Buybacks And Dividends On The Decline In First Quarter 2008

Today, Standard & Poor's reported dividend and buyback activity for the first quarter of 2008 for the S&P 500 Index. Although buybacks continue at a rate exceeding $100 billion and dividends exceed $60 billion, the buyback and dividend trend is not positive.

One critical aspect of a dividend growth investment discipline is to look at the change in the dividend growth rate of a particular company. For those knowledgeable in calculus, it is the second derivative that is important. Although the growth rate may be positive, the rate may be lower than the prior period. This means the rate of change (second derivative) is negative. If the dividend growth rate is slowing, is this a precursor to slowing earnings growth? A number of factors other than the dividend growth rate are important criteria to review, e.g., payout ratio, dividend yield, etc, but the slowing rate of dividend growth is certainly a yellow flag.

Getting back to the S&P 500 Index buyback and dividend detail for the first quarter of 2008, although difficult to tell, the YOY dividend growth rate is slowing, i. e., the second derivative is negative. Additionally, the below chart notes the sequential dividend and buyback total for the first quarter is lower than in the 4th quarter of 2007.

(click on chart for larger image)

This could be a signal that earnings growth for the S&P 500 Index is set to turn negative at some point in the near future? The 1st quarter of 2008 represents the second quarter in a row that the level of buybacks has declined. The decline in the dividend total is the first decline since a decline was recorded in the 1st quarter of 2006.

Source:

S&P 500 Stock Buybacks Retreat in Q1 But Remain Strong (pdf)
Standard & Poor's
By: David Guarino & Howard Silverblatt
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,3,2,2,1204837108299.html

The Dow Dogs Are Truly Dogs This Year

The Dow Dogs are getting off to a doggish start in 2008. The Dogs of the Dow are the ten highest yielding stocks in the Dow Jones Industrial Average on December 31st of the prior year. The ten Dow Dogs for 2008 are detailed below, along with their year to date performance through June 17, 2008. The Dow Dogs are down 15.7% while the Dow Jones Industrial Average is down 10.5%

It should be noted that Dow Jones removed Altria (MO) and Honeywell (HON) on February 19, 2008. The two replacements were Bank America (BAC) and Chevron (CVX).

(click on table for larger image)

Source: Dogs of the Dow

Financial Stocks' Price To Book Ratio Sees Further Decline

The price to book ratio for the S&P 500 financial sector is down to 1.2 versus a price to book of 1.3 in March earlier this year. Argus Research notes:

The S&P 500 Financials index is close to the bottom reached in March 2003, coincidentally about the same time that the broader S&P 500 hit its own bear market low. This time, however, the S&P 500 is less than 15% from its 2007 peak while the Financials are down by nearly 40%. Probably more revealing is that the Financials index now trades for just 1.2-times reported book value, the lowest level since the last major credit crisis in the early 1990’s. At these levels, we’d be ready to sound the ‘all-clear’ signal if not for the fact that we believe that analysts as a group are still too optimistic about bank earnings over the next few quarters. Our 2008 estimates are below the consensus for many of the banks that we follow. We expect a busy second-quarter pre-announcement period for the banks over the next few weeks which may start to finally dampen expectations for 2008.

(click on chart for larger image)

Source:

Financials: Where’s the Bottom? ($)
Argus Research Company
June 16, 2008
http://www.argusresearch.com/

Stocks At Risk Of Removal In S&P 500 Index/Dividend Aristocrats Index

One criteria Standard & Poor's uses in considering a stock for inclusion in the Dividend Aristocrats Index is the stock must be a member of the S&P 500 Index. Recent stocks removed from the S&P 500 Index have been stocks with a market capitalization below $5 billion dollars.

Two recent changes to the S&P 500 Index involve the removal of Brunswick (BC) and OfficeMax (OMX). These two companies are being replaced by Cabot Oil & Gas (COG) and Massey Energy (MEE) at the close of trading on June 20, 2008.

(click on table for larger image)

Source: Standard & Poor's (pdf)

Existing stocks in the S&P 500 Index that have a market cap below $5 billion are detailed in the below table. Stocks highlighted in red are current dividend aristocrats. The two stocks that are in bold are upcoming removals. It should be noted that changes to the Aristocrats Index do not occur until December of each year.

