Q2 Growth Report, Part 2

<< Read Q2 Growth Report, Part I

Earnings or dividends: Which is more important? Which provides more of a clue to the outlook for this market?

In the first part of this series, I presented some of the data compiled by our Alert HQ processes. The focus was on Revenue and EPS. I contrasted 2009 Q1 results with our recent Q2 results. In this post, I'll do the same with dividends.

For today's purposes, I'll highlight the companies that managed to increase dividends this quarter.

The following table provides the comparison between the two quarters:

	Q1-2009	Q2-2009
In S&P 500	140	112
All stocks	829	778

The number of stocks in the S&P 500 that increased their dividend and have made it onto Part 2 the Q2 Growth Report has decreased by 28. At first glance that doesn’t seem too bad but actually that corresponds to a 20% decline.

Similarly, looking at the entire stock market, the number of stocks that raised dividends in Q2 dropped by 51 as compared to Q1. That amounts to a 6% decline.

This data is not as bullish as the data presented in the Growth Report - Part 1. It is clear that in Q2 companies still felt pressured to preserve cash and they opted for maintaining their dividend at current levels or even reducing dividends.

Repeat winners

Note that there are 516 stocks that qualified for this report in both quarters. These are the real dividend growers but unfortunately there are too many to list here; therefore, I have listed them in the spreadsheet that contains the detailed lists from which the table above was derived. You can download the dividend spreadsheet by clicking on this link.

The Growth Elite

The stocks in the following table were obtained by looking for those that were included in the both types of Growth Report for both quarters.

Symbol	Name
CMCSA	COMCAST CORPORATION
HTS	HATTERAS FINANCIAL CORP.
NHC	NATIONAL HEALTHCARE CORP.
ROST	ROSS STORES, INC.
SEP	SPECTRA ENERGY PARTNERS, LP
UHT	UNIVERSAL HEALTH REALTY INCOME TRUST

Conclusion

In Part 1 of the Growth Report we saw some signs of strength returning to the market as the number of stocks with increasing revenues and EPS grew significantly.

The situation with dividends, however, is a different story. The comparison of Q2 to Q1 for the S&P 500 no doubt suffers because the S&P 500 contains a large number of financial stocks, some of which were so stressed they had to eliminate or reduce dividends in order to preserve cash, offset plunging earnings and bolster capital.

Looking at the market as a whole, the decline in the number of stocks that raised dividends was much more mild. That’s about the best I can do to spin this information in a positive way. It makes the stocks that qualified for today’s list that much more remarkable.

In terms of what today's report says about this market, it is a mixed message. The Growth Report tends to highlight two kinds of stocks:

• Companies that have the classic kind of growth/momentum story based on rising revenue and earnings (Part 1)
• Those "steady as she goes" companies that generate cash and return it to shareholders in the form of dividends (Part 2)

It is not a necessary condition for a bull market that both kinds of companies march in lockstep. The fact that the number of companies that are raising dividends is lagging is less of a concern as we attempt to recover from a bear market. What you want to see at the bottom of a bear market is the return of growth. The fact that we have an expanding cadre of companies that are growing revenues and earnings seems, at this point in the market's recovery, to be a more significant and needed development.

This is not to say that companies that pay dividends are not worthy investments. Indeed, today's lists may bring to your attention some solid companies that are well positioned to take advantage of the recovery.

Disclosure: no positions

Comments

[David Van K...:]

A lot of generalizations about dividend-paying companies fail to capture the view as seen by serious, long-term dividend investors. It happens every quarter when S&P puts out press releases concerning dividends, and there is some of that same distortion in this article.

The "distortion" I refer to is not that the facts are incorrect. It's that serious dividend investors can usually spot likely dividend freezes or decreases--so-called dividends in peril--well in advance and avoid those stocks. So the S&P's quarterly statistics on how many companies raised or lowered their dividends are a little misleading--no serious dividend investor invests in the whole index for its dividends. They select stocks surgically, one at a time, applying important critera including the company's history and culture of raising its dividends, plus whether its current financial situation seems strong enough to support increases going forward.

The little misleading item in this article is the comparison of the number of companies raising their dividends in Q2 versus Q1. The number went down. But the unstated back story is, what is each company's normal schedule for riasing its dividend? I follow a lot of dividend companies, and while I've never studied this particular issue, my impression is that many more raise their dividends early in the year than later. They do this every year. Each company has its own routine annual pattern. So without knowing that, just saying that fewer companies raised dividends in Q2 compared to Q1 does not tell you much. That's probably true every year.

Sep 04 10:38 AM