2009 was the year that dividends were cut or went on hold. 2010 is becoming the greatest year of increases and initiations of dividends that the markets have ever seen. There are dividend hikes galore, dividend initiations, and there are a few companies which are still trying to act as dividend holdouts.
24/7 Wall Street has picked the biggest dividend stories of 2010 that will be with shareholders well beyond this year. Although some of these dividend changes may not be the biggest in payouts this year, for 2010 these are the biggest dividend stories by our count.
The biggest dividend stories of 2010 revolve around General Electric Co. (NYSE: GE), Starbucks Corporation (NASDAQ: SBUX), UnitedHealth Group (NYSE: UNH), Microsoft Corporation (NASDAQ: MSFT), Intel Corporation (NASDAQ: INTC), J.P. Morgan Chase & Co. (NYSE: JPM), Verizon Communications Inc. (NYSE: VZ), and AT&T Inc. (NYSE: T), Wal-Mart Stores, Inc. (NYSE: WMT), Weyerhaeuser Company (NYSE: WY), BP plc (NYSE: BP), Cisco Systems, Inc. (NASDAQ: CSCO) and Apple Inc. (NASDAQ: AAPL).
We have broken each grouping out individually and covered the situation in detail.
THREE HIKES & THEN SOME
General Electric Co. (NYSE: GE) is one of the greatest dividend stories of 2010. After the Great Recession went into full speed and when companies and the country was on the verge of collapse, GE joined in with large dividend cuts. The rate went from $0.31 per quarter to $0.10 per quarter. Even today, that old dividend rate is not possible.
But GE has finally started its dividend hiking process. The $0.10 dividend is soon to go to $0.12 per quarter. At $16.00, this generates a dividend yield of 3%, and that rate was 3.1% on July 23, 2010, the date the hike was announced. GE is also immediately restarting its share buyback plan this quarter, but that unfortunately uses competing dollars for dividend checks versus keeping the share float lower. While 3M Co. (NYSE: MMM) has raised and raised its payout, GE is now back above 3M as far as dividend yields at 3.0% versus 2.45%. This also puts GE back in the top-half of the 30 companies in the DJIA as far as a dividend yield is concerned. Our original projection was that the dividend would jump up by about 40% rather than by 20%. The good news is that while some may have taken the 20% hike as a disappointment, GE’s share price action has not shown that the disappointed crowd had more power than the crowd which was pleased with the hike.
Here is our next prediction… As long as there is no true double-dip recession, GE will take that hike up to the $0.14 or $0.15 per quarter in 2011.
Starbucks Corporation (NASDAQ: SBUX) may have fully achieved its turnaround and its shares may have run into some fresh headwinds based upon value and growth. Regardless of that, the Starbucks dividend story became the biggest dividend story for the entire food and beverage sector in 2010. For years during its growth it never paid a dividend. April was its first dividend ever paid at $0.10 per quarter, which was roughly 1.6% at the time the dividend was paid. But at the most recent earnings in July, Starbucks raised its quarterly payout again. This is almost unheard of for a company to start a dividend and then immediately hike the payout. That 30% hike in the dividend payout comes to $0.13 per quarter, and that generates a yield of almost 2.1%. In the food and beverage sector, in just two quarters Starbucks went from no dividend to one of the highest against peers.
UnitedHealth Group (NYSE: UNH) was one of the biggest surprises in the dividend hike trends of 2010. This is the largest public stock health insurance provider in the country. There is also that thing nagging on its Achilles heel called Healthcare Reform. You’ve probably heard of it about 16,000 times. The big goal, which some may say is to just kill the companies with cost constraints on the revenue-side and unlimited costs on the expense-side, is for Uncle Sam to effectively turn the surviving health insurance providers into large regulated utilities.
The company now expects to pay out 12% to 13% of its projected cash flow from operations and the $0.03 per year payout was hiked up to a quarterly payout of $0.125. That is $0.50 per year, and that comes to a payout of about 1.65%. This was a jump of about seventeen-fold at the time of the dividend announcement in May.
