Tuesday, July 31, 2007
If the allocation between stocks, cash and bonds seems appropriate, what amount of fluctuation in equity values can one tolerate. If a lower volatility equity portfolio is desired, now could be the time to look at higher quality stock investments. Historically, large capitalization, high quality, dividend growth stocks held their value better in down markets.
Over the last five years, the better performing segment of the U.S. equity market has been small and mid capitalization equities. As noted in the charts below, although the small cap index (Russell 2000) has been one of the better performing segments of the U.S. equity market, it has been one of the worst performers year to date and last week. This is volatility.
Sunday, July 29, 2007
- Erratic earnings: Companies with inconsistent or cyclical earnings have broken the hearts of dividend lovers many times over. When times are good, management teams at lumpy-earnings firms often fool themselves into believing the profits are here to stay, and they confidently raise their payouts accordingly.
When the company's results revert back toward the mean, though, usually because cyclical firms often have little pricing power and their results are largely at the whim of uncontrollable market forces, management painfully discovers it has bitten off more than it can chew. Avoiding erratic earnings streams is step one for the dividend growth investor.
High or rising payout ratios: The same fat dividend that warms the heart of investors can sometimes give a company's management severe heartburn. Companies are loath to cut or suspend dividends even when that option, however ugly, is clearly the best move for the firm in the long haul. Managers know, with good reason, that dividend cuts and suspensions send the message that they do not think the firm will be able to maintain or continue growing earnings at a rate high enough to support their payout (emphasis added).
It should be no surprise, then, that management is often willing to feign confidence by continuing to raise their payouts in the face of slowing or flat earnings growth...
Decelerating dividend growth rates: The last quick check also happens to be the first long-range sign that a long-growing company could fall flat on its face. Investors should take note when a company that has grown its dividend at a hearty clip over a multi-year period suddenly yanks back the reins and reduces the size of its dividend hikes.
Now, there are plenty of reasons why such a move could make practical sense. The company could be shifting toward a policy of returning more money to investors through share repurchases, ramping up capital expenditures or research and development, or simply exhibiting prudent management.
While repurchases typically boost share prices, in the insurance industry, they're a sign that competition is pushing premiums low enough to threaten profit growth. Property and casualty stocks are lagging behind both life insurers and U.S. benchmarks as commercial insurance prices decline the most since they started falling in 2004.
The insurers buying stock wouldn't have to resort to repurchases if competitors weren't driving prices to potentially unprofitable levels, said Donald Light, an analyst at Celent LLC, a Boston-based financial research and consulting firm.
"Buybacks should limit price declines, but they're also a sign of falling prices,'' he said. "You don't think there's a lot of attractive new business when you're buying back your own shares."
Avoid the Next Dividend Implosion
The Motley Fool
By: Joe Magyer
July 28, 2007
AIG, Chubb, Allstate Buybacks Portend Lower Premiums
By: Hugh Son and ZacharyR. Mider
July 27, 2007
Saturday, July 28, 2007
The Next Rogue Wave
By: Jim Puplava
December 15, 2006
Friday, July 27, 2007
...Very simply, investors over the last few years have been looking for places to put money to work. Corporates haven’t been borrowing, and even governments have enjoyed improving budget balances and have had to borrow less. Forced to find a place to put their money to work, investors began to look to subprime borrowers - the individuals with either low income or bad credit or both - as a potential investment option. Banks would provide the cash for mortgage loans to subprime borrowers, and then they would bundle those loans up into one big package, sometimes called a pool, and then sell securities whose value was linked to the performance of the pool of mortgages. Investors could buy the securities and were effectively lending money to the subprime borrowers, with the banks serving as the middlemen.
The collapse has been due to something very simple: people lent money to borrowers who couldn’t pay it back. Now the process is beginning to snowball; subprime borrowers are defaulting, which puts homes on the market for a forced sale, which drags prices down, which makes it more difficult for other subprime borrowers to refinance their mortgages into loans with better terms, which then causes more defaults.
Turmoil in the Credit Markets
July 19, 2007
Cool! Residential Mortgage Backed Securitization Process
The Big Picture
By: Barry Ritholtz
July 27, 2007
Wednesday, July 25, 2007
Anheuser-Busch increased its quarterly dividend 11.9% to 33 cents per share versus 29.5 cents per share in the same period last year. The payout ratio, based on 2007 estimated earnings of $2.81, is 47%. Anheuser-Busch has an S&P Quality Ranking of A+.
Bank of America increased its dividend 14.3% to 64 cents per share versus 56 cents per share in the same period last year. The new dividend yield, based on today's closing stock price of $47.93, increases to 5.34%. The payout ratio increase to 52% based on 2007 estimated earnings of $4.92. BAC's S&P Quality Ranking is A.
Tuesday, July 24, 2007
As noted in the chart below, the bottom three performing sectors on Tuesday in the S&P 500 Index were financial, energy and utilities:
Wells Fargo increased its quarterly dividend 10.7% to 31 cents per share versus 28 cents per share in the same quarter last year. This represents the 20th consecutive year WFC has increased its dividend and is the 25th increase since 1987. The estimated payout ratio on estimated 2007 earnings of $2.74 is 45%. WFC carries an A quality ranking from Standard & Poor's.
Monday, July 23, 2007
Sunday, July 22, 2007
- Buybacks in 2006 totaled $432 billion.