The S&P Midcap 400 Index contains several stocks with market capitalizations far above $5 billion:

• Peabody Energy (BTU) with a market cap of $21.1billon
• Precision Castparts (PCP) with a market cap of $14.4 billion
• Cognizant Technology Solutions (CTSH) with a market cap of $10.3 billion
  

Could The Market React Differently This Time?

I am always skeptical when market strategists state things are different this time around. In the run up to the technology bubble in early 2000, many market strategists tried to justify higher P/Es due to the growth of the internet. Until 18-months ago, the rapid inflation in real estate prices was partly supported by strategists citing the growth of the baby boomers and their desire to purchase second homes.

In a recent market commentary, New Paradigm Ahead?, by Liz Ann Sounders, Schwab's (SCHW) Chief Investment Strategist, Liz Ann makes a case for higher U.S. equity prices. She details sixteen events that may occur that may lead up to a better U.S. equity market:

• U.S. economy slows dramatically (check)
• U.S. Fed cuts interest rates dramatically (check)
• Dollar sinks further (check)
• Commodity prices go parabolic (check)
• Speculative hoarding of commodities ensues (check)
• Regulators and Congress rev up the anti-speculation rhetoric (check)
• Commodity-hungry emerging economies suffer (check)
• Global growth suffers, including noticeably in China (check)
• Investors shift funds from international stocks to commodities (check)
• Non-U.S. central banks consider rate cuts to fight growth slowdown (pending?)
• U.S. Fed enters pause mode (could be there already)
• Rate differentials support dollar rally (fledgling rally so far)
• Commodity prices begin to correct (fledgling correction so far)
• Commodities move from U.S. economic headwind to tailwind (pending?)
• Lower commodities/inflation supports U.S. valuation expansion (pending?)
• Investors shift from international stocks/commodities to U.S. stocks (pending?)

In the above list, Liz Ann has "checked" the events that have occurred to date.

I am always skeptical of the "it is different this time" belief; however, could the above events lead to higher equity prices?

Source:

New Paradigm Ahead?
Charles Schwab & Company
By Liz Ann Sounders, Chief Investment Strategist
May 16, 2008
http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/new_paradigm_ahead.html?cmsid=P-2603064&lvl1=research_strategies&lvl2=market_insight&refid=P-2413636&refpid=P-994224

Using The PEG Ratio To Find Value

The PEG Ratio is often referred to as the P/E to Growth Rate measure. P/E is a company's price per share divided by earnings per share. The growth rate can by a company's 1 or 3 year compound annual earnings per share growth rate. The lower a company's PEG ratio the cheaper the stock relative to the company's earnings growth.

• P/E = Price Per Share/Earnings Per Share
• PEG Ratio = (P/E)/Earnings Per Share Growth Rate
  

The importance of comparing PEGs across different stocks is the PEG enables an investor to uncover stocks that may trade at relatively high P/Es because the company's earnings are expected to grow at a faster rate than maybe a lower P/E stock. An example in the below spreadsheet is CSX Corp. (CSX) that trades at a P/E of 21.3 with an earnings growth rate of 24% (PEG = .87) versus Entergy (ETR) that trades at a P/E of 19.8 with an earnings growth rate of 14% (PEG = 1.45).

One must evaluate a company's PEG relative to the company's historical PEG ranges as well as evaluate the PEGs across industries. Some stocks may generally trade at higher P/Es relative to their growth rate due to the long term stability of that company's earnings. Also, a company may trade at a lower PEG due to the market anticipating negative earnings news from the company. A good example of this is Textron (TXT). Textron trades at a 1.2 PEG; however, after the close Friday, Textron announced in an SEC filing that top end earnings would be lower due to issues at the company's finance unit. The stock traded down 5% in Friday's after hours session.

As noted in my earlier post on using Enterprise Value As A Starting Point For Finding Bargain Stocks, no one single metric should be used when determining the appropriateness of a specific investment. Nonetheless, the PEG ratio is another variable an investor can use when screen ing for stocks.

In conclusion, it is useful to use several variables in one's stock screening exercise. I have found Microsoft's (MSFT) Money site contains a fairly advanced stock screen tool. The screening tool works best in Internet Explorer.

The Herd Dumps Financials

For a dividend focused investor financial stocks are frequently present in dividend growth stock screens. However, the last 12-18 months have seen financial stocks as a difficult investment choice due to real estate/commercial related loan losses. Additionally, the once steady financial dividend growers have resorted to cutting or eliminating dividends in an effort to preserve precious capital.

