Six Companies with Sustainable Dividends

During these economic challenging times, one of the key aspect that helps us understand the financial strength of the company (and stocks) is its ability to pay growing dividends. It is also critical to make sure we understand whether companies can sustain their dividends. Following are eight companies that recently announced their quarterly results.

McDonald's Corporation (MCD): The 2Q09 earning per share was $0.98 (vs. $0.87 in 1Q09).

• The key highlight was reduced overall profits on y-o-y basis (vs. $1.04 in 1Q08) due to fluctuations of exchange rates.
• Quarterly dividend of $0.50/share is well covered with earnings. The quarterly payout ratio is 51%.

3M Company (MMM): The 2Q09 earning per share was $1.12 (vs. $0.74 in 1Q09).

• The key highlights were increased EPS, reduced overall income, and reduced revenue.
• Increased EPS seems to be due to controlled operating expenses.
• In near term, it seems that quarterly dividend of $0.51/share is well covered with earnings. The quarterly payout ratio is 45%.

Procter & Gamble Company (PG): The 4Q09 earning per share was $0.80 (vs. $0.84 in 3Q09).

• The key highlight was reduced earnings on q-o-q and y-o-y basis (vs. $0.92 in 4Q08) and reduced revenue.
• For year 2009, EPS increased by 17% to $3.64 (from $4.26). This increase is due to sale of Folger’s business unit.
• Yearly dividend of $1.76/share is well covered with earnings. Payout ratio is at 41%.

Clorox Corporation (CLX): The 4Q09 earning per share was $1.20 (vs. $1.08 in 3Q09).

• The highlight was 8% increase in EPS (vs. $1.13 in 4Q08) on y-o-y basis.
• For year 2009, EPS increased 16% to $3.81 (from $3.24)
• Increased EPS came from combination of increased revenue and cost control.
• Annual dividend of $2.00/share is well covered with earnings. Payout ratio is 52%.

The Chubb Corporation (CB): The year 2Q09 earnings per share was $1.54 (vs. $0.95 in 1Q09).

• This is increase in earnings on y-o-y (vs. $1.27 in 2Q08)
• The highlights were increase in operating income (6%) and reduced revenue from premium collections.
• Quarterly dividend of $0.35/share is well covered with earnings. The annual payout ratio is 23%.

PepsiCo (PEP): The year 2Q09 earnings per share was $1.02 (vs. $1.05 in 1Q09).

• The key highlights were reduced y-o-y EPS (vs. $1.05 in 2Q08).
• Y-o-Y revenue reduced by 3%. The reduction in EPS was due reduced sales of Pepsi’s beverage products.
• Quarterly dividend of $0.45/share is very well covered. Quarterly payout ratio is 44%.

AT&T Inc. (T): The 2Q09 earning per share was $0.54 (vs. $0.53 in 1Q09).

• The key highlights were reduced overall profits on y-o-y basis (vs. 0.63 in 1Q08) and reduced revenue.
• Quarterly dividend of $0.41/share is barely covered with these earnings. This quarter’s payout ratio is close to 76%.
• The last few quarters shows that payout ratios have increasing trends. Is this a warning sign?

United Parcel Service Inc. (UPS): The 2Q09 earning per share was $0.44 (vs. $0.40 in 1Q09).

• The key highlights were reduced overall profits on y-o-y basis (vs. 0.85 in 1Q08) and reduced revenue.
• Quarterly dividend of $0.45/share is not covered with these earnings. The quarterly payout ratio is more than 100%.
• The quarterly payout ratios have been above 100% for two quarter in a row now.
• Expect dividend cuts for UPS.

Based on these results, we can observe that earnings from MCD, MMM, PG, CLX, CB, and PEP cover the dividends paid to the shareholders. These can be sustained. However, T and UPS are at the point where dividends are either close to earnings or already exceed the earnings. As the payout ratios start increasing beyond 70% it is perhaps a warning sign that dividends will be under strain unless earnings improve.

Full Disclosure: Long on PG, MCD, and PEP.

Comments

[Did U Think...:]

MCD will roll over soon. Learn to read a stock chart because you can lose a whole years worth of dividend in a single day of capital losses.

Aug 18 08:18 AM

[WD216:]

UPS is not cutting any dividends, they have a track record of 45 years of paying dividends, both as a private company and public company. You cannot assume a company will cut their dividend just because they did not earn enough money in a quarter to cover it. As the economy rebounds UPS will again easily cover their dividend.

If you know anything about how UPS operates you would know that UPS has a reputation of being honorable and consistent, a dividend cut would tarnish that and therefore will not happen. This is one of the safest dividend plays in the market.

Aug 18 08:50 AM

[TCK:]

Isn't the same or similar post that runs every week ?

