris Intl. (PM)

Market price: $68.05

Shares: 1.78 billion

Dividend record:

            Dividend yield: 3.76%

            Dividend: $0.64 quarterly

            Dividend payout ratio: 62.6% ($2.56 annual dividend divided by $4.09 recent EPS)

Earning power: $3.67 per share @ 1.78 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.91    $6,130 M           $3.44

2007     $2.86    $6,038 M           $3.39

2008     $3.31    $6,890 M           $3.87

2009     $3.24    $6,342 M           $3.56

2010     $3.92    $7,259 M           $4.08

Five year average earnings = $3.67

Value below 12x average earnings = $44.04

Market price at 18.5x average earnings = almost speculatively priced

Speculative above 20x average earnings = $73.40

Strength of balance sheet: Quite weak (liabilities are rising faster than assets)

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Book value per share: $1.90 (Really?  That’s bad)  I calculated it at $1.97 which is still horrible

Price to book value: 35.81 (Wow!!  That’s horrible)

Current ratio: 1.07 (Less than 2.0 is bad)

Quick ratio: 0.37 (Less than 1.0 is bad)

Pfizer (PFE)

Market price: $20.43

Shares: 7.90 billion

Dividend record:

            Dividend yield: 3.92%

            Dividend: $0.20 quarterly

            Dividend payout ratio: 76% ($0.80 annual dividend divided by $1.05 recent EPS)

Earning power: $1.12 per share @ 7.90 billion shares

            Earnings adjusted for changes in capitalization

            EPS       Net inc.             Adj. EPS

2006     $2.66    $11,019 M*        $1.40

2007     $1.17    $8,140 M           $1.03

2008     $1.20    $8,104 M           $1.04

2009     $1.23    $8,635 M           $1.09

2010     $1.02    $8,257 M           $1.05

* Net income was $19,332 M but $8,313 M was from discontinued operations.  I removed the discontinued ops so the earnings wouldn’t be skewed too much.

Five year average earnings = $1.12

Value below 12x average earnings = $13.44

Market price at 18.24x average earnings = almost speculatively priced

Speculative above 20x average earnings = $22.40

Strength of balance sheet: Fairly stable

Image006

Book value per share: $11.17

Price to book value: 1.83 (good)

Current ratio: 2.00 (Over 2.0 is good)

Quick ratio: 1.66 (Over 1.0 is good)

Johnson & Johnson (JNJ)

Market price: $66.49

Shares: 2.74 billion

Dividend record:

            Dividend yield: 3.43%

            Dividend: $0.57 quarterly

            Dividend payout ratio: 51.7% ($2.28 annual dividend divided by $4.41 recent EPS)

Earning power: $4.39 per share @ 2.74 billion shares

            Earnings adjusted for changes in capitalization (PFE has been buying back shares)

            EPS       Net inc.             Adj. EPS

2006     $3.73    $11,053 M         $4.03

2007     $3.63    $10,576 M         $3.86

2008     $4.57    $12,949 M         $4.73

2009     $4.40    $12,266 M         $4.48

2010     $4.78    $13,334 M         $4.87

Five year average earnings = $4.39

Value below 12x average earnings = $52.68

Market price at 15.14x average earnings = priced for investment

Speculative above 20x average earnings = $87.80

Strength of balance sheet: Strong (That’s what I like to see…shareholder equity covering up the liabilities – nice.)

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Book value per share: $21.51

Price to book value: 3.09 (decent)

Current ratio: 2.05 (Over 2.0 is good)

Quick ratio: 1.57 (Over 1.0 is good)

Disclosure: I don’t own any of these stocks.

                                                                                                              

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3 High Dividend Stocks The Smart Money Is Buying

By Jonathan Chen

Created 06/20/2011 - 11:59am

[1]

In times of uncertainty, investors look to high-dividend paying stocks for some sort of normalcy. Every investor looks for dividends to juice yields and returns, as dividends are an important source of income for many, especially retirees.

We also want to be playing the same game the "smart money" is playing. The hedge funds, the legendary investors, the institutions. They are all known as the "smart money," so why should they benefit and not us?