Yesterday, in the first 30 minutes of market trading, the stock market action in financials was nothing short amazing. Near the end of the trading day there was speculation that the trading was driven by several rumors (which I will not repeat) which fueled the selling/shorting of the financial sector.

As the below charts depict, the daily market action for a large number of financial stocks and financial focused indexes looks exactly the same: a sharp sell off in early trading and a slow recovery by the end of the day.

(click on charts for larger image)

The last chart is that of General Electric (GE). I included GE's chart since more than 50% of the company's earnings are derived from GE Capital. It appears investors sold GE in the morning as well.

The take away for investors in all of this is to remember to focus on company fundamentals when making investment decisions. Do not get caught up in the herd mentality that often infects the market.

Market Remains In A Downtrend

From a technical standpoint the NYSE Index remains in a downtrend channel.

(click on chart for larger image)

The percentage of NYSE stocks trading above their 50 day and 200 day moving averages have declined from their highs in mid May; however, the percentages do not appear to have reached oversold levels.

(click on charts for larger image)

Investor Bullish Sentiment Swings Lower

This week's sentiment survey from the American Association of Individual Investors reported a sharp decline in bullish investor sentiment. The individual investor bullishness level came in at 31.25% versus the prior week's level of 43.48%. Additionally, the bull/bear spread was reported at -22% versus last week's reading of +5%. The S&P 500 Index closed at 1,335 on the day prior to the report. Since the reports release, the S&P 500 Index is up 24.5 points or 1.8%.

(click on graph for larger image)

Data Source: American Association of Individual Investors

Enterprise Value As A Starting Point For Finding Bargain Stocks

The American Association of Individual Investors website contains a number of useful predefined stock screens. The most recent issue of the American Association of Individual Investors' AAII Journal contained an article covering one of the screens that can be used as a starting point to finding 'out of favor stocks.' The focus of the article is to use enterprise value to EBITDA as a starting point for screening for bargain stocks. The article notes:

...The enterprise value is calculated by adding market capitalization, preferred stock, and total debt and reducing this total by the amount of cash held by the firm. Debt and preferred stock is added because the acquirer must shoulder the cost of assuming the obligations of the firm. Cash is subtracted because once you acquire the firm, it becomes yours. The enterprise value to EBITDA ratio relates a firm’s takeover cost to its earnings potential. The lower the ratio, the more attractive the firm...

Below is a list of 11 of the 30 companies AAII uncovered in the screen.

Source:

Using Enterprise Value to Locate Bargains ($)
AAII Journal
By: John Bajkowski, AAII Vice President, Sr. Financial Analyst
June 2008
http://www.aaii.com/includes/DisplayArticle.cfm?Article_Id=3443

Tobin's q

Tobin's q ratio was originally formulated by Yale University professor James Tobin. James Tobin is a Nobel laureate in economics. The theory behind the ratio is the combined market value of companies on the stock market should be equal to the replacement cost of company assets.

According to a recent report from Argus Research, the current value of Tobin's q equals .68.

(click on chart for larger image)

According to Argus Research,

When the stock market trades at a ‘discount’ to its replacement cost, the market is inexpensive, or cheaper to buy than build. This discount possesses ‘q’ ratios that are less than 1.0. When “q” exceeds 1.0, the market trades at a premium. The run-up from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent (1Q08) level of 0.68 implies a reasonable valuation of market conditions. The long-term average for Tobin’s ‘q’ is 0.75.

What are the implications with "q" values greater than or less than 1.0,? According to the website, Money Terms,

A Tobin's Q of more than one means that the market value of assets (as reflected in share prices) is greater than their replacement cost. This means it is likely that capex will create wealth for shareholders. This means companies should increase capex, raising more money to do so if necessary, but should not make acquisitions. This should reduce share prices and increase asset prices, pushing Q towards one.

A Tobin's Q of less than one suggests that the market value of the assets is less than replacement cost, making acquisitions cheaper than capex; buying cheaper than setting up from scratch. This should increase share prices and reduce asset prices, again pushing Q towards one.

An investor should not rely on one single variable when determining valuations, but this does provide insight into one perspective on market valuation.

Source:

Tobin's q at .68 in Q1 ($)
Argus Research
June 10, 2008
http://www.argusresearch.com/

Election Year Market Return: Don't Sell In May?

An often repeated stock market mantra is to "sell in May and go away." One often forgotten fact is historically the market has performed differently in presidential election years.

A recent chart by Chart of the Day details the performance of the Dow Jones Industrial Average in election years.

