Our review focuses on Amazon.com, Inc. (NASDAQ: AMZN), Bed Bath & Beyond, Inc. (NASDAQ: BBBY), Berkshire Hathaway Inc. (NYSE: BRK-A), Cincinnati Bell Inc. (NYSE: CBB), Dollar General Corporation (NYSE: DG), Dollar Tree, Inc. (NASDAQ: DLTR), eBay Inc. (NASDAQ: EBAY), Electronic Arts Inc. (NASDAQ: EA), EMC Corporation (NYSE: EMC), Express Scripts, Inc. (NASDAQ: ESRX), Flextronics International Ltd. (NASDAQ: FLEX), Google Inc. (NASDAQ: GOOG), Jack In The Box Inc. (NASDAQ: JACK), Symantec Corporation (NASDAQ: SYMC), Teradyne Inc. (NYSE: TER), United Continental Holdings, Inc. (NYSE: UAL), Urban Outfitters, Inc. (NASDAQ: URBN), Western Digital Corporation (NYSE: WDC), Yahoo! Inc. (NASDAQ: YHOO), and Zebra Technologies Corporation (NASDAQ: ZBRA).
You will see that not all of these are old technology giants meant solely as a chase of the fresh Dell Inc. (NASDAQ: DELL) dividend announcement. Our aim is to identify companies which can make payouts but which have been holding the cash for a rainy day for far too long. Some of the more obvious Dividend Sinners are the same as you have seen criticized before, but many of these are overlooked by the media and by investors alike.
Cisco Systems, Inc. (NASDAQ: CSCO) waited far too long to adopt a dividend policy and look what happened to its shares after inaction. Kohl’s Corporation (NYSE: KSS) was the last of the big department stores to have a payout. We have finally seen in the last year that Amgen Inc. (NASDAQ: AMGN), Apple Inc. (NASDAQ: AAPL), and NASDAQ OMX Group Inc. (NASDAQ: NDAQ) capitulated and finally decided to declare a dividend policy over the last year or so; and Dell Inc. (NASDAQ: DELL) finally jumped on board with a good dividend policy.
Of the 2011 Dividend Sinners there were only one-fifth (4 of 20) of the companies covered a year ago which have since decided to institute a dividend policy. We would like to propose that one-fourth or more begin a dividend policy as 2012 merges closer to 2013.
Here is our list of The 20 Dividend Sinners in 2012 and why…
Amazon.com, Inc. (NASDAQ: AMZN) is the king of online retailing. The market cap is also $97.5 billion and its low-margin model to buy future growth has the stock trading at a whopping 175-times expected earnings in 2012. This valuation premium puts Amazon in a different camp than many of the other companies in this dividend sinners list. With shares close to all-time highs and with shareholders loving Jeff Bezos, is there much reason to criticize the company right now? This company has expanded and expanded without paying a penny to shareholders along the way. A token dividend might allow new income investment funds to own this stock and it would not likely signal that the growth is over here as Amazon moves its industry wrecking ball from sector to sector in brick-and-mortar retail and wholesale.
Bed Bath & Beyond, Inc. (NYSE: BBBY) has been a massive retail growth story. The home products retailer has a forward price/earnings multiple of about 15.5 and its market cap is $16.5 billion. Bed Bath & Beyond has been public since the early 1990s and it has announced a stock split on 4 different occasions. The company grows and grows, it has nearly $2 billion in cash and liquidity, and it has no significant long-term debt. Thomson Reuters sees earnings at $4.62 EPS this year. This company could declare a special dividend and declare an ongoing dividend if it chose to do so. Since it has no leverage at all, we would even think that the company could issue debt with rates so low and go ahead and pay out much of that small debt offering on top of a special dividend.
