The Super and Stupor in Recent Dividend News

Includes: GIS, LLY, O, PFE, WPC
by: Low Sweat Investing

Through Wednesday of this week, The Wall Street Journal reported dividend news from several companies. Here’s a fast look at what seemed super and what caused stupor, at least for me.

Packaged food giant General Mills (NYSE:GIS), which reports earnings Thursday, announced a 4% dividend increase, the company’s second increase this year, bringing the yield to 2.9% and year-over-year dividend growth to 14%.

GIS had a spotty history of increases until 2004, when it began raising dividends in earnest, often more than once a year. What a difference. Reuters shows average 3-year and 5-year increases of about 9%, with revenue and earnings growth to support the dividend growth. Payout ratio: 41%.

And how about giving some extra points to GIS for saying the right thing? “Our company strongly believes in returning cash to shareholders through dividends, and increasing those dividends as our business grows.”

Super. Note, however, that GIS does have slightly more debt than equity and its recent cash flows were surprisingly uneven. But with a P/E of 16 and ROE at 25%, long-term dividend-growth investors could do a lot worse than considering a hearty helping of this low beta (.28) breakfast of champions.

Realty Income (NYSE:O), a retail REIT (that’s a scary two-word combination), also raised its dividend again, nudging the year-over-year increase to just under 1% and the yield to 6.5%. And O kept up its increases when less-than-super REITs were cutting and running.

O has been a core holding for dividend investors for years, and rightly so. It’s a high quality Dividend Achiever that increases dividends quarterly and pays monthly.

Even so, as with many REITs, you don’t have to look far to see the cracks. Compared to less than 1% this year, O’s annual dividend increase last year was about 3.6%, and it’s been double that in prior years.

The general problem, of course, is those two words ‘retail REIT.’ But more specifically, O’s 2009 cash flow from operations simply has not been covering its dividends.

Too soon to worry? Probably. But soon enough, O will need to start growing more than just its dividend, so keep a sharp eye.

For a perplexing puzzle of ‘super and stupor,’ try figuring out Dividend Achiever WP Carey, LLC (NYSE:WPC). It’s way over my pay-grade.

WPC has a variety of interests in real estate, real estate financing and investment funds. The company raised its regular distribution again this quarter, a move that upped it about 2% year-over-year and pushed the yield from regular quarterly distributions to 6.9%. WPC also added a special distribution that tacks on another 1%. The company is organized as a partnership, so K-1 filings and other IRS considerations come into play.

WPC has lots of cash on hand from investment sales. Cash from operations did not cover distributions in 2007, 2008 or so far in 2009, though I suspect that may be a reflection of what looks to me like a fairly complex business model.

To its credit, WPC seems to believe in dividend growth for the long haul, stating in the FAQs on its website its “philosophy to grow our distributions, however slight, in a prudent manner, so that we can continue to do so over the long run.”

An opportunity? I’m quite sure there are experienced high-yield investors out there who fully understand this stock and have made money on it over the years.

But I’m not one of them. Complete stupor.

This final dividend news is a twisted tale of two formerly super dividend divas, pharmaceutical legends Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY).

And maybe another reason people ‘just say no’ to drugs.

PFE sunk its Aristocrat status, four decades of increases, by halving its dividend roughly six months ago to help fund its acquisition of Wyeth. Now PFE is doing a flip-flop, not only raising the dividend nearly 13% but also announcing “we currently believe that we can support future annual dividend increases, barring significant unforeseen events.” Yield: 3.9%. Weirdness: 100%.

Meanwhile LLY, still hanging on as a Dividend Aristocrat and also with over four decades of annual increases, decided to go with the placebo next quarter by maintaining its dividend at the current level. Yield: 5.5%. Outlook: Cloudy.

There’s more to the twisted tale, of course. PFE cited expected integration benefits with Wyeth, while LLY is struggling with upcoming patent expirations that will result in about 40% of its current sales being hit by generic competition between 2011 and 2013.

So there’s plenty more homework for investors in assessing both these stocks, but to paraphrase an old saying, it’s difficult to predict what might happen, especially in the future.

That said, PFE has easily outperformed LLY over every trailing time period you can chart during the past two years, including since its dividend cut. And with these recent announcements, it’s not clear why that would change any time soon.

And that’s it for now, the latest dividend news that seemed super and caused stupor, at least for me. Several other companies also increased their dividends recently, with more to come. You’ll find good profiles on them in other Seeking Alpha articles, so look around.

Finally, for a Dividend Aristocrat that lives up to its very funny name, check out my Seeking Alpha article “With a Name Like Becton Dickinson . . .” (NYSE:BDX).

References and Links

Disclosure: Long BDX, O.