U.S. Dividend Watch List: September 12, 2014

Top Five Watch List Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from September 13, 2013 and have checked the performance one year later. The top five companies on that list can be seen in the table below.
Symbol Name 2013 Price 2014 Price % change
NWN Northwest Natural Gas 40.72 43.82 7.6%
ED Consolidated Edison 54.88 56.43 2.8%
SCG SCANA Corporation 46.24 49.88 7.9%
XOM Exxon Mobil Corp. 88.40 95.78 8.3%
T AT&T Inc 34.32 34.50 0.5%
      Average 5.4%
         
DJI Dow Jones Industrial 15,376.06 16,987.51 10.5%
SPX S&P 500 1,687.99 1,985.54 17.6%
Our top five failed to keep up to with the market. Exxon Mobil (XOM) was the best performer with a gain of +8.3% and that alone didn’t match the Dow Jones Industrial average gain of +10.5%. It’s worth noting that most of these companies appeared to be interest rate sensitive and should underperform in rising rate environment. The interest rate (10yr T-Bill), however, declined from 2.9% to 2.6%. The best performer on our entire watch list was Integrys Energy Group (TEG) which rose +23.2%.

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Gold Stock Indicator: September 12, 2014

Gold as represented by the SPDR Gold shares (GLD) and gold stocks as represented by the Philadelphia Gold and Silver Stock Index (XAU) have declined –3.92% and –7.83%, respectively.

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As indicated in our last review of the Gold Stock Indicator on August 23, 2014, we said the following:

“…the Gold Stock Indicator hovers at the higher end of the established range and appears to be on the cusp of a decline.”

Below is the Gold Stock Indicator as of September 12, 2014.

Quick Take: Consolidated Edison

“The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great ‘earnings’ – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. ‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”

Buffett, Warren. Berkshire Hathaway. 2002 Letter to Shareholders. February 21, 2003.

U.S. Dividend Watch List: September 5, 2014

The market was virtually flat for the week but there was plenty of volatility to go around. The S&P 500 closed slightly above 2,000 this week. We ended the week with 73 companies on our list. Because navigating such a large list of companies can be overwhelming, we’ve decided to highlight 26 companies.
Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
MCD McDonald’s Corp. 93.07 0.92% 16.85 5.52 3.24 3.48% 59%
VIVO Meridian Bioscience 18.87 0.96% 22.20 0.85 0.79 4.19% 93%
SCL Stepan 47.73 1.75% 16.00 2.98 0.68 1.42% 23%
DE Deere & Company 82.79 2.51% 9.30 8.90 2.13 2.57% 24%
WSO Watsco Inc. 91.58 2.83% 23.51 3.90 1.80 1.97% 46%
HSY Hershey Company 90.58 3.07% 24.48 3.70 1.99 2.20% 54%
CASS Cass Information Systems, Inc. 46.51 3.45% 23.26 2.00 0.80 1.72% 40%
ONB Old National BanCorp. 13.19 3.94% 14.34 0.92 0.43 3.26% 47%
RAVN Raven Industries 27.31 4.24% 25.52 1.07 0.48 1.76% 45%
AAN Aaron’s Inc 25.81 4.28% 21.19 1.22 0.08 0.31% 7%
FFIN First Financial Bankshares 29.58 4.69% 22.49 1.32 0.53 1.79% 40%
FLO Flowers Foods Inc 19.39 4.81% 23.62 0.82 0.47 2.40% 57%
WABC Westamerica BanCorp. 48.80 4.99% 20.50 2.38 1.52 3.11% 64%
AFL AFLAC 61.46 5.28% 9.70 6.33 1.48 2.41% 23%
LNN Lindsay Corporation 75.07 5.54% 19.15 3.92 0.92 1.23% 23%
FNFG First Niagara Financial Group 8.66 5.68% 11.86 0.73 0.32 3.70% 44%
NPBC National Penn Bancshares 10.09 6.21% 15.24 0.66 0.40 3.96% 60%
GTY Getty Realty Corp. 18.84 6.26% 10.07 1.87 0.85 4.51% 45%
FULT Fulton Financial Corp. 11.75 6.33% 13.82 0.85 0.32 2.72% 38%
UTX United Technologies Corp. 108.70 6.35% 17.22 6.31 2.36 2.17% 37%
PFE Pfizer Inc 29.65 6.39% 18.62 1.59 1.02 3.44% 64%
ALB Albemarle Corp. 63.72 6.45% 15.80 4.03 1.03 1.62% 26%
MLAB Mesa Laboratories Inc 68.86 6.53% 27.80 2.48 0.60 0.87% 24%
UVV Universal Corp. 52.24 6.61% 16.13 3.24 2.03 3.89% 63%
VMI Valmont Industries, Inc. 137.55 6.63% 16.01 8.59 1.13 0.82% 13%
EMR Emerson Electric 65.08 6.95% 18.29 3.56 1.72 2.64% 48%
26 Companies              

Watch List Review

McDonald’s (MCD) topped our list this week. The company has been struggling with declining sales. The latest news to hit the company was the departing of their US chief creative officer. The stock is trading 17x earnings and yielding 3.5%. Despite the bad news, earnings are expected to rise by 7% by the end of 2015. The biggest factor driving the bottom line is the cost cutting measure the company is engaged in. McDonald’s, as well as their competitors, are selling the company-owned stores to franchisees. By doing so, the company has transferred the cost of running restaurants onto franchisees. Bloomberg Businessweek wrote a wonderful article highlighting this strategy. In addition, we encourage anyone interested in the company to take advantage of the complimentary report from Valueline.

Second on our list is Meridian Bioscience (VIVO). We have a long history with this stock. This dividend achiever has a long record of dividend payment. However, one has to wonder if the company can continue to raise the dividend with slowing of the bottom line. A payout ratio of 93% is extremely high and leaves little room for error on the company operational front. The company currently has a dividend payment of $0.80 per share and is projected to earn $0.85 – $0.90 in 2014. The outlook for EPS in 2015 doesn’t look different than 2014 with the company expecting to earn $0.85-$0.91. If we lean on the conservative perspective, the dividend payout ratio will be at 94%. There is one thing we believe would be make us somewhat bullish on the stock and that would be a dividend cut. If the company announced a dividend cut, we can expect shares to tumble lower. At that point, it would a great start for a re-assessment.

Disclaimer On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. Our view is to embrace the worse case scenario prior to investing. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

Utility Stocks and Rising Interest Rates

Every stock market investor should be concerned about the impact that rising interest rates might have on future investment returns.  The prevailing theory is that when interest rates rise then stock prices should decline due to the impact to earnings from higher borrowing costs.  Since we are at or near the lowest level in interest rates, conventional wisdom suggests that eventually interest rates will rise.

With rising interest rates, investors should expect that stock prices will decline as per share earnings are reduced.  One industry that borrows heavily for going operations is the utility sector (electricity, water, gas etc.).  This article will give a cursory examination of utility stocks from the beginning of a rising interest rate cycle to the peak (1939 to 1980).  We will attempt to determine if the conventional thinking on rising interest rates and their impact on utility stocks is correct.