Berkshire Hathaway Inc. (NYSE: BRK-A) has been given a pass forever and the star CEO of Warren Buffett still is greatly revered on Wall Street and on Main Street. But in a world of “What have you done for me lately?” it has to be brought up that the would-be replacement for Warren Buffett would eventually consider having to pay shareholders a dividend of some sort. Berkshire Hathaway is as an investment, under some argument cases, a half-bond and half-equity strategy. It has made many investors rich in the past, but it has stagnated with the broad markets over the last decade. Buffett has admitted that the book value growth and share performance does not have the same opportunities ahead as what was seen up until the last decade. He has also hinted that the firm could ultimately pay a dividend, but right now it has set the parameters for when it would buy back its stock. Perhaps a dividend yield of 2% isn’t asking too much considering its massive cash and its $200 billion or so in market value.
Cincinnati Bell Inc. (NYSE: CBB) is a bit of a Hail-Mary telecom strategy now. This company is one of the few telecom players left which does not pay a dividend. It actually used to pay a dividend, but that has not been the case for more than a decade. The market cap is only $675 million, it has low cash, and it carries over $2.5 billion in long-term debt on its books. It also carries a negative equity and a negative ‘net tangible assets’ level according to Yahoo! Finance. This stock has been dead money for so long that it has been mostly forgotten about and our take is that it remains a possible buyout target as part of the last bit of the telecom M&A consolidation wave. When you have AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) paying about 5% in dividends, why would investors want to park money in a low growth regional telecom that dates back to the 1800s and still cannot figure out a way to pay a dividend?
Two different dollar stores are in our Dividend Sinners list again. It turns out that both Dollar General Corporation (NYSE: DG) and Dollar Tree, Inc. (NASDAQ: DLTR) do not pay dividends yet. These companies are effectively “The next Wal-Mart” when you think of the secular trends toward dollar stores in the years ahead. Dollar General is still getting its shares sold by private equity owners. Dollar Tree has a pending two-for-one stock split but there is still no cash payout. These shares have grown and grown, they trade with a premium to most retail valuations now, Warren Buffett and team gave an endorsement of the sector earlier this year, and it may be difficult to get shares to keep performing higher and higher ahead. A dividend would likely do the trick to maintain interest by new shareholders.
eBay Inc. (NASDAQ: EBAY) has come back close to a multi-year high, yet the online auction monopoly feels stuck. It trades at just over 17-times earnings and its future expansion comes from PayPal, ancillary services, and international markets. The market cap is now about $53 billion and it has almost $9 billion in cash and liquidity against long-term debt of $1.5 billion. Are there new markets to go into that we are not yet privy to? Probably, but starting a dividend payment might force Amazon.com to start paying a dividend rather than buying up so many online retail outfits that will encroach on eBay’s “Sell It Now” territory.
Electronic Arts Inc. (NASDAQ: EA) has been dead money and the freemium game market has moved in front of traditional console and PC gaming outfits. The company has been trying to turn around but shares remain under $13 versus over $50 and $60 from before the recession. With a new wave of consoles expected to hit shelves in the next couple of years, a dividend would offer some nice signals here about how it views its future. The stock trades at under 12-times earnings, it has a market cap of $4 billion,and it has cash and short-term liquidity of over $1.8 billion. This video game outfit has gone through restructurings and layoffs, signaling that the only reason it is not a matured story is that it does not offer a dividend.
EMC Corporation (NYSE: EMC) is the king of storage, and it has control of VMware Inc. (NYSE: VMW). The market value is above $51 billion, it trades at 14-times this year’s expected earnings, and it has what is growing closer to $11 billion in total liquidity with a negligible long-term debt level if you discount its deferred long-term liability charges. The company has said that it reviews its dividend policy but has chosen to grow with acquisitions. EMC is largely immune to outside pressure from holders, but this company could literally be an activist investor’s dream to be able to force EMC to unlock that shareholder value if it was not structured in a manner which shields it from shareholder pressure. EMC could consider a one-time dividend as well as a regular dividend policy, unless it needs that much capital to go out and make another fairly large acquisition.