Aug 18 08:51 AM

[L S:]

In regards to the comments about the UPS dividend, having a reputation for being 'honorable and consistent' sounds great, but the reality is that many companies are having to alter their dividend plans due to the recession. I'm sure the same argument against a dividend cut was made for Dow Chemical. Dow had gone something like 97 years with no dividend cuts, steadily increasing the dividend that entire time. If you go by the past track record, this should have been the safest dividend in the market. But... the dividend was cut 64%.

I don't claim to have thoroughly researched UPS or their financial picture, but any sensible investor should understand that the depth of this recession has caused some companies to make unprecedented changes to their dividend structures. You can't simply rely on past performance or 'reputation' as a means to predict future payouts. Do the research. Check out the financials. Otherwise, you can join the ranks of Dow Chemical and/or other investors who were hit with unexpected dividend cuts.

Aug 18 09:02 AM

[FloridaJo:]

Don't forget XOM. Since 1963 it has doubled it's dividend payment on average every 11 years. Although today's dividend is about 2.5% return on holdings, I believe it give a solid floor to the price of the stock.

Aug 18 09:02 AM

[Old Rick:]

Did U think sez: "MCD will roll over soon. Learn to read a stock chart because you can lose a whole years worth of dividend in a single day of capital losses. "
----------------------...
And what do the chicken entrails...er...stock chart tell you? When will MCD roll over? What is soon? I could read anything I wanted to in that chart. You want a double (or triple) bottom? You got it! You want it below 50/200/365 day MAs? You got it! How about the only things that work in investing (key word); great earnings, good/great prospects, good dividend.

Aug 18 11:20 AM

[ERCaptain:]

One can argue about the quality of the individual stocks listed, but one cannot argue the power of a rising dividend.

With a strategy of having dividend stock portfolio of rising dividend stocks, and investor would have outperformed their non-dividend paying counterparts by about 7.7% a year for the last 20 years (rising div 11.2% non div 3.5% -- source "Factset, returns 7/31/88-7/31/08")

Thanks for the article.

Aug 18 12:13 PM

[jarco:]

Good focused article. Thanks for your efforts.

Your comment on AT&T payout ratio notwithstanding, an important aspect worth considering is restainability of EBIDT cash flow. Aside from Chub (with typical insurance/finance duribility questions), all of your list is affected by variable consumer sentiment spending and a lack of "hard' assets except AT&T.

The latter aspect limits competition whereas PG, CLY, PEP, and to a lesser extent MCD, continue to be pounded by price competition and spending options from the consumer day in and day out.

Wireless continues to grow and likely wiil be positive net hard line losses. Same applies to VZ. I would suggest at even 75% payouts, utilities including telcos should be able to sustain current better than average dividends. On balance, higher current dividends will cumulatively exceed lower but growing alternatives for quite some time into the future.

Aug 18 12:43 PM

[WD216:]

L.S., I did do the research on UPS, have you? They are flush with cash, have a steady business, dominate the package delivery business, generate good cash flow and have been around for 100 years. You compare them to Dow Chemical who has a cyclical business and goes head to head with a slew of chemical companies? I think you need to research UPS before making off the cuff remarks.

Companies flush with cash do not cut dividends. That is stock investing 101 and it's one of the reasons I have been and still am a very successful investor.

Aug 18 02:14 PM

[whidbey:]

What should one do? Set up a sub portfolio? Are you sure that dividends are solid? I think these articles are difficult to support since they are not balanced, have no rationale except dividends. I always felt that dividends were incidental to the quality of the underlying stock.

Has all this rush to dividends become the key to investing?

Aug 18 05:13 PM

[WD216:]

whidbey, no one said dividends were the key to investing, however they are part of the overall decision. Why not receive anyway from 4% to 6% as you wait for the stock to appreciate?

Check the history of stocks and the percentage gains over a period of 20 to 30 years. You will see that dividend producing stocks did very well overall. These stocks are also generally cushioned against a price drop, as the dividend protects it. You just have to make sure the company is solid, has large cash reserves and is growing (long term).

Beside the fact that dividends for the past several years have been taxed at 15% as opposed to upper 30's for short term gains. So if you are in a high bracket dividends are another major advantage. If not, then oh well, maybe you should have your money in a savings account or mutual fund.

Aug 18 05:46 PM

[L S:]

W.D.... Down boy.... I already said I didn't research UPS, I was simply telling a cautionary tale on Dow Chemical to warn people against basing future dividend projections solely on past performance. I was encouraging people to do the research. It sounds like you have, but you didn't post anything beyond your opinion to back that up. Obviously the two companies are in different industries and situations and you can't assume what happened at Dow will happen at UPS.

If you had provided some financial details on UPS's cash flow and performance prospects, I probably wouldn't have even posted. Your original post simply mentioned that they'd never cut the dividend because they were "honorable and consistent". I tend not to make investing decisions on such 'solid' advice. Congrats on being a successful investor. I'm not doing bad myself. If you've got the numbers that back up your contention that UPS's dividend is safe and can show that, I won't argue with you. I'm not familiar with their situation and have never had the desire to research the company to that extent. But frankly, I am highly skeptical any time I see anyone push for (or against) any company without posting the numbers to back up the argument. There are far too many people on these boards who have an agenda, a stock, or a company to promote.


