by James Brumley | July 10, 2013 8:11 am
With bond yields on the rise, a whole slew of dividend-paying companies are going to have to make some tough decisions if they hope to keep investors interested. A few of these companies are going to have to take some drastic action too — by cranking up their payouts so their risk/reward ratios make sense.
Of course, while the reasons these organizations should up their dividend payout soon are solid, that doesn’t necessarily mean they’ll do so.
Investors shopping for yields — and rising yields in particular — might want to think long and hard before diving into any of these three stocks. All three would need to offer up some strong reassurances that better payouts are on the way:
In April, when Apple (AAPL) finally acquiesced to David Einhorn’s wishes and upped its payout 15%, the market cheered. What the market didn’t seem to recognize is that Apple’s improved dividend was — and is — still just a pittance.
Oh, the dividend yield of 2.9% is actually better than the market average. However, the $3.05 it plans to give back to investors over the course of the coming 12 months is only 7% of what Apple is projected earn next fiscal year.
In Apple’s defense, it also has cranked up its share-buyback program to a cap of $60 billion, which happens to be the biggest repurchase plan ever in the history of anything. Then again, with $39 billion in cash and short-term investments in addition to the $105 billion in longer-term investments it’s carrying on the books, the funds for the buyback are simply something that should have been given back to AAPL owners long ago.
It’s admirable to see a company save some cash for a rainy day. Sometimes, however, there’s not a lot of purpose in doing so.
Enter Western Union (WU), which reliably makes good money, but keeps a little too much of it.
It would be easy to assume the Western Union business model was a low-margin affair, leaving little room for dividends, let alone dividend growth. The money transfer business is surprisingly potent, though, with this company’s operating margins approaching 25%, and net margins near 18%.
And to be fair, it gives a decent chunk of it back. In 2010, it paid out 25 cents in dividends from the $1.36 per share it earned (18%). 2011’s dividend payout was 31 cents of the $1.84 the company earned per share (17%). And in 2012, Western Union’s dividend reached 42 cents per share, or 25% of earnings of $1.69.
Were it a tech or a pharmaceutical company, those payout ratios wouldn’t raise an eyebrow. For a cash cow like Western Union though, what could it possibly do with that hoard to actually grow the business? WU is sitting on a whopping $1.77 billion in cash, which is nearly 20% of the company’s market cap.
Again, it’s not a bad idea for a company to hold into some cash until it’s clear the economy is on firm footing. We’re there, though — American Express (AXP) needs to loosen up on the purse strings. The current AXP dividend yield is a paltry 1.2%, but it’s not like the charge card outfit can’t afford to spread more of the wealth now.
Oh, it hasn’t always been easy to pay its shareholders. In 2009, American Express paid out 72 cents in dividends, which was nearly half of the $1.54 per share it earned that year. In 2010, the company again paid a dividend of 72 cents, out of the $3.35 it earned. AXP maintained that 72-cent dividend in 2011, despite earning $4.09. The company finally upped its dividend in 2012, but only a measly 11% — to 80 cents — even though it booked a profit of $3.89.
Not that the economy is red-hot, but after four solid years of growth and/or reliable strength, it’s pretty clear American Express is doing something right; the need for the safety net is gone. Credit card debt (for better or worse) is nearly at two-year highs, and just 16% below its July 2008 peak when everyone was acting as if cash was flowing like water out of their kitchen faucet. And, the current credit-usage trend might well get us back to those heyday levels within the foreseeable future.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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