A dividend is the payment that a company distributes to its shareholders as a percent of earnings. Management can decide whether to pay a dividend, how much it is, and the frequency of payments. A dividend is often distributed quarterly and is quoted as the amount of dividend per share. Companies that are growing fast tend not to issue a dividend, as they pour money back into the business.
Earlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)
Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.
We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.
At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.
But there are two blatant threats to companies in the key stock indices and the profits they generate.
First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More
The numbers are still coming in pretty good this earnings season and corporate outlooks are holding up well for the year.
Stocks have been trading off of Federal Reserve Chairman Janet Yellen’s monetary policy report to Congress, and less so on earnings.
This market is tired and you can see it in the trading action of individual stocks that beat the Street with their earnings. Most market reaction is pretty mute.
One that wasn’t, however, was Intel Corporation (INTC). The company’s second quarter really got institutional investors fired up. The stock was $26.00 a share mid-May; now it’s close to $34.00, which is a very big move for this company.
Microsoft Corporation (MSFT) doesn’t report until next week, but the company’s shares moved commensurately with Intel’s.
Earnings strength from these older technology benchmarks is really good news for both the stock market and the economy in general. It means that the enterprise market is spending money again, and that’s exactly what the technology industry needs.
Even Cisco Systems, Inc. (CSCO) got a boost from Intel’s earnings results. This stock has been trying to break out of a long price consolidation. It hasn’t really done anything on the stock market since its bubble burst in 2000.
I actually view Microsoft as an attractive company for equity portfolios looking for higher-quality stocks.
The position is very fairly priced and offers a current dividend yield of just less than three percent. And management has a multifaceted business plan focused on growth in personal computers (PCs), the cloud, and devices.
But the best potential with a company like Microsoft is its prospects for … Read More
One of my favorite companies for long-term, income-seeking investors is Johnson & Johnson (JNJ).
While pharmaceuticals are the company’s anchor, its other business lines help with cash flow and dividend increases.
Investors have bid Johnson & Johnson shares tremendously in recent years, and it’s difficult to consider buying the company now, as the position is up another 10 points since March.
But Johnson & Johnson is the kind of stock income-seeking investors should keep an eye on for more attractive entry points, even though they may not come around all that often. The most recent possible entry points were in late September of last year and late January of this year.
My expectations for a mature company like this is for total annual sales to grow by the mid-single digits, with earnings growth and dividends producing an approximate 10% total annual return.
With a 10% annual return on investment, your money doubles every seven years.
Johnson & Johnson is typically priced at a slight premium to the S&P 500, but the company has earned its higher valuation by providing relatively consistent growth, reliable corporate outlooks, and a strong track record of dividend increases.
The company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
Johnson & Johnson has typically been a good performer over the long term, but just like any large-cap, it can sit and produce no capital gains for long periods of time.
The position broke out at the beginning of 2013 after a number of years of modest capital gains. Institutional investors, wanting the earnings safety and solid dividends that the company provided, bid the stock … Read More
If there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.
This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.
And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)
The stock actually offers a pretty decent dividend. It’s currently around 2.6%.
While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.
The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.
Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.
Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.
Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More
There are some companies—mature businesses with well-known brands—that continue to execute in a manner worthy of the finest growth stories.
While the stock market does its thing every day, I find that there are actually very few investment-quality stocks that deliver respectable returns consistently over time.
The business cycle exists, and so does the enthusiasm that institutional investors have for particular companies.
One company that I continue to like for long-term investors is NIKE, Inc. (NKE). Here’s the thing about this well-known athletic footwear and apparel manufacturer—the company just keeps on growing.
The fact of the matter is that the running shoe business is a good one, and solid management execution has allowed this company to deliver continued double-digit comparable growth in a world where mature economies are barely growing at all.
NIKE is worthy of long-term portfolios. The company pays a dividend with a current yield that is approximately 1.3%.
The stock has been in consolidation for a good seven months, but it’s performed incredibly well over the last 10 years and should continue to do so.
Once again, NIKE beat Wall Street consensus and the stock jumped after it reported great 2014 fiscal fourth-quarter and year-end financial results.
Fourth-quarter sales from continuing operations grew 11% to $7.4 billion. Currency neutral, the gain was more like 13%.
NIKE owns the “Converse” brand, and its sales grew in the double digits to $410 million. NIKE-branded products experienced gains in all geographic regions except Japan, where sales were flat on a comparable basis.
The company’s gross margin expanded due to higher average selling prices and more direct-to-consumer sales.
Bottom-line earnings grew … Read More
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