Source: Chart of the Day

As Chart of the Day notes:

With the 2008 presidential campaign now in full swing, today's chart illustrates how the stock market has performed during the average election year. Whether the average election year is measured from 1980 or 1900, the market has tended to struggle during the first five months of an election year. That initial subpar performance was then followed with a rally (on average) right up to the November election. One theory to support this election year stock market behavior is that the first five months of choppiness is due in part to the uncertainty of the outcome of the presidential election (the market abhors uncertainty) with the market beginning to rally as the outcome of the election becomes increasingly evident.

Dividend Payers Underperform Non-Payers In May

In May the dividend paying stocks in the S&P 500 Index underperformed the non-payers, 1.90% versus 4.75% respectively. However, over the course of the trailing 12-months, the dividend payers have managed to maintain a slight performance edge over their non dividend paying counterparts, -10.56% versus -11.07%.

With respect to dividend increases and decreases, Standard & Poor's notes (pdf):

• Year-to-date, there have been 17 Financials reductions in dividend rates compared to 12 for 2002 through 2007.

• For the month, 27 issues increased, 0 initiated, 2 decreased and 0 suspended, versus 25 increases, 1 initiation, 0 decreases, 0 suspensions for the same period in 2007.

• Year-to-date increases are down 144 versus 155 issues in 2007, with decreases up 19 versus.

The Risk In Hedging Energy Exposure

One concern being discussed by investment strategist and business news commentators is the thought that the sharp rise in many energy stocks is being driven by investor speculation. If individual investors want to protect against a potential sharp drop in their energy holdings, they can hedge the exposure via investment products like the Proshares UltraShort Oil & Gas (DUG) exchange traded fund. The UltraShort Oil & Gas Proshare seeks:

daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index^SM.

Yesterday, crude oil futures increased $10.75. This was the the largest, single-day price gain ever. Oil prices closed at a new record high of $138.54 per barrel, surpassing the May 21st record of $133.17. With this sharp spike in crude oil futures, one would think the UltraShort Oil & Gas Proshare would have declined. In fact, DUG actually rose 2.47%!

The lesson in this example is one should be aware of the underlying components in these types of indexes. The four largest positions in the Dow Jones Oil & Gas Index (DJUSEN) are:

As detailed in the above table, the four largest holdings in the Dow Jones Oil & Gas Index all declined on Friday. Additionally, these four holdings account for 49.34% of the overall index. So, if oil prices decline will the the UltraShort Oil & Gas Proshare rise?

In conclusion, if an investor is looking to hedge any position or sector within their overall account, understanding the components of the hedging product is vitally important.

(Disclosure: I hold a position in the Dow Jones Oil & Gas Proshare)

Investor Bullish Sentiment Rises

Earlier this week, the American Association of Individual Investors reported investor bullish sentiment rose to 43.48%. This compares to the prior week's bullishness reading of 31.36%. The bull/bear spread was reported at +5% versus last week's -14%.

(click on chart for larger image)

Data Source: American Association of Individual Investors

Ambac Financial Dropped From S&P 500 Index

Standard & Poor's announced Ambac Financial (ABK) will be removed from the S&P 500 Index after the close of trading on June 10th. Ambac will be replaced by Lorillard. According to S&P:

Lorillard is being distributed to the public via a two-tier process involving 1) the retirement of the tracking stock Carolina Group (NYSE:CG), in exchange for which approximately 62% of Lorillard’s common stock will be issued, and 2) an offer in which shares of S&P 500 constituent Loews Corp. (NYSE:LTR) can be exchanged for the remaining shares of Lorillard. As of today’s close of trading Ambac’s market capitalization was roughly $860 million, ranking 500th in the index.

Lorillard is a producer and seller of cigarettes, under brand names including Newport, Kent, True, Maverick and Old Gold.

(click on charts for larger image)

Bullish Investor Sentiment Sees Sharp Decline

The American Association of Individual Investors reported bullish investor sentiment declined this week. The bullishness level fell to 31.36% versus last week's level of 46.30%. The bull/bear spread equaled -14% versus a +12% in the prior week.

(click on graph for larger image)

Source: American Association of Individual Investors

Although investor sentiment declined, the percentage of NYSE stocks trading above their 50 and 200 day moving averages remain at fairly high levels as noted in the charts below.

