Dividend stocks for Growth Investors

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. 

If it don't go up, don't by it. 

Will Rogers

For many investors, current income is not an important consideration in building their portfolios. They may have sufficient income from other sources, including employment. For them, building and growing the overall value of their portfolios may be the primary focus of their efforts. Should these “growth investors” concern themselves at all with a strategy built around investing in dividend paying securities?

One of the classic advantages of dividends is their large contribution to the long-term performance that has made stocks so attractive to investors. (About 50% of the returns of your stocks are contributed by dividends.) Reinvesting those dividends can compound the growth of a portfolio. The attraction dividend-paying stocks hold for investors looking for a steady and rising stream of income to support their lifestyles is pretty clear.

The goal of a growth investor, is to increase the overall size of the portfolio so that it will be large enough to meet a future need. That need may be a lump sum to pay for college expenses, or a much larger account from which to draw retirement income. In either case, the object of the game is to make the pot of money bigger in the time available. The key to winning the game lies in understanding that total return is what counts.

Total return is made up of two parts: price appreciation and income. A security that goes up in price by 5% and pays 5% in income adds as much to the financial pot as one that goes up by 10% in value, but pays no income. Still, like the customer who insists on having his pizza cut into 6 slices because he doesn’t think he can eat eight, some investors want their returns delivered only as appreciation.

Stocks that pay dividends do tend to be more mature companies, with characteristically slower growth rates. This is sometimes taken to mean they have low total-return prospects. More accurately, they offer a different path to total return, and that path can lead to an excellent outcome. Flashy price gains are exciting; steady and reliable income can seem boring by comparison. To the extend those flashy gains come at the expense of increased volatility in annual returns, chasing them could lead you down the road to disaster.

Dubai bites the bullet on debt

Dubai bites the bullet on debt
Dubai has finally entered a treatment facility voluntarily.

By Una Galani, Breakingviews.com
Published: 6:12AM GMT 26 Nov 2009

Dubai World, one of the emirate’s biggest holding companies, has shocked creditors by asking for a standstill on the $60bn of debt attached to its entire portfolio, which includes ports operator Dubai Ports World, investment vehicle Istithmar and Nakheel – the property developer responsible for one of the Gulf’s most iconic sights: a series of man-made palm islands. If the emirate’s request is granted that would amount to a technical default.

Though Dubai’s troubles had been widely heralded, investors had been expecting a timely repayment of bonds. Sheikh Mohammed bin Rashid al-Maktoum even recently told critics of the emirate’s ability to meet its financial commitments to “shut up”. No surprise then that the request for a standstill from Dubai World until May 2010 sent the price of Dubai’s five year credit default swaps leaping to 420 basis points – up 100 basis points. That is still less than half the high Dubai’s CDS reached in February when confidence in the emirate was at an all time low.

Dubai has been smart to prove that it can still raise money. At the same time as asking creditors for more time, Dubai announced it had raised a further $5 billion tranche of its $20 billion emergency support bond from two government-owned banks in Abu Dhabi. Two weeks ago, the emirate also placed $2 billion worth of Islamic sukuk bonds with private investors, although those proceeds were not raised for distressed entities.

So why isn’t Dubai putting its hand in its pocket to help Dubai World meet its most pressing maturity, namely Nakheel’s $3.5 billion sukuk due mid-December? One reason could be because Dubai World faces at least a further $2.2 billion of maturities in the coming six months and more after that. Deloitte’s Aidan Birkett, who will lead the restructuring effort, will be one of the first outsiders to see the true scale of the problem that lies within.

Creditors might not like having to grant concessions, but anyone with a long term interest in Dubai should be pleased that the emirate is biting the bullet. Authorities last week took the decision to remove some of the key architects of modern Dubai from their positions. Now the debt laden emirate appears to have finally realised that it can’t pay off all of its debts without a serious financial restructuring. The first step to a cure is admitting there’s a problem.

Dubai: what the immediate future holds

Dubai: what the immediate future holds
Until last Wednesday, most investors saw Dubai as an attractive tourist destination, a regional financial centre and an example of what bold and visionary leadership can achieve.

By Mohamed A El-Erian
Published: 12:23AM GMT 29 Nov 2009

Some worried that Dubai's impressive achievements came with a debt burden that would prove difficult to sustain after last year's financial crisis.

This weekend, investors around the world are united in wondering "what does Dubai mean for me?"

Dubai has triggered local, national, regional and global forces that will play out in the weeks ahead.

At the local level, the standstill is an explicit recognition that the Emirate's debt and leverage levels cannot be sustained in what, at PIMCO, we have called the "new normal". The question for Dubai is now two-fold: can an orderly extension of debt payments be achieved; and how will this impact the risk premium that is attached to other economic and financial activities in the Emirate?

The key issue at the national level is how Abu Dhabi, the largest and richest of the seven UAE Emirates, will react. Here, it is a question of willingness. The leaders of Abu Dhabi must strike that delicate balance between using enormous wealth to support Dubai and ensuring appropriate burden sharing among those that repeatedly failed to heed Abu Dhabi's past warnings about the excesses in Dubai.

The regional dimension is captured by a word familiar to investors in emerging markets: "contagion". The immediate reaction of almost all markets (and too many commentators) is to lump together countries in the region that have very different characteristics. Witness how market measures of risk have surged for all the oil exporters in the region even though they share none of Dubai's debt and leverage characteristics.

At the global level, the Dubai announcement serves as a catalyst to take the froth off expensive financial markets. For the last few months, massive injections of liquidity (primarily by the US), aimed at limiting the adverse impact of the financial crisis on employment, have turbo-charged financial market valuations rather than make their way to the real economy. While many have worried about the generalised over-extension of equity markets, most have hesitated to take money off the table as there did not appear to be a catalyst to break the general "trend is your friend" mentality. Dubai is that catalyst.

So, what next?

First, it will take time to sort out the Dubai situation. Inevitably, this is an uncertain and protracted process that involves both on- and off-balance sheet exposures. It will cast a cloud not only on companies in the Emirate itself but also on institutions that have large exposures there, especially in the banking and real estate sectors.

Second, the immediate indiscriminate sell-off in regional (and emerging market) names will, over time, give way to greater differentiation based on economic and financial realities. Those with strong fundamentals will recover (including Abu Dhabi, Brazil, Kuwait, Qatar and Saudi Arabia) while others, including countries with large deficits and debt burdens in eastern/central/southern Europe, may come under more pressure.

Finally, and most importantly, Dubai serves as a warning to those that were quick to find comfort in the sharp market rally of the last few months. Since the summer, the appreciation of risk assets has been driven predominantly by artificial liquidity injections rather than fundamentals. The Dubai announcement is a reminder that a flood of government-induced liquidity cannot mask all excesses, all the time.

Investors should treat last Wednesday's announcement as an illustration of the lagged financial effects of the global financial crisis. The Dubai situation is no different than that facing commercial real estate in the US and UK.

Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.

