"W. Wells" <otf70@[EMAIL PROTECTED]
> wrote
> Where is a good place to check the ability of a company to
> continue paying its dividend?
Do you mean for the long term or the short term?
I am speaking as a "defensive investor," namely someone
whose stock picks are conservative. I am not looking to beat
the market. I am looking to keep up with inflation, both
with dividend income and principal.
I find short term changes are often hard to predict. Often,
one needs information to which only company insiders have
access. We all eventually learn about companies in trouble,
and the market starts pricing in expected dividend cuts.
Whether the cuts come to fruition is another matter, though.
I expect any reputable entity that rates "likelihood of
maintaining dividends for the long term" is going to use as
input largely Ben Graham criteria. E.g.
-- Size of the company (larger is safer)
-- How long the company has been paying dividends (longer is
safer)
-- Earnings losses over last decade (fewer is safer)
-- Current ratio (higher is safer)
I also watch:
Dividend payout ratio (DPR), lower is safer.
Dividend increase record, the more years with increases, the
safer I expect it to be. I think that's not numerology
talking but instead a rough indicator of how in demand the
company's product is. Granted exceptions occur.
A few anecdotal observations:
A few years ago I was not so rigorous in my stock picks. I
still had large companies with a long history of dividend
increases, but the likes of, for example, PSD, SLE and CAG
still cut their dividends. If I had followed all the above
criteria, I might not have bought at least two of these
stocks. Looking at these companies' current DPRs and
extrapolating back to estimate what it would have been
without the cut suggests that, to some extent, I could have
anticipated the dividend cuts.
On the other hand, for a large, old company, insofar as the
health of a company is concerned, a dividend cut can, simply
stated, be a sound decision. While the price of a stock does
generally decline somewhat after a cut is announced,
shareholders do often applaud cuts. In the case of all three
companies above, the price recovered (and then some) within
two years or less. So I would say that one does garnish some
protection by choosing "large cap and older companies."
One reality of the past several months though is the hazard
of investing in financial institutions. Citigroup and
Wa****ngton Mutual, among others, slashed their dividends
stunningly. This was "despite" a 10+ year record of
increasing dividends. As I am sure you have read at this
point, one could argue that the way these banks financed
mortgages simply was not transparent to investors. And yet
on the other hand, many folks spoke of the evidence of a
housing bubble and the likelihood of its bursting. Naturally
banks would take a hit in such an instance. Indeed, I
estimate Citicorp (which ultimately became a part of
Citigroup, complicating tracking of the dividend history
here) cut its dividend in late 1988 and late 1990 by some
75%. By Nov, 1993, the dividend was back at its 1988 rate,
if what I pieced together using the New York Times's
archives, Citigroup's web site, and Yahoo's web site is
reasonably correct. Renamings and mergers greatly complicate
following the dividend history.
Will Trice's (and then my) posts on Graham's observations on
investing in banks is worth a read.
Dapperdobbs observations that this housing bubble bursting
and credit crisis is worse due to xyz certainly deserves
consideration, though.
Note to dapperdobbs: One of the kind regulars here sent me a
pdf version of the August 2007 Fidelity article on this
credit/housing crisis. For some reason, I never got it to
come up on the web with my computer.
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