Bank on Yield - Cramer's Mad Money (10/17/08)

by: Joan Wickham

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Friday, October 17.

It’s All About the Dividends - Merck (NYSE:MRK), Eli Lily (NYSE:LLY), Pfizer (NYSE:PFE)

After another day of market nausea, Jim Cramer told viewers there's only one thing that can protect their capital: dividends. He told viewers to look for companies with recession-proof businesses that have a good dividend, and a long history of raising that dividend. Cramer used drug maker Merck as one shining example for his thesis. Merck currently yields 5.3% with its dividend, and while that's lower than the dividends of Eli Lily, 5.8%, and Pfizer, 7.6%, Cramer said Merck is in the best cash position among the three, with a history of boosting its dividend, even during the bad times. Admittedly, 2008 has not been a good year for Merck. There have been many questions swirling around the company's cholesterol drugs Vytorin and Zetia, its HPV and cervical cancer drug Guardasil has seen softer sales due to safety concerns, and it has tussled with the FDA over product labeling. But Cramer said that even at a stripped down valuation, Merck is worth at least $29.90 a share, which is higher than its current value. According to Cramer, Merck has the ability to grow and boost its dividend, even in a weakening economy. The company, which trades at the same level as it did last year, is about halfway through a cost-cutting plan aimed at stripping between $4.5 billion and $5.0 billion from its budget and has higher cash flows than last year. Cramer said Merck's dividend pays investors to wait for the company's valuation to match its stock price. He recommended scaling into a position slowly around Merck's upcoming earnings announcement, and ahead of its analysts conference in December. He said Merck's a buy any time its yield hits 5.5% or higher.

What Recession? - United Technologies (NYSE:UTX)

United Technologies chairman George David discussed his company's stellar quarterly results despite very tough market conditions. David said that his company beat estimates by 2 cents a share and raised its yearly earnings guidance. He cited “relentless disciplines” and excellence in engineering as two factors that have allowed the company to remain a low cost producer. As for the financial crisis on Wall Street, David two markets: financials and everything else. He said that at United Technologies hasn't seen much evidence of a recession and up until now has not had any issues gaining access to commercial paper markets. Even internationally, David said the company has seen strength in orders, with elevator sales in China, for example, up 30% year over year. Cramer called his company as an example of what can go right in the market, and stood behind David, who's propelled the stock up 996% during his tenure.

Banking on the Yield - Watsco (NYSE:WSO)

Cramer recommended heating and air conditioning maker Watsco as another high dividend yielding stock that should do well during the looming recession. He called the company a perfect way to play the coming bottom in the housing market. Watsco currently yields 3.8%, and since it's levered to housing, Cramer said now is the time to invest. The company recently reported earnings that missed estimates by 7 cents a share, but he said that quarter could have been a lot worse. In fact, the company attributed the $25 million shortfall in revenues to a mild fall season and disruptions due to hurricanes, not to any economic concerns. Cramer noted that Watsco's margins have improved in the last quarter, and its cost-cutting efforts have shaved $25 million from the company's bottom line. With another $8 million to $12 million of cost savings expected in the coming quarters, Cramer said the company deserved the two analyst upgrades it received today. Cramer again recommended buying the stock on a scale, based on its dividend yield. Watsco shouldn’t have any trouble maintaining the dividend – it gets 80% of revenue from replacement parts so it doesn’t need new-housing starts to stay afloat, and there’s $3 a share in cash in the stock, more than enough to meet the $1.80 per share the company pays out. There’s even a good chance Watsco could up its payout, Cramer said. Just three quarters ago, the dividend was increased 12.5%. If the company did that again, the yield would jump to 5.3%. At $36 a share, Watsco will yield 5%, a good entry point, as will $32 a share, when the company will yield 5.5%. "Wait until then to pull the trigger," said Cramer.

An Obama Play - Allscripts Healthcare (NASDAQ:MDRX)

Cramer talked with Glen Tullman, Allscripts Healthcare chairman and CEO, to learn more about that stock's recent big decline. Back on August 25, Cramer talked with Tullman about an upcoming dividend payout that could hurt the stock. Sure enough, there’s been a precipitous drop over the past couple of weeks for just that reason. Tullman explained that the decline was not due to poor earnings, but rather a $5 special dividend that was paid out to all shareholders. He called the dividend a great move for shareholders and the company. Tullman said Allscripts is performing well, with one third of all physicians now using the company's products and services. He said the company has what it needs to grow and is investing over $70 million in research and development. In the meantime, Tullman said Allscripts has the products that its customers need today and is selling them in record numbers. Cramer again recommended Allscripts as a great healthcare cost reduction story. He called it “a pure Barack Obama play” because the company fits into the Democrat’s plans to cut healthcare costs.

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