May 21st, 2013
This time it’s different.Not!
Companies results and dividends
Many developed stock markets are now nearing their five-year highs. The US is now trading at all-time highs. Even the FTSE 100 is within striking distance of its 6930 all-time high, reached just before New Year's Eve in 1999. Remember the dotcom crash that followed shortly afterwards?
In the main, London share prices have now returned to levels last seen before the credit crisis. Yet, corporate profits are generally speaking stagnant.
What’s going on?
According to FT columnist John Authers, this morning, investors are increasingly willing to pay more for a given level of earnings. “Price / earnings multiples have gone from 12 to 16 in the process” while, since September 2011, “global earnings per share have been flat.”
At first sight this kind of behaviour would suggest that investors are feeling more confident about the future than for some time, and that they expect earnings growth to improve substantially . . . soon.
Otherwise why would investors be willing to pay an apparently high(er) price for today’s earnings?
However, while profit margins are already at record levels, clearly, something else, i.e. something not profits related, is driving share prices up.
If it is not a major (expected) change in profits that drives share price up, than perhaps it is the change in the amount of money being pumped into the system.
Clearly, when central banks pump liquidity into the markets on a regular basis, as the Fed, BOE, ECB and most recently the Japanese Central Bank are doing… share prices rise faster than profits.
When central bank policy is loose, i.e. an environment with low interest rates, profit margins are expanding (because people are buying more) and share prices go up. When the central banks are tightening, with interest rates going up, people stop buying as much, and earnings go down as are share prices.
Also, due to the rather weak state of the ‘real’ economy, it is fascinating that companies would rather prefer to buy their own shares, than borrow money to buy rivals. Currently companies can borrow extremely cheaply by issuing bonds. So, it is no surprise that many companies are buying their own shares back with borrowed money, or for them to pay special dividends in order to keep existing shareholders happy.
In short, for as long as the printing presses are up and running, and both interest rates and inflation remain relatively low, stock markets are likely to remain at these elevated levels if not go (much?) higher.
However, the really bad news is that increasingly higher share prices leave less room for disappointment, from any quarter. Once central banks pull the plug, lowering, or, worse altogether, stopping the amount of money printing, share prices will come plunging down regardless of the state of their profits. This is the major risk that all ‘Johnny-come-late’ investors are currently facing.
What to do?
The best way for ‘risk-averse’ long-term income investors to deal with the current situation is only to buy high quality dividend paying shares when they are historically undervalued. In the meantime, you rake in your dividends, adding to your cash reserves. Keeping your powder dry.
Importantly, refrain from buying shares that are nearing or already are trading at historically overvalued levels as per our proprietary value/yield valuation methodology.
Crash proofing your portfolio
If and when the market crash happens do you know what to do and what and when to buy?
What is currently expensive will eventually get cheap; cheap shares will eventually get expensive, and vice versa. So if you buy now when a dividend paying shares is becoming increasingly expensive, you are more than likely to generate disappointing results in the long run.
The big threat now is that investors are increasingly willing to pay a premium for dividend paying shares. Of course that will change one day, when shares will crash. That is why I am currently rather cash rich in my own Dividend Income Portfolio.
If you are looking for a good source of information on when a high quality dividend paying share is historically undervalued or overvalued, you should consider becoming a subscriber of Dividend Income Investor.com
We focus on high-yielding, reliable dividend payers, and purchase them when they are historically undervalued. Once we believe their dividends have become unsustainable, or when they have become historically overvalued, we sell.
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A number of companies have released their results and dividends, including:
Royal Dutch Shell
Royal Dutch Shell – the quarterly dividend payer – published its first quarter results. Announcing a 4.7 percent jump, the Q1 dividend will be US 45¢ - compared to 43¢ paid for Q1 2012. The 2013 forecast dividend in sterling is approx 118 pence.
So-called adjusted replacement cost earnings were up at $7.5bn for the quarter whilst operating activities cash flow was down 14 percent at $11.6bn. Gearing was lower at 31 March at 10.1 percent, down from 11.9 percent a year earlier.
BP’s Q1 dividend is US9.0¢ payable on 21 June. This compares favourably with its Q1 dividend payment of US8.0¢ paid last year. The 2013 dividend forecast in sterling is 24.4 pence.
Replacement cost profits were down slightly over Q1 2012. BP’s debt has come down substantially, since 31 December when it was $27.5bn with gearing of 23.2 percent, to $17.6bn at 31 March with gearing of only 13.6% due to the cash coming in from the sale of their stake in Russian TNK-BP.