Mohamed A El-Erian is CEO and co-CIO of PIMCO, the investment management firm

http://www.telegraph.co.uk/finance/economics/6678194/Dubai-what-the-immediate-future-holds.html

Dubai: an emirate in crisis

DUBAI facts

Ruled by Sheikh Mohammed bin Rashid Al-Maktoum (above), who has embraced the extravagance of his emirate

16bn  Ruler's personal wealth – world's fourth-richest royal

1.7m Population

240,000 Oil production per day

State company is Dubai World, a property-focused investment group with a $59bn debt problem

Government holding companies bought large stakes in HSBC, Deutsche Bank and US retailer Barneys

Key London assets include the Adelphi, on the Strand, and the Grand Buildings in Trafalgar Square

The ruler's slogan is "Leader, equestrian, poet"



ABU DHABI facts

Ruled by Sheikh Khalifa bin Zayed al-Nahy (above), who has taken a reserved and anonymous stance in his
oil-rich state

$21bn Ruler's personal wealth – world's second-richest royal

1.3m Population

2.7m Oil production per day

State company is the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund with assets worth more than $250bn

The company bought 4.9pc of Citigroup for £7.5bn in 2007 and is thought to be the world's second-largest institutional investor behind Bank of Japan

Key London assets include the ExCel exhibition centre in the Royal Docks and No1 Knightsbridge Green, close to Harrods

Its flagship project is the Gulf version of the Peggy Guggenheim Museum, which is set to open in 2011

****The Investment Policy Statement

The purpose of the IPS is to put in writing exactly what you're trying to accomplish with your portfolio, how you plan to get the job done, and how you'll measure your progress along the way.  It should serve as the anchor that keeps you from drifting away from your plan to chase the latest hot tip or investment fad.  By helping you to stay focused on your long-term goals, it can also keep you from becoming so discouraged by the inevitable setbacks that you give up on investing altogether.  An IPS doesn't have to be a complex document, but it should include the following: 

• Your risk tolerance
• Your time horizon
• Your need for current income
• Your need for long-term growth
• Your plan of action
• Your schedule for measuring your progress

-----

Your risk tolerance

A great way to measure your risk tolerance is to decide what percentage you're prepared to lose in any given year without abandoning your strategy.  Be honest with yourself.

Translate the percentage numbers into real dollar amounts.  It's one thing to tell yourself you can sit calmly through a 20 percent decline, and another to open an account statement that shows one out of every five dollars of your hard earned money seems to have disappeared.  Since the markets tend to spend about a quarter of the time falling, sometime during your lifetime as an investor it's virtually certain that you'll be facing losses in your account.

Big return targets, whether for growth or current income, tend to increase the likelihood of big dips in portfolio value.  Investors are infamous for selling at market lows in a panic, usually just before the market recovers.  The more harrowing the ride, the more likely you are to want to get off.  Be sure you don't put yourself on the path to surrender by choosing too dangerous a route.  If you're not prepared to accept any declines along the way, then you're not entitled to the superior gains that stocks have traditionally provided.  That's fine; just scale back your plans to match the steady but lower long-term returns you'll probably be able to get from fixed investments.

Your time horizon

Your time horizon is simply how long you plan to maintain your current investment strategy.  It's usually tied to some major expense or event, such as the arrival of college years for the kids or a planned retirement date.  For investors already in retirement, the time horizon for an income portfolio may be their life expectancy.  The shorter your time horizon, the more conservative your plan should be.  As we have just witnessed, markets can go down for several years in a row.  While they have always eventually recovered in the past, the markets may not follow your timetable, leaving you short of the necessary funds when it's time to write the check.  In general, money you absolutely need to spend within four or five years should not be a part of your investment portfolio.

Your need for current income

Your need for long-term growth


The total return your portfolio provides is made up of two parts:

• income and
• growth. 

If your portfolio is providing you with the cash you currently need to support your lifestyle, you need income.  We believe there are potential pitfalls in relying on the systematic liquidation of portfolio growth ("dollar lost averaging") to fund your current income needs and that these pitfalls are serious enough to offer a strong argument for basing your withdrawals on the cash income your investments can generate instead.

 

How much money do you need to take from your portfolio today?  How much will you need in the years ahead as the cost of living rises?  Is your portfolio big enough to produce that much cash?  An investor with an $800,000 portfolio can get $1,000 per month by taking cash at just a 1.5% annual rate, while someone with $150,000 invested needs to draw cash at an 8% rate to pocket $1,000 per month.  If prevailing rates are around 4% and you need to take 12% to make ends meet, you've got trouble.  Your choices are to cut your expenses or shop at the high yield end of the investment market where risks are greater.  As the spread between what's reasonable and what's necessary grows, so does the likelihood of depleting a portfolio.

Those investors who don't need to take current income from their investments, or who have more than enough invested to meet their needs, can focus on growing their portfolios.  You'll still need to know your required rate of return - the total return you'll need to achieve, on average, to take you from where you are right now to where you want to be.  Answering the following questions will help you to find your required rate of return. 

• How much will your future goals cost once inflation is taken into account?
• How much have you accumulated so far?
• Where is the rest going to come from in the time you have remaining?
• Is there a rate of return you can reasonably expect that will help you get the job done, and can you actually achieve that return while staying within your comfort level?

Without the pressure of monthly withdrawals, investment income can be reinvested to provide for future income goals, inflation protection, or generational wealth creation.  As part of your total return equation, the level of income you should be looking for can be matched to the distance in dollars you have to go to reach your goals, and risk you're prepared to assume to get there.

Your plan of action

The description of your plan of action can be as simple as "Invest primarily in dividend-paying stocks," or as comprehensive as a complete summary of the details of your investment process.  The key is to create a benchmark against which you can measure every investment decision you make to help you keep your plan on track. 

Your schedule for measuring your progress

Plan on reviewing your progress at predetermined intervals spaced at least one year apart.  This is not the same as the process of regularly monitoring your securities.  It's a chance to take a fresh look at your circumstances to see if there have been any material changes in your income needs, time horizon, or risk tolerance.  The purpose of this review is to make sure your plan of action still makes sense given any changes in your situation, and to help you keep your overall investment experience tied to the long-term context of what you hope to achieve.  This review is about you, not about the markets.  The investment environment is always changing, and your plan of action already takes that kind of change into account.  Be careful not to let what's going on right now in the investment markets alter your strategy.

Keep a historical perspective in mind.  Big bull market advances don't last forever, and neither do major bear market declines.  So long as your process is performing as you would expect under the circumstances and still meets your needs, your Investment Policy Statement should not require a major revision.

The concept and purpose of using Screen and Standards in Stocks Selection

As you begin the process of culling your universe of stocks down to a useful list, think about the qualities you find in your candidates in terms of screens and standards.

 

Screen

 

A screen is any element of a security that would eliminate it from further consideration, for example, the absence of a dividend.

 

The purpose of a screen is to limit your universe of stocks to a manageable list of candidates. 

The concept of using a screen to narrow our choices is a familiar part of daily life.  For example:

• people with food allergies can't eat certain dishes, no matter how delicious they are.
• we only read books written in languages we understand, and
• when we shop for clothing we start by looking for clothes that will fit.  After all, it doesn't matter how nice an item is if it's not the right size.

Screens help us discard all the possibilities that, no matter what else they may have to offer, just don't meet our needs.  Any stocks that fails to meet one of your screens simply won't be on your list of candidates.

 

 

Standards

 

Standards are those criteria by which you will compare one security to another when both of them pass your screening process in order to select your perferred choice. 

 

The purpose of standards is to help you decide which stocks on your list of candidates to invest in. 

 

Returning to our shopping example, once we narrow our choices to those items that are the right size we can try them on to see which ones fit the best.  There are other clothing standards in addition to fit such as color, style, quality, and price that we can use to compare our finalists when deciding which ones to buy.

 

The stocks that pass through your screens will be ranked according to a variety of investment standards to help you find those candidates on your list that appear to offer the most promising fit for your dividend portfolio.


