Seeking Alpha
Long-term horizon, dividend investing
Profile| Send Message|
( followers)  

It's that time of year again: Earnings season!

I was recently marking my calendar for upcoming earnings announcements and I happened to notice that the January 23rd to 27th week was particularly notable for long-term dividend growth companies. That is, companies that have multiple decade records of not only paying but also increasing their payouts each year. Noteworthy firms included McDonald's (NYSE:MCD), Johnson & Johnson (NYSE:JNJ) and Kimberly-Clark (NYSE:KMB) on January 24th, Colgate-Palmolive (NYSE:CL) and AT&T (NYSE:T) on January 26th and Procter & Gamble (NYSE:PG) and Chevron (NYSE:CVX) on January 27th.

Surely these are among the foundation holdings for any dividend growth investor. Thus in monitoring one's portfolio it seems logical that they would want to check in to see how their ownership stakes have been stacking up. But for the dividend growth investor, their concentration is likely much different than the short-term mindsets of say a trader or an analyst. In the short-term, price fluctuates are widely whimsical as one is making lengthy predictions based upon short term facts. For example, is Google (NASDAQ:GOOG) really worth 8% less than it was on Thursday just because it made more money, but not as much as expected? Perhaps in the short-term, but it seems rational that this trend won't hold for a fundamental business in the long-term.

In this way, I would suggest that long-term dividend growth investors who are watching the upcoming earnings announcements of their favorite companies would do well if one or two of them happened to miss consensus earnings. As long as the miss was due to a short-term concern and you see no lasting impact to the underlying prospects of the business, this would appear to be an opportunity to buy more income at a now lower short-term price.

Obviously, long-term earnings impairment is the exact opposite of what one would be cheering for, but it stands that short-term fluctuations can provide opportunities. Additionally, I would advocate that external events causing short-term price declines via systemic risk would be preferable to an earnings miss. However, if you liked PepsiCo (NYSE:PEP) at $66 with a 3.1% current yield, there's no reason not to like PEP more at $60 with a 3.4% after earnings, as long as your underlying long-term thesis remains the same.

The lasting implication here is that you should first consider what you want to own and why. Next you come to a price that you are comfortable with. ('Margin of Safety' for the Graham devotees out there) If the market offers you an acceptable price, you take it. If not, you keep on shopping. In the end, the wonderful business is what you're after as searching for the perfect price is impossible to pinpoint and often even more difficult to act upon. Perhaps an example by Peter Lynch will add some clarity:

"People spend all this time trying to figure out "What time of the year should I make an investment? When should I invest?" And it's such a waste of time. It's so futile. I did a great study, it's an amazing exercise. In the 30 years, 1965 to 1995, if you had invested a thousand dollars, you had incredible good luck, you invested at the low of the year, you picked the low day of the year, you put your thousand dollars in, your return would have been 11.7% compounded. Now some poor unlucky soul, the Jackie Gleason of the world, put in the high of the year. He or she picked the high of the year, put their thousand dollars in at the peak every single time, miserable record, 30 years in a row, picked the high of the year. Their return was 10.6%. That's the only difference between the high of the year and the low of the year. Some other person put in the first day of the year, their return was 11.0%. I mean the odds of that are very little, but people spend an unbelievable amount of mental energy trying to pick what the market's going to do, what time of the year to buy it. It's just not worth it."

Similarly, with the upcoming earnings announcements of so many quality long-term dividend growth companies, I was curious as to what types of returns one would have received if they had invested at the worst possible time. I took a look at seven of my favorite long-term dividend increasers with earnings announcements in the next week. I choose the stocks highest price in the 1995-2000 time range, included the payouts for the last decade and calculated an average yearly return for the last 10 years. The results are as follows:

Company

1995-2000 High

2001- 2011 Payouts

Today's Price

Avg. Yearly Return

McDonald's

$45.25

$13.05

$101.50

9.73%

Johnson & Johnson

$52.63

$15.77

$65.30

4.41%

Kimberly-Clark

$69.69

$22.39

$73.68

3.26%

Colgate-Palmolive

$63.84

$14.60

$88.94

4.95%

AT&T

$57.50

$15.39

$30.42

-2.25%

Procter & Gamble

$52.91

$15.11

$66.00

4.36%

Chevron

$49.88

$22.83

$106.60

10.01%

1 Share of Each

$391.70

$119.14

$532.44

5.22%

SPY

$153.25

$22.91

$131.24

0.06%

If one had bought the market at the worst possible time in 2000, the total return, including dividends, would have been effectively flat. On the other hand, if one happened to buy one share of each of the seven mentioned stocks, you would have enjoyed an excess total return of over 5%. It should be noted that the high was selected during a 5-year period as to make certain of both the highest short-term price and that the long-term impact was captured. There is assumption that the stocks were bought on the last trading day of 2000. While this certainly isn't the case, I wanted to make sure that I was not excluding a high share price by simply starting each security at the same point. Thus in the calculations, the average yearly return for price appreciation would be lower, as it is likely stretched over a greater amount of time, whilst the amount of payouts received would increase. In any event, the likelihood of picking the top is just as probable as someone finding the bottom. In this way, the math and time of the example likely work out approximately and thus are useful as an example.

What impressed me about this example was not that this particular collection of companies beat the market. After all, one might expect that exceptional companies would do better than a collection of 'average' companies over the long-term. The enlightening bit of it was that if you happened to buy at the worst possible time, in just 10 years you would not only see a growing wealth of payout return, but in six of the seven cases you would have seen a nifty price appreciation as well. This seems to make a solid case for buying and holding a wonderful business whenever you are able, and even more so when the price declines.

Moving forward I would pay attention to the upcoming earnings announcements of my favorite long-term dividend increasers. If I like their prospects for the next 10, 20 or 30 years, any short-term fluctuations could be an opportune time to own a wonderful business.

Here's a look at 7 dividend stalwarts announcing earnings this coming week:

January 24th:

  • McDonald's - Has increased dividends for 35 straight years. 2.8% current yield. 22.9% 5-year average dividend growth rate.

  • Johnson & Johnson - 49 years of increases, 3.5% yield, 8.7% 5-yr div growth rate.

  • Kimberly-Clark - 39 years of increases, 3.8% yield, 7.4% 5-yr div growth rate.

January 26th:

  • Colgate-Palmolive - 48 years of increases, 2.6% yield, 12.6% 5-yr div growth rate.

  • AT&T - 28 years of increases, 5.9% yield, 5.2% 5-yr div growth rate.

January 27th:

  • Procter & Gamble - 55 years of increases, 3.2% yield, 11.1% 5-yr div growth rate.

  • Chevron - 24 years of increases, 3% yield, 9% 5-yr div growth rate.

My plan of action for the upcoming announcements would be to 1) see what goes down, 2) determine if it is a short-term or long-term concern and 3) initiate or add to a wonderful company that I believe will continue to increase payouts whilst fundamentally rewarding shareholders. Happy Earnings Season!

Source: How To Find Opportunities Within Upcoming Earnings Announcements