Here is a list of a few low-risk, high dividend stocks that will allow investors to play the same game the "smart money" is playing, and hopefully, generate the same returns.

Philip Morris International Inc. (NYSE: PM [2]) is a low-risk, large-cap stock that sports a hefty 3.7% dividend yield, in addition to strong growth from outside the U.S. Philip Morris International was spun off from Altria (NYSE: MO [FREE Stock Trend Analysis] [3]) last decade as a way to unlock the value from the company's international presence, and not deal with the regulatory scrutiny here in the U.S. Shares trade at 13.6 times earnings, and have risen 17% this year, best among the tobacco stocks only behind Lorillard (NYSE: LO [4]). Capital Research Global Investors, Blackrock, and State Street are among Philip Morri's largest investors.

Pfizer Inc. (NYSE: PFE [5]) is another low-risk defensive play, and sports a dividend yield of 3.9%. The company is currently in the process of divesting businesses as a way to unlock shareholder value. Shares have been stagnant for what seems like forever, but it looks as if shares are starting to perk up a bit. The company has a rock solid balance sheet, trades at less than 9 times earnings, and counts State Street, BlackRock and Vanguard among major shareholders. The stock is also a hedge fund favorite.

The last name to consider is Johnson & Johnson (NYSE: JNJ [FREE Stock Trend Analysis] [6]). The New Brunswick-based company is the maker of things like Band-Aids, Tylenol, and other products we use everyday, but don't really think about it. Johnson & Johnson has one investor in it that will make other shareholders sleep better at night: Warren Buffett.

Late last year, the company issued one of the lowest yields over U.S. Treasuries on record, indicating the strong demand for its debt. Johnson & Johnson boasts a triple-A credit rating from Standard & Poor's, a distinction shared by only three other U.S. industrial firms. It trades at just 12.8 times earnings, and is one of the safest companies out there.

Link to original article: http://www.benzinga.com/trading-ideas/long-ideas/11/06/1183851/3-high-dividend-stocks-the-smart-money-is-buying

Terra Nitrogen hits 52 week high; dividend yield decreases. When should you buy?

Terra Nitrogen hit its 52 week high today at $132.98.  The move upward in price has dropped the dividend yield down to 4.09%, but some of the online investing sites compute the yield wrong because of the special dividend that TNH paid last quarter.  For example, Google Finance reports Terra Nitrogen’s current dividend yield at 7.49.  TNH is paying a $1.36 quarterly dividend that equates to $5.44 annually.  $5.44 dividend divided by $132.98 market price equals a yield of 4.09%.

Motley Fool writer Dan Dzombak dug up some reassuring dividend safety info on Terra Nitrogen (TNH) which you can read below.  I agree with his conclusions on the dividend’s safety.

I still think that Terra Nitrogen is approaching the speculative price territory.  See my recent article:

http://www.myhighdividendstocks.com/high-dividend-stocks/two-views-of-terra-nitrogen-tnh-value-or-investment#more-440

Terra Nitrogen would become a high dividend stock again at the price of $90.66 per share.  I would wait until the stock falls somewhere between $90 and $70 to purchase.  A general stock market correction will take Terra Nitrogen down along with many other medium dividend stocks.  You can see in this chart how recently TNH traded in the $60’s:

http://stockcharts.com/h-sc/ui?s=TNH&p=W&b=5&g=0&id=p69438073925

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By Dan Dzombak

Motley Fool

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updated 6/12/2011 7:30:00 AM ET 2011-06-12T11:30:00

Dividend investors know that it pays to follow how much of a company's money goes toward funding its payouts. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

  • The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than 1 means that the company is not bringing in enough money to cover its interest expenses.
  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.
  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business' health. The FCF payout ratio measures the percentage of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Let's examine Terra Nitrogen and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Terra Nitrogen

15.4%

962.7

64.5%

64.4%

Mosaic (NYSE: MOS)

0.3%

54.3

4.0%

7.3%

Potash Corp. (NYSE: POT)

0.5%

23.5

7.3%

38.4%

Scotts Miracle-Gro (NYSE: SMG)

1.9%

8.8

23.6%

17.8%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage of 962.7, Terra Nitrogen covers every $1 in interest expenses with over $900 in operating earnings, meaning the company barely has any debt at all. Given that its EPS payout ratio and FCF payout ratio are below 70%, you shouldn't have to worry that Terra Nitrogen will need to cut its dividend anytime soon.

