Are Utility Stocks in a Bubble?
Utility stocks pay some of the safest dividends around and typically sport much higher dividend yields than the market, reflecting their low growth prospects and making them a favorite source of income for retirees living off dividends. Many dividend investors wonder if utility stocks are in a bubble today after benefiting from extremely low interest rates for more than six years. Utilities were clobbered on Friday after strong employment data strengthened the likelihood that the Fed would raise interest rates next month for the first time since mid-2006. The fear is that many investors flooded into higher yielding stocks like utilities because they could not earn enough safe income from the very low yields bonds offer today (see below). Once bond yields [...]
Chevron (CVX) and ExxonMobil (XOM): Are the Dividends Safe?
With the price of oil dropping more than 20% during the third quarter, CVX and XOM were both battered and more investors wondered if their dividends were safe. While each stock has recovered over 20% from its low reached in late August, the risk profiles of these oil giants are different. XOM remains one of our top dividend stocks, but we continue evaluating both businesses and the safety of their dividends. Let’s start with CVX. As seen below, CVX has failed to generate free cash flow this year, losing $1.8 billion YTD (-$7.2 billion, excluding asset sales). Including total dividend payments of $6 billion, the company’s cash drain has been $7.8 billion YTD. Source: Simply Safe Dividends [...]
Johnson & Johnson (JNJ): 3% Dividend Yield and Predictable Income Growth for Retirees
JNJ reported Q3 earnings last month. Currency headwinds hurt reported sales growth by about 8%, and the expected run off of hepatitis C products added additional pressure. Excluding these two items, JNJ’s revenue would have grown by 5.6%, in line with last quarter’s adjusted growth and not bad for a company with over $70 billion in sales last year. There are many reasons why we like JNJ and have made it a core position in our Conservative Retirees dividend portfolio. About 70% of the company’s sales are from products that collectively hold #1 or #2 global market share positions, over half of revenue is generated overseas (rising healthcare demand in emerging markets), its product portfolio is well diversified by [...]
ExxonMobil (XOM): A Dividend Aristocrat Nearing Trough Demand
XOM’s Q3 results saw revenue drop by more than 35% and earnings fall nearly 50% compared to 3Q14, driven by weak upstream results (upstream earnings fell 79%). However, strength in XOM’s downstream businesses resulted in earnings actually rising 1% compared to last quarter. While headline figures remain ugly, we are optimistic that XOM’s fundamentals are nearing a bottom and are happy to keep the stock in our Conservative Retirees dividend portfolio. With most of its earnings dependent on the price of oil, there is only so much XOM can do to manage its business throughout the current downturn. The company grew its production by 2.3% in Q3 compared to the year-ago quarter, and XOM appears to be doing a [...]
Living Off Dividends in Retirement
Living off dividends in retirement is a dream shared by many but achieved by few. In today’s environment marked by rising life expectancies, extremely low bond yields, and a 7-year bull market, retirees face challenges on all fronts to build a consistent income stream that will last a lifetime. Before zeroing in on any particular strategy or investment vehicle, retirees need to understand how much risk they are willing to tolerate in the context of their entire portfolio and the corresponding rate of return that can reasonably be achieved. While each of us will ultimately reach different conclusions and asset allocations, we are united by common desires – to maintain a reasonable quality of life in retirement, sleep well at [...]
Procter & Gamble (PG): Organic Growth Ahead…Maybe?
P&G’s earnings report was well received by the market last week. Currency-neutral earnings per share grew 12%, margins expanded nicely, and management’s expectations for improving organic sales growth trends were reaffirmed. After analyzing the report, we are happy to keep P&G in our Conservative Retirees dividend portfolio. However, many investors remain concerned about underlying volume trends across each of P&G’s segments. Organic sales declined by 1% last quarter, driven by favorable price/mix benefits of 3% and a volume decline of 4%. Volume declines were seen across every segment: Beauty -4%, Grooming -3%, Health Care -6%, Fabric Care & Home Care -2%, and Baby / Feminine / Family Care -6%. The primary fear is that organic sales growth built on [...]
Caterpillar (CAT): 4.3% Dividend Yield, But Where is the Bottom?
From 2012 to 2014, CAT’s stock generated an annualized return of 2.8%, significantly trailing the market’s annualized return of 20%. Year-to-date, CAT is down 22% and lags the market by more than 20%. As the commodity super cycle fueled by China’s unsustainable infrastructure growth continues unwinding, it comes as no surprise to see CAT struggle over the last few years. The company expects revenue to be down another 5% in 2016, marking the first stretch of four consecutive years of revenue declines in the company’s 90+ year history. CAT has experienced cyclical downturns before, but the current depressed environment seems different, more prolonged. Unlike the typical V-shaped cycle, this one is coming off of 10+ years of what looks to [...]
Walmart (WMT): Profits Collapse, 3.3% Yield – What Now?
At Simply Safe Dividends, we love nothing more than to find an easy-to-understand, time-tested, high quality dividend grower trading at a reasonable valuation. Not surprisingly, we frequently review our list of all 52 dividend aristocrats to hunt for companies that have demonstrated great consistency. During our review, we look for businesses with strong competitive advantages that protect current cash flow and, importantly, allow a company to continue growing its earnings over long periods of time. In the case of WMT, there is no doubt it has substantial competitive advantages. With over $485 billion in sales last year, WMT sold the equivalent of $66.53 worth of merchandise to every single person in the world ($485.7 billion in sales divided by an estimated [...]
AT&T (T): A High Yield Dividend Aristocrat
AT&T (T) reports its first quarterly results including DirecTV this week. We think the cost synergies management expects to generate from the deal over the next three years are reasonable – greater negotiating power to buy content at cheaper rates, marketing synergies, more concentrated truck-rolls to service customers, supply chain benefits from set-top boxes, less SG&A redundancies, and more. With wireless and pay-TV markets looking saturated, buying more subscribers via acquisition and taking out costs is a logical strategy to further enhance market share and free cash flow generation. However, we believe T’s large move into pay-TV trades near-term synergies for greater long-term strategic uncertainty. Dividend investors only concerned with the safety of T’s 5.6% dividend yield do [...]
PepsiCo (PEP) Turns in Another Great Quarter
PEP reported quarterly results last week, beating expectations and reinforcing the key reasons why we have like the stock. We continue to believe PEP has a clearer and, as of today, brighter future than Coca-Cola (KO). The ongoing trends that drove PEP’s strong quarter suggest that the strategic differences between PEP and KO will only become more important going forward. For these reasons, PEP remains one of our favorite dividend stocks. Before we get into another PEP vs KO debate, let’s quickly review the points from PEP’s quarter that stood out to us. PEP’s organic sales grew more than 7% (compared to 5% growth last quarter), with strength in both snacks (+10%) and beverages (+5%). Earnings per share, excluding [...]