Can a Dividend Growth Stock be Misleading?

Includes: CBU, COST, DUF, GWW, XOM
by: H.W. Daniel

Can a dividend growth stock be misleading? I ask myself this question after stumbling across an article about numerous companies that recently raised their dividends. To name a few, consider the following:

Community Bank System (NYSE:CBU): 9.1% quarterly dividend increase (QDI) announced on April 26, 2010

Costco (NASDAQ:COST): 14% QDI announced on April 22, 2010

Duff & Phelps (NYSE:DUF): 20% QDI announced on April 29, 2010

Exxon (NYSE:XOM): 4.8% QDI announced on April 28, 2010

WW Grainger (NYSE:GWW): 17% QDI announced on April 28, 2010

When considering a one-year chart showing the performance of the listed companies, the main standout is Duff & Phelps, down roughly 45%. Looking at the performance of the companies from the end of April up till now, still Duff & Phelps is down by a near 35%. Buy, outperform, and hold opinions total one, two, and three, respectively, for the six analysts who cover the stock. I wonder why there are no underperform or sell opinions towards Duff & Phelps when its stock has clearly underperformed for the past six plus months.

On April 22, DUF announced that its President, Gerry Creagh will leave the company “to pursue other interests.” He left one week before the company announced the QDI. Is it possible that the QDI was an action from management to potentially offset the negative impact of Gerry leaving? Then a few weeks later, on June 15, DUF goes on to acquire Cole & Partners without disclosing the stipulations to the transaction.

On a separate note, why would DUF not raise debt for their capital structure, which has very little debt, while interest rates are so low? If they decide to issue debt, it is unlikely that it would be part of some takeover defense strategy considering the size of the company, but it would further optimize their capital structure as fixed payments on debt are tax deductible.

With DUF being right at its 52-week low, investors have a lot to assimilate going forward. DUF, to me, is sending mixed signals and I would therefore stay away from owning the stock. Ideally, if I was long a financial, I would take a short position in DUF to create some kind of hedge.

Disclosure: No positions