Sometimes a measurement you use as a screen to shorten your list will also be used as a standard to rank your choices. 

The most obvious screen you'll be running your universe through is the size of the dividend yield.  If you've set your minimum dividend yield at 2.25%, then a stock with a yield of 3% and another stock with a yield of 4% would both pass the dividend screen you've set and be added to your list of candidates. 

Later, when ranking your candidates to decide which ones to buy, you can use the dividend yield measurement again - but this time as a standard.  On the basis of the dividend yield standard, the 4% stock would rank higher than the one with a yield of 3%.

How high the dividend yield should be to pass through your screen depends largely on

• how much income you need to take from your portfolio, and
• how much risk you're comfortable assuming. 

If you haven't stopped to address these two important factors, now would be a great time to do so.

Choosing the Right Tools

You can't have everything.  Where would you put it?

Imagine walking into a home improvement superstore with only a vague idea of what you want to buy.  You could spend hours wandering up and down aisles looking for the right tools.

Investments are tools you use to achieve your long-term financial goals and choosing the right tools is critical to your success.  The universe of possible choices is huge.  There is a virtual superstore of more than 2,800 companies listed on the New York Stock Exchange, nearly 3,500 listed on the Nasdaq and thousands more listed on other exchanges in the US and around the world.  In addition to stocks, there are:

• commodities,
• real estates,
• bonds,
• annuities,
• options,
• hedge funds,
• mutual funds,
• futures contracts, and on and on.

One of the beauties of investing for dividends is that you can limit your search to just stocks - and to just those stocks that pay dividends.

How do you conduct your search?

How you conduct your search will play a large part in how many stocks you'll be able to choose from. 

• If you're using a computer, you may be able to access, download, or process thousands of potential candidates. 
• If you're conducting your search by hand, you may be looking through the stock listings in the newspaper with a highlighter. 

In either case, your goal is the same:  to find a manageable list of stocks that meet your initial criteria. 

Over time, these will become familiar friends.  By tracking their fortunes over the years, you can gain a solid understanding of their underlying value and potential future prospects.

Phenomenal surge in Coastal’s profit

Phenomenal surge in Coastal’s profit

Tags: Coastal Contracts | Kenanga Research

Written by The Edge Financial Daily
Wednesday, 25 November 2009 11:29

COASTAL CONTRACTS BHD [] (Nov 24, RM1.99)
Maintain buy at RM1.95, target price at RM3.68: Coastal Contracts showed a phenomenal third quarter (3Q09) with another record quarter of RM48 million net profit. Nine-month FY09 revenue of RM315.2 million came in at 75% of our forecast but net profit of RM108.7 million was at 97%. Assuming a constant quarter into the year-end, net performance will most likely be 40% ahead of our forecast principally because of strong vessel delivery and higher margins fetched compared to our forecast which we had warned to be conservative.

Quarter-on-quarter, revenue was up 48% on the back of higher vessels delivered. 3Q saw a total of 11 vessels (nine tugs/barges and two offshore support) delivered compared to a mere four (two tugs/barges and two offshore support). No details were given on vessels delivered, but we suspect them to be the normal 5,000 bhp AHTS with market values of between RM45 million to RM50 million each.

Shipbuilding margins remained robust standing at 33.2% (2Q09: 33.4%). FY09 revenue is raised 9.4% with net profit by 39.1% due to a combination of higher margins and lower effective taxes being modelled in. FY10 revenue is also raised by 10.6% with net profit by 38.7% for the same reasons.

The new target price of RM3.68 is based on eight times FY10F (RM2.66 previously) with our buy call maintained. Farsighted management, strong visibility and a strong record of outperforming their guided numbers are key reasons behind our buy call. Trading at a mere 4.2 times 2010F is unjustified compared to the oil and gas sector which is trending at least in the teens.

The outlook for the company is improving substantially after the recent thawing of the credit crisis. Management is once again guiding very positively on the back of rising enquiries given a relatively more stable economic environment not to mention crude oil prices which are currently averaging at the high US$70s to low US$80s per barrel.

Verbal guidance of RM1.4 billion order book should sustain the group right up to 2011 provided there are no cancellations. Farsighted management which had focused their selling to major asset owners including some of the world’s largest offshore support players should help to mitigate cancellation risks.

Based on preliminary estimates, we suspect that the group could have another RM2 billion worth of inventory that could be offered into the market over the next few years. This is not confirmed by management but they did guide that enquiries have been building up very strongly with further sales likely over the course of the next few months. — Kenanga Research, Nov 24


This article appeared in The Edge Financial Daily, November 25, 2009.

Chief of I.M.F. Urges Continued Stimulus Efforts

Chief of I.M.F. Urges Continued Stimulus Efforts

By MATTHEW SALTMARSH
Published: November 24, 2009

PARIS — The chief of the International Monetary Fund urged the world’s major economies on Tuesday to retain their economic stimulus programs until there were durable signs of a recovery, including an end to rising unemployment.

Dominique Strauss-Kahn, head of the International Monetary Fund, on Monday. He urged the world’s advanced nations to continue with their stimulus programs until they return to a solid economic footing.

“A premature exit is the main danger,” Dominique Strauss-Kahn, managing director of the I.M.F, said during an interview at the fund’s office here. “We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

Mr. Strauss-Kahn, who was visiting Europe this week, added that “the bigger risk is of growth not coming back, a jobless recovery and to believe that we are out of the woods.”

The comments place the I.M.F. firmly on the side of the major Western governments, the primary backers of the fund, in calling for retention of state support like aid for banks and automakers and tax breaks for consumers.

The I.M.F.’s position contrasts starkly with the prescription it gave to Asian countries grappling with a different economic crisis a decade ago.

Then, the fund, which is based in Washington, lent money to countries including South Korea, Indonesia and Thailand. But it linked its support to harsh financial medicine like high interest rates and a restrictive fiscal policy aimed at balancing budgets. The conditions were blamed for prolonging the downturn in the region.

The I.M.F. has “learned a lot from the Asian crisis — that one-size-fits-all doesn’t work and that you have to adapt to the constraints of the country,” Mr. Strauss-Kahn said.

In the current context, continuing the stimulus entails risks, according to some economists and politicians, like impoverishing future taxpayers, creating excessive reliance on foreign creditors, keeping unproductive banks afloat and even stoking inflation.

Some economists are worried that the splurge in government spending could push the public finances of some countries close to the brink. Rising deficits have caused strains in bond markets, reflecting worries about the possibility of default and the ability of investors to digest the surge in supply.

In Europe, borrowers like Ireland and Greece have come under particular strain. There has been speculation that the government in Britain — where the budget deficit is projected to rise above 13 percent of gross domestic product next year — may face more severe balance of payments difficulties.

A recent report by Variant Perception, a research firm based in Charlotte, N.C., said the British fiscal situation was “already on a par with some of the worst financial crises in the postwar period that have precipitated currency crises.”

Mr. Strauss-Kahn acknowledged the dangers. “I understand the concerns about deficits and they are not unfounded,” he said. “Defaults, of course, are a concern, but they are not likely.”

He stressed that in the event of extreme strains in government bond markets, systemically important borrowers would find support either from multilateral lenders or central banks.

He also acknowledged concerns about commercial banks becoming too dependent on ultracheap financing from the major central banks.

Over all, he said, the fund was more confident about the global outlook than it was in September, when it last released economic projections. This suggests that, excluding a dip in activity in December, it would raise its key forecasts in the update in January. “The U.S. recovery appears to be stronger than we thought in September,” he said. “What I see in the global figures now is that things are moving faster than expected.”