- 56.8% of the 500 companies reduced their share count.
- Buybacks boosted EPS by at least 4% for more than 20% of the issues in 2006.
- Over the ten quarters between Q4 2004 and Q1 2007, S&P 500 issues spent $965 billion on buybacks, slightly less than the $1,010 billion spent on capital expenditures, and substantially more than the $534 billion paid in the form of common dividends.
- In 2006, S&P 500 companies spend more on buybacks ($432 billion) than the United States government spent on Medicare ($408 billion).
- S&P 500 treasury shares increased 19.7% in 2006.
- The market value of S&P 500 treasury shares is $590 billion higher than their balance sheet posting, and represents 12.4% of the current market value.
S&P notes if the 338 issues with treasury shares made a mark-to-market adjustment to the value of the shares, the market value increase would be $589 billion. The total market value of the treasury shares would be $1,591 billion, representing 17.6% of their market value. For the S&P 500 Industrials (Old) [see S&P report at link below].
The availability of this discretionary liquid asset, cash and treasury shares, makes almost every company a potential growth issue and many a potential take-over target. What companies choose to do with this enormous asset is perhaps the most important decision facing them, and it could have long-lasting effects as to their profitability and market value for years to come...Buybacks, while adding to short-term returns, are temporary in nature if the shares are not retired - which they have not been. Cash build-ups that are now being used to supplement earnings via interest income and reduce share count are not a substitute for operating earning and, as such, should not be priced into future earnings or multiples.
S&P 500: Buybacks and Treasury Shares The Overlooked and Hidden Assets (pdf)
Standard & Poor's
By: Howard Silverblatt and Dave Guarino
July 19, 2007
Saturday, July 21, 2007
Thursday, July 19, 2007
Wednesday, July 18, 2007
Monday, July 16, 2007
"The significant increase in foreign sales by U.S. companies over the past five years is due to the rapidly expanding foreign market for goods and services. We believe that the present trend will continue with greater portions of U.S. products being produced and sold abroad.”
Standard & Poor’s findings were based on fiscal year 2006 data for issues with full reporting information, representing 53.7% of the S&P 500’s market value. Standard & Poor’s also calculated that an additional 0.95% of sales was generated from U.S. produced goods and services that were exported abroad, down from the 1.14% reported in 2005.
Foreign Sales by U.S. Companies on the Rise, Says S&P
Standard & Poor's
By: David R. Guarino and Howard Silverblatt
July 9, 2007
Thursday, July 12, 2007
Wednesday, July 11, 2007
Monday, July 09, 2007
In the case of JNJ, the $10 billion dollar buyback would represent about 5.5% of the company's outstanding shares at today's closing price of $62.72. JNJ has 2.87 billion shares outstanding. If the buyback were completed today, the share count would reduce to approximately 2.71 billion shares. Analysts' earnings per share estimate for year end 2007 is $4.04. This equates to a net income figure of about $11.59 billion dollars. The EPS figure on the lower share count would equal $4.28; thus boosting EPS growth by nearly 6% while actual net earnings remain unchanged.
In an environment where buyback activity is high, an investor must look at the company's growth in revenue, earnings, etc., before converting to a per share basis. This will provide an investor insight into the true growth rate of a company. It is estimated for 2007 that almost one half of the growth in S&P 500 earnings per share will result from share buybacks.
Certainly this buyback activity has contributed to the bull market advance. The reduced number of shares available in the market for investors to purchase is contributing to the upward trend in the market. If the supply is lowered and demand remains the same, prices will move higher.
Saturday, July 07, 2007
In December 2006, the Powershares organization developed an exchange traded fund that replicates Mergent's Buyback Index. The Powershares Buyback Achievers Portfolio trades under the ticker PKW. The PKW Index inception date is 12/20/2006 and has slightly underperformed the S&P 500 Index. On a hypothetical longer term performance basis, the PKW ETF would have outperformed the S&P 500 Index by a fairly wide margin.
A chart of the hypothetical returns over a longer time period is detailed below.
Thursday, July 05, 2007
For the period ending July 4, 2007, bullish sentiment increased to 43.84% versus 39.02% last week. The 8-period moving average increased slightly to 39.1% versus 39% last week. Since 2000 the 8-period moving average was 53.5% in mid December 2000 and 62.9% at the end of January 2004.
Wednesday, July 04, 2007
Howard Silverblatt, an analyst at S&P noted:
"The decline in dividend increases is disturbing, especially in light of continued, moderate earnings growth and the abundance of corporate cash. We believe the present wave of corporate buybacks is contributing to the slower pace of dividend growth in 2007."
It appears companies are more comfortable with stock buybacks and extra dividends than committing to ongoing higher dividends a a regular basis. Are companies signaling something about their business prospects going forward if they are not willing to commit to higher ongoing dividend payments.
Monday, July 02, 2007
Sunday, July 01, 2007
- The information you need to manage your personal finances.
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If one plans on seeking an independent adviser to assist in management of their 401(k), one should obtain answers to the following questions noted in the article:
More detailed information on this topic can be found by clicking the article's link noted below.
- How well does the adviser know your plan? Ideally the person should be familiar with or willing to learn about how your 401(k) works and the investment choices available.
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Who'll Coodle Your Nest Egg
July 9, 2007