Cramer's Mad Money - Is Your Dividend Safe? (12/10/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Wednesday December 10.

Freeport McMoRan (FCX), Lennar (LEN), Boyd Gaming (BYD), Masco (MAS)

Cramer has been pushing dividend stocks, but how do you know if the dividend is safe? First, a stock’s earnings should be at least double its dividend. Freeport McMoRan was offering shareholders $2 per share, but its earnings were only 94 cents a share, so it is little wonder Freeport is cutting its dividend. Cyclical stocks are more volatile and tend to slash their dividend when times get hard. Lennar and Boyd Gaming are two cyclicals with risky dividends. While companies that consistently raise dividends tend to be a safer bet, the past is no guarantee of the future. Cabinet maker Masco has raised its dividend annually for 49years and yet its 108% debt-to-equity ratio puts its current yield in doubt.

Executive Decision: Nucor (NUE) CEO Dan DiMicco

Even though Nucor pre-announced lackluster earnings, it raised its dividend. Cramer asked CEO if that yield is sustainable. The components of Nucor’s total yield are twofold: the core dividend was raised in an expression of “confidence in the future,” explained Dan DiMicco, but its special dividend was suspended. When credit became harder to get and customers “shut off the order spicket,” Nucor went from reporting record breaking quarters to facing a fourth quarter with only 50% capacity. However, DiMicco told Cramer the suspension of the special dividend was no cause for concern, since the fact Nucor is still profitable while at only 50% capacity is a bullish sign. Obama’s infrastructure plan should consume a lot of steel and profits should increase by Q2 and for 18 months after, the CEO said. The fact the stock was up 7% on bad news is a good sign, said Cramer, adding that while he likes Nucor lower between $28 and $32, $43 might be a good price for an Obama steel play.

Executive Decision: Windstream (WIN) CEO Jeff Gardner

Cramer recommended Windstream on the summer Verizon Alltel deal because he thought Windstream would pick up assets Verizon would be forced to sell to meet anti-trust regulations. However, Cramer admitted his mistake; since June, the stock has fallen 32%. In addition, contrary to Cramer’s rule about safe dividends, the company’s earnings are not double the dividend but are close to equal. In addition, the FCC is considering legislation that could force WIN to cut rates and could reduce the company’s subsidies. Windstream also has a debt-to-equity ratio of 100%.

Cramer asked CEO Jeff Gardner how the company can maintain its 11% dividend. While the debt may be substantial, the company doesn’t have to pay it off any time soon, and Jeff Gardner said Windstream has “been consistent in delivering that cash.” The CEO thinks mid-sized carriers have been doing a good job convincing the FCC of “what an important role we have played,” and he thinks the regulations will be pushed off. Gardner says Windstream has been successful in competing against cable companies with its smart pricing and aggressive advertising, and adds it has 1 million customers on the broadband side. In addition, while the company wants to buy up assets, it is mindful of leverage and is aiming to keep it in the 3.2 range. Cramer says the CEO made a good case that he won’t cut the dividend, but warned that Windstream is a gamble. Since he recommended it at $13 before it fell to $9, he gives the stock only one thumb up.

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Comments

[tk77mann:]

WIN has better cash flow than earnings show. It has about 50% more depreciation per quarter than CapEx spending, so it has that extra cash to buy back shares and pay down debt. Depreciation much greater than CapEx is always great for the cash flows for dividend / value investors. I hope the stock stays low so I can buy more 11+% tax-advantaged yields in a business that is fairly recession-resistant.

2008 Dec 11 03:19 PM