Bank on Yield - Cramer's Mad Money (10/17/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Friday, October 17.

It’s All About the Dividends - Merck (MRK), Eli Lily (LLY), Pfizer (PFE)

After another day of market nausea, Jim Cramer told viewers there's only one thing that can protect their capital: dividends. He told viewers to look for companies with recession-proof businesses that have a good dividend, and a long history of raising that dividend. Cramer used drug maker Merck as one shining example for his thesis. Merck currently yields 5.3% with its dividend, and while that's lower than the dividends of Eli Lily, 5.8%, and Pfizer, 7.6%, Cramer said Merck is in the best cash position among the three, with a history of boosting its dividend, even during the bad times. Admittedly, 2008 has not been a good year for Merck. There have been many questions swirling around the company's cholesterol drugs Vytorin and Zetia, its HPV and cervical cancer drug Guardasil has seen softer sales due to safety concerns, and it has tussled with the FDA over product labeling. But Cramer said that even at a stripped down valuation, Merck is worth at least $29.90 a share, which is higher than its current value. According to Cramer, Merck has the ability to grow and boost its dividend, even in a weakening economy. The company, which trades at the same level as it did last year, is about halfway through a cost-cutting plan aimed at stripping between $4.5 billion and $5.0 billion from its budget and has higher cash flows than last year. Cramer said Merck's dividend pays investors to wait for the company's valuation to match its stock price. He recommended scaling into a position slowly around Merck's upcoming earnings announcement, and ahead of its analysts conference in December. He said Merck's a buy any time its yield hits 5.5% or higher.

What Recession? - United Technologies (UTX)

United Technologies chairman George David discussed his company's stellar quarterly results despite very tough market conditions. David said that his company beat estimates by 2 cents a share and raised its yearly earnings guidance. He cited “relentless disciplines” and excellence in engineering as two factors that have allowed the company to remain a low cost producer. As for the financial crisis on Wall Street, David two markets: financials and everything else. He said that at United Technologies hasn't seen much evidence of a recession and up until now has not had any issues gaining access to commercial paper markets. Even internationally, David said the company has seen strength in orders, with elevator sales in China, for example, up 30% year over year. Cramer called his company as an example of what can go right in the market, and stood behind David, who's propelled the stock up 996% during his tenure.

Banking on the Yield - Watsco (WSO)

Cramer recommended heating and air conditioning maker Watsco as another high dividend yielding stock that should do well during the looming recession. He called the company a perfect way to play the coming bottom in the housing market. Watsco currently yields 3.8%, and since it's levered to housing, Cramer said now is the time to invest. The company recently reported earnings that missed estimates by 7 cents a share, but he said that quarter could have been a lot worse. In fact, the company attributed the $25 million shortfall in revenues to a mild fall season and disruptions due to hurricanes, not to any economic concerns. Cramer noted that Watsco's margins have improved in the last quarter, and its cost-cutting efforts have shaved $25 million from the company's bottom line. With another $8 million to $12 million of cost savings expected in the coming quarters, Cramer said the company deserved the two analyst upgrades it received today. Cramer again recommended buying the stock on a scale, based on its dividend yield. Watsco shouldn’t have any trouble maintaining the dividend – it gets 80% of revenue from replacement parts so it doesn’t need new-housing starts to stay afloat, and there’s $3 a share in cash in the stock, more than enough to meet the $1.80 per share the company pays out. There’s even a good chance Watsco could up its payout, Cramer said. Just three quarters ago, the dividend was increased 12.5%. If the company did that again, the yield would jump to 5.3%. At $36 a share, Watsco will yield 5%, a good entry point, as will $32 a share, when the company will yield 5.5%. "Wait until then to pull the trigger," said Cramer.

An Obama Play - Allscripts Healthcare (MDRX)

Cramer talked with Glen Tullman, Allscripts Healthcare chairman and CEO, to learn more about that stock's recent big decline. Back on August 25, Cramer talked with Tullman about an upcoming dividend payout that could hurt the stock. Sure enough, there’s been a precipitous drop over the past couple of weeks for just that reason. Tullman explained that the decline was not due to poor earnings, but rather a $5 special dividend that was paid out to all shareholders. He called the dividend a great move for shareholders and the company. Tullman said Allscripts is performing well, with one third of all physicians now using the company's products and services. He said the company has what it needs to grow and is investing over $70 million in research and development. In the meantime, Tullman said Allscripts has the products that its customers need today and is selling them in record numbers. Cramer again recommended Allscripts as a great healthcare cost reduction story. He called it “a pure Barack Obama play” because the company fits into the Democrat’s plans to cut healthcare costs.

Seeking Alpha publishes a summary of Jim Cramer's stock picks every day including: Mad Money Recap, Lightning Round and Stop Trading!

Get Cramer's Picks by e-mail -- it's free and takes only a few seconds to sign up.

Seeking Alpha is not affiliated with Jim Cramer, CNBC or TheStreet.com

Comments

[Norman Lepo...:]

Thanks to Cramer I watch Fox Business Channel.

2008 Oct 18 09:36 AM

[hy is the s...:]

Good yielding companies may be a reflection of solid (perhaps excess) earnings. Or just as often plummeting market price- which may indicate a loss of market share or profits. Therefore it is important to investigate the reason for high earnings

2008 Oct 18 01:06 PM

[ashizashiz:]

Dear Fellow Victims:

Together, daily, we share news of the latest in the greatest financial ripoff in the history of history. Billions---literally--... human beings left to suffer and freeze and starve over the next 5-10 years, as the Plutocrats and Kleptocrats hunker down with their riches, their mansions, their Lamborghinis, etc.