Regarding currency adjustments, Mr. Strauss-Kahn said that the euro appeared “somewhat overvalued,” while the renminbi was “still undervalued.” A rise in the value of the Chinese currency would be a logical element in the country’s “shift from an export-driven economy to one that was more dependent on domestic demand,” he said.

The I.M.F. has been asked by the Group of 20 to study ways to allow banks to pay for their own bailouts. It is expected to report on the matter in April. One option it will examine is a tax on financial transactions.

Meanwhile, the announcement last week by Hungary that it would forgo the next installment of an I.M.F. loan was “the best news of the year,” Mr. Strauss-Kahn said. Other countries in the region — like Ukraine, Latvia, Romania and Serbia — still face “challenges,” he said.

After the crisis, the I.M.F. will continue to offer technical advice and training as well as taking “a more formal role linked to the G-20 as a kind of think tank and institution to help implement the follow-up to G-20 meetings,” he said. Further out, it may even become a lender of last resort.

http://www.nytimes.com/2009/11/25/business/global/25imf.html?ref=economy

Dubai’s Investment Troubles Leave Markets Unsteady

Dubai’s Investment Troubles Leave Markets Unsteady

By BETTINA WASSENER
Published: November 27, 2009

HONG KONG — Stock markets fell across Asia on Friday as investors were spooked by news this week that Dubai World, the emirate’s main investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt.

Dubai, in debt from financing a building boom, is seeking to defer payments.

The Hang Seng index in Hong Kong fell 4.8 percent and South Korea’s key market gauge, the Kospi, dropped 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan both sagged 3.2 percent.

European markets, however, were flat, with the CAC 40 in Paris and the FTSE 100 in London turning a few points higher. The three major European markets all fell more than 3 percent on Thursday. Wall Street is expected to open sharply lower as investors there try to play catch up. American markets will be open for a half-day, after being closed Thursday for Thanksgiving.

The dollar gained against the euro, and crude oil prices fell $3.68 to $74.28 in premarket trading in New York. Treasury prices rose.

In the Asian markets, banks and construction firms were among the biggest losers, even as many companies issued statements declaring they had little or no direct exposure to the Dubai World debt.

European banks may be hit hardest if Dubai World cannot meet its obligations, according to a research note Friday from Credit Suisse. The Swiss bank estimated that European banks could have a total exposure of 13 billion euros.

Bloomberg News, citing a report by JPMorgan Chase and Company, said that the Royal Bank of Scotland Group underwrote more loans than any institution to Dubai World, the state company seeking to reschedule debt, while HSBC Holdings had the most at risk in the United Arab Emirates.

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in the report, citing Dealogic data.

The turmoil was touched off by Wednesday’s announcement from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow Dubai World to suspend its debt repayments for six months. European markets reacted negatively to the news Thursday.

Dubai’s move — the global high-finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its debt, worries about the sovereign debt of oil-rich Middle Eastern countries were unfounded.

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Still, the news had companies scrambling Friday as their stock prices dropped.

In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai World. Standard Chartered said it would issue a statement “if there was anything material to disclose.”

Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”

Chinese banking giants including ICBC, Bank of China and Bank of Communications said they had no exposure, Reuters reported, but their shares all dropped.

In Japan, Sumitomo Mitsui Financial Group fell 3.7 percent, Mizuho Financial dropped 3.9 percent and Mitsubishi UFJ 2.2 percent, though none would say how large their exposures were, according to Bloomberg News. Taiwan’s fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much.

Real estate and construction firms of varying sizes were also scrambling to assess the impact. In India, for example, Reuters reported that the chairman of realty firm Omaxe said the company had an exposure of 450 million rupees, or $9.6 million, through a joint venture with Dubai World’s property developer unit Nakheel, and was looking to exit the project.

And the South Korean builder C&T Samsung said it had stopped work on a $350 million bridge in the city after a unit of Dubai World halted payments, according to Bloomberg News.

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.

“Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far,” Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday. “I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors, especially oil-rich Abu Dhabi — or so investors had assumed.

Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.

Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”

Mr. Wolter of RBS said he too believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.

http://www.nytimes.com/2009/11/28/business/28markets.html?ref=global

Asian Stocks Fall Amid Dubai Fears

Asian Stocks Fall Amid Dubai Fears

By THE ASSOCIATED PRESS
Published: November 27, 2009
Filed at 7:22 a.m. ET

LONDON (AP) -- European stock markets regained their poise Friday but Asia fell sharply as investors weighed the impact that Dubai's trouble with $60 billion in debt would have on the global financial and economic recovery.

Sentiment among investors has been hit hard by Wednesday's news that Dubai World, a government investment company, has asked creditors if it can postpone its forthcoming payments until May. That stoked fears, mainly in Europe on Thursday, of a potential default and contagion around the global financial system, particularly in emerging markets.

Asian stocks were particularly badly hit as they played catch-up following the big losses in Europe in the previous session. Hong Kong's Hang Seng closed 1,075.91 points, or 4.8 percent, lower at 21,134.50, while South Korea's benchmark plummeted 4.7 percent to 1,524.50.

In Europe, the FTSE 100 index of leading British shares was down 14.18 points, or 0.3 percent, at 5,179.95, while Germany's DAX fell 13.08 points, or 0.2 percent, to 5,601.09. The CAC-40 in France was 15.02 points, or 0.4 percent, lower at 3,664.21. On Thursday, Europe's main indexes slid over 3 percent, with banks, especially those thought to have exposure to Dubai such as Barclays PLC, HSBC PLC and Standard Chartered PLC, particularly badly hit.

All eyes in Europe will be on Wall Street, which was closed Thursday for the Thanksgiving Holiday. Expectations are that it will open down but that the selling won't turn into a rout -- Dow futures were down 236 points, or 2.3 percent, at 10,206 while the broader Standard & Poor's 500 futures slid 31.1 points, or 2.8 percent, at 1,077.80.

''It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course,'' said Jane Foley, research director at Forex.com.

Across all markets, there is a growing awareness that investors may use the upcoming year-end to lock-in whatever profits have been made over the last 12 months.

''Market cynics have been looking for a correction in the equity market, which has blazed the trail in the past seven months,'' said David Buik, markets analyst at BGC Partners.

''However they have been unable to find sufficient reasons to nail their flag to the mast, by taking profits, whilst alternative asset classes were unattractive options -- well they certainly found an excuse yesterday with the Dubai debt debacle,'' he added.

Investors were also keeping a close eye on associated developments in the currency markets after the dollar slid to a new 14-year low of 84.81 yen.

However, the dollar climbed back off its lows to 86.46 yen amid mounting expectations that the Bank of Japan may intervene in the markets by buying dollars or selling yen after Japan's finance minister Hirohisa Fujii said he was ''extremely nervous'' about the movements in the yen and that the ''market had moved too far in one direction.''

On Thursday, the Swiss National Bank reportedly intervened to buy dollars to prevent the export-sapping appreciation of the Swiss franc. That seems to have worked -- for now, at least -- as the dollar has moved back above parity, trading 0.9 percent higher at 1.0118 Swiss francs.

The British pound has also been battered amid fears about the exposure of Britain's banks to the region. The pound was down 0.9 percent at $1.6375.

Another currency losing some of its shine was the euro, which fell 0.8 percent to $1.4906 -- in times of uncertainty the dollar is considered to be more of a safe haven currency. Investors are also concerned about the exposure of European banks to Dubai.

