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Add to MSN Stock List Message Board Related Articles The best market indicators out there Ride out a reversal with down-and-out stocks Like 1987, only worse Related Resources Check MSN Moneys Market Report Look up todays lists and trends Track your portfolio on MSN Money Jubak's Journal Recent articles: • Why it's so tough to pick stocks now, 8/28/2003 • Where have all the growth stocks gone?, 8/19/2003 • 5 ways to make the big trends work for you, 8/12/2003 More... | Jubak's Journal Lost in the market fog? Follow the dividends Companies that increase their payouts send a clear, powerful message about their prospects. Here are 5 stocks with better times ahead. By Jim Jubak When the big picture is confusing, it pays to focus on the details. Its extremely difficult to make a call on the market's direction for the next month or two. Its not much easier to sketch in the outlines of the economic recovery thats supposedly been just around the corner for so long. But despite the fog that shrouds the financial landscape, investors are still getting extremely useful information about the prospects for some individual stocks. This information is coming from corporate officers and directors, who have a solid track record in predicting the direction of the shares of their own companies. Test -- Related Resources Module  • Link number one • Link number two • Link number three • Link number four • Link number five Im talking, of course, about the signals that companies send when they raise their dividends. Boards and managements are extremely reluctant to cut dividends, so an investor can be pretty sure that the company believes business is good enough to meet the increased commitment to pay millions more in dividends. That signal is especially valuable at a time when economic uncertainty is high. A company that can raise its dividend now is confident that it can predict the course of its business over the next year or more. And that kind of confidence is worth buying at a time like this.
Here are five stocks where management and directors have sent out strong signals that better times lie ahead with recent moves to increase dividends:
Up market vs. down market Market timer Dan Sullivan, editor of The Chartist newsletter, sees stocks poised to continue the rally that began in March. After testing the low end of the recent trading range in early August, most of the major indexes moved up to new highs on stronger volume. In addition, the advance/decline line for New York Stock Exchange issues turned up. The ratio of advancing stocks to declining stocks is still climbing, indicating the number of stocks participating in the rally continues to increase. Technical analyst Phil Erlanger doesnt see things that way. The indicators the editor of the Erlanger Squeeze Play follows are flashing warnings of a downtrend for the Standard & Poors 500 ($INX) and the Nasdaq 100 ($NDX.X). The market has failed to climb on good news, such as Intels Looking at market fundamentals doesnt clarify the picture much. For instance, Intels forecast prompted a round of upgrades and estimate increases by Wall Street analysts who saw the news as confirmation that technology sales have finally turned the corner. Prudential Securities boosted its fourth-quarter revenue forecast for chip maker Taiwan Semiconductor Manufacturing What's missing But other Wall Street analysts werent impressed by Intels news. The company didnt say it was seeing a pickup in corporate demand, and, at this stage in the still-potential economic recovery, thats the news everyone wants. Anything else, these fundamental skeptics say, has already been priced into stock valuations. Intel is up 78% this year, for example, and Agere is up 92%. Both sides in the fundamental debate eventually wind up pointing to evidence of a coming economic recovery to buttress their case. Even here the data we have to date isnt conclusive. Oh, its not that either side really doubts that some kind of a recovery is in the works. In recent weeks, more and more data, from increased August sales forecasts from Wal-Mart Rather, the argument is over whether the recovery will be strong enough to lift stock prices further after the Nasdaq has rallied 39% and the Dow 24% since the March 11 lows. The average forecast for gross domestic product growth, according to The Wall Street Journal, is 3.6% (on an annual basis) in the third quarter and 3.8% in the fourth quarter. But that average includes economists calling for as much as 5.4% growth and as little as 1.9% in the third quarter. (Only one economist in the Journals survey calls for negative growth.) Looking ahead six more months to the second quarter of 2004, the spread is just as wide -- from 5.5% to 2%. As if this technical and fundamental confusion werent enough, the trading patterns of the last few months make all data tough to interpret. Technical analysts worry that the extremely light trading volumes of August make all indicators less reliable than usual. (Nasdaqs volume is off by 13%+ from its average for the year and off 26% from its volume between Memorial Day and July 31.) Volume on Aug. 25 was the year's second lowest, just behind the day after the blackout. On low-volume days, the efforts of a relatively few traders can skew the market. Worrisome signs Also, its not clear what investors should make of the rally to begin with. Its possible to argue that the kinds of stocks that led the market up in the second quarter are 1) exactly the stocks that move up in the early stages of a sustainable rally or 2) exactly the speculative stocks that lead a rally destined to fail. According to Charles Schwab, the second-quarter rally was led by low-priced stocks of money-losing companies. The stocks in the S&P 500 trading for less than $10 a share gained an average of 50% in the quarter, while stocks trading for more than $10 a share gained an average of 18%. Money-losing companies in the index gained 48% on