The 1.65% yield might not sound like much on the surface against other business sectors, but this is THE dividend story of the healthcare sector when you consider that Washington D.C. has the health insurance sector under fire from all angles over all aspects of the business.
THE TECH DIVIDEND DUEL
In technology, a broad sector of course, we have noted that Microsoft Corporation (NASDAQ: MSFT) has perhaps the safest of all dividends in the sector. There is still a shot that Microsoft will choose to make a rather large one-time dividend payment again before the end of the year to capture the tax efficiency.
But the biggest technology dividend on size and scale belongs to Intel Corporation (NASDAQ: INTC). It was in mid-November of 2009 that the hike was announced, but it was not paid until the first quarter of 2010. You have to consider where Intel was in the cycle at the peak of the panic in the recession. Intel was actually warning that a quarterly loss could be a possibility. (That hasn’t happened in years.)
The hike was from $0.14 per quarter, a dividend payout that had been in place for about two years, up to $0.158 per quarter. The new rate is just over 2.90% based on a $21.50 current share price. The $0.632 payout of today compares to Thomson Reuters estimates of $2.06 EPS in 2010 and $2.13 EPS in 2011, generating implied dividend coverage ratios of more than 3.0. It may be unfair to ask for or demand that even higher payouts come sooner rather than later.
Microsoft has an even wider dividend coverage ratio, closer to 5.0 based on expected 2011 (June) annual estimates. Intel is the current dividend story of 2010 for technology, but the technology dividend story of 2010 could end up being Microsoft.
THE “I WANNA BUT THEY WON’T LET ME…” BANK DIVIDEND HIKE
Jamie Dimon is probably the best bank CEO on Wall Street and Main Street, and he is probably the only bank CEO that has a chance of standing up to politicians who can say they bailed out the banks and the economy. Dimon confidently boasts that J.P. Morgan Chase & Co. (NYSE: JPM) was forced to participate in the bailouts and that his bank was one of the ones that would have survived had the government just let the cards fall where they may. Whether you believe it is another matter.
Dimon wants to raise that dividend back up to a higher rate on the common stock. The current rate is only $0.05 per quarter, which generates a tiny 0.50% yield based on a $40.00 share handle. Under no circumstances will Dimon be able to get back up to the old $0.38 per quarter. At $40.00, that rate would be nearly 3.8% for a dividend in today’s terms. President Obama and Congress would raise hell until the end of their days if Dimon took the payout back up there, although Thomson Reuters has earnings estimates at $3.59 EPS for 2010 and $4.61 EPS for 2011. That would be a dividend coverage ratio of more than 2.0 this year and 3.0 next year.
Under “The New Normal” that is not likely. Still, Dimon will probably be the first or among the very first of bankers who challenges Washington D.C. Whether that can happen in 2010 under Fin-Reg is still up for debate, but Dimon is the only banker that has expressed that the bank could immediately begin dividend hikes.
THE NEVER-ENDING TELECOM DIVIDEND WAR
Verizon Communications Inc. (NYSE: VZ) (NASDAQ: VZ) and AT&T Inc. (NYSE: T) have been at war on who has the highest dividend yield payout. The key difference is that Verizon recently gave out shares of Frontier Communications Corporation (NYSE: FTR) based on the merger so that Verizon holders held the majority of the company. The big issue ahead is whether Verizon gets that iPhone and breaks the AT&T exclusivity. There is also the Verizon Wireless partnership with Vodafone plc (NYSE: VOD), which the company is expected to begin receiving dividends for. If that pans out and if Verizon gets the iPhone, then the dividend investor interest is likely to head over to Verizon regardless of where AT&T’s yield compares.
