Dividends Will Be A Company's Renewed Focus?

Money manager Neil Hennessy of the Hennessy Funds believes companies will reward shareholders by initiating or increasing dividend payments. In the below video Hennessy explains why he believes company managements will have a heightened focus on dividends.

Berkshire Hathaway's 2009 Annual Letter Is Out

The much anticipated 2009 Berkshire Hathaway (BRK.A) annual letter to shareholders, written by Warren Buffett, is now available on the company's website. This letter is always an interesting read by investors. I anticipate noting my thoughts on the letter later this weekend. The PDF version of the annual letter can be accessed on Bershire's Hathaway's website.

The Impact Of Rising Interest Rates On Stocks And Bonds

One thing that seems almost certain is the next move in interest rates will be a move higher. What will a move higher in interest rates mean for stock and bond investors?

It should be noted longer term market rates have already been trending higher over the past twelve months. The 30-year U.S. Treasury rate has increased from around 3.5% a year ago to 4.6% today. Short term rates, i.e., the 1-month Treasury rate, has actually declined from around .20% a year ago to .08% today. In other words the yield curve has steepened. But back to the original question.

For a bond investor, higher interest rates will have a negative impact on the price of a bond or price of a bond mutual fund. The impact of this "interest rate risk" depends on the maturity or duration of a particular bond. In its simplest form, the duration indicates how much the price of a bond or price of a bond mutual fund will change given a 1% or 100 basis point change in interest rates. For example, if the duration of the bonds in a bond mutual fund is 5 years, then the price (NAV) of the bond fund will decline 5% (increase) for a 100 basis point increase (decrease) in interest rates. The question for investors then is how long does it take to recover the loss in principal.

In a recent research article from Charles Schwab (SCHW) titled, Should You Worry About Bond Funds if Interest Rates Rise?, it is noted that,

"More than 90% of the total return since 1976 generated from a broadly balanced portfolio of US investment-grade Treasury, agency and corporate bonds has come from interest payments as opposed to change in price..."

If an investor understands the recovery time, they will then know if their time horizon matches the term or duration of the bonds or bond fund.

For stocks they tend to perform better in declining interest rate environments as well. Unlike bonds though, on average, stocks have generated positive returns in rising interest rate environments as well as in declining rate environments. Although stock returns have tended to be positive in periods where interest rates have increased, the better returns are found in declining interest rate periods.

In Standard & Poor's article, Rising Rates Revisited, they include returns be S&P 500 sector as well.

For investors then, if one believes interest rates will trend higher over a period of time in which it will be necessary to access the principal invested, paying attention to the duration of an investment as well as the types of stocks within a portfolio will be important.

Source:

Should You Worry About Bond Funds if Interest Rates Rise?
Charles Schwab & Co.
By: Rob Williams
February 24, 2010
http://tinyurl.com/ylbmaeu

Rising Rates Revisited
Standard & Poor's
By: Sam Stovall
February 19, 2010
http://tinyurl.com/23j6med

Investor Fund Flows Favoring Fixed Income Investments

The below chart notes the change in fund flows for the broad mutual fund asset classes of equity, fixed and money market funds. If the line is above the "zero" x-axis, then the respective asset class saw positive fund flows for the period in question. For the periods earlier than 2010, the data is monthly.

The chart shows fixed income funds have generated positive investment flows since September of last year. During that same time period, equity funds saw outflows except for a brief period in early January of this year. The negative flow in money market cash has been driven mostly by institutional investors. Retail investors have actually added to their money market funds since the beginning of February. Is this a contrarian sign?

Investors interested in reviewing the data for a longer time period, the Investment Company Institute website contains more detail on flow data.

2010 Dogs Of The Dow Performance Update

The year to date performance of the 2010 Dogs of the Dow are slightly ahead of the Dow Jones Industrial Average Index. As the below table indicates, the best performing Dow dog is Boeing (BA) with a YTD return of 14.2%. The worst performing dog is Verizon (VZ) returning a negative 12%. In 2009, the Dow Dogs slightly underperformed the Dow Index, 17.8 versus 18.8, respectively.

Source: Dogs of the Dow

The "Dogs of the Dow" investment strategy is one where an investor ranks the thirty Dow Jones Industrial Average members by yield, highest to lowest, based on the last trading day of the prior year. An investor then invests an equal amount in the ten highest yielding Dow stocks and holds them for one year. More information on the Dogs of the Dow investment strategy and other variations on the strategy can be found at a website devoted to Dogs of the Dow investing.

4 Dividend Increases Earlier This Month

February is the busiest month for dividend increases and below is detail on four companies increasing their payouts earlier this month.

Sigma-Aldrich (SIAL)

• announced a 10.3% increase in the quarterly dividend to 16 cents per share versus 14.5 cents per share in the same quarter last year.

• based on 2010 estimated earnings per share of $3.14, the projected payout ratio is 20%. This compares to the 5-year average payout ratio of 20%.

• SIAL carries an S&P Earnings & Dividend Quality Ranking of A+ and is one of S&P's Dividend Aristocrats.
  

United Technologies (UTX)

• announced a 10.4% increase in the quarterly dividend to 42.5 cents per share versus 38.5 cents per share in the same quarter last year.

• based on 2010 estimated earnings per share of $4.60, the projected payout ratio is 37%. This compares to the 5-year average payout ratio of 27%.

• UTX carries an S&P Earnings & Dividend Quality Ranking of A+.
  

Archer-Daniels Midland (ADM)

• announced a 7.1% increase in the quarterly dividend to 15 cents per share versus 14 cents per share in the same quarter last year.

• based on June 2010 estimated earnings per share of $2.96, the projected payout ratio is 20%. This compares to the 5-year average payout ratio of 18%.