Express Scripts, Inc. (NASDAQ: ESRX) recently completed its Pac-Man merger with Medco Health Solutions and it has been public for nearly 20 years now. It has never paid a dividend but it has split six different times. This healthcare and cost containment via pharmacy benefit management provider trades at about 15-times expected earnings and its market cap is close to $43 billion. The company probably has a couple of years more that it can avoid paying a dividend while it works in this giant Medco merger, but for it to not start a dividend policy might make some shareholders wonder if the earnings power and leverage here are manageable endlessly without paying a dividend.
Flextronics International Ltd. (NASDAQ: FLEX) is not alone in the offshore electronics manufacturing service providers but its $4.3 billion market value places it among the largest players in this field. This company has been public for about two decades and it is basically the largest servicing the technology sector of its public peers. Valuations are low at about 6.5-times earnings. Of the larger non-dividend EMS players, a dividend policy might start to clear up some of the long-term volatility in this name and it might even eventually help the company exit a very long-term trading range of about $5.50 to $8.00 that has been in place for a couple of years.
Google Inc. (NASDAQ: GOOG) announced a fake dividend, effectively which was a 2-for-1 stock split via a new class of shares. The move of the split was to effect a seizure of control that would continue ahead for Google’s founders. The search giant has seen its stock stuck in a range despite its growth and it is fighting for the most popular destination on the web with Facebook, Inc. (NASDAQ: FB). The management under Larry Page and Sergey Brin is now without the adult supervision of Eric Schmidt and the company seems overly eager to make investments and acquisitions which are not necessarily core to the business model of generating profits from the internet. Google has a market value of $184 billion and it recently had close to $50 billion in liquidity without considering its Motorola acquisition. Google can easily pay a dividend, even of the one-time payouts, to its shareholders.
Jack In The Box Inc. (NASDAQ: JACK) may have had better commercials than its fast food peers before, but it does not pay a dividend like most of its peers. It trades at almost 18-times expected earnings, and it has a market capitalization of about only $1.1 billion on an expected nearly $2.2 billion in annual sales. The growth story here has ended for the most part, so the company needs to figure out that the McDonald’s Corporation (NYSE: MCD) effort of returning a significant portion of earnings to holders was one thing that helped shareholders. That being said, the balance sheet is more leveraged against its liquidity as of now and around $25.00 the stock is getting up to the peak of a multi-year high around $26.00 or so. It did have a 2-for-1 stock split in 2007 but its FAQ under the investor relations site notes, “We do not anticipate paying dividends in the foreseeable future.” Jack in the Box either needs to do something with its Qdoba Mexican Grill asset (over one-fifth of the total store count) or it needs to start returning capital to shareholders is it wants to get above the highs of its trading range.
Symantec Corporation (NASDAQ: SYMC) has been stuck in the mud for longer than anyone would care to remember after its acquisition of Veritas, leaving investors with an identity crisis over security versus storage despite it continuing to grow its sales. At $14.57, this stock is at the bottom of a long-term trading range of under $15 to about $20 per share. The company has over $3.1 billion in cash and liquidity against about $2 billion in long-term debt. Another boost is that it trades at under 9-times expected earnings with a market cap of about $10.5 billion. Symantec has already gone through share buybacks and its FAQ under the investor site still says, “Symantec has never declared cash dividends and presently intends to continue this policy.” It needs to end this policy and begin to aggressively start repaying shareholders with a dividend as the stock buybacks are just not working.
Teradyne Inc. (NYSE: TER) is a company which many investors do not know about but they should. It is in testing for semiconductors and for all sorts of electrical systems . This one has also been public since about 1970 and it has not paid out any dividends outside of share buybacks. Teradyne trades at less than 8-times this year’s expected earnings and its market capitalization is about $2.6 billion. Outside of the recession, this $14.00 stock has spent much of the last decade between $10 and $20 per share. Teradyne also has more than $750 million in liquidity on-hand and trades at only about 1.5-times book value. A real dividend policy would likely do its shareholders some good here. Unfortunately, one limitation may be that much of its capital may be housed outside of the U.S. and would be taxed too high if brought back in.
