2010 was the year dividends came back in vogue and as public chatter gained momentum, many high quality, dividend paying equities enjoyed a nice run. Verizon (VZ) picked up around 16% for the year to complement its 5%+ yield. Utility stalwart Southern Company (SO) turned in over 14% plus yield not included. Even outliers like Cream of Wheat maker B&G Foods (BGS) climbed nearly 50%. Throw in the yield and you’re better than 57%. Numbers like that, naturally, generate talk of whether the whole dividend investing idea is done at least for the near term. Don’t count on it.
Two years ago when nervous Nellies were paying the government for the privilege of owning treasuries, investors who could make a fist started sniffing around underloved dividend stocks. The 10 year was paying a beggarly 2.1%. However, Orville Redenbacher’s dad, ConAgra (CAG) was yielding around 6%. While owning CAG shares carries more risk than the Treasury, 6% does a better job of paying the bills than 2.1%. Right?
A broader question may be do dividends really ever go out of style? No. General Electric (GE) and Procter and Gamble (PG) have paid them since the 1890’s. Back then, spats were all the rage in men’s accessories. And Bank of New York Mellon (BK) has shown the love since 1785. The Constitution was still a rough draft. In fact, stock dividends trace their roots back to 17th century Holland. With that kind of mileage, the dividend is hardly a fad. Spats? Not so much.
If you look around, you probably haven’t missed the run. AT&T (T) is still trading with a single digit trailing P/E and paying about 6%. Drug giants Lilly (LLY) and Bristol Myers (BMY) pay better than 5% and have very modest P/E’s. There’s still time to own good dividend payers. Talk may cool down. Fine. Some of the names you may want may come back as the fad chasing money goes elsewhere. Let ‘em chase something else.
Well … maybe we can win with this week's three lil’ piggies …
Say … CHEESE !!!!!!!
CPI Corp. (CPY)
Recent Price: 20.85
Current Yield: 4.79%
After our children were born, my wife signed what seemed like a 5 year contract with the photography studio headquartered on the second floor of our local Sears. The end result was a huge storage box full of babies with the big blocks, babies on the rocking horse, and the obligatory shirtless babies (boys) floating on a cloud. I may have found a way to get some of the money back. Headquartered in St. Louis, CPY manufactures and sells professional portrait photography of young children, individuals, and families through its different subsidiaries which include portrait studios operated under license in locations such as Sears (SHLD), Wal Mart (WMT), and Toys R Us (TOYS). Numbers are good. Revenues have defied recession and risen impressively. The 9 year average ROE is a remarkable 33.84%. The forward multiple is nearly as cheap as the trailing at a little more the 10 times projected earnings. We’re comfortable with the reasonable 32% payout ratio, too. Also … we’re purely talking here … but on the surface, CPY looks like an ideal private equity candidate. We have heard nothing. We know nothing. Just the impression we get. This name is pretty under followed. A true outlier. Might be worth a look before word gets out.
While the longer term numbers are compelling, the company has experienced a small hiccup lately. They posted a loss Q3 2010 due to a 10% decline in same store sales and a 1% drop in sales across the board. Not a great development with a company that small. Earnings were also affected by increased employee insurance and workers comp costs (the bane of businesses of all sizes). The bigger picture for CPY is cloudy as well. My experience was 10 years ago. People having tiny babies today have Shutterfly, Snapfish, and a bazillion other different web based apps to produce and archive photos of their offspring. Do you really need to go to the photo studio at the mall and plop down $75 or $100? Shares are also kinda thinly traded. A good day’s volume might be between 70 and 40 thousand. Easy to get hosed by the traders there.
Dollars from Doctors …
Medical Properties Trust, Inc. (MPW)
Recent Price: 10.70
Current Yield: 7.47%
MPW is specialized medical REIT that acquires and develops healthcare facilities such as inpatient rehab, long term acute care hospitals, regional and community hospitals as well as single discipline healthcare facilities (heart centers, orthopedic, etc.). MPW’s valuation is probably the most intriguing feature. Shares trade at a lower premium to NAV than its peer group. The company retired some debt last year and has no significant maturities until next year. Analysts also forecast a dividend increase for 2011. And although healthcare faces an uncertain, at best, regulatory future, no shortage of industry growth thanks to millions of aging baby boomers. You gotta put those sick people somewhere.
Despite the CRE value out there, MPW has been slow to acquire. Despite the available capital, it seems they’re keeping their powder dry. Can't grow the income if you don’t grow the portfolio. Analysts have lowered their 2011 FFO estimates after a lackluster Q3 2010. So, although there’s talk of a dividend increase, the proof isn’t yet in the pudding. Lastly, who knows what challenges face the healthcare industry going forward as the new Republican majority House of Representatives prepares to challenge President Obama’s healthcare reform mandate. Chances are probably slim that the law will be repealed wholesale so all parties, doctors, insurance companies, and even healthcare REITS, will continue to sit on their hands somewhat.
Messed up Munis …
Invesco Van Kampen Advantage Municipal Income Trust II (VKI)
Recent Price: 10.43
Current Yield: 8.5%
Meredith “Mrs. Bradshaw” Whitney continues to yap about the pending doom facing the municipal bond market and, no surprise, the muni market continues to get smacked about a bit. Whether Lil’ Miss Sunshine reprises her genius as she did with her 2007-2008 bank disaster call or not, good value opportunities are being created especially in the closed end municipal fund space. VKI appears to be one of the more discounted funds out there trading at a better than 19% discount to its 52 week high. Shares also trade at a 2% discount to NAV. Not bad. Glancing through VKI’s portfolio provides some encouragement as well. Holdings are predominantly A rated or better. Also most are revenue bonds. While we’re taught that G.O. (general obligation) bonds are the best to hold, knowing that a bond’s income stream is created by sensible revenue from a toll road or water/sewer fees.
While a lot of the muni fear may be overblown, the situation does bear watching. The general economy is slowly improving. But, state and local governments are still tightening their belts and dealing with scary looming deficits which does, indeed, give some credence to Whitney’s thesis. As with most older CEF’s, VKI uses leverage. How much? Almost 50%. That could be a big problem going into a rising interest rate environment which we are definitely heading toward. And while the income VKI throws off is federal income tax free, it may be subject to AMT. If you fall into that bucket, keep that in mind.
Disclosure: Long T, VZ, SO, CAG, LLY, PG, MPW and BMY in client accounts.