If there has been one underlying theme to the current market rally it has been companies utilizing dividends and buybacks to supercharge their share price gains and energize their shareholder base. Home Depot (HD) utilized the strategy early on and has continued to add to their repurchase program to much fanfare and many other names have followed.
The programs are so successful because they return capital to shareholders, thus providing an attractive alternative to fixed income securities while also demonstrating the strength of the company paying the dividends. Also key to the success of these programs is that the blue chip companies utilizing share repurchase programs are not reissuing the shares to employees via stock options in equal amounts, something the technology companies are, and have been for years, guilty of.
Chart of the Day:
Regarding the general market and whether there will be any rally into the end of the year, well much of that depends upon the Federal Reserve and their taper decision. We have noticed however that the Nasdaq, home to numerous momentum sectors, has found support around 4,000 multiple times over the past week which has U.S. felling bullish.
Source: Yahoo Finance
We have economic news today and it is as follows:
- CPI (8:30 a.m. EST): Est: 0.1% Actual: 0.0%
- Core CPI (8:30 a.m. EST): Est: 0.1% Actual: 0.2%
- Current Acct Balance (8:30 a.m. EST): Est: -$101.0 B Actual: -$94.8 B
- NAHB Housing Mrkt Index (10:00 a.m. EST): Est: 55 Actual: 58
Asian markets finished mostly higher today:
- All Ordinaries -- up 0.27%
- Shanghai Composite -- down 0.45%
- Nikkei 225 -- up 0.83%
- NZSE 50 -- UNCH
- Seoul Composite -- up 0.23%
In Europe, markets are trading lower this morning:
- CAC 40 -- down 0.76%
- DAX -- down 0.19%
- FTSE 100 -- down 0.31%
- OSE -- up 0.13%
Buybacks and Dividends Leading the Way...
In the past 16 hours we have seen two Dow Jones Industrial components announce dividend increases by very large amounts and one of the two increasing their share buyback programs. The two, Boeing (BA) and 3M (MMM), are pushing the Dow higher this morning and attracting inflows to the industrial names.
Boeing has been base building once again, is the buyback and dividend increase going to be enough to create the momentum for the next leg higher?
Source: Yahoo Finance
Boeing was first last night after the bell to make an announcement and decided to increase their quarterly dividend by 50% while also increasing their share buyback program by $10 billion. What investors need to realize here is that Boeing is not engaging in financial engineering, but rather redeploying excess capital that is the result of operations being strong. If shareholders approve the proposed $10 billion program, it will start once the remaining $800 million on the current buyback program is used up.
This morning we got news that 3M was raising its dividend by 35% to $0.855/share from $0.635/share. The move was well received by investors in pre-market trading and has carried over into early morning trading. Investors are rotating back into the shares after just recently dumping them after not liking what the company had to say about moving forward. The dividend move has created a new value proposition and demonstrates management's belief that the company will continue to strength in their operations. We liked the idea of purchasing shares on the pullback, but with the spike today we think there might be better value elsewhere now.
After the recent sharp pullback, 3M investors needed some good news and the dividend increase was exactly that.
Source: Yahoo Finance
While we are on the topic of industrials and dividend raises, many have been focusing on General Electric (GE) and the fact that they also recently raised their dividend; albeit by a more modest, when compared to the previously discussed companies, 16%. While Boeing and 3M had large increases, we expect that General Electric will continue to grow their dividend steadily and at a more modest clip as the company restructures their business and winds down their consumer credit operations. Historically we have disliked General Electric as a business, mostly because of our belief that they engaged in phantom accounting and fully utilized the financial arm to essentially manufacture their earnings, something that Jack Welch has confirmed in certain interviews when he discussed finding pennies. With the renewed focus on industrial operations, specifically in the oilfields, we like the direction of the company. From our discussions with certain individuals in these various fields the company should see a steady rise in free cash flow as well as revenue growth as they have product lines which are industry leading. If readers are looking for a possible play with steady growth as well as a steadily growing dividend then General Electric appears like a solid name to look into.