Link to original article: http://www.msnbc.msn.com/id/43370848/ns/business-motley_fool/

What will it take for Philip Morris (PM) to become a high dividend stock?

Philip Morris International (PM) just bought the global rights to nicotine aerosol technology.  This move could help protect revenues and profits.  This dividend stock is currently yielding 3.68%.  I’m going to run PM through my quick valuation checks to see what will it take to make PM a high dividend stock?

Philip Morris International (PM)

Market price: $70.30

Shares: 1.78 billion

Dividend record: dividend increases every year for the past three years

Dividend: $0.64 quarterly

Dividend yield: 3.68%

Dividend payout ratio: $2.56 dividend divided by $4.08 most recent EPS = 62%

Stock price necessary for 6% dividend yield: $42.67

Earning power: a very stable $3.67 five year average earnings

Earnings yield: 5.9%

(Earnings adjusted for changes in capitalization)

            EPS     Net. Inc.          Adj. EPS

2006    $2.91   $6,130 M         $3.44

2007    $2.86   $6,038 M         $3.39

2008    $3.31   $6,890 M         $3.87

2009    $3.24   $6,342 M         $3.56

2010    $3.92   $7,259 M         $4.08

5 year average earning power per share: $3.67

Value territory @ below 12 times average earnings = $44.04 (it was near this price as recently as May 2010)

Speculative territory @ above 20 times average earnings = $73.40.  PM’s price is approaching speculative territory at 19.2 times it five year average earnings.

Balance sheet – huge hits to shareholder equity need to be investigated

Book value: $1.90 (what? Where did all the equity go?)

Image003

Price to book value: 37 (this is horrendous)

Current ratio: 1.07 (above 2.0 is good.  PM will be strained to pay some short term debts coming due)

Quick ratio: 0.37 (above 1.0 is good)

Conclusion: If you want to own it, then put PM on your watch list for a target price of $44.04.  I will consider performing detailed analysis on PM if the price drops considerably toward the $44.04 target.  If you own it, then consider selling it at $73.40 and above.  The balance sheet scares me.

Disclosure: I don’t own Philip Morris (PM), or plan to until it yields 6% and improves its balance sheet

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Philip Morris International Buys Nicotine Aerosol Technology

By Melissa Korn

   Of DOW JONES NEWSWIRES

 

NEW YORK (Dow Jones)--Philip Morris International Inc. (PM) bought the global rights to technology that creates nicotine in the form of an aerosol as the company seeks smokeless and potentially less harmful alternatives to traditional cigarettes.

The world's biggest tobacco company by revenue, which sells cigarettes such as Marlboro and L&M outside the U.S., bought the patent from inventors including Jed Rose, director of Duke University's Duke Center for Nicotine and Smoking Cessation Research. Terms of the deal weren't disclosed.

It's too early to say what form a product might eventually take or whether it will contain tobacco, Philip Morris spokesman Peter Nixon said. He said translating the technology into a product could take "a few years."

Nicotine itself isn't believed to cause many common smoking-related diseases. Explaining that the ailments are often linked instead to combustion, Philip Morris said the new, non-burning technology "has the potential to reduce the harm of smoking."

A number of companies have expanded their smokeless tobacco offerings in recent years amid increasing bans on indoor smoking and continued concerns over the harmful effects of cigarettes. Philip Morris is in a partnership with Swedish Match AB (SWMA.SK), which makes moist snuff products called snus, for international marketing of smokeless tobacco. British American Tobacco PLC (BATS.LN, BTI), one of Philip Morris's major competitors, launched a startup in April to develop new nicotine-based, non-tobacco products.

Meanwhile, in the U.S., Altria Group Inc. (MO) recently began testing spit-free, tobacco-coated sticks that resemble toothpicks and Reynolds American Inc. (RAI) launched an advertising campaign this week for its Camel Snus product to coincide with an expanded smoking ban in New York City.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

Link to original article: http://online.wsj.com/article/BT-CO-20110526-712786.html

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Exelon (EXC) analysis delayed due to possible merger with Constellation Energy Group (CEG).

