Cramer's Mad Money - Does the Rate Cut Matter? (10/29/08)

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Includes: BBT, CAT, ETN, MAS, MRK, TRN, VZ, WSO
by: Miriam Metzinger

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday October 29.

Does the Rate Cut Matter?  Verizon (NYSE:VZ), Merck (NYSE:MRK), BB&T (NYSE:BBT), Watsco (NYSE:WSO), Eaton (NYSE:ETN), Caterpillar (NYSE:CAT)

 

While some on the The Street are cynical about the rate cut, Cramer believes Wednesday’s interest rate reduction was a crucial move by Fed Chairman Ben Bernanke, who for now is putting inflation worries on the back burner, albeit a year too late. Tuesday’s huge 889 gain in the Dow would have succumbed to a selloff if it had not been for the rate cut, said Cramer. A lower prime rate means that consumers and businesses can afford to borrow again, and banks will benefit since there is more incentive to borrow money. A lower interest rate could drive cash from savings accounts back into the stock market as investors once again embrace strong dividend stocks such as  Verizon, Merck, BB&T, Watsco, Eaton and Caterpillar. To help create economic stability around the globe, China and Europe also need to lower rates, according to Cramer, who thinks Europe’s Central Bank could slash rates by 50%, a move that would aid American  businesses like Caterpillar which have extensive international exposure.

 

All Dividends Are Not Created Equal - Verizon vs. Masco (NYSE:MAS)

 

It is no secret Cramer has been touting stocks with strong dividends in the current economic environment. After all, dividends provide passive income and tend to rise as the stock price falls. However, not all dividends are created equal, and can be deceptive in difficult economic times when companies need to hold on to their cash. Cramer says a dividend is safe if the company has strong earnings, cash flow and a clean balance sheet. As a general rule, earnings should be twice the dividend, and while Verizon falls slightly short of this standard with earnings only 1.4 times the dividend, Cramer pointed to Verizon’s cash flow, which is 60% higher than reported income and solid balance sheet. Cramer thinks Verizon’s 5.9% yield is safe, but suggests waiting for a decline to $28.30 where the dividend would increase to 6.5%. Although Masco has a history of raising its dividend, Cramer says its 9.3% yield is not sustainable given lackluster earnings. Its cash flow is buoyed up only by demanding earlier payments from customers and delaying its own bill payments, and Masco has $4 billion in debt. Cramer suggests Masco, a housing stock, save its pennies rather than offering an overly generous, unsustainable dividend.

 

Trinity (NYSE:TRN) on Track

 

While Trinity has been suffering from selloffs at hedge funds, and the stock price has declined 19% since the middle of the month. Cramer invited CEO Timothy Wallace onto the show to discuss Trinity’s prospects. While rails have suffered somewhat, Wallace pointed out that its wind tower business is still strong. Trinity’s wind tower orders have not been cancelled, but in some cases, orders have been delayed because of concerns over financing. Wallace added the company is not giving guidance because it is not in a position to predict long-term earnings, not because it expects a decline. Cramer is dubious about Trinity, given rising oil prices and difficulties with financing, but he doesn’t think the stock will drop dramatically.

 

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