On Aug 18 02:14 PM WD216 wrote:

> L.S., I did do the research on UPS, have you? They are flush with
> cash, have a steady business, dominate the package delivery business,
> generate good cash flow and have been around for 100 years. You compare
> them to Dow Chemical who has a cyclical business and goes head to
> head with a slew of chemical companies? I think you need to research
> UPS before making off the cuff remarks.
>
> Companies flush with cash do not cut dividends. That is stock investing
> 101 and it's one of the reasons I have been and still am a very successful
> investor.

Aug 19 08:39 AM

[WD216:]

L.S., of course doing the proper research is important however this is not quite the forum to open up a detailed analysis of the company UPS. I simply pointed out that I did my DD and my conclusion was that the UPS dividend is very safe. That was it.

We all have our different investing styles and I'm glad yours is working also. Good luck.

Aug 19 08:57 AM

[Living4Divi...:]

Say what?

GE had an even longer track record and they cut their dividend.

It doesn't matter if they have enough cash on hand. Pfizer had plenty of cash on hand and they cut the dividend to pay for the Wyeth merger.

Some companies will cut the dividends just to bolster the bottom line.

What about Goldman Sachs who paid huge employee bonuses after the companies worst year. Where is the payout to the shareholders?


On Aug 18 08:50 AM WD216 wrote:

> UPS is not cutting any dividends, they have a track record of 45
> years of paying dividends, both as a private company and public company.
> You cannot assume a company will cut their dividend just because
> they did not earn enough money in a quarter to cover it. As the
> economy rebounds UPS will again easily cover their dividend. <br/>
>
> If you know anything about how UPS operates you would know that UPS
> has a reputation of being honorable and consistent, a dividend cut
> would tarnish that and therefore will not happen. This is one of
> the safest dividend plays in the market.

Aug 19 02:53 PM

[WD216:]

Living4Div you have a point. But like L.S. you picked out two companies that do not represent the norm. So congrats on that. GE caught up in the financial crisis and PFE who did have the cash but instead screwed their shareholders. Certainly two exceptions.

You unknowingly proved the fact that all investments should be diversified, even dividend producing ones. If you owned several high dividends stocks you would have be cushioned.

BTW, anyone not seeing that GE was going to cut their dividend had to be living in a cave,

Aug 19 03:16 PM

[Wisdom vs. ...:]

WD, you still do not get the point. UPS is a great company with integrity, and they are also under stress for macro reasons they cannot control-- and long run, probably still a good investment.

i know a little about T (in my portfolio). they are getting killed in enterprise and will continue to get killed b/c 1. enterprise just laid off millions and will not need to expand their systems and 2. new enterprise systems are more powerful, yet cheaper-- bad trend. sure, they own the spectrum, data is rising fast and S appears to be dieing, but what if T's conservative 4G adoption leaves them in the cold? i am watching cash flow carefully, ready to exit

Aug 19 06:32 PM

[Avooch:]

price price price price price

did I mention Price ?


BTW payout ratios used to be 67% for any good mature company

Aug 20 12:30 AM

[Cabdriver:]

I like your process so far, just wish you'd have named the "3" on your "radar'. I'm a relative newbie [retiree] & enjoy doin' the research.


On Aug 19 12:43 PM dividendmachine1 wrote:

> as a person who has made his living allocating capital and writing
> an investment newsletter
>
> And whose annual dividend income MORE than exceeds his annual living
> expenditures
>
> I feel the need to add afew things
>
> The key is not just the right stocks but the right price as well
>
>
> A few of the stocks mentioned are nice but the valuations are not
> shown
>
> 3 of the best stocks according to valuation are nowhere on this list
>
>
> I enjoy the authors articles and he has the right idea
>
> Picking the right stocks at the right price and portfolio allocation
> is paramount to success.peace

Aug 20 11:23 AM

[Value Seeker:]

It's not just one quarter. The last 2 quarters have been down materially year-over-year as you can see here (www.rocketfinancial.co...), and barring a massive rebound in the economy I'm not sure you should expect that to change much over the next few quarters either


On Aug 18 08:50 AM WD216 wrote:

> UPS is not cutting any dividends, they have a track record of 45
> years of paying dividends, both as a private company and public company.
> You cannot assume a company will cut their dividend just because
> they did not earn enough money in a quarter to cover it. As the
> economy rebounds UPS will again easily cover their dividend. <br/>
>
> If you know anything about how UPS operates you would know that UPS
> has a reputation of being honorable and consistent, a dividend cut
> would tarnish that and therefore will not happen. This is one of
> the safest dividend plays in the market.

Aug 20 04:01 PM

[StockData.org:]

someone is in love with UPS

Aug 24 02:28 PM