I was going to start analyzing Exelon (EXC) because it pasted my mechanical tests, but today’s news of its possible acquisition of rival Constellation Energy (CEG) has scared me off until later.  All three major areas of analysis will change: dividend record, earning power, and strength of balance sheet.

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(Reuters) - Power company Exelon Corp (EXC.N) struck a deal to buy rival Constellation Energy Group (CEG.N) for $7.9 billion in a bid to become the largest generator of competitively priced electricity in the United States.

It would be the latest in a string of deals in the fragmented U.S. utility industry, which faces new costs to upgrade power grids and meet environmental controls.

It is Exelon Chief Executive John Rowe's latest -- and likely last -- attempt to transform his company through acquisitions. Exelon was thwarted in efforts to buy independent power producer NRG Energy Inc (NRG.N) in 2009, Public Service Enterprise Group (PEG.N) in 2006, and Illinois Power in 2003.

The combined company will keep the Exelon name and its headquarters in Chicago. Rowe plans to retire after the deal closes, and Exelon Chief Operating Officer Christopher Crane will become the new company's CEO. Constellation CEO Mayo Shattuck will become executive chairman.

"This enterprise will have the scale and financial strength to drive expansion in competitive energy markets, as well as new investment in the next wave of clean generation and sustainable products and services," Shattuck said.

Constellation shareholders will receive 0.93 Exelon share for each Constellation share, the companies said in a statement.

The offer values Constellation at $38.59 a share -- 12.5 percent above its Wednesday closing price of $34.30.

Exelon said the deal is expected to increase its 2013 earnings by more than 5 percent.

Exelon, among the leading U.S. utilities and the nation's top nuclear power company, will add 1.2 million customers to its existing 5.4 million. The combined company will serve Maryland, Illinois and Pennsylvania.

About 55 percent of the new entity's power generation fleets will be nuclear, 24 percent natural gas, 8 percent renewable and hydro, 7 percent oil and 6 percent coal.

Exelon shares were off 35 cents ay $41.14 in morning trade, while Constellation was up 3.5 percent to $35.49.

REGULATORY HURDLES

The companies expect the deal to close early in 2012. But utility deals in the United States are usually drawn-out procedures that face tough scrutiny from states and regulators.

Constellation has faced challenges in closing its own deals in the past. Florida power company FPL Group Inc scrapped a $12.5 billion takeover of Constellation in 2006 after the merger became embroiled in Maryland state politics.

Recent deals in the industry indicate utilities believe regulators are becoming more receptive to consolidation. Duke Energy (DUK.N) has offered $13.7 billion for Progress Energy (PGN.N), Northeast Utilities (NU.N) is buying NSTAR (NST.N) for $4.2 billion, and AES Corp (AES.N) has bid $3.5 billion for DPL Inc (DPL.N).

The Exelon-Constellation deal must be approved by shareholders of both companies, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, state regulators in Maryland, New York and Texas, and other regulatory bodies.

Following completion of the deal, Exelon shareholders will own about 78 percent of the combined company.

Barclays Capital, J.P. Morgan Securities, Evercore Partners and Loop Capital Markets were financial advisers to Exelon.

Morgan Stanley, Goldman Sachs and Credit Suisse advised Constellation.

(Reporting by Michael Erman in New York and Krishna N Das in Bangalore; Editing by Saumyadeb Chakrabarty, Ian Geoghegan and John Wallace)

Link to original article: http://www.reuters.com/article/2011/04/28/us-constellation-exelon-idUSTRE73Q8BS20110428

April 28, 2011 09:49 AM Eastern Daylight Time 

Kendall Law Group Investigates Constellation Energy Group, Inc. Merger for Shareholders

DALLAS--(BUSINESS WIRE)--Kendall Law Group, led by former federal judge Joe Kendall, is investigating Constellation Energy Group, Inc. (NYSE: CEG) for shareholders in connection with the proposed acquisition by Exelon Corporation. The national securities firm’s investigation seeks to determine whether Constellation Energy and its Board breached their fiduciary duties by entering into the agreement without properly shopping for a deal that would provide better value for shareholders. If you are a Constellation Energy shareholder and would like additional information about your rights, contact the Kendall Law Group at 877-744-3728 or by email at skendall@kendalllawgroup.com.