Well, I take my lessons from 2 sources: Mohandas K. Gandhi and Billy Ray Valentine. Gandhi you know, I hope. Valentine, played gracefully by a young Ediie Murphy, was the guy in TRADING PLACES who goes from being poor to rich, at the expense of Winthorp, played gracefully by a skinny Dan Aykroyd. ANYWAY....

So, here's the point:

1. Gandhi organizes a day of "fasting and prayer" to protest British rules in India. Of course, a day of fasting and prayer also means 500 million Indian workers off the job: no trains, no buses, no public works---which effectively leaves 100,000 British ex-pats in India totally cut off from the world. A bad day for the Brits, to say the least.
2. Billy Ray Valentine (Capricorn) points out to Lewis Winthorp--as Winthorp cleans out his shotgun barrel in preparation, one can only assume, for a knee-cap shattering meeting with The Dukes brothers (Randolph and Mortimer Duke, of Duke and Duke Commodities, INC.)---that the way you really get a rich person back is NOT by shooting him, but instead by making him poor.

OK, you with me so far?

Now for the union of Gandhi and Valentine.

It seems to me that the real criminals in all of this are the bankers, the folks in the financial industry, the Paulsons and Bernankes and Fulds and all of the folks who have become wealthy on the backs---and on the debt---of the rest of us. This system of FRACTIONAL RESERVE BANKING, a system in which money = debt, this system can only function and make millionaires of a few while leaving the rest in the dust if and only if the rest of us choose to play.

Look, what terrified Paulson more than anything---and then he convinced Bush to be terrified, and he convinced the scumbags in Congress to be terrified----was the idea of a financial system, whose very existence is dependent upon growth and therefore upon more and more debt, collapsing because the borrowing cycle had been shut down.

These total assholes admitted it, and they assumed the rest of us wouldn't really get it. They said, flat out, that we are risking a systemic financial collapse unless we can get the credit markets working again.

Look, I want you to PLEASE watch this video RIGHT NOW. Afterwards, come back to my post.

video.google.com/video...

OK, now...here comes my thesis...well, not really...ummmm....more like my proposal.

Let's stop playing! I say, get together with people in your community and come up with a plan so that (a) everyone can eat and (b) everyone can stay warm and (c) everyone has water to drink and (d) EVERYONE STOPS PAYING FOR THINGS THAT ARE MAKING THE MOTHERFUCKERS RICH!!!

To hell with paying taxes! Think about taxes for one second. All of our taxes have to go up, because we have, to this point, lent the FED over a TRILLION dollars---and Scumbag Paulson is giving all of OUR money (money that we have earned through our hard work as teachers, and carpenters, and farmers and police officers, etc.) to the banks so that the credit market will loosen so that the banks will loan us back our money...at interest!!! I say, no more!!!!!!!!!!

I say we need to come together in our communities and protect each other and help each other and go on strike from giving our hard earned money away so that amoral scum like Henry Paulson can make millions more dollars off of us. I am done with that shit!

We cannot do this alone. Alone we are pariah who get nicked by the FBI and thrown in jail and called extremists. I say, this needs to be a mass movement. A mainstream movement of protest against a financial system that CAN ONLY SURVIVE on the growing debt burden of the ordinary folk.

I may not be William Wallace, and while I like Mel Gibson as an actor I find some of his views about religion rather abhorrent...but I will say this: It is time to claim...OUR FREEDOM!!!!!!!!!!!!!!!...

2008 Oct 18 06:02 PM

[burnout:]

ashizashiz,
Got 67 (or however many it might be) virgins waiting for you?

2008 Oct 18 07:06 PM

[billp37:]

Cramer observes

"I wonder if they even realize that Oct, 21, the day of the Lehman reckoning when we give the Wall Street gangsters their pay off on their hit jobs on Lehman, will cause the federally owned AIG (NYSE:AIG) write gigantic checks and will also reveal who guaranteed this stuff. It will most likely be lots of institutions the Fed doesn't understand or doesn't know."

www.bloggingstocks.com.../

Cramer appear to have read Cohan

"A CDS is like selling insurance on your car to hundreds of people who don't own it -- yet if your car goes up in flames each of those people collects the full value of your car. More specifically, CDSs are insurance against a bond or loan default. Why are CDSs so dangerous? Three reasons: a CDS seller does not need to put any capital aside to cover losses if the security defaults, the buyer doesn't need to own the asset it wants to protect, and there is no central place where information about all these CDS deals is collected and updated.

Surely our biggest financial institutions would shun such risky contracts, right? Wrong. Thanks to $16 billion in CDS insurance premiums over the last two years, three of the largest banks on Wall Street -- JPMorgan Chase (NYSE: JPM), Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC) -- control 92% of the CDS market. For years, those CDS premiums were almost pure profit. But the financial crisis has changed all that. "

www.bloggingstocks.com.../

Watching CNBC on Tuesday may prove to be interesting?

2008 Oct 18 07:47 PM

[billp37:]

burnout

You may be messing with wrong cats?

www.prosefights.org/fu...

US CATS are interested in peaceful settlement of these unfortunate matters.

www.prosefights.org/th...

2008 Oct 18 08:20 PM

[billp37:]

burnout

We are pussycats.

12121.hostinguk.com/wh...

Not wrongcats.

And want peaceful settlement of these unfortunate matters.

www.google.com/search?...

2008 Oct 18 09:00 PM

[Michael Zhuang:]

Cramer gives very few sound advice, but this one "bank on yield" is sound. I did a study of the performance of high yielding stocks during the Great depression. Their prices fell by 83%, about the same magnitude as the Dow, but their dividends feel by only 11%. If dividends were reinvested, those stocks recovered their losses in three and half year time. However, don't invest in any individual stocks - who would have though AIG, FNM would go to near zero - invest in a high-yield index ETF instead.

investmentscientist.co.../

(or the Website link above)

2008 Oct 21 07:15 AM