Monday, October 30, 2006

Sell in May and Buy in November?

The S&P 500 Index performed well during the 3rd quarter of 2006 by returning 5.6%. Historically, strong performance has not been a characteristic of the 3rd quarter of a mid-term election year. A review of this phenomenon is contained in the Businessweek Online link.

(click on graphs for larger image)

Does a strong 3rd quarter indicate the 4th quarter will be a weak one? Not necessarily. The old adage "sell in May and go away" is an old Wall Street mantra that has worked at times in the past. The market does have a tendency to exhibit weaker performance characteristics from May-October; however, one must look at where the Fed and the economy are within their cycles. The Fed appears to be on hold if not done raising interest rates.

In a BusinessWeek article dated May 4, 2005 titled, Sell in May, But Don't Walk Away, Sam Stovall details the potential market opportunity for the period November through April.

September Performance of Dividend Payers versus Non Payers

Following is an update on the performance of dividend paying versus non-dividend paying stocks in the S&P 500 Index. This information is compiled by Standard and Poors.

Total Return Performance as of 9/29/2006:

AverageAverageS&P 500Weighted

S&P 500S&P 500WeightedTotal

Month-average change2.56%2.76%2.46%2.58%
12-months 12.69%6.83%8.71%10.79%
# of Stocks384116500500
Average yield1.94%

Saturday, October 28, 2006

Dividends as an Approach to Selecting Stock Investments

One method to use in selecting equity investments is to focus on a company's dividend practice. With dividend growth stocks, a company's board of directors (BOD) know its investors tend to own the stock in part to collect an ever growing dividend or income stream. A company's BOD will strive to maintain the dividend growth rate even when business may be weakening. This desire to maintain the dividend growth will force other company financial measures to deviate from normal levels when business may be weakening. Over time, a company's long run stock return tends to match its long term dividend growth rate, all else being equal.

Ideally, one would want to invest in a company that increases its dividend at least every fifth quarter. Additionally, the dividend yield should be at such a level, say greater than 1%, that any change in the dividend growth rate is significant enough to have an impact on a company's balance sheet and cash flow.

An example would be Aflac (ticker AFL). The company reported earnings on 10/24/2006 that were lower than the same quarter a year earlier. However, if one looks at AFL's 3rd quarter 2006 operating earnings, they were up 9.1% compared to the 3rd quarter of 2005. One reason cited for the lower earnings was the impact of a stronger US Dollar versus the Yen. Nearly 75% of AFL's revenue and earnings are generated from the company's Japanese business segment. Looking forward, the markets project the US Dollar will weaken against the Yen (Yen Chart). A weaker US Dollar will enhance AFL's earnings as the Yen is converted to US Dollars for financial reporting purposes. From a dividend perspective, AFL increased its 4th quarter dividend to 16 cents a share versus 11 cents a share in the same quarter a year earlier. The company also stated they were increasing the 1st quarter 2007 dividend to 18.5 cents per share versus 13 cents a share in the 1st quarter of 2006. Is this an indication that the company anticipates improving business going forward?

AFL Dividends per Share ($)

2002 2003 2004 2005 2006 2007

March 0.05 0.07 0.095 0.11 0.13 0.185

June 0.06 0.07 0.095 0.11 0.13

Sept. 0.06 0.08 0.095 0.11 0.13

Dec. 0.06 0.08 0.095 0.11 0.16

AFL Dividends per Share YOY Comparison

2002 2003 2004 2005 2006 2007
March 18% 40% 36% 16% 18% 42%
June 20% 17% 36% 16% 18%
Sept. 20% 33% 19% 16% 18%
Dec. 20% 33% 19% 16% 45%

The 5-Year dividend growth rate for AFL is 22%. An item to watch is the payout ratio. The company's payout ratio has increased from 15% in 2002 to 19% in 2006. Annualizing the 18.5 cent 1st quarter dividend results in a 2007 projected payout ratio of 22% for the year 2007.

From a stock price perspective, based on Friday's closing price of $45.08, the stock is trading approximately 9% below its 52-week high of $49.65 and approximately 6% above its 52-week low of $42.41.

Friday, October 27, 2006

My initial post

For some time I have contemplated creating this blog. I will strive to post relevant investment information on a daily basis. The goal of the site is to provide investors with insight into an investing approach that will create wealth over time. An important aspect of wealth creation is not losing ones wealth when the markets are not moving higher.

My personal investment bias is to invest in companies that generate a steady return over time, i.e., singles and doubles. This singles and doubles approach tends to lead to investments in higher quality dividend growth companies. On the other hand, there are times when a company's stock price seems to be trading below its fair valuation. Short term gains are possible in these situations.