On April 28, 2011, the companies announced the definitive merger agreement under which Constellation Energy would be acquired by Exelon, in a transaction valued at approximately $7.9 billion. Under the terms of the agreement, Constellation Energy stockholders will receive 0.93 Exelon shares (NYSE: EXC) for each share of Constellation Energy/CEG common stock held. The value of consideration being offered is worth approximately $38.59 a share, which represents a 12.5 percent premium over Constellation Energy stock's Wednesday closing price of $34.30. The firm’s investigation seeks to determine whether Constellation Energy and its Board undertook a fair process in negotiating the deal.

Kendall Law Group was founded by a former federal judge, includes a former United States Attorney, prosecutors and securities lawyers who are experienced in complex securities litigation. The firm has been counsel in numerous merger and acquisition cases nationwide, including some of the largest transactions in the United States.

Contacts

Kendall Law Group LLP
Scott Kendall, 214-744-3000
877-744-3728 Toll Free
214-744-3015 Facsimile
skendall@kendalllawgroup.com
www.kendalllawgroup.com

Link to original article: http://www.businesswire.com/news/home/20110428006191/en/Kendall-Law-Group-Investigates-Constellation-Energy-Group

Examples of Speculative and Investment Common Stocks You've Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

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Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

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There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

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Comments on the Various Groups.  The companies listed in Group A are representative of the so-called “first-grade” or “blue-chip” industrials, which were particularly favored in the great speculation of 1928-1929 and in the markets of ensuing years.  They are characterized by a strong financial position, by presumably excellent prospects and in most cases by relatively stable or growing earnings in the past.  The market price of the shares; however, was higher than would be justified by their average earnings.  In fact the profits of the best year in the 1929-1938 decade were less than 8% of the December 1938 market price.  It is also characteristic of such issues that they sell for enormous premiums above the actual capital invested.

            The companies analyzed in Group B are obviously speculative, because of great instability of their earning records.  They show varying relationships of market price to average earnings, maximum earnings, and asset values.

            The common stocks shown in Group C are examples of those which meet specific and quantitative tests of investment quality.  These tests include the following:

1.      The earnings have been reasonably stable, allowing for the tremendous fluctuations in business conditions during the ten-year period.

2.      The average earnings bear a satisfactory ratio to market price.

3.      The financial set-up is sufficiently conservative, and the working-capital position is strong.

Although we do not suggest that common stock bought for investment be required to show asset values equal to the price paid, it is non the less characteristic of Group C that, as a whole, they will not sell for a huge premium above the companies’ actual resources.

            Common-stock investment, as we envisage it, will confine itself to issues making exhibits of the kind illustrated by Group C.  But the actual purchase of any such issue must require also that the purchaser be satisfied in his own mind that the prospects of the enterprise are at least reasonably favorable.

* * * * * * *

Safe Bulkers is a dry bulk shipper with around sixteen ships rented out to various customers.  The dry bulk market suffering due to the global recession and a glut of ships built during the boom, but Safe Bulkers is well positioned to prosper in even that harsh environment.  Its prospects and the industries are good.

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Examples of Speculative and Investment Common Stocks You've Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

Item

Goldcorp (GG)

Proctor & Gamble (PG)

American Capital Agency Corp. (AGNC)

Seadrill Limited (SDRL)

Safe Bulkers (SB)

AT&T (T)

Dividend Yield

0.84%

3.14%

19.50%

7.46%

6.85%

5.77%

Earnings per share

2001

?

?

-

-

-

?

2002

?

?

-

-

-

?

2003

?

?

-

-

-

?

2004

?

?

-

-

-

?

2005

$0.35

?

-

-

?

?

2006

$0.51

$3.05*

-

$0.56

$1.48

$1.24

2007

$0.58

$3.64*

-

$1.32

$3.18

$2.02

2008

$1.85

$4.25*

$0.28

($0.43)

$1.81

$2.18

2009

$0.30

$4.73*

$0.94

$3.31

$2.51

$2.05

2010

$1.64

$4.47*

$2.30

?

