Dividend Tree's  Instablog

During these economic challenging times, one of the key aspect that helps us understand the financial strength of the company (and stocks) is its ability to pay growing dividends. It is also critical to make sure we understand whether companies can sustain their dividends. Following are eight companies that recently announced their quarterly results.

McDonalds Corporation (MCD): The 2Q09 earning per share was $0.98 (vs. $0.87 in 1Q09).

• The key highlight was reduced overall profits on y-o-y basis (vs. $1.04 in 1Q08) due to fluctuations of exchange rates.
• Quarterly dividend of $0.50/share is well covered with earnings. The quarterly payout ratio is 51%.

 3M Company (MMM): The 2Q09 earning per share was $1.12 (vs. $0.74 in 1Q09).

• The key highlights were increased EPS, reduced overall income, and reduced revenue.
• Increased EPS seems to be due to controlled operating expenses.
• In near term, it seems that quarterly dividend of $0.51/share is well covered with earnings. The quarterly payout ratio is 45%.

 Procter & Gamble Company (PG): The 4Q09 earning per share was $0.80 (vs. $0.84 in 3Q09).

• The key highlight was reduced earnings on q-o-q and y-o-y basis (vs. $0.92 in 4Q08) and reduced revenue.
• For year 2009, EPS increased by 17% to $3.64 (from $4.26). This increase is due to sale of Folger’s business unit.
• Yearly dividend of $1.76/share is well covered with earnings. Payout ratio is at 41%.

Clorox Corporation (CLX): The 4Q09 earning per share was $1.20 (vs. $1.08 in 3Q09).

• The highlight was 8% increase in EPS (vs. $1.13 in 4Q08) on y-o-y basis.
• For year 2009, EPS increased 16% to $3.81 (from $3.24)
• Increased EPS came from combination of increased revenue and cost control.
• Annual dividend of $2.00/share is well covered with earnings. Payout ratio is 52%.

 The Chubb Corporation (CB): The year 2Q09 earnings per share was $1.54 (vs. $0.95 in 1Q09).

• This is increase in earnings on y-o-y (vs. $1.27 in 2Q08)
• The highlights were increase in operating income (6%) and reduced revenue from premium collections.
• Quarterly dividend of $0.35/share is well covered with earnings. The annual payout ratio is 23%.

 PepsiCo (PEP): The year 2Q09 earnings per share was $1.02 (vs. $1.05 in 1Q09).

• The key highlights were reduced y-o-y EPS (vs. $1.05 in 2Q08).
• Y-o-Y revenue reduced by 3%. The reduction in EPS was due reduced sales of Pepsi’s beverage products.
• Quarterly dividend of $0.45/share is very well covered. Quarterly payout ratio is 44%.

 AT&T Inc. (T): The 2Q09 earning per share was $0.54 (vs. $0.53 in 1Q09).

• The key highlights were reduced overall profits on y-o-y basis (vs. 0.63 in 1Q08) and reduced revenue.
• Quarterly dividend of $0.41/share is barely covered with these earnings. This quarter’s payout ratio is close to 76%.
• The last few quarters shows that payout ratios have increasing trends. Is this a warning sign?

 United Parcel Service Inc. (UPS): The 2Q09 earning per share was $0.44 (vs. $0.40 in 1Q09).

• The key highlights were reduced overall profits on y-o-y basis (vs. 0.85 in 1Q08) and reduced revenue.
• Quarterly dividend of $0.45/share is not covered with these earnings. The quarterly payout ratio is more than 100%.
• The quarterly payout ratios have been above 100% for two quarter in a row now.
• Expect dividend cuts for UPS.

 Based on these results, we can observe that earnings from MCD, MMM, PG, CLX, CB, and PEP cover the dividends paid to the shareholders. These can be sustained. However, T and UPS are at the point where dividends are either close to earnings or already exceed the earnings. As the payout ratio start increasing beyond 70% it is perhaps a warning sign that dividends will be under strain unless earnings improve.

 
Full Disclosure: Long on PG, MCD, and PEP.