OCTOBER 15, 2019
Standing
butt-naked on the beach–is that a dividend? Maybe that’s the joy. Either way, there you are. Why? You found your dividend, and they pay, everyday. What would you do to get there? We learned what to look for and we’re sharing. We also came to terms with a criminal bank. Wouldn’t you? Wells is different now. Really? Naw, not really–maybe. Corporate culture is as difficult to change as a raging surf. Besides, crime pays well, for a while. Wells knows.
Once and for years Wells was run like some rum-poisoned pirate ship. Former CEO John Stumpf is gone, replace by a tenured insider present for all the criminality. Absolutely nothing else has changed, except for the firing of thousands who were only following heavy-handed dictates of senior management bent on committing sprawling fraud. So, let’s say Wells is in progress.
Meanwhile, Morningstar pins a $58.00 price target on the stock. That suggests a 16% up move from here. That’s without the 4.15% dividend. Is it worth it? Is any dividend worth owning the stock for? We use Wells and Barron’s as examples. We pose all the proper dividend questions. STOCKjAW talks “Dividend Joy. How Now.”
We’ve
always considered Wells the equivalent of cat scat. We used to refuse buying it on purely ethical grounds, but slowing economic growth changed that. Deprivation will change a whole lot of things people swear are sacrosanct. Ask the Donner Party, if you can locate any of them. “I’d never pay roaming charges to talk to my ex-wife while in the Caribbean.” And if she’s taking care of your family member that happens to have four legs and fur? “Get off the phone goddamnit.”
The dividend “payout ratio” is the metric that tells us the percentage of free cash required to pay the current dividend rate.. The “coverage ratio” tells us the number of times, cast in percentages, that the current dividend rate can be covered.
It should be a commencement staple. “You now stand at your ethical peak. Everything’s circumstantial from here, thus downhill.” Well, perhaps. Few college grads are warned about prosperity-grinding trade wars. We’ve paid thousands for this one, and it’s growing old. What university actually teaches functional financial literacy? Did you ever hear the word “dividend” in school? Or “A good dividend can put a log on the fire in the winter.” Or better yet “place you upright butt-naked on the beach in January.”
Investors
stand at a crossroad. Our market has changed. The buy growth and the joy will come days are over. The stage is a global economic slowdown, following years of euphoric expansion. We’re shifting our portfolio in accordance. Think high quality and cash flow, low P/Es and dividends. The on-stage act now is trade. That show has converted equity markets into a yo-yo. All of that uncertainty has evaporated corporate enthusiasm, cap-ex, and in turn is now even challenging consumer sentiment. As you know, seventy percent of our economy is driven by consumers.
The trade war may shift into a truce, but the reduction in global GDP is real. The 11 year bull is sleepy. For many companies face-stretching growth has shuddered to a shambling search for single-digit gains. Accept that and thrive. Dividends are more important than ever now.
We’ve despised Wells Fargo for years. We’ve done our best to expose their ass-ugly criminal ways. The fact that this repeat offender remains under federal supervision, still, speaks for itself. They can’t be trusted off the lead. Well’s corporate culture has long been aggressive beyond the point of law. Think “fake accounts.” Has that changed? Hard to impossible to say. Smart people will tell you that corporate culture is one of the hardest things to accomplish in business.
Never
allow ethics to stand between you and a fat dividend, particularly in troubling times. We’re feeling sort of troubled. WFC now pays–4.15%. Trundle on over to the feds and tell them you want over 4% on your money. Be sure to hunch your shoulders as you hustle a retreat under a barrage of blackened banana peels and peach pits. And remember, it’s like Wells and the fake accounts, it wasn’t personal. It was just business yo.
Wells’ dividend is currently 4.15%. Their payout ratio is 35.9%. Their coverage ratio is 278%. That means they can pay–almost three times over. There’s more.
Dividends don’t emit from a vacuum. They’re paid by companies, with cash flow. Those companies have a share price. Living crazy means buying a dividend supported by a company with an seriously volatile or diminishing share price. Who cares if they pay 3.5% if their share price has decreased by 8% over the past year? That means you’re driving in reverse. Yet guess what? Even the routinely savvy overlook that.
Barron’s released a piece on Saturday, October 12th. “5 quality stocks with decades of dividend growth.” The inside title reads “Safe, growing dividends set these 5 stocks apart in a low-rate world.” Rigor and methodology were highlighted. We did this and that. They picked solely from the “dividend aristocrats” list. They lined up the coverage, and payout ratios, and years of consistently raising. Who did they end up with? The three highest payers were, opioid kingpin Johnsn & Johnson(JNJ) at 2.8%, Illinois Tool Works(ITW) at 2.8%, and Nucor(NEU) at 3.2%. Did they bother to examine share price stability? No.
This Barron’s piece states that “The S&P 500 index yields about 2%, higher then the 1.54% offered by the 10-year U.S. treasury note.” O.K. And of their five dividend picks they offer up Pentair(PNR), yielding a mere 2%, and W.W. Grainger(GWW), also yielding 2%. So they offer you individual stock risk for the exact same yield available in most any wonderfully diversified S&P index fund.
Did Barron’s apply any of their rigor to underlying fundamentals? Hardly. Their argument rests on continuous years of dividend raising, and market cap. “It’s crucial, therefor, to find stocks whose dividends are reasonably safe, and likely to grow even in a slowing economy.” They didn’t mention that these dividends would mean nothing if the underlying share price was sinking.
The
last eleven years have provided wonderful conditions for most every company. Things change. Economies change, and so do the companies who depend on them. Long histories come to an end, for people, companies, and even countries. Ask the UK. Ask them next year. Long years, even decades, of dividend raises are nice. Yet, no smart investor drives while staring out the rear window.
Barron’s “dividend aristocrats” list included Pentair PLC, a water systems/filtration business. PNR’s share price has dropped -6.85% over the past six months and pays 1.93% dividend. You do the math. PNR’s total return is negative over every time period–greater than 11% down over both three and five year periods, with the dividend. It’s a stand-up comedian’s dream.
Barron’s
is a first class print. Out point here remains the importance of knowing. Investing is work, not rocket science. When we know, we remain far more on course. Trusting is no substitute for knowing. Both Wells and JPM report this morning. Let’s see how they do, and what they say. Good luck and good investing.
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Thanks for Reading.
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Nice research. Never take anything at face value.
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