Dividend Stocks

All posts tagged Dividend Stocks

In April of last year, I made the case of going long Vodafone (VOD).

Since then, I’m up nearly 44% on my purchase price (including dividends). Vodafone currently yields nearly 7.5%.

Recently, Barrons had a good article on why investors should still consider investing in Vodafone.

Its ADRs, which trade on Nasdaq and each represent 10 ordinary U.K.-listed shares, could rise more than 20%, to $35-$38, over the next two years. Including dividends, the total return could top 35%, with significantly less volatility than the average stock, given Vodafone’s relatively stable business. (Vodafone ordinary shares closed in London Friday at 180 pence. The ADRs finished near $29.)

There were also several quotes from fund managers:

“Vodafone’s stock is significantly undervalued,” avers Bruno Lippens, a portfolio manager with Pictet Asset Management, “essentially because the market still doesn’t appreciate Verizon Wireless” and the way the dividend will translate into reliable future cash. While there’s no formal annual commitment, Verizon Wireless has little net debt and produces about $1 billion monthly in Ebitda. “Absent massive investment needs, I don’t see an alternative” to paying out a regular annual dividend, adds Lippens, who sees some 40% upside in Vodafone.

The author of the article also thinks that a liquidation of Verizon Wireless could occur within five years, which could be as high as 50% of VODs current market cap.

Last week, search engine giant, Google (GOOG) jumped 15% in one day.

About six weeks ago, I wrote a post stating that Google was undervalued by 33%, and worth buying at around $500 per share.

Since then it’s jumped to $600, a whopping 20% jump, more if managed to get in at the low point. Quite a strong move for a large cap stock.

I still think the story for Google is strong, but if I didn’t already own it, I wouldn’t necessarily buy it today. Instead, I’d look for another cheap stock, something a little more boring.

As I wrote about in a previous post on investing in boring stocks, I prefer unloved, boring stocks with no growth prospects over exciting, glamor stocks. Incidentally, the stock I mentioned in that post, Johnson & Johnson (JNJ), is up over 10% in the past four months.

One of the stocks I’d consider is Cisco (CSCO).

This tech giant has lost its luster, with the stock price having gone nowhere for the past ten years.

I blame the poor leadership of the CEO, John Chambers, for the stocks performance. But at today’s prices, it probably doesn’t matter how incompetent the management is.

Cisco currently trades for $15.66 with a newly introduced dividend yield of 1.50%. It trades for a P/E of 12.2 but more importantly it trades for a P/FCF of only 9.2.

FCF or free-cash-flow is one of my favorite metrics when valuing stocks. It’s the cash left over after all the expenses have been paid out, and capital expenditures have been made. Unlike earnings, free-cash-flow is very hard to manipulate. Over the past decade, even though Cisco’s share price has stagnanted, the free-cash-flow has more than doubled from $4.1 billion to $9.2 billion.

For a stable, profitable market leader like Cisco, ten times free-cash-flow is a great deal. As Warren Buffett indicated in his purchase of Lubrizol, it’s okay to pay 20 times free-cash-flow for a great company.

Cisco also has an incredibly strong balance sheet, with about $40 billion in cash or $7.80 per share in cash – that’s almost half of it’s stock value.

Even though Cisco faces increasing competition and has a penchant for wasting money on acquistions that don’t seem to make any sense, it still has a wide economic moat. Cisco makes devices that move internet traffic. And the amount of internet traffic is increasing every day.

It’s only a matter of time before Cisco becomes a $25 stock again.

Disclaimer: I’m long Cisco.

I remember the good ol’ days of the Internet Bubble in late 1999, early 2000. I bought Qualcomm (QCOM) at around $300 a share and watched it skyrocket to $800 a share in less than a year. Valuations didn’t matter, only the stories behind the stocks. I had lofty ambitions of early retirement and life of luxury. Warren Buffett was widely derided (amongst my friends) as an old fool who didn’t understand the new economy – this time it was surely different.

Sadly, no one told me the party was going to end and I rode that pony all the way back down the hill.

And then my brokerage called me and informed me that not only was my investment account worth zero, I also owed them an additional thousand dollars! Yeah, leverage works both ways.

That’s when I realized that investing isn’t about excitement, it’s about buying dull, income-generating stocks and as Buffett would say, sitting on your hands for extended periods of time.

I realized that I didn’t need to be invested in growth stocks that double every year. I just need to find stocks that generate 8-12% a year in capital appreciation and dividends, and I’ll be able to beat 90% of money managers on the planet.

So why am I bringing this up today? I recently read an article about how an investor was abandoning his position in Johnson and Johnson (JNJ), citing lack of growth as the main reason.

I am not suggesting that JNJ is about to collapse or slowly fade into the background. As I said, JNJ is a strong cash flow generator and the company does generate very strong returns on capital. With such a large amount of reinvestable cash, there will always be at least the hope of better days.

The problem, though, is that JNJ just isn’t a dynamic player. If you want a company that will produce large amounts of cash, and send a fair bit of it back to shareholders in dividends and buybacks, JNJ is a fine choice. But if you really want to harness the growth potential of the healthcare market with a top-notch operator, JNJ simply does not fit the bill.

Based on the 150+ comments, it seems like the investor and numerous readers were tired of the lack of stock performance of JNJ. How anyone would mistake a humongous, global conglomerate for a growth stock is another story, but is it really a dog of a stock?

