I have a prediction for you. Well, actually it's not much of a
prediction as much of a forecast. You see, rather than go out on a
limb and make a bold statement like somemarket pundits seem to
enjoy so much, I actually have the fact to back up my
The prediction? Get ready for a rising tide ofdividend
increases. It's inevitable. According to a recent estimate by
Moody's, corporations hold an estimated $1.24 trillion in cash
Talk about keeping the powder dry.
Sooner or later, corporate America will have to do something
with all that scratch. But rather than use it toward new product
development or acquisitions in this uncertain climate, many
companies are likely to announce share buybacks and dividend hikes.
After all, that's better than just letting it sit there,
earning next to nothing in interest.
You can run the numbers with a range of companies to see what
kind of dividend hikes they could sport. I've done the math and
have found no less than three examples of companies that may soon
be on the cusp of a big dividend hike -- setting them on the course
to possibly doubling their payouts down the line. That's not a
reason alone to buy these stocks, but after further research, it
could make the case for buying all the more compelling.
1. Harley-Davidson (NYSE:
Currentdividend yield : 1.5%
This stock was also once an income-seeker's dream. The annual
payout, which stood at 20 cents a share in 2003, rose by a similar
amount every year until it hit $1.29 a share in 2008. Since then,
management has grown much more cautious, trimming the dividend back
to 40 cents a share in 2009 and 2010.
Nowadays, the iconic motorcycle manufacturer is back on the
dividend-growth track, with the payout rising to 48 cents a share
in 2011 and up to 62 cents a share this year. Look for that trend
Let's do the math: Harley-Davidson earned $599 million in 2011
and paid out $111 million in dividends. In more confident times,
management appears quite comfortable parting with more of that
income and giving it to shareholders. For example, in 2008, the
company had $654 million innet income and paid out $302 million in
dividends (equating to apayout ratio of 46%).
Well, analysts see the company building a rising stream of
profits, culminating inearnings of about $3.43 per share in 2013.
That works out to be $800 million in net income. If you assume that
management grows comfortable with a 35% payout ratio, then you're
talking about $280 million in dividends (or $1.19 a share). That
means Harley-Davidson may have a dividend yield approaching 3% next
year, roughly double the current payout.
2. Ford Motor (NYSE:
Current dividend yield: 2.1%
Shares of this automaker have lost half of their value since the
start of 2011, giving the impression that Ford is returning to the
bad old days of 2008 and 2009. Sure, there are troubles in its
European operations, but Ford is still quite profitable these days,
taking home more than $7 billion inoperating income in 2010 and
2011. (As a point of reference, in the boom years of the past
decade, Ford had only one very profitable year -- 2004, when it had
$4 billion in operating income). In other words, Ford is generating
record profits now -- in a still-tougheconomy and is poised to
perhaps exceed $10 billion in operating income when Europe stops
being a drag.
To send a clear message about its fiscal health, Ford instituted
a 5-cents-a-share quarterly dividend in the fourth quarter of 2011,
equating to a 20 cents annual payout and a 2%yield . But Ford can
do much better.
Note that after several productive years, Ford now has more cash
then debt, and as it doesn't need to keep building its cash higher,
the company may soon choose to part with one-third of its operating
income in the form of a dividend. Well, one-third of the $7 billion
in operating income equates to a $2.33 billion sum. That works out
to be an annual payout of 62 cents per share -- three
times the current payout, and equating to a 6.2% yield. In fact,
Ford's profits are likely to be considerably higher as the global
economy mends, so we may be looking at a $1 a share dividend by
mid-decade. It's not bad for a $9.50 stock.
3. Worthington Industries (NYSE:
Current dividend yield: 2.5%
Another way tospot looming dividend hikes is to focus onfree
cash flow compared to the current payout. Many companies tend to
limit their dividend payments until thebalance sheet is in order.
Once they have enough cash on hand, they are less inclined to
retain future earnings.
Case in point: Worthington Industries, which processes steel
into various end products such as tanks, tubes and other equipment
used in industrial settings.
Worthington pays out an annual dividend of 52 cents a share,
good for a 2.5% yield. Yet Goldman Sachs predicts thatfree cash
flow per share , which hit $2 in fiscal (May) 2012, will exceed
$2.75 by fiscal 2014. Simply boosting the payout ratio to 50%,
which is what mature, steady industrial firms do, would push the
dividend up to about $1.35. And that works out to be a juicy 6.4%
Risks to Consider:
Companies have been quick to reduce their dividends when the
economy slips intorecession , so further dividend hikes should only
be assumed in the context of a firming economy.
Action to Take -->
Many companies are flush with cash these days and have just begun
to move dividend payouts back to levels seen five years ago. This
trend should continue, and you can use the payout ratio to gauge
how much more dividend growth these firms may have. As I said
earlier, a dividend that could double -- or even triple -- is not a
reason alone to buy these stocks, but it could make it that much
-- David Sterman
P.S. -- Amy Calistri has developed a portfolio of dividend
stocks like these that holds up remarkably well in down markets.
For example, in the sell off last year the S&P 500 lost 5.3% in
August alone. Despite all the turmoil, Amy's Daily Paycheck
portfolio fell just 1.0% during the month. To learn more about
Amy's strategy -- including a few more high-yield picks she likes
-- you can visit this link to read more.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F in one or more if its "real money" portfolios.
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