We ran a comparison late last year after they had both hiked their dividends to see if each could keep raising dividends indefinitely. At the time we did the analysis, Thomson Reuters had AT&T’s 2010 earnings targets at $2.24 EPS versus $2.34 EPS expected now. At the same time we did the Verizon projections, the estimate from Thomson Reuters was $2.50 EPS for 2010 versus $2.21 EPS today. The Verizon yield based upon today’s prices is 6.70% versus 6.50% for AT&T. Both companies have announced dividend payout hikes almost each year. If one of the two hikes its payout in the coming weeks, the other is certain to follow. AT&T currently pays $1.68 per year in dividends awith $2.34 EPS estimates for this year and Verizon currently pays out $1.90 versus $2.21 EPS estimates for this year. That implies that AT&T pays out close to 72% of its earnings as dividends versus about 85% of income paid as dividends by Verizon. The difference in Verizon is that the recent earnings adjustments are based partly on the Frontier deal, and that has skewed matters. If you look at the old estimates of a year ago before Verizon did this then that payout would be implied as being 76% of income. AT&T could boost its payout and Verizon could claim it already did boost its payout via Frontier even if it does not make a formal dividend hike.
These are the two highest dividend yields of the thirty DJIA components by a wide margin, which makes the Verizon-AT&T dividend story one of the top dividend stories whether we like it or not.
THE BIG RETAIL DIVIDEND THAT MAY BE… MAYBE
Wal-Mart Stores, Inc. (NYSE: WMT) is hard to count just as being a retailer. It is arguably a consumer staple even though it is a retailer by its industry codes. The issue to consider here for dividend investors is that Wal-Mart has effectively raised its dividend every single year for years and years. The current yield of about 2.4% is not very high in the DJIA component rankings and the stock has definitely been dead money for a decade. The current payout is just over $1.21 per year and that compares to Thomson Reuters estimates for the next two fiscal years of $4.00 EPS and $4.39 EPS. Wal-Mart has chosen to spend its cash on billions worth of share buybacks rather than by making an incredible dividend yield for its holders. If Wal-Mart would stop buying back the float (like someone is going to acquire the $190 billion company), it could adopt the same sort of dividend payout ratio that seems to be a current standard of about 40% of income. That would allow the 2011 dividend announcement to jump up all the way to $1.60, and that would result in a current yield of 3.1%.
Arguably, Wal-Mart could pay out closer to half of its income and offer a $2.00 annualized dividend, which would bring the yield based upon today’s share price for a yield of almost 4.0%. Does Wal-Mart need to consider any acquisitions? It would not be allowed to do so by regulators. The only expansion that Wal-Mart has for major growth vehicles ahead is internationally. The company might not be Machiavellian enough to realize this, but a huge dividend hike would also put pressure on all of its major peers to pay out more in dividends and therefor handcuff its peers’ cash balances. Wal-Mart is now fluctuating between #4 and #5 on our own Real-Time 500 on companies ranked by market cap. There is just very little buzz left to do. The company probably does not want to hear a call to create a REIT around its gas stations and it probably wants to hear for calls to spin Sam’s off to holders even less. Until Wal-Mart does something drastic, this is going to be a range-bound stock indefinitely. The easy solution would be to stop buying back stock and put pressure on its entire peer group by making its dividend yield significantly more.
A LONG-TIME FORESTRY-PAPER REIT CALL FINALLY COMES TRUE
It was just on July 12, 2010 that Weyerhaeuser Company (NYSE: WY) took the dividend scene over by storm. It was also close to a decade overdue. The company declared a special dividend of $5.6 billion as it plans to convert to a real estate investment trust. Forestry, wood, and paper conglomerates have started adopting the REIT trends in order to keep investors around and to attract new investors. To qualify as a REIT, a company must invest at least 75% of total assets in real estate, deriving at least 75% of gross income as rents from real property or interest from mortgages on real property, and most important for you dividend investors, it must distribute at least 90% of taxable income to shareholders in the form of dividends. Weyerhaeuser holders could elect stock or cash for the special dividend, with the total cash payment limited to 10% and capped at $560 million total. The remaining was in stock. The ex-date was a $26.42 price adjustment on July 20. To show just how well this went: on the July 12 announcement the shares rose over 8% to an adjusted price of $14.32; after the event shares were at $15.94; shares were at $16.65 at the time this was written.