(click on graphs for larger image)

Supervalu Increases Dividend 1.5%

Today, Supervalu, Inc. (SVU) announced a 1.47% increase in its 3rd quarter 2008 dividend. The new quarterly dividend will increase to 17.25 cents per share versus 17 cents per share in the same quarter last year. The company's 2nd quarter dividend of 17 cents per share will be paid on June 16th to shareholders of record on June 2. SVU's estimated earnings per share for year end February 2009 is $3.10. The dividend payout ratio on the 2009 earnings estimate is approximately 22%. The 5-year average payout ratio is 28%. The company carries an S&P Quality Ranking of A-.

In addition to the dividend increase, the company announced a new annual share repurchase program authorizing the purchase of up to $70 million of the Company's common stock. Stock purchases will be made from time to time in open market purchases primarily from the cash generated from the settlement of stock options. The company noted this annual authorization program replaces the existing $235 million share repurchase program authorized in April 2007.

Energy Stock Added To The S&P 500 Index

Could the addition of another energy stock to the S&P 500 Index be additional evidence that energy stock performance may have seen its better days? Today Standard & Poor's announced it would add Southwestern Energy Co. (SWN) to the S&P 500 Index at the close of trading on June 5, 2008. SWN will replace Trane as it is being acquired by Ingersoll-Rand (IR).

Source: Standard & Poor's (pdf)

Bullish Sentiment Increases Slightly

In the American Association of Individual Investors sentiment survey release this week, bullish investor sentiment moved higher by a small amount. The bullish sentiment level increased to 46.30% versus last week's reading of 45.16%. Conversely, bearish investor sentiment increased to 34.26% versus 29.68% last week. One result was a narrowing of the bull/bear spread to 12% from 15%. It should be noted the 8-period moving average of the bullish sentiment level continues to move higher for the ninth consecutive week.

(click on chart/table for larger image)

Data Source: American Association of Individual Investors

Stock Buyback Reduction Versus Dividend Cut

Given the high level of stock buyback activity over the last few years, should a company's reduction in its buyback program be viewed similar to a dividend reduction? If nothing else, significantly more weight should be applied to a company's dividend practice versus its buyback intentions when evaluating stocks. A company that is committed to growing its dividend finds it less palatable to cut a dividend versus reducing or eliminating a buyback program.

I good example is Home Depot's (HD) first quarter 2008 earnings release earlier this week. In a discussion with the Wall Street Journal, the company's CFO noted:

"the second half of Home Depot's $22.5 billion share-repurchase program remains 'on pause just because of the instability of our business and the instability of the credit markets.'"

The other caution is the potential distortion in financial ratios that involves shares outstanding in the calculation. Ratios like P/E and EPS, just to name a few, may not reflect the underlying trends within a company. The reason is shares outstanding are in the denominator a number of different ratios.

For an investor, slowing dividend growth and buyback program reductions can be used to evaluate potential earnings difficulty on a forward looking basis.

Source:

Home Depot Net Falls 66% As Store Growth Brakes ($)
Wall Street Journal
By: Ann Zimmerman & Marry Ellen Lloyd
March 21, 2008
http://online.wsj.com/article/SB121127839332906705.html

S&P 500 Operating Earnings Up 8.77% Ex-Financials

According to Standard & Poor's, first quarter operating earnings are up 8.77% when excluding the 95 financial issues in the index. With the financial issues included though, operating earnings are down 25.89%. This preliminary data is after approximately 95% of the S&P 500 companies have reported earnings.

(click on table for larger image)

The year over year operating earnings changes are detailed below.

(click on table for larger image)

Excluding financials and consumer discretionary stocks, the YOY operating earnings change is fairly respectable.

Source:

S&P 500 Q1 Earnings Down 25.9%;
Financials Again Posts Negative Earnings (pdf)
Standard & Poor's
By: David R. Guarino & Howard Silverblatt
http://www2.standardandpoors.com/spf/pdf/index/2008Q1_earnings.pdf

The Bulls Have The Advantage

A lot has been said about the bulls needing to make a stand and push the S&P 500 Index above 1,420. Well this week the S&P did take out this resistance level and closed above 1,420 both Thursday and Friday. Next week the focus of the technical discussion might centered around the S&P 500 ability to hold and close above 1,420; thus creating a support level for the market. In the end though, I think this type of discussion is good; however, a long term investor should not get too focused on only technical data.

If an investor waited to put money to work until these support and resistance levels were validated, they would have missed a strong upward move in the market since the end of March as noted in the NYSE Index chart below.