Elsewhere in Asia, Japan's Nikkei 225 stock average fell 301.72 points, or 3.2 percent, to 9,081.52 while Australia's index dropped 2.9 percent. China's main Shanghai stock measure was off 2.4 percent.

Oil, meanwhile, tracked developments in stock markets and benchmark crude for January delivery fell $3.79 to $74.17 a barrel in electronic trading on the New York Mercantile Exchange.

--------

AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

http://www.nytimes.com/aponline/2009/11/27/business/AP-World-Markets.html

Lloyds rights issue: what it means for shareholders

Lloyds rights issue: what it means for shareholders
Lloyds Banking Group outlined details of its proposed £13.5 billion fund-raising today in what is set to be Britain's biggest ever rights issue.

Published: 2:19PM GMT 24 Nov 2009

Lloyds Banking Group
The group's 2.8 million army of private investors – the biggest shareholder base in the UK – now have to make up their mind whether to support the cash call. Our Q&A should help them decide.

Q: How is the bank proposing to raise the money?

 A: Through a rights issue – the selling of new shares in the company at a discount. Existing shareholders will be offered the new shares in proportion to their holdings.

Any not taken up may be bought by other investors, or ultimately the investment banks underwriting the process, which have pledged to mop up any unwanted shares to ensure Lloyds gets its money.

This fund-raising comes in addition to an £8.8 billion debt conversion offer that did not need shareholder approval and already went through yesterday.

Q: Why is Lloyds raising this cash?

A: The bank, which is 43pc owned by the taxpayer, wants to avoid taking part in the Government's toxic asset protection scheme (APS).

Under the original terms, Lloyds would have paid £15.6 billion to insure £260 billion in loans under the scheme – raising the taxpayer stake to 62pc. Royal Bank of Scotland, which is taking part in the APS, will end up being 84pc owned by the Government after it puts risky loans up for insurance.

But Lloyds will have to pay the Government a fee of £2.5 billion in return for the protection already provided by the taxpayer since the announcement of the asset protection scheme earlier this year

Q: What is the offer on the table for shareholders?

A: Lloyds is offering 1.34 new shares for every existing share owned at a deep discount of 37p each – a 59.5pc discount to last night's closing price and a 38.6pc discount to the bank's theoretical "ex-rights" price when the extra shares will be taken into account.

Q: How much will this cost the average shareholder?

A: The typical Lloyds investor owns 740 shares and will be offered the chance to maintain their stake by buying 991 new shares at a cost of £366.67.

Q: What happens now?

A: Shareholders will attend a company general meeting at the NEC in Birmingham on Thursday to vote on 12 resolutions which enable the rights issue to go ahead.

Either 50pc or 75pc of votes cast need to be in favour, depending on the individual resolution.

Q: What happens if the rights issue gets voted down?

A: It is the second time that Lloyds has gone cap in hand to shareholders recently, after HBOS – now part of Lloyds after last autumn's rescue takeover – tried to tap them for £4 billion in 2008, although this was only taken up by 8.3pc of investors.

But the latest plan is unlikely to meet with resistance, given the unsavoury alternative of taking part in the APS and handing majority control to the Government.

The Government – the biggest stakeholder in Lloyds – has also already said it will back the move and Lloyds is likely to have canvassed other big institutional shareholders. If it is not given the go ahead then it will have to go back to the drawing board and seek alternative ways of avoiding the APS or take part in the insurance scheme.

Q: In the event of the rights issue going ahead, what options do shareholders have?

A: Investors can buy the new shares they are offered at the discount price, therefore maintaining the proportion of the bank they own.

They can let their rights lapse and receive a cheque – for an estimated £315.84 for the average investor – from the bank in return when they are sold on the open market. But in this case, the holding they own will be reduced.

Another possible manoeuvre is "tail swallowing", where investors sell enough rights to the new shares as to allow them to take up as many shares as they can without paying out extra money.

For a typical Lloyds investor, this would work by selling the rights to 529 new shares under the offer for £169.28, allowing them to take up rights to their remaining 54 shares, at a cost of around £169.46, not including any potential broker fees.

Q: What is the timetable after the meeting?

A: If the fund-raising is backed by shareholders, the "nil-paid rights" – the right to buy the new discounted shares – will begin trading on the London Stock Exchange the following day, November 27, for a period of two weeks.

There are various deadlines for shareholders, depending on whether they have share certificates or not and if they are taking up their rights in full or "tail swallowing".

The latest deadline for any shareholder to take up rights in full is December 11, but some will have earlier deadlines and Lloyds will be writing to each investor with full details after Thursday's general meeting. The new shares will start being traded on the open market on December 14.

The underwriting banks will sell rights on behalf of those investors who choose to do nothing and they will receive a cheque.

Q: How many shareholders are there?

A: There are 2.8 million smaller investors, many of whom are former HBOS savers who picked up stock when Halifax demutualised more than a decade ago. The remaining shareholders are institutions such as pension funds and investment firms and, of course, the taxpayer.

Q: What will it cost the Government to take part?

A: The Government – or taxpayer – will have to fork out £5.7 billion net of an underwriting fee to maintain its stake at 43pc, on top of the mammoth £17 billion already pumped into the group.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/6644079/Lloyds-rights-issue-what-it-means-for-shareholders.html

Dubai is just a harbinger of things to come for sovereign debt

Dubai is just a harbinger of things to come for sovereign debt

By Jeremy Warner
Economics
Last updated: November 27th, 2009


Watch out. This may be just the beginning. In the scale of things, the debt problems of Dubai are little more than a flea bite. Dubai’s sovereign debts total “just” $80bn, which counts for nothing against the trillions being raised by advanced economies to plug fiscal deficits.


Dubai has been a one-way ticket of economic expansion until recently

Small wonder, though, that this minor tremor has sent such shock waves around the wider capital markets. The fear is that threatened default in this tiny desert kingdom is just a harginger of things to come for government debt markets as a whole. According to new estimates by Moody’s, the credit rating agency, the total stock of sovereign debt worldwide will have risen by nearly 50 per cent between 2007 and 2010 to $15.3 trillion. The great bulk of this increase comes not from irrelevant little states like Dubai, but from the big advanced economies – America, Europe, and Japan.

Perversely, they are for the time being beneficiaries of the “flight to safety” that trouble in Dubai has sparked. Government bond yields in the major advanced economies have fallen in response to the crisis in the Gulf. If experience of the banking crisis, when investors removed their money from one bank only to find that the one they had put it into looked just as dodgy, is anything to go by, this effect will not last.

Up until now, markets have assumed that the ruinous fiscal cost of addressing the financial and economic crisis was probably just about affordable to the major economies. That view may be about to be challenged.



http://blogs.telegraph.co.uk/finance/jeremywarner/100002318/dubai-is-just-a-harbinger-of-things-to-come-for-sovereign-debt/

Dubai's financial crisis: a Q&A

Dubai's financial crisis: a Q&A
Dubai, the gulf emirate that has grown explosively over the last decade, is now at the centre of markets' attention on fears that it could struggle to repay its debt.

By Richard Spencer in Dubai
Published: 8:55AM GMT 27 Nov 2009

Comments 2 | Comment on this article

Towering high above the Dubai skyline, Burj Dubai, the world's tallest man-made construction, edges closer to completion

Dubai ruling family has moved to calm investors' fear over its economic stability after stock markets tumbled around the world. 