United Continental Holdings, Inc. (NYSE: UAL) is now the biggest airline by revenues and by market cap ($7.3 billion) now that United and Continental have merged into an airline giant. The airline segment only has Southwest Airlines Co. (NYSE: LUV) offering a small 0.4% dividend yield and the rest of the legacy carriers are hoarding cash as AMR is bankrupt. Still, UAL has over $7 billion in cash and liquidity even if its total liabilities are many times that for the cost of financing a jet fleet. UAL is now moving closer to the $40 billion in revenue mark and it trades at less than 5-times its expected earnings. Warren Buffett always said “Remind me to never buy an airline” but perhaps he might consider one if it lived by a strong dividend policy. Valuing an airline now is no easy task and a dividend policy might unify the analysts even more than the three upgrades we recently saw at once in the sector.
Urban Outfitters, Inc. (NASDAQ: URBN) was in the first half of the last decade what Gap Inc. (NYSE: GPS) was in the 1990s. Its stock has since become stuck in a range while the retail apparel sector has consolidated under private equity mergers. It trades at about 19-times expected earnings and its value is about $4 billion in market cap. It also has a fairly high cash and liquidity balance of about $360 million and no real long-term debt other than leases and deferred liability charges. With estimates of $1.46 EPS this year, returning 20% of non-GAAP earnings to its holders would generate a dividend yield north of 1% and it has room to grow its payout ahead without wasting growth opportunities for expansion ahead.
Western Digital Corporation (NASDAQ: WDC) does not pay a dividend like its hard-disk rival Seagate Technology PLC (NASDAQ: STX). Both companies recently completed large drive mergers and that may cap the ability to make large payouts. Western Digital announced just in May an additional $1.5 billion that was to be allocated toward share buybacks to work down its 260 million share count and the FAQ area of its site confirms “WD does not currently pay dividends.” We doubt that this will jump suddenly into being a large dividend payer, but it does stand out with nearly an $8 billion market value and it trades at only about 4-times expected earnings. If the company wants to minimize some fears about the threat of flash-drives then it should signal this by committing to a strong dividend policy.
Yahoo! Inc. (NASDAQ: YHOO) is the internet turnaround which cannot turn around. We consider it leaderless at the moment, it was firing yet another round of workers, and it trades at half of it could have been bought out for had Jerry Yang not been allowed to bring that cat-box toys out to the playground. The former internet king has perhaps a few billion that can be unlocked in international assets if handled properly and the company can ‘pledge’ the bulk of those assets to shareholder payouts. The market capitalization is still close to $19 billion with over $7 billion in liquidity (short-term and long-term) versus no real long-term debt. Yahoo! trades at just over 2-times tangible book value and perhaps it should make a more formal promise at planning shareholder payouts while it fights the likes of Google Inc. (NASDAQ: GOOG), Facebook, Inc. (NASDAQ: FB), and every other search and content play that lives on the web.
Zebra Technologies Corporation (NASDAQ: ZBRA) has been dead money despite its stance as winning in barcodes and RFID systems for retail and many other inventory management solutions. The company serves healthcare, manufacturing, retail, automotive, and many other sectors and it has been public since the early 1990s. Why Zebra Tech was never acquired by private equity during the land grab is a mystery, but shares have been stuck. The market cap is only $1.7 billion and it has about $350 million in liquidity with no real long-term debt to speak of. The company could easily adopt a 2% dividend yield without upsetting its growth nor without altering cash flows in a way that would pressure its balance sheet. Zebra’s stripes are showing an old-tech company that needs a new-world dividend.
So, now you have a great list of Dividend Sinners for 2012. Don’t expect all of these companies to just capitulate and start paying a dividend just because they should. Maybe one-fourth of them will capitulate. Activist shareholders could be far more aggressive in a few of these companies which have less board of director control than others. Regardless of the situation individually, many of these companies should understand that many fund managers, pension managers, and other new investors just will not look at investing companies as legitimate investments until companies pay a dividend.
JON C. OGG