$1.66

$3.36

10-yr. average

?

?

-

-

-

?

5-yr. average (2006-2010)

$0.98

$4.03

3-yr. average

$1.17

4-yr. average

$1.19

$2.13

$2.17

12 times 5Y average earnings

$11.71

$48.36

$14.08

$14.28

$25.56

$26.04

20 times 5Y average earnings

$19.60

$80.60

A Mechanical Check for Investment in Common Stocks. The First in a Series.

In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.

On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE .  I have to admit that I was a little lazy.  Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening.  It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.

The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.

Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog.  The goal is separate the speculative stocks from the investment stocks.  The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).

* * * * * * *

Higher Prices May Prevail for Speculative Commitments.  The intent of this distinction must be clearly understood.  We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock.  We do suggest that such a price would be speculative.  The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation.  It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations.  Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.  This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.

            Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom.  It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum.  This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects.  We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment.  It is a necessary but not sufficient condition.  The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.

            From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation.  This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.

* * * * * * * *

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Daytona 500 Stocks.

I just discovered the Stock Car Index (SCARX) while surfing for info on NASCAR during the Daytona 500.  The purpose of this mutual fund is to:

The investment seeks growth of capital and current income by investing in the Companies of the StockCar Stocks index. The fund invests in the companies of the StockCar Stocks index. The index consists of 40 companies that support NASCAR's Sprint Cup Series. The companies in the index either sponsor NASCAR Sprint Cup racing teams or races, or they earn money from NASCAR Sprint Cup events.
 
 
Some of the 40 companies that support NASCAR are dividend payers.  Here are the top ten holding of the fund:
 

Top 10 holdings

Security

Net Assets

 

SPDR S&P 500

6.22%

 

Ford Motor Company (F)

5.49%

 

Infineon Technologies AG ADR (IFNNY)

3.44%

 

Stanley Black & Decker (SWK)

2.77%

 

Sony Corporation ADR (SNE)

2.67%

 

Aflac, Inc. (AFL)

2.57%

 

Aaron's, Inc. (AAN)

2.52%

 

O'Reilly Automotive, Inc. (ORLY)

2.46%

 

Caterpillar Inc. (CAT)

2.38%

 

Office Depot, Inc. (ODP)

2.37%

 

 
The largest holding is the S&P500 itself which only yields 1.71%.  The fund must own one of the S&P500 ETFs.
 
Next is Ford Motor company.  Ford (F) is currently yielding zip, zero.
 
In third place is Infineon Technologies (IFNNY).  It does not pay a dividend.
 
In forth place is tool company Stanley Black & Decker (SWK).  Stanley is the first consistent dividend payer in this fund.  I see dividend growth going back to 1986 with this stock.  It is currently yielding about 2.16%.
 
You might not not think of Sony when you think of NASCAR, but Sony (SNE)  is #5 in this mutual funds holdings.  You might also be surprised to learn that it is a dividend payer, albiet a small payer at a yield of 0.78%.
 
Insurer Aflac (AFL) comes in sixth and is the second consistent dividend payer and dividend grower in the top 10 holdings.  Aflac's dividends go back to 1986 on the Google Finance charts.  They yield about 2% on average.
 
Aaron's Inc (AAN) rides in seventh position yielding a misley 0.24%.  But at least they pay a dividend.
 
O'Reilly Automotive Inc. (ORLY) is drafting Aaron's  in eigth place.  It doesn't pay a dividend and never has.
 
Our nineth place company is Caterpillar Inc. (CAT).  Caterpillar is a consistent dividend payer and dividend grower.  Right now it is yielding 1.66%.
 
Rounding out our top ten is Office Deport (ODP).  The Office does not pay a dividend.
 
Not mentioned is AT&T (T), but they have sponsored cars in the past.  AT&T is a consistent high dividend payer.  It yields 6.2%.
 
As I write this during the Daytona 500 commercials there are 40 laps remaining.  Much of the favorites have been taken out in various crashes.
 
I would like to see the aging Mark Martin win his first Daytona 500.
 
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