The big uncertainty remains the final bill from the Gulf of Mexico spill. So far the total charge has been US$42.2bn but it is not over yet due to ongoing legal action.
AstraZeneca issued first quarter results. Revenue and results were down compared with last year’s first quarter, due essentially to the loss of exclusivity on several brands. AZN expect that this decline will follow through to the full year results for 2013.
A restructuring programme has been launched which will initially require substantial costs but is projected to deliver profitable benefits over the next few years. Net debt increased in the quarter to $1.8bn but despite that by 31 March gearing was still a very low 7.9 percent, up from an even lower 5.8 percent at 31 December. The 2013 dividend forecast in sterling is 186 pence.
GSK released first quarter results. The Q1 dividend is 18 pence payable on 11 July, with the shares having gone ex-dividend earlier in May. An 5.9 percent increase compared to the Q1 2012 figure of 17 pence. The 2013 dividend forecast is 77.5 pence.
While net operating cash inflow was up, net debt mushroomed to a massive £15.4bn, from £8.9bn a year ago, driving gearing up from an already high 101 percent to a “utilities look-a-like” 230 percent. Why? To part-pay for a rather unnecessary share buyback this year.
British American Tobacco
Against a backdrop of fragile economic conditions persisting in many parts of the world British American Tobacco’s first quarter statement was remarkable upbeat. Though volumes are down, revenue has grown implying successful policy of implementing price increases. Even better, market share grew in the company’s top 40 markets.
The anticipated dividend for 2013 is 151 pence. No wonder the shares keep motoring up.
Imperial Tobacco Group
Imperial Tobacco Group half year report to 31 March showed revenue and results down while debt was up a lot, to £11.0bn, from £8.8bn at the year end of 30 September 2012. Gearing is now about 178 percent against 145 percent last year.
Irrespective, the company is confidently upping its interim dividend - 11.0 percent ahead of last year’s interim payment of 31.7pence - to 35.2 pence going ex-dividend on 17 July and payable on 16 August. The dividend forecast for 2013 is 116.6 pence
The company also announced that it intend to grow its dividends by at least 10 percent per year over the medium term, which is well ahead of foreseeable inflation. We’ll see.
Unilever accounts in Euros and the Q1 dividend in Euros is 26.9¢. For Q1 2012 it was 24.3¢, an increase of 10.7 percent. Following sterling conversion Q1 2013 dividend is 22.91 pence payable on 12 June, an inflation beating 15.6 percent up to the 19.81 pence for 2012. The forecast dividend for 2013 is 89.0 pence.
While developed markets remain sluggish, the company is expecting another year of profitable volume growth due to high growth in emerging markets with sustainable core operating margin improvements and strong cash flow.
British Land released annual results to 31 March. The final quarter dividend is 6.6 pence going ex-dividend on 3 July and payable on 09 August. This makes an annual total of 26.4p, a below inflation increase of 1.1 percent over last year’s 26.1 pence. Directors expect next year dividends to be not less than 2013 i.e. (at least) the same.
BT Group published annual figures to 31 March. The final dividend is 6.5 pence going ex-dividend on 7 August and will be payable on 2 September. This makes an annual total of 9.5 pence, an inflation beating 14.5 percent above last year’s dividend of 8.3 pence.
With cash flow increasing, BT was able to lower net debt to £7.8bn from £9.1bn during the year. However, their pension fund deficit again increased, this time by £3bn to £5.9bn. Debt and gearing remain excessive. Nevertheless, the company expects that improving efficiency across the business will allow them to continue delivering strong financial results with the directors confidently forecasting dividend increases of 10-15 percent for each of the next two years.
Sage Group issued its six month figures to 31 March. The interim dividend will be 3.69 pence, an inflation beating increase of 6 percent on last year’s 3.48 pence, having gone already ex-dividend on 15 May, the dividend is payable on 7 June.
The company also announced the payment of a special dividend of 17 pence, going ex-dividend on 10 June and payable on 28 June, together with a share consolidation. This means investors will end up with fewer shares following the payment of the special dividend.
Some time ago, for no apparent business reason, Sage announced
its intention to leverage-up, i.e. to finance share buy-backs and now the special dividends. From a healthy net cash position a year ago, they now have debt of £231m making gearing of 21.2 percent.
Till next time.
Dividend Income Investor.com
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