(click on chart for larger image)

On a short term basis, a case could be made that the market needs to consolidate at this level before moving higher. The chart below shows that 78% of NYSE stocks are trading above their 50-day moving average. From a longer term perspective though, only 53% of NYSE stocks are trading above their 200-day moving average.

(click on chart for larger image)

Beginning next week and going forward should be interesting for the market. From a short term perspective we could see some sideways market movement as some of the recent gains are digested. Longer term though, the market appears to want to go higher as it climbs the commodity "wall of worry."

Investor Bullish Sentiment Declines And Market Moves Higher

The American Association of Individual Investors' Sentiment Survey tends to be a contrarian indicator. True to form, this week the bullish sentiment reading declined to 45.16% versus last week's 52.81% and the S&P 500 Index moved higher by 1.4%. The less volatile 8-period moving average moved higher to 44% versus last week's 41.6. The bull/bear spread narrowed to 15% compared to 28% last week.

(click on graph for larger image)

Data Source: American Association of Individual Investors

Yield Curve Predicting Stronger Economic Growth?

According to the Federal Reserve Bank of Cleveland, one year ago the yield curve was predicting there was a 35% chance the U.S. economy would be in a recession by May 2008. At that time, many thought this high probability was not realistic. Fast forwarding to today, the higher probability predicted last year seems to have been somewhat correct in that the economy has certainly slowed.

Instead of looking in the rear view mirror, today's yield curve might be predicting stronger economic growth one year in the future. According to the Cleveland Fed study, "...the expected chance of the economy being in a recession next May stands at 0.9 percent, just below April’s 1 percent, and March’s 2.7 percent."

Although the article notes the yield curve does not do a great job in predicting the actual rate of GDP growth, based on the yield spread,

Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 3.0 percent rate over the next year. This is on the high side of other forecast.

Lastly, as the yield curve steepens (wider yield spread) it does appear future economic activity is stronger one year later. The below chart graphs the yield spread versus GDP lagged by one year.

Two related posts on the yield curve are noted below.

• The Yield Curve: Its Predictive Power

• Does The Inverted Yield Curve Predict A Recession?

Source:
The Yield Curve
Federal Reserve Bank of Cleveland
By: Joseph G. Haubrich
May 13, 2008
http://www.clevelandfed.org/research/trends/2008/0608/01monpol.cfm

Exchange Traded Fund Assets Grow 28%

As of March-2008, assets in exchange traded funds grew 28%. The Investment Company Institute reported assets in ETFs grew to $571 billion as of March-2008. This compares to $444 billion in March-2007. During that same time period, the number of exchange traded funds increased to 644 funds versus 454 funds at the end of March 2007.

(click on table/graph for larger image)

Source: Investment Company Institute

Recent Dividend Increases

Company	Rate of Increase	New Qrtly Rate	Old Qrtly Rate (YOY)	New Yield	Old Yield	Quality Ranking
Pepsi	13.33%	$.425	$.375	2.52%	2.22%	A+
Rohm & Haas	10.81%	$.41	$.37	3.04%	2.74%	A-
Granger (W.W.)	14.29%	$.4	$.35	1.86%	1.63%	A
Johnson & Johnson	10.84%	$.46	$.415	2.76%	2.49%	A+
Procter & Gamble	14.29%	$.4	$.35	2.45%	2.15%	A+
Exxon Mobil	14.29%	$.4	$.35	1.8%	1.58%	A+
TJX Companies	22.22%	$.11	$.09	1.42%	1.16%	A+
Chubb	13.79%	$.33	$.29	2.5%	2.2%	A-
Wal-Mart	7.95%	$.2375	$.22	1.66%	1.54%	A+
Air Products & Chemical Co.	15.79%	$.44	$.38	1.8%	1.55%	A

Bullish Investor Sentiment Essentially Unchanged: May 8, 2008

The American Association of Individual Investors reported that investor bullish sentiment was essentially unchanged this week at 52.81% versus last week's 53.29%. The bull/bear spread widened one percentage point to 28% from the prior week's level of 27%.

(click on graph for larger image)

Data Source: American Association of Individual Investors

Market Is A Leading Indicator Coming Out Of Recession/Economic Slowdown

The stock market tends to serve as a leading indicator heading into a recession as well as coming out of a recession. T. Rowe Price (TROW) along with Ned Davis Research note:

...on average the stock market peaked about nine months before the onset of recessions, the pattern of each recession is different. In the 1990–91 recession, for example, the market hit its high less than a month before the recession began, while stocks peaked 14.5 months before the most recent recession began in March 2001.