Q. Where did Dubai go wrong? I thought it was in the "oil-rich Gulf"?

A. Dubai is part of the United Arab Emirates, seven city-states which have separate ruling families, separate budgets, but security, immigration and foreign policies in common. Abu Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s on diversified its economy into ports, trade, services and finance, largely successfully. But its liquidity-fuelled real estate and tourism binge in the last decade may have been one step too far.


Q. What is the extent of its problems?

A. The emirate has said it has $80bn of debts, though some analysts say the true figure could be double that. Dubai World, the state-owned holding company whose bail-out plans triggered the current crisis, has liabilities of about $60bn, though only part of that is debt. The main problem is its real estate subsidiary Nakheel, which has huge bonds coming due, including an Islamic bond for $3.5bn in December. It appears to have little cash flow to meet payments - as well as relying on debt, it also sold most developments off-plan, with new developments now on hold.

Q. The big market crash after Lehman Brothers folded was more than a year ago. Why has Dubai only just been hit?

A. The property crash hit Dubai at the time - house prices fell 50 pc in six months. Nakheel was known to be in trouble. But investors assumed that as a state-owned company it would not default on its debt. The government refused to issue detailed statements of how it was to handle Dubai World's debt problems, and rounded on those who said that the crash had undermined Dubai's development model.

This encouraged a belief that a rescue package was already in place, probably funded by Abu Dhabi. The statement on Wednesday that the government was asking for a six-month standstill on repayments implied the rescue was in doubt.

Q. Why hasn't Abu Dhabi come to Dubai's aid? It has the world's largest sovereign wealth fund.

A. Abu Dhabi has, via the federal central bank, bought one $10bn bond issued by the Dubai government earlier this year, and, via its own banks, bought another $5bn bond this week. But the latter came with a rider that it was not to be used for the Dubai World bail-out. This raises two questions: what are the other debts for which it is to be used? And how is the Dubai World debt to be met, even after the six-month delay, if Abu Dhabi will not fund the rescue package?

Q. What about other Dubai companies? How are they doing?

A. Dubai World owns DP World, the successful ports operator which bought P&O. Other arms of the Dubai government, and the ruling family's directly owned holding companies, also own successful companies such as Emirates Airlines and Jumeirah Hotels, as well as stakes in buildings and businesses around the world, including the London Stock Exchange. But the emirate's lack of transparency and relatively untested financial legal system means that no-one knows if these can be demanded as collateral against Dubai World and other government debts.

Q. Nevertheless, exposure of western banks to the debt seems quite small compared to the trillions of dollars to which we have become accustomed. Why the panic?

A. At the most basic level, fears that exposed banks will have to write down losses, and that both Dubai and Abu Dhabi may have to sell worldwide assets, has hit prices everywhere. At an "animal spirits" level, the disclosure of significant unforeseen problems in Dubai has refocused attention on where else might have hidden "black holes". The health of sovereign debt worldwide, already seen as the major financial issue for the next decade, is also being reexamined.

Q. Can Dubai survive?

A. Dubai is still seen as the premier place to do business in the Middle East and beyond. It is a preferred base for not just Arab but Pakistani, Iranian and even Indian businesses, due to the wider region's political uncertainty. Its reputation for liberal attitudes helps. But events this week have damaged its reputation for economic competence, which the emirate's rulers will now have to work hard to restore.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6668281/Dubais-financial-crisis-a-QandA.html

Dubai debt fears: experts react

Dubai debt fears: experts react
Financial markets have been rattled on fears that Dubai could default on its debts after one of the Government's leading companies asked for a standstill on its debt.

Published: 6:41AM GMT 27 Nov 2009


Asian stocks fell for a second day on Friday, with the Nikkei 225 down almost 3pc and markets in Hong Kong and Australia all weaker. The FTSE 100 fell 3.2pc on Thursday, matching declines across European markets.

Mark Mobius, Chairman of Templeton Asset Management:

Dubai debt worries grip financial markets “If Dubai has to default, that could start a wave of defaults in other areas. This may be the trigger to allow for the market to take a rest and pull back.”

Nader Naeimi, a strategist AMP Capital Investors in Sydney:

“People are worried about the contagion effect from Dubai. Events like this bring back all the bad memories from the global financial crisis.”

Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong:

“Dubai has prompted a wave of risk aversion globally. This might prompt a short sell-off in the won but I think that’s what it will be. It’s not going to be a huge fallout because Asia looks more solid in terms of fundamentals.”

Francis Lun, general manager of Fulbright Securities in Hong Kong

"The panic button's been hit again."

Robert Rennie, strategist at Westpac Global Markets Group

"This an important reminder that the credit crisis is forgotten but not gone,"

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6667415/Dubai-debt-fears-experts-react.html

Dubai default fears rock markets

Dubai default fears rock markets
Global markets had their biggest collective fright since the chaos of the financial crisis as fears that Dubai could default on its debt gripped investors.

By Louise Armitstead
Published: 8:59PM GMT 26 Nov 2009

A metro train passes by Jumairah Lake Towers in Dubai.
Investors are worried that the state could default on its debt
Photo: AP Photo/Kamran Jebreili)

The FTSE 100 suffered its worst one-day fall since March closing down 3.2pc. Companies with big Middle Eastern shareholders led the rout, on the back of concerns that the high-rolling emirate would be forced to sell stakes to raise capital. Barclays Bank tumbled 7.9pc and the London Stock Exchange fell 7.4pc.

There were similar scenes across European stock markets with the French CAC-40 down 3.4pc and the German DAX index down 3.3pc. In America, markets were closed for the Thanksgiving holiday, but electronic trading of the benchmark S&P 500 equity futures contract showed a potential drop on Wall Street of 2.2pc.

On Wednesday, Dubai World, the government investment company behind some of the emirate's most ambitious projects, said it was seeking to delay repayment on a tranche of its debt.

The company has $60bn (£35.9bn) of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world's biggest artificial island, and the Nakheel Tower, the world's tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14. The company also unveiled a restructuring programme, to be headed by Aidan Birkett, Deloitte's managing partner for corporate finance.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over.

British bank stocks, that are among the most exposed in the world to the Middle East, were hard-hit. Royal Bank of Scotland slumped 7.75pc, Lloyds Banking Group lost 5.75pc and HSBC fell 4.4pc – all three are among nine banks who were bookrunners on an outstanding $5.5bn syndicated loan to Dubai World in June 2008.

HSBC's interim accounts showed that the bank had a $15.9bn exposure to the whole of the United Arab Emirates.

The concerns for UK banks also hit sterling, which fell to its weakest point in a month against the euro and a basket of currencies, while gilt futures leapt to a six-week high, propelled by renewed fears about credit quality.

Property shares fell sharply amid concerns of a fire sale of Dubai's UK assets, which include the Grand Buildings in London. Dubai has also been a major buyer of UK property.

Land Securities and British Land both shed over 3pc. Similarly construction companies were down including Balfour Beatty and WS Atkins, who are involved in key projects in the Middle East, including the Dubai Metro.

The confidence in emerging markets was hit. Analysts at Merrill Lynch said: "The risk of corporate default in Dubai clearly shows that contagion risks have not disappeared and that perhaps the market has turned a little complacent about risk.

http://www.telegraph.co.uk/finance/businesslatestnews/6664913/Dubai-default-fears-rock-markets.html

Is this bye-bye Dubai?

Is this bye-bye Dubai?
Dubai dazzled the world with its extravagance and excess. Now it wants to defer its debts. What went wrong, asks Richard Spencer.

By Richard Spencer
Published: 7:52AM GMT 27 Nov 2009

The brief statement was short but, in the words of one banker, desperate. "Dubai World intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010."