average, while money-making companies gained 20%. So the jury is still out: premature speculative rally or initial stages of a sustainable rally? All that confusion stands in stark contrast to the clarity of a company that raises its dividend. Kimberly-Clark illustrates the clarity neatly. When the company increased its quarterly dividend in February by 13% to 34 cents, it was sending investors a clear signal that the diaper price war with Procter & Gamble If the company can deliver on those numbers, I calculate a 12-month target price for the shares of about $56, an 11% gain from here. Add in the stocks 2.6% yield and those promised increases in the dividend payout and the return for a year is around 14%. Ive found a few other stocks that carry a relatively high yield and have increased their dividends in the last year and in a recent quarter. Real money Exxon Mobil shares yield 2.7%, and the oil giant recently raised its quarterly dividend to 25 cents from 23 cents. Considering the number of shares Exxon Mobil has outstanding, even a two-cents-a-share increase is real money; the company will pay $6.5 billion in dividends over the next 12 months. The company also has announced a $5 billion share-buyback program. TCF Financial, the Minneapolis banking company, has a strong track record of dividend growth. The bank has increased its dividend by 19% a year over the last five years. The last year has been no exception, with the annual dividend going to $1.15 from $1. These are risky times for banks as rising interest rates take a bite out of their mortgage businesses and expose their fixed-income portfolios to potential losses. In this context, TCF Financials dividend increase raises my confidence that this well-managed, conservative bank has those risks under control. (The stock, however, is fully valued at its current price of about $46. Wait for a better buying opportunity.) General Dynamics sent investors a strong message with its recent dividend increases: The troubles at the companys Gulfstream executive jet unit were temporary and wouldn't hurt the companys ability to match its average 25% return on equity over the last 10 years. General Dynamics shares yield 1.5% after a dividend increase to $1.18 a share from $1.10 for the last 12 months. Genuine Parts, a giant auto parts wholesaler, has increased its dividend each year since 1955. This year the quarterly payout went to 30 cents from 29 cents, bringing the yield to 3.7%. I also like the confidence the dividend increase signals in the companys ability to meet its 3% to 4% growth forecast this year. The recent increase in the price of parts used to service already purchased cars, called the aftermarket, should help increase profit margins. Two other stocks already in Jubaks Picks, PepsiCo From this columns crop, Im going to add Exxon Mobil to that company. Im setting a 12-month target price of $42, about 14% above the recent price. Add in the stocks 2.7% yield and the total potential return rises to more than 16% with less-than-market risk. Buy Exxon Mobil Upstream and downstream, integrated energy giant Exxon Mobil is a cash machine. High prices for oil and natural gas produced earnings of $2.8 billion in Exxon Mobils upstream energy production business for the second quarter. While margins in the refining business hurt profits in the downstream refining and marketing unit, quarterly earnings still came in at $1.1 billion. The companys cash flow is strong enough to let Exxon Mobil have its cake and eat it, too: The company will reinvest $15 billion in its business this year, distribute $6.5 billion in dividends and buy back $5 billion in shares. You cant expect a company this large to produce huge gains for a portfolio. If, however, you add the potential for the shares to appreciate to $42 within the next 12 months to the stocks 2.7% dividend yield, then I think investors can look forward to a 15% return with well-below market risk. Im adding Exxon Mobil to Jubaks Picks with a July 2004 target price of $42 a share. New developments on past columns 5 big trends investors must watch So how big a deficit will the federal government run up through 2013? Projections like these always rely on assumptions about future spending and economic growth, but a recent report from the Congressional Budget Office (CBO) contains enough detail on the what ifs to let investors make up their own minds. The CBO estimates that the federal government will run a deficit of $401 billion for the fiscal year that ends in September 2003 and $480 billion for the fiscal year that ends in September 2004. One key assumption in those forecasts: The economy will grow by 3.8% during calendar 2004. (Thats 3.8% real growth after inflation.) Those deficits represent about 4% of gross domestic product, high but well below the record 6% level hit in the early 1980s. The CBO projections are forced to make a second key assumption: By law, the CBO projections arent allowed to include anything but spending that has already been approved by Congress. So likely spending such as extensions of the temporary tax cuts, a Medicare prescription drug benefit and some fix to the growing alternative minimum tax mess arent included in the fiscal 2004 deficit. Put them in, and the projected shortfall for that year goes up to $500 billion. But the real impact of including likely spending isnt apparent until you take a look at the projections for the cumulative deficit over the next 10 years. Keep to the CBO rules and the total shortfall adds up to $1.4 trillion, a huge swing from the 10-year $5.6 trillion surplus the CBO projected in 2001. But include likely spending and the cumulative deficit for the 10 years soars to $5.9 trillion. Just for reference, back in June, economists at Goldman Sachs projected the 10-year deficit at $4.5 trillion. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: PepsiCo and Pfizer. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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