• ADM carries an S&P Earnings & Dividend Quality Ranking of A and is one of S&P's Dividend Aristocrats.
  

Bemis (BMS)

• announced a 2.2% increase in the quarterly dividend to 23 cents per share versus 22.5 cents per share in the same quarter last year.

• based on 2010 estimated earnings per share of $1.92, the projected payout ratio is 48%. This compares to the 5-year average payout ratio of 49%.

• BMS carries an S&P Earnings & Dividend Quality Ranking of B+ and is one of S&P's Dividend Aristocrats.

Disclosure: Long interest in UTX.

The Value Is In Quality

For the period between the March low in 2009 and year end 2009, low quality stocks drove the market's move higher last year. The better return that was achieved in the lower quality equity assets in 2009 versus 2208 also occurred in other asset classes as detailed below.

Riskier Assets Outperform

With respect to stocks at this point in time, “If you go farther down on the quality scale, you are not getting a valuation discount,” said Cathy Seifert, head of financial services equity analysis at S&P. As noted in a number of my earlier blog posts, S&P's Quality Ranking measure looks at the growth and stability of a company's earnings and dividends over the prior 10-year period. S&P's research has noted that companies with above average quality rankings tend to outperform over the long run.

"S&P believes that high-quality stocks offer both increased safety of principal and potentially higher long-term returns versus low-quality issues,” says Richard Tortoriello, an S&P equity analyst. “We believe the recent market pull-back offers investors an opportunity to participate in a cyclical bull market. We would favor high-quality issues at this point."

A partial list of the stocks that carry S&P's 4 or 5 STAR rating and also have a buy rating by an S&P analyst is detailed below.

Source: S&P's Outlook dated 2/17/2010

Disclosure:
Readers should assume I have a long interest in each company on the above list and/or may be selling an investment in one or more of the above companies at anytime.

Conflicting Investor Sentiment Data

The sentiment data reported this week by the American Association of Individual Investors and Investors Intelligence is somewhat conflicting. The individual investor bullish sentiment as reported by AAII shows bullish sentiment rose to 36.75% versus last week's reading of 29.23%. Most of the increase in bullish sentiment came from those investors that were neutral last week. The neutral reading fell over six percentage points. On the other hand, the Investor Intelligence results show:

"bullish sentiment among newsletter writers is currently at 34.1%, which is the lowest level since March 2009. At the same time, bearish sentiment (26.1%) is the highest since November, while the percentage of newsletter writers in the correction camp has sky-rocketed all the way to 39.8%, which is a level that hasn't been seen since 1983," as reported by Bespoke Investment Group.

S&P 500 Index Finding Support

Just returned from several days of travel out of town visiting clients in Charleston, S.C. The city of Charleston is rich with history. I must say though, traveling by air is becoming less fun. Getting to a destination seems to take an entire day if you need to change planes along the way, which I had to do. Throw in some weather related delays and that just adds a little more to the travel adventure.

The market continues to look for direction in the face of the negative news related to sovereign debt issues in Greece. Today's market advance came on the back of a potential resolution of the debt crisis with the EU maybe stepping in to provide some support. The downside to this is the lack of moral hazard. As noted in a recent issue of The Economist magazine,

"A messy Greek default would harm almost everybody. As markets and governments know only too well, behind Greece stand others: Portugal, Ireland, Spain and even Italy, the world’s third-biggest sovereign debtor."

Back to the market. The S&P 500 Index (SPX) is attempting to find support around the 150 day moving average. The 200 day moving average is around 1,020. Since late January, the downside volume has been steadily decreasing with volume on up days staying level or trending slightly higher.

The market does appear oversold in the short run. The percentage of S&P 500 stocks trading above their 50-day moving average has declined to 22%. At the beginning of the year, this percentage reached nearly 95%.

Earnings reports for the 4th quarter have been coming in relatively strong. Rightfully so, the market has been focused on top line revenue results. Revenues have been coming in ahead of expectations, but still below year ago levels.

Catching Up On A Few Dividend Increases From Last Week

Last week saw a number of companies announce increases in their dividends. Two notable increases were from L-3 Communications (LLL) and Colgate Palmolive (CL).

L-3 Communications

• announced a 14% increase in the quarterly dividend to 40 cents per share versus 35 cents per share in the same quarter last year.

• based on 2010 estimated earnings per share of $8.15, the projected payout ratio is 20%. This compares to the 5-year average payout ratio of 16%.

• LLL carries an S&P Earnings & Dividend Quality Ranking of A-.
  

Colgate-Palmolive

• announced a 20% increase in the quarterly dividend to 53 cents per share versus 44 cents per share in the same quarter last year.

• based on 2010 estimated earnings per share of $4.85, the projected payout ratio is 45%. This compares to the 5-year average payout ratio of 45%.

• CL carries an S&P Earnings & Dividend Quality Ranking of A+.

Decline In Bullish Investor Sentiment Continues

Today's release of the American Association of Individual Investor's sentiment survey shows individual investors continue to become less bullish on the market. The current bullishness level takes the bullish sentiment level near one standard deviation below the bullishness average. The bull/bear spread is reported at -14% versus last week's spread of -2%. As this is a contrarian indicator, this is one indicator that suggests the market could be in store for a bounce?

Dividend Payers Outperform Non Payers In January

For the month of January 2010, dividend payers in the S&P 500 Index ($SPX) outperformed non payers. January saw the Index decline 3.70% compared to the payers' decline of 2.48% and the non payers' decline of 4.75%. This past January was the first in the last three years where there were no dividend decreases or dividend suspensions for companies in the S&P 500 Index (updated 2/3/2010: Valero (VLO) reduced its dividend 66% in January). In declining markets, dividend paying stocks, and especially dividend growers, tend to hold up better than the overall market.

Source: Standard & Poor's