In a nutshell, the government was asking banks to let two of Dubai's most famous companies hold off on their mortgage payments. Since they are state-owned, the announcement suggested the city itself was in trouble: governments aren't supposed to default on their debts, and when they do – as Argentina did in 2001 – it causes chaos around the world.

Yesterday, the creditors didn't know whether to laugh or cry. On the one hand, this is an undoubtedly serious situation. Western banks, and the construction firms that built those castles in the sand, are exposed to serious amounts of money. Dubai's total government owings are officially $80 billion, unofficially twice that, and the cash flow to pay that back is a mystery.

More to the point, confidence had returned to the city's dealings, its companies were rehiring, precisely on the same assumptions that have seen rising property prices in London and rising stock markets everywhere. The crisis was over, meltdown averted, and growth was back.

But if Dubai's revival turns out to be fake, perhaps the rest is, too?

Yesterday, share prices around the world fell as the news was absorbed. One analyst asked whether this was the "new Lehman brothers".


http://www.telegraph.co.uk/news/worldnews/middleeast/dubai/6667851/Is-this-bye-bye-Dubai.html

Statement of Retained Earnings

-----

SAMPLE Consolidated Statement of Retained Earnings
For the Year Ending December 31, 2002

December 31, 2002

$2,185,000   Retained Earnings Beginning of Year
$2,188,000   Net Income

$   700,000   Less Cash Dividends
$3,673,000   Balanced Retained Earnings End of Year

-----

The statement of retained earnings indicates the amount of the company's earnings (net income from the current income statement) and adds this amount to the previous retained earnings from the balance sheet.  When a company earns a profit, management must decide either to:

1.  Pay out all or part of the earnings to shareholders as dividends; or
2.  Retain the earnings to

• finance the purchase of assets,
• retire debt, or
• grow the other resources of the company.

The retained earnings on the balance sheet are the sum of undistributed earnings of the company that have accumulated over time. 

The statement of retained earnings indicates the amount of retained earnings accumulated at the beginning of the year, and then adds the net income for the period.  If management declares a cash dividend, it is deducted from retained earnings to arrive at the balance of retained earnings for the end of the year, which is carried forward to the balance sheet.

The statement of retained earnings shows you how much net income the company will retain or pay out in dividends for the year - an important factor when you are focusing on dividend-paying stocks.

Three distinct yield categories of stocks

Income investors should focus their search on dividend stocks that have yields high enough to generate the income they require.  If you need an income stream equal to 4 percent of invested capital, then you should look for stocks with yields int he 4 percent range. 

There are thousands of stocks, so to make your job of finding the right dividend stocks easier, we suggest you mentally group them into three distinct yield categories:

Category 1:  Low-yielding stocks
These are issues that have a dividend yield of less thant he yield of the S&P 500 Index.  The yield on the S&P 500 Index is about 1.5%.

• Although they do pay a dividend, they tend to reinvest most of their earnings to foster growth in value through price appreciation. 
• These stocks are very appropriate for growth investors, but they may fail to meet your income requirement.

Category 2:  Medium-yielding stocks
These are issues with dividend yields that are equivalent to the index's yield or higher and tend to be companies focusing on providing a balanced return from both dividends and price appreciation.

• When screening for stocks, we target stocks with yields that are at least 150 percent of the index's yield.  They are committed to their dividend program and pay out from 30 to 50 percent of earnings in dividends. 
• You can shop in this group for income, but remember that the object of your search is to find stocks that meet your income requirement, so you should concentrate on stocks with higher yields.

Category 3:  High-yielding stocks
These are issues with yields today in the 4 to 5 percent range or higher and are companies that are generally in mature industries that focus on providing investors with returns through dividends. 

• They pay out 50 percent or more of their earnings to attract investors to their high dividend yield.
• Mature industries that fit this category are utilities, banks, pharmaceuticals, energy and real estate investment trusts (REITS).  The high yields of REIT stocks can be compelling.
• You will be able to find a fair supply of high-yielding stocks with dividend yields equivalent to most bonds' yields.  It just depends on where you look. 
• You can find stocks with yields in excess of 4 percent from mature companies in certain industries like utilities that focus on attracting investors to their high dividend yields.
• You can also find undervalued stocks with juicy yields that have fallen out of favour with investors.  In many cases, their price has declined while their dividend has remained stable, increasing the stock's yield in the process.  Analyse these situations carefully to determine why the stock has declined in price and if its dividend is secure.  There is often a fundamental business reason why the stock price is declining:  failing to meet earnings expectations, declining revenue, increasing debt levels, etc.  Your job is to determine if the price decline is a temporary setback or part of a larger negative trend.  If you're confident that the pricing adjustment is based on temporary conditions that you see improving, then you may have found a nugget of gold!

Stock versus Cash Dividends

Some firms pay stock dividends in addition to or in lieu of cash dividends.  Stock dividends are a form of recapitalization and do not affect the assets and liabilities of the firm.

There is a misconception that stock dividends increase the ability of the firm to grow.  Many investors believe that stock dividends preserve cash and actually allow the firm to reinvest more for growth.  Because of this belief many stocks trade higher after paying a stock dividend.  However, stock dividends do not increase the earning power of the company.

In the US, if an investor receives additional shares from a stock dividend (and the investor does not have the option to take the dividend in cash), there is no tax consequence until the investor sells the stock.

Evaluating Dividend-Paying Companies

A company should be evaluated on three dividend attributes:

1.  Reliable dividend payment history
2.  A record of increasing dividends
3.  A relatively high dividend yield

A company's dividend history is factored into the company's stock price. 

• One with a superior history of paying and increasing dividends will usually command a higher price than a company that has a poor record. 
• A high dividend yield will often attract more investors to a stock, and this can translate into higher prices as investors buy up shares to lock in a generous stream of dividends.
• A track record of dividend growth is an important indication of the company's ability to grow earnings. 

But beware of company with a high dividend yield that has an eroding earnings outlook.  Remember, a company can only pay dividends from current or accumulated earnings.  Without good earnings, there is good chance that the high dividend you covet may be cut.

What dictates dividend policy?

Management determines if it is going to distribute earnings in the form of a dividend or reinvest all earnings to further the business plan of the company.  The ratio of dividends paid out to investors versus the amount of earnings retained is called the payout ratio.  Changes in tax law and investor preference can influence decisions in the corporate boardroom regarding how much profit to retain or to pay out to investors in the form of dividends.  However, dividend increases often lag behind an increase in earnings because management will want to be certain that a new higher dividend payment will be sustainable going forward.

Looking back over market history, we can see that dividend policy and payouts have remained relatively steady and that any change in dividend yield has had a lot more to do with the change in stock prices than with changes to dividend policy made by corporate directors.  (Note:  You can 'price' your stocks by looking at historical dividend yields.)

Management is usually very reluctant to reduce dividends because a cut is often perceived as a sign of financial weakness.  Even during the Great Depression, companies were loath to cut dividends.  From 1929 to 1932, dividend yields soared because most companies maintained their dividends as stock prices collapsed in the crash.  But, as stock prices rose from 1933 to 1936, dividend yields fell - even though companies were actually increasing the dividends they paid.

This inverse relationship between dividend yield and price was really evident during the huge bull market run from 1982 to 1999.  Companies increased dividends steadily over the period, actually increasing dividends paid by almost 400 percent.  Yet the dividend yield collapsed to historic lows because stock prices increased by 1,500 per cent.