Once upon a time, we called Weyehaeuser’s ownership and/or control of enough timber land to be the unofficial 51st state in America. The current environment, and an environment which may last for years, does not exactly scream a sudden boom coming back in paper demand and in wood demand for building houses. This was long overdue, but it has been very well received.
THE GREATEST DIVIDEND CUT OF THE YEAR, MAYBE A CHANGE
BP Plc (NYSE: BP) is one of the greatest dividend stories of 2010, but in a really bad sense. The company capitulated to politicians and decided it needed all its cash as well.
The old $0.84 per share payout would have been a 10% dividend yield IF it had been kept and if you bought during the month that ADRs were trading at $34 and lower. Those are of course big IFs. When BP can begin to pay a dividend is up in the air. It has committed to a $20 billion clean-up fund. It has endless costs. Now the company is under a new CEO, or will be this year. The company has also committed to $30 billion in asset sales and to cleaning up its act. That old $0.84 dividend per quarter per ADR is not likely to be seen for quite some time. Bob Dudley might not want to start a fight with politicians from the day he takes over, but it could become fathomable that IF the BP plug stays capped, then Dudley could at least start talking about the dividend even if he doesn’t take formal action about the dividend.
THE GREATEST DIVIDENDS THAT ARE NOT… YET
Then there is the notion of the greatest dividends that should be, but are not yet there. This comes to a near-tie, making two into one and the same for a single dividend story, between Cisco Systems, Inc. (NASDAQ: CSCO) and Apple Inc. (NASDAQ: AAPL). Both are growing, but these two are at different stages of growth and at different stages of their cycle. Neither reward their shareholders with a dividend, so it is arguable that owning these growth stocks is effectively nothing more than owning a right to all that future money that could be paid out.
Steve Jobs has panned the notion of dividends for Apple Inc. (NASDAQ: AAPL). His attitude does not even seem like a ‘for now’ period. The company wants to hold vast sums of cash for flexibility. The company generated $4 billion in cash in the last quarter alone, and its tally of cash, short-term assets, and longer-term securities now comes to over $45 billion all combined on the latest consolidated balance sheet. With a $241 billion market cap, it is not as though Apple seems likely to make a huge acquisition. How much flexibility does the company need? Apple is expected to grow and keep having solid results. Even if the $4 billion last quarter was a fluke and even if you cut it in half, Apple could be back up to $16 billion in cash in two-years if it emptied out its coffers. Gross margins are roughly 39.1%, well above PC companies. We of course are not suggesting such a notion, but it could actually pay out a one-time dividend of nearly 20% this year while the dividend tax rates are likely lower than they ever will be again after this year.
Cisco Systems, Inc. (NASDAQ: CSCO) is another company with high margins, massive cash, and what has so far been a refusal to pay a dividend. Its latest quarter-end had cash and short-term investments come to $39 billion. Cisco has been a serial share repurchaser and a serial acquirer of smaller companies. The company is also embarking on its moves into the data-center and has more future-tech initiatives than you can easily count. The company is a leader in its field and its gross margin is through the roof. Not having a dividend currently is an opportunity missed by the company, even if its direct long-term debt is over $12 billion. Cisco’s biggest problem is that it has become a utility in the sector with a stock that has spent most of the last decade in a trading range rather than making endless money for its shareholders. With a $134 billion market cap, even if Cisco kept one-third of its cash and sent the rest out as a one-time dividend while tax rates are the lowest they will be through the end of this year it could pay out about $26 billion. That would be almost a 20% dividend.
Will that happen? Highly unlikely. This is meant to show how much it can pay out if it chooses to. The share buybacks keep its share count from growing endlessly, but if you ask dividend investors if they like buybacks or dividends better it is the dividend that matters more.
It should be noted that Cisco is the only one of the thirty DJIA components which does not reward shareholders with quarterly income checks.
The Chinese calendar should have called 2010 “The Year of the Dividend.”
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JON C. OGG
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