In This Market, Dividends Look Great
By GREGORY ZUCKERMAN
The brutal drops in stock prices in recent weeks have devastated investors' portfolios. That's the bad news.
The good news: The stock-market plunge has also made a number of quality companies paying hefty dividends much cheaper -- boosting their "dividend yield," or the annualized dividend as a percentage of the stock price. That has some analysts recommending these shares to investors eager for some ballast in a rough market.
Indeed, stocks such as Coca-Cola, Altria Group and Merck sport dividend yields ranging from 3.4% to 6.6% and are considered relatively safe picks even in a painful global recession.
But some high-dividend stocks can be dangerous, especially as corporate profits fall, cash flows shrink and companies find it more difficult to make these payments to shareholders. Dividends generally are the second expenditure that companies trim to conserve cash in a downturn, after stock buybacks. Some investors piled into Bank of America in the past few months, attracted by a dividend yield that topped 7%. But earlier this month, the bank slashed its dividend in half, sending its shares lower.
Look Beyond Yields
In selecting stocks, "a pure dividend view misses the risk of earnings adjustments that could force future dividend cuts," says Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There is lots of risk for industrial, energy and materials firms that likely will suffer margin deterioration as the global economy slows and internal cash needs grow.
"Conversely," he adds, "financial and health-care companies may be in a far better position, as many diversified financial stocks already have gone through dividend reductions, while health-care entities are generally less cyclical."
Last week, stocks went on a roller-coaster, soaring on Monday, tumbling later in the week, and finishing the week with the Dow Jones Industrial Average up 4.8%.
The turbulence makes companies that pay a reliable, hefty dividend much more attractive. Coca-Cola, for example, has a 3.4% yield and has been on a roll, despite the weakening global economy. Coke posted better-than-expected third-quarter profit growth of 14%, as strong growth from international markets helped offset weakening U.S. beverage sales. About 81% of Coke's profit came from foreign markets last year, and the company has expanded in emerging markets. Coke's revenues from Latin America, a relative bright spot in the globe, jumped 24% in the third quarter.
Drug companies like Merck have had more challenges, amid a paucity of blockbuster new drugs and a weakening dollar. But Merck now trades for less than nine times its 2009 expected earnings, and its dividend -- producing a yield of 5.3% -- is viewed as relatively safe.
Consider Utilities
Although utilities' shares have fallen sharply, some investors and analysts see their dividends as stable, and argue that the shares could be strong because they will outperform in a downturn. Goldman Sachs recommends American Electric Power, Consolidated Edison and Entergy. These stocks have dividend yields between 3.7% and 6%.
Whitney Tilson, who helps run hedge fund T2Partners, is a fan of tobacco maker Altria, which has a 6.6% dividend yield and may not see much of a sales slump in a downturn.
He also likes Crosstex Energy LP, a master limited partnership that operates natural-gas pipelines and processing and treatment plants. The stock has tumbled 57% in the past year, but the dividend has risen to an annualized $2.52, for a yield of 17.3%. Mr. Tilson says he expects the payout won't be cut.
Freeport-McMoRan Copper & Gold has a 6.1% dividend yield and trades for less than five times its expected 2009 earnings. The catch? It has suffered as commodity prices have plunged. Shares have been dumped by hedge funds -- former fans of the stock that have found themselves under heavy pressure lately and eager to raise cash. Any stabilization of commodity prices likely would leave the company in a strong position, analysts say.
But investors should be careful about high-dividend payers. Some analysts say investors should be wary before buying shares of CIT Group, a lender that sports an 8.5% dividend yield, because the company could see rougher times in the months ahead. The company cut its annualized dividend from $1 to 40 cents earlier this year.
A CIT spokesman says "the dividend is paid at the Board's discretion and serves as an indication of their confidence in CIT's long-term earnings potential."
'Unsustainable' Dividend
Another stock to be wary of: McClatchy, a newspaper company with a dividend yield of 10.2%, even after recently halving its payout. "Their dividend is unsustainable and will likely be cut" again, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's a tough business, in this environment especially."
Richard Tullo, an independent analyst, also is concerned about whether New York Times and Eastman Kodak can continue to pay dividends producing yields of 7.4% and 4.1%, respectively. The Times's "rich dividend may be sacrificed, as earnings will remain weak and as the company will have to move to strengthen its balance sheet," Mr. Tullo says, adding that Kodak's dividend could be cut as the company diversifies into new businesses.
Representatives of McClatchy, New York Times and Kodak declined to comment.
Mr. Tilson urges continued caution regarding many financial shares. "We would stay away from almost all high-yielding financials," he says. A high dividend yield for a bank or other firm under pressure "indicates the skepticism investors have that the company will stay alive…. Also, the government could force them to eliminate the dividend" to conserve needed cash.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
http://online.wsj.com/article/SB122438121647847893.html
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