Some companies do run into trouble and cut or omit their dividend payments, but this is the exception rather than the rule. 

• The typical dividend-paying company not only maintains the dividend payout it establishes, but follows a policy of steadily increasing its dividend as earnings increase. 
• Some companies increase their dividend payments every quarter, some once per year, and others only as profits allow. 
• Some companies will even pay extra or special dividends if earnings have been quite good for a number of years.

Many established public companies pay cash dividends and have a dividend policy that is well known to their investors.  Some of them have been paying cash dividends for a very long time.

Twelve of the companies in the S&P 500 today started paying dividends more than a century ago.

S&P 500 Century Dividend Payers

Company ----  Cash Dividends Paid Each Year Since
Stanley Works ----1877
Consolidated Edison ---- 1885
Lilly (Eli) ---- 1885
Johnson Controls ---- 1887
Procter & Gamble ----1891
Coca-Cola Co ---- 1893
First Tennessee National ---- 1895
General Electric ---- 1899
PPG Industries ---- 1899
TECO Energy ---- 1900
Pfizer. Inc. ---- 1901
Chubb Corp ---- 1902
Bank of America ---- 1903

Business and Dividend Life Cycles

Business life cycles are most influenced by access to resources and capital. 

A company's success and development are also affected by a host of outside factors - competition from companies in the same industry, economic conditions, even changing consumer preferences.

There are 6 phases in a company's development that influence its dividend policy:

1. The Start-Up Phase:   In the start-up phase, someone invest cash for stock in the business to develop products, hire employees, pay for equipment, and rent space.  It is not unusual for a company to raise seed money from professional investors and enter the start-up phase with a hundred or more employees.  A small company needs to plow all profits back into growing and perfecting its business model to survive.

2.  The Early Growth Phase:  If the company launch is successful, it will enter the early growth phase.  As the demand for its products and services increases, sales and profits increase.  The company will need to reinvest all cash flow and profit to achieve competitive scale.

3.  The Late Stage Growth Phase:  In the late stage growth phase, the company continues to grow and may begin to pay a small dividend, usually 10 to 15% of earnings.  This is a clear signal to investors that the company has reached a level of stability in profits and cash flow necessary to support a dividend.

4.  The Expansion Phase:  If the company is well run, it will enter the expansion phase.  Its rate of growth may slow as competitors take some of the company's market share.  Companies at this stage generally increase their dividend payout ratio to approximately 30 to 40% of earnings.

5.  The Maturity Phase:  Companies can continue to expand even as they reach their maturity phase, but their growth rate usually slows measurably.   Well-run mature companies can continue to be a competitive force in their respective industries for decades or even several generations.  Many of the companies in this group are mature companies, a few over a century old.  It is during this stage that companies tend to increase their dividend payout ratios to 50 to 60% of earnings, which provides investors with generous dividend income.

6.  The Decline Phase:  In the later stages, many companies fail to innovate - to keep their competitive advantage.  These companies will enter the decline phase, and unless they reinvent themselves, they will eventually cease to exist.  In this phase, as sales and profits decline, they will eventually reduce or eliminate their dividend payouts. 

Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.

Business and Dividend Life Cycles
Start Up

Growth Rate 20%
Dividend Payout Ratio 0%

Early Growth
Growth Rate 30%
Dividend Payout Ratio 0%

Late Stage Growth
Growth Rate 35%
Dividend Payout Ratio 15%

Expansion
Growth Rate 25%
Dividend Payout Ratio 30%

Maturity
Growth Rate 20%
Dividend Payout Ratio 55%

Decline
Growth Rate < 5% and declining
Dividend Payout Ratio < 20%


AT&T is a great example of a company currently in decline, possibly on its way to extinction. 

Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.

At one time, AT&T was the most widely held stock in America.  The company paid its first dividend in 1893 and became known as the widows and orphans stock because it was such a consistent source of dividend payments for investors.  AT&T's history dates back to 1875.  The company's founder, Alexander Graham Bell, invented the telphone and together with several investors started the American Telephone and Telegraph Corporation.  As a telephone company, AT&T was so successful it achieved regulated monopoly status.  In 1984, the US Department of Justice broke the AT&T monopoly into eight companies:  seven regional operating "Bells" and AT&T.

For most of its history, AT&T had been largely insulated from market pressures and competitive forces.  After the break up, smaller and leaner communication companies stole AT&T's market share, first through price competition and later by becoming product innovators.  For the new AT&T to successfully compete in an unregulated environment, it would require a drastic change in corporate culture.  Over the past few years, operations and profits have continued to decline, and AT&T is now struggling to survive. 

AT&T's story of dominance and decline highlights the constant need for you to follow up your initial purchase analysis with a routine review to see if the companies you hold are performing as expected. 

• Each time you decide to continue to hold a stock, you are in fact making a new buying decision. 
• Understanding the business life cycle outlined above will enable you to identify companies that are about to emerge as great dividend payers, as well as help you to spot the mature companies headed down the road to extinction.

"Make Hay While the Sun Shines": When Greed leads to Heavy Losses

An illustrative story.

Rick found out the hard way that greed leads to heavy losses, not gains.

At age 40, Rick had been in an unfortunate accident that would prevent him from ever working agin.  To compensate for his loss of future earnings, he was awarded a lump sum of approximately $4 million.  In 1996, Rick's attorney recommended that he seek out a financial planner to manage his money.  Rick's goals were to set up an investment portfolio that would provide him with current income of $8,000 per month, and an income that would keep pace with inflation over the balance of his lifetime.  Because he depended on income from his assets for his sole support, he wanted to be very careful with his money.

Lump sum: $4 million
Current income:  $8,000 per month

As the stock market advanced unabated, Rick started to listen to the siren's song of the easy money to be made.  He told his planners that he wanted to get more aggressive with his accounts.  The high returns and easy money that the markets were offering were just too good to pass up.  He acknowledged that he had told his planners that he needed to be conservative before, but now he felt that he should "make hay while the sun shines!"  In other words, he perceived that there was little risk involved in getting more aggressive.

Rick did not need to chase high returns because his asset base was sufficient to allow him to pursue a lower risk and return strategy.  Most important, he would always be okay so long as he kept his capital base intact to produce the income he required.  His planners counseled Rick to stick with his conservative income and growth plan because he could not earn back the money he might lose.  But by 1999, the siren song proved too much for him.  He abandoned his investment strategies and moved his entire portfolio into high-flying tech stocks just before the speculative bubble burst.

The ensuing "Tech Wreck" shattered Rick's financial security along with that of millions of other investors.  Greed had won again.  Rick's more aggressive investment strategy that had looked like a sure path to untold wealth became the wrecking ball that destroyed his financial security.  With losses that averaged in excess of 70 percent, Rick's capital base was decimated, and with it, the engine of his income production.

To add insult to injury, the income strategies Rick abandoned actually increased in value.  With the huge stock market declines, investors fled to the relative safety that income-producing investments provided.  Bond prices increased as did the prices of many high-yielding dividend-paying stocks.

People are risk takers or risk avoiders by nature.

As market rises, investors tend to forget that risk is a four letter word, greed takes over, and those who once thought themselves in the conservative camp abandon caution in search of higher returns and what looks to be easy money to be made. 

But an investor's tolerance for risk is part of his or her basic personality, and tolerance for risk rarely changes.  People are risk takers or risk avoiders by nature. 

Investors and the markets are said to be rational, but most people are heavily influenced by their emotions.  The primal emotions of fear or greed often cause investors to play the loser's game of buying high and selling low.