After holding it for a decade (like some of the readers claimed they did), should you sell it now in favor of a tantalizing growth stock, like maybe SalesForce (CRM) that sells for 260 times earnings?

The problem with growth stocks is that everyone knows they’re a growth stock destined for great things, and investors usually overpay for this privilege, or should I say, excitement.

Studies have shown that over the long run, growth (or glamour) stocks underperform boring, value stocks.

So are people correct in giving up on boring, no-growth JNJ?

Well, JNJ’s story sure isn’t getting any more interesting. In fact, the 100+ year-old stodgy company is so unexciting, I can’t even be bothered to read what it does on its profile page on Yahoo! Finance. I know it makes medicine and related products. It had a slew of recalls and maybe it even makes Splenda. But seriously, who cares?

I don’t need to be swayed by some BS management story. I went to business school, I know how those yarns are spun! Just show me the numbers…

JNJ has a market cap of $166B and it has zero net debt – always a good sign.

Over the past decade (2001 through 2010), income has almost doubled from $33B to $61.6B. Operating cash flow has almost doubled from $8.8B to $16.38B. And most importantly, free cash flow (or as Benjamin Graham would say, the Owners Share of Income) also nearly doubled from $7.1B to $14B.

In terms of valuation metrics, the P/E fell from 32 to 12.7 over the same time period, and the P/CF fell from 20.5 to 10.3. Which meant that it went from being grossly overvalued in 2001 to being favorably-valued in 2010.

At today’s prices, the P/FCF is currently 11.84, which is quite cheap for a blue-chip stock and it has a projected yield of 3.6%, which incidentally, puts in on par with the yield of the 10-year US Treasury.

However, JNJ has been growing its dividend around 9-10% every year since 1972. In fact, it has increased the dividend every single year for 48 years!

If you had invested in JNJ 10 years ago, your entry price (adjusted for splits and dividends) would be about $37. It’s currently trading around $60.50, so while a 64% increase over a decade may not be the dreams that growth stocks are made of, at least your initial quarterly dividend payment of 0.16 cents has more than tripled to 0.54 cents.

And even though you made the wrong decision in buying an overvalued stock a decade ago, you’re still not doing too badly. At your entry price of $37, you’re almost making a 6% yield today.

Buying this boring, no growth stock today gives me an annual yield of 3.6%. If it repeats its performance over the next decade and the dividend triples again, I’ll be making 12% annual yield from the dividends, based on my purchase price. I can live with that sort of sub-par performance!

And if the P/E expands to growth-stock levels, causing the share price to soar and the dividend yield to drop back under 1% like it did 2001, I’ll be happy to sell it to some growth-story-chasing investor.  But until then I’m happy eschewing the glamor stocks in favor of the cheap, boring, no-growth, value stocks.

Disclaimer: I bought some JNJ for my retirement account yesterday around $60.50. I’m happy to keep it for a decade, or until they cut their dividend. I also shorted CRM at the same time.

Last week the internet was buzzing with rumors of Apple coming out with an iPhone that would work on the Verizon Network. If you decide you wanted to trade this rumor what would you do? Would you buy Apple (AAPL) or would you buy Verizon Communications (VZ)? What if I told you Apple didn’t pay a dividend, while Verizon had a 6% dividend yield. Would that make a difference?

As it turns out, I decided I wanted in on this trade. I’ve been wanting to buy an iPhone for a while but the AT&T network is severely congested in major cities and the sound quality for calls is terrible. So I’ve been holding out for the iPhone until it’s available on the Verizon Network.  I did however get myself a 32GB iPod Touch that is simply amazing.

I didn’t buy either of these two companies. Instead I bought Vodafone (VOD) with a dividend yield of approximately 5.3% based on my $23.10 purchase price. It’s not widely known, but Vodafone owns 45% of Verizon Wireless. The remaining 55% of Verizon Wireless is owned by Verizon Communications.

Verizon Wireless borrowed billions of dollars from its parent company to build out its infrastructure and for the $30 billion purchase of Alltel. It’s been generating nearly $10 billion a year in free cashflow and has been paying back the loans. These loans will be completely repaid in a few months. So what will it do with all the money its generating? It’ll start paying dividends to VZ and VOD.

Verizon needs the money for its own dividend payments. In addition to the wireless division, it runs a landline division that isn’t anywhere as profitable as Verizon Wireless. And last week, Vodafone publicly asked Verizon to either spin off Verizon Wireless or to start paying dividends as soon as it was done with the loan repayments.

By itself, Vodafone generates $8 billion a year in free cashflow. It’s 5.3% dividend seems pretty safe and has the potential to see a massive increase if Verizon Wireless decides to pay out a major portion of its cash flows.  In addition to its stake in Verizon Wireless, Vodafone owns a tiny stake in China Mobile and a 44% stake in some French Telecomm company who’s name I can’t pronounce.

This way you get exposure to a global Telecomm player with exposure to the growing US wireless market and no exposure to the US landline market.  You also get a 5%+ dividend yield with exposure outside the the US and the US Dollar. If we do see inflation, this dividend is likely to keep up with it and is probably a better bet than a treasury bond (which would lose value if we saw high inflation).

For the time being, the “Can you hear me now?” dude is a little less annoying!

Disclaimer: I entered a 50% position in VOD. If the price drops from my purchase price I’ll double down.