by Marc Bastow | July 18, 2013 6:20 am
Ben Bernanke’s yapper has been awfully busy in the past couple months, and that has had real consequences for the stock and bond markets.
For the stock market, it has been pretty gravy — the Dow Jones Industrial Average and the S&P 500 are sitting around new all-time highs reset this week. Bonds, on the other hand, saw a massive exodus during June that has helped push 10-year Treasury yields (which move in the opposite direction of prices) from around the 2% mark to start the year to as high as 2.76% and still around a current 2.5%.
While Bernanke & Co. have done their part to assure investors that the Federal Reserve’s bond buying won’t be going anywhere anytime soon, bond rates still are holding up, creating the concern of a “new par” of Treasury notes for dividend stocks that yield close to that number.
These four stocks are right in the crosshairs, and very much could use a dividend boost to keep ahead with this new yield reality.
Dividend Yield: 2.5%
Last Dividend Increase: 14%, August 2012
It’s not a stretch to imagine that a company whose CEO acknowledges “there’s room for” a dividend increase … well, has room for a dividend increase.
And that’s exactly what International Paper (IP) CEO John Faraci said back in May.
It’s not that International Paper doesn’t pay dividends or hasn’t increased its payout, it’s just that its recent history is a little inconsistent. After a dramatic cut from 25 cents to just 3 cents in 2009, increases have come in spurts — three consecutive quarters at the 3-cent level were followed by three at 13 cents, one quarter at 19 cents and six at 26 cents.
So we’re actually above the original dividend … we just got there in a loopy way, and we’re only a penny better after four years.
IP shares themselves are doing well — with 21% year-to-date gains, they’re still ahead of the broader market, so shareholders aren’t exactly banging down the door. Still, IP sits on more than $900 million in cash, and brought in $478 million in free cash flow just to support a quarterly payout of $132 million. A 25% hike here would get IP to the 3% yield threshold.
After all … there’s room.
Dividend Yield: 1.5%
Last Dividend Increase: 100%, announced June 2013
Yes, Oracle announced a doubling of its dividend payment just a month ago, to be paid out Aug. 2. But ask shareholders about ORCL’s flat returns over the past two years and see if they’re satisfied yet.
Oracle’s pitiful dividend yield isn’t a result of a screaming stock, but just a lack of cash paid out to shareholders. ORCL shares are in fact in the red year-to-date, as the company is struggling to grow in the crowded enterprise space. Most recently, fourth-quarter results showed flagging growth, just like the third quarter — and the company went so far as to blame its salespeople both times around.
Growth — and with it, performance — might be a long way off.
Meanwhile, Larry Ellison and his company sit on $32 billion of cash and short-term equivalents, and pumped out more than $5 billion in free cash flow in just the past quarter — more than enough to cover the roughly $2.2 billion it would pay out in dividends annually at 12 cents per quarter. It has the cash, and its 13% dividend payout ratio is well below the S&P 500 average. ORCL … open up your purse strings.
Dividend Yield: 2.2%
Last Dividend Increase: 10%, June 2013
Quick question: At the start of the year, did anyone seriously entertain the idea that Hewlett-Packard (HPQ) would have to raise its dividend just to be on par with the 10-year Treasury?
But, that’s what an 85% run in six months will do.
Realistically, this might be the first time in years shareholders aren’t at HPQ’s throat demanding more income as recompense for shoddy stock performance. So the chances of this happening in the next couple months are pretty iffy. Still, the longer-term trends aren’t good — HPQ remains 50% off its peak around $54 reached just a couple years ago, and the company still is heavily dependent on the PC world and woefully behind in mobile.
It feels like a bubble, but a little padding could help soften the pop.
HPQ’s cash flow is one of the few things that investors universally seem to appreciate about the company — even if it can’t use it properly for growth, it’ll certainly help Hewlett-Packard survive. Despite losing $12 billion in fiscal 2012, HPQ still is sitting on $13 billion in cash, and it had more than $2 billion in free cash flow in its most recent quarter — enough to pay its $283 million in quarterly dividends several times over.
Despite its run, Hewlett-Packard sure as heck doesn’t look as safe as a government guarantee. HPQ could put itself in much better shape by paying a dividend that reflected that.
Besides, which would you rather have: cash … or another disastrous acquisition?
Dividend Yield: 1.2%
Last Dividend Increase: 15%, announced April 2013
It’s been a bit of a strange dividend run for financial giant American Express (AXP). Admittedly, times were tough in 2008-09, when AmEx was paying out 18 cents per quarter. But as the economy slowly came back to life in the next couple years … AXP just kept its foot on the brake.
In fact, it wasn’t until 2012 that American Express finally starting amping up its payouts, raising it twice since then — including its April announcement of an August increase — for a total improvement of 27% in that time.
It’s hard to complain too much considering the stock boomed more than 500% out of the depths, and is about 20% better than its pre-collapse highs. Still, with $3 billion in cash and just more than $1.3 billion in free cash flow to cover what amounts to a $255 million quarterly payout — and a yield closer to 1% than 2% — American Express has some room to give here.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
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