4 Companies With Second-Rate DRIPs

Includes: ARCH, BA, CL, KMB
by: Investment Underground

By Robert Gordon

I have utilized Dividend Reinvestment Plans, or DRIPs, though my entire investing life. Of course, not all companies offer them, but among those that do, all DRIPs are not equal.

I'm going to discuss companies I believe are good investment choices, but offer second rate, or worse, DRIP plans. When purchasing a stock for DRIP purposes, I want a quality company that offers its DRIP at little or no cost to me. I also want a history of dividend increases that are likely to continue, and a yield currently above the average for the Fortune 500.

Kimberly-Clark (NYSE:KMB) is a paper goods and healthcare company which manufacturers and sells such ubiquitous brands as Kleenex, Huggies, Scott and Viva. In 2011, stated earnings were $3.99, but excluding special factors, 2011 earnings came to $4.80 per share. Management expects 2012 earnings from continuing operations of $5.00 to $5.15, and analysts generally agree with a mean prediction of $5.10 per share in 2012.

Kimberly-Clark has raised its dividend every year for 40 years in a row. Earlier in 2012 management raised the quarterly dividend from $0.70 per share to $0.74 per share, an effective annual yield of 4.1%. The company also has an ongoing share buyback plan, which will further support the stock in 2012 and beyond.

Kimberly-Clark has premier brands, a tremendous record of dividend growth, a generous payout, and plenty of room for future dividend increases. So, why isn't it a perfect stock for DRIP investors? How about a $10 start-up fee, a $5 fee for optional cash purchases, a $2.50 charge for an automatic recurring investment, and a typical $15 fee upon selling shares. I want and expect companies to offer set up and maintenance of their DRIP to be no cost. Kimberly-Clark charges almost every way it can. But at least it will reinvest dividend payments with no fee. Thanks, but no thanks.

Colgate Palmolive's (NYSE:CL) 206 year history has developed it into a global company manufacturing and marketing everything from its namesake products to Hills animal products, Irish Spring and dozens of other brands. Its earnings have been quite healthy, coming in at an even $5.00 per share in 2011. Analysts anticipate growth to $5.39 per share in 2012, and $5.90 per share in 2013. Healthy business? Check.

Colgate has raised its dividend 48 years in a row, and the annual amount now stands at $0.58 per quarter, for an annual yield of 2.5%. Another dividend hike is likely with Colgate's next quarterly report this spring. Quality dividend history? Check. Room for dividend growth? Check. So, how about the company's DRIP?

Colgate boasts the worst DRIP I have ever seen. It charges for everything, even for reinvesting dividends. Specifically, it charges a $10 set up fee, a $1 fee for automated, recurring investments, a $2,50 charge for optional share purchases, and its aforementioned fee for dividend reinvestments is 5% of the amount, or $1,25, whichever is less. These amounts may seem nominal, but to me, it also seems a crummy way to treat business owners. I will not invest money in a company that treats shareholders like this, and urge you to share in my indignation.

Arch Coal (NYSE:ACI) is a major domestic coal mining concern specializing in low sulfur and metallurgical coal, the latter used not for energy but rather for industrial applications such as steel making. Arch is not my favorite coal company overall, but its story right now is compelling. Under the weight of a more energy conscious domestic economy, coal sales have declined, and prices have fallen. The U.S. Energy Administration forecasts domestic coal production will fall about 50 million tons in 2012 from the already depressed 2011 level, as miners and producers respond to slackening coal demand.

As luck would have it, Arch expanded significantly in 2011 with its $3.4 billion purchase of International Coal. The purchase was paid with cash raised from debt and stock issuance. So now is not the best of times for Arch. But come on, under $12 per share? Arch is trading at its 52 week low, and its stock has fallen by about 70% since April, 2011. If there were ever a case of a company being oversold, Arch is it. Analysts see a whopping 80% of upside, to over $20 per share, for Arch in the next 12 months, and its five-year estimated PEG is a paltry 0.46, another sign of an oversold state.

Arch has raised its dividend seven times in the last eight years, and its current yield is 3.6%. I see Arch as a great opportunity for a risk tolerant investor, but make your investment outside of the company's DRIP. It charges $2.50 for automatic investments, and the same for optional cash purchases, and the same even to participate by reinvesting dividends. For smaller investors, those fees would wipe out the value of the dividend. Arch can, and should, do better.

Dow Industrial component Boeing (NYSE:BA) is a world leader in the design and manufacture of advanced civilian and military aircraft, along with weapons systems. Having resolved its well publicized labor strife, Boeing had an excellent 2011, and the future looks even brighter. Taking out the effects of a one time event (most all of which had positive impacts on earnings), operating earnings in 2011 of $4.81 per share represented a 7% increase from 2010's $4.45 per share. Operating margins gained momentum through all of 2011, ending 150 basis points higher in the fourth quarter of 2011 than in the fourth quarter of 2010, at 9.2%. The company's future is secure too, with a nearly $300 billion dollar backlog of civilian aircraft.

Boeing raised its dividend last year to a quarterly $0.44 per share, for a yield of 2.4%. Its five year, estimated PEG is 1.23, indicative of a fair current valuation of the company. Its market leadership, its reputation, and the fact that development costs should be coming down with the bulk of Dreamliner research costs behind it, all bode well for Boeing's future, and I consider the company a potential core, long term holding. So, what is the "nickel and dime" stuff with its DRIP? One can only participate in the plan if one first owns at least 50 shares of Boeing stock, a not insignificant barrier to small investors. After that, it changes $1 each for automatic investing, optional share purchases, and even for reinvesting dividends.

Boeing is a tremendous company. But its DRIP seems more than a bit amateurish. I would avoid the DRIP, though not the company itself.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.