Not only has the market peaked, on average, nine months prior to the beginning of a recession, the market tends to recover in advance of an improving economy.

...the market bottomed on average about five months before the end of recessions, this low has ranged from just about two months before the end of the 2001 recession to more than eight months prior to the end of the 1953–54 recession.

One aspect of the market coming out of a recession is the outperformance of small company stocks relative to large cap stocks. On the other hand, going into an economic slowdown, small caps significantly underperform large cap stocks.

According to the spring edition of the T. Rowe Price Report, "For the 12-month period following the end of the last nine recessions, small-cap stocks on average provided a 24% gain compared with 17.6% for the S&P 500." Going into the slowdown though, "in 18 bear markets since the 1930s, small-cap stocks have suffered a median decline of 29% versus 21.4% for large-cap stocks."

Since studies indicate it is difficult to time the market, investors should use this point in the market cycle to make adjustments to their asset allocation. The adjustments should focus on those that bring an investor's overall portfolio allocation in line with their long term objectives.

Source:
Tracking Stock Market Performance
Through Past Economic Recessions (pdf)
T. Rowe Price Report
Spring 2008
http://www.troweprice.com/gcFiles/pdf/04779-Spring08-final.pdf?
scn=2008&rfpgid=7949&ft=GNL_CTT

Pain At The Pump

One expenditure weighing on consumer sentiment is the price of a gallon of gas. As the chart below shows, the inflation adjusted price of a gallon of gas has surpassed the prior peak that occurred in 1981.

Source: Chart of the Day

Dividends Are A Critical Component Of Total Return

A significant benefit of focusing on a company's dividend practices is the fact dividends must be paid out of cash. Regardless of a firm's reported earnings based on Generally Accepted Accounting Principles (GAAP), a look at the cash flow statement provides insight into the true cash generation capability of a company.

In a recent dividend investing white paper (pdf) from Eaton Vance (EV), the company notes dividends have accounted for over 50% of a stock's return since the 1930s.

The white paper shows:

Dividends have been a major component of investment return over the long-term. In fact, over the past 45 years, more than 50% of the annualized total return of the S&P 500 Index came from dividends.¹ As the chart below shows, $1000 dollars invested in 1960 in the S&P 500 would have grown to over $114,718 today. But if you take away dividends, that same $1,000 dollars would be worth $24,517.<sup>2

1</sup>Total return is annual price appreciation, or loss, plus dividends.
² Source: Lipper Inc. Not meant to represent income from any Eaton Vance fund. S&P 500 Index is an unmanaged index commonly used as a measure of U.S. stock market performance. For illustrative purposes only. Past performance is no guarantee of future results. It is not possible to invest directly in an Index.

Lastly, over longer periods of time, data indicates the dividend growers and initiators out perform the other types of companies in the S&P 500 Index.

Lastly, the white paper details the impact that legislative tax changes have had on the likelihood of companies to pay a dividend. Also, as the baby boomers begin entering retirement, paltry bond yields are enticing the baby boomers to look at dividend paying and dividend growth stocks.

Source:
Dividend Investing:
Favorable Long-Term Opportunities for Total Return and Income
Eaton Vance
By: Judith A. Saryan, CFA & Michael A. Allison, CFA
April 2008
http://www.eatonvance.com/alexandria/2843.pdf

Dividend Payers Underperform Non Payers In April

For the month of April 2008, the dividend paying stocks in the S&P 500 Index underperformed the non payers, 4.70% versus 7.12%, respectively. On a year to date basis though, the payers continue to maintain a performance edge over the non payers (-3.63% versus -4.92%).

Source: Standard & Poor's

Individual Investor Bullish Sentiment Continues To Rise

I have been traveling on business for the last several days and unable to post on recent dividend news. Over the weekend, I will strive to detail some of the dividend growth news that was reported this past week.

In the meantime, individual investor bullish sentiment rose to its highest level since being reported at 54.64% in October 2007. The percentage of individual investor reported as bullish this week rose to 53.29%. The bull/bear spread widened to +27% versus last week's reading of +19%.

This is a volatile contrarian indicator; however, since the bullish reading bounced along in the 20% range in mid to late March, the S&P 500 Index is up 6+% since that time.

(click on chart for larger image)

Data Source: American Association of Individual Investors