Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Dividends

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. Dividends are often distributed quarterly and are 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.

How the Markets Will Close Out 2014

By for Profit Confidential

Markets Will Close Out 2014Credit card companies are some of the best indicators in the global economy. Visa Inc. (V) just reported a pretty decent quarter. While earnings were down comparatively due to a one-time charge, adjusted earnings handily beat consensus.

The company’s fiscal fourth quarter came in solid, with growth of 10% on a constant dollar basis to $3.2 billion compared to the same quarter last year.

Recently, the company increased its quarterly dividend 20%, and a new $5.0-billion share repurchase program has now been authorized.

Management estimates that its upcoming fiscal 2015 will produce revenue growth in the low double-digits and diluted earnings-per-share (EPS) growth in the mid-teens, which is very solid.

Visa’s share price really hasn’t done anything for the last 12 months. But this is on the back of tremendous capital appreciation in 2012 and 2013.

This stock market certainly seems trendless as of late. Investors are taking in corporate earnings news, but not doing too much with it.

The earnings numbers from many large-caps and conglomerates are pretty solid. But this market is tired out and the near-term action seems muted.

September and October are often difficult months for stocks and it’s unclear as to why. But going by the earnings results we’re getting and the forecasts that corporations are providing, I think it’s reasonable to expect a good fourth quarter—barring any shocks.

The marketplace knows that the Federal Reserve is going to initiate a new upward cycle in interest rates. It also knows that the central bank has proven to be highly accommodative to equities in recent history and deflationary indicators will increase the duration of when rates … Read More

Crushed Oil Sector a Profitable Opportunity?

By for Profit Confidential

Crushed Oil Sector

The big news so far this earnings season isn’t corporate financial results but the price of oil, which continues to be under pressure.

Domestic production has finally caught up to spot prices and combined with reduced expectations for the global economy, oil prices continue to be vulnerable.

Resource investing is inherently volatile; risk related to commodity-based investing is always higher. But as oil prices have given oil stocks a well-deserved buzz-cut, value is appearing, which is not a common trait in today’s stock market.

There are countless growth stories in domestic oil and gas production. The smaller-cap growth stories have been expensively priced for a considerable period of time. They just got a big haircut as well, and all of a sudden, they are much more fairly priced.

For quite some time, oil prices held firm just over the $100.00-per-barrel level, which makes the recent drop all the more momentous. Conspiracy theories abound.

Some of the best opportunities when oil bottoms, I believe, will be in the large-cap space, but it’s important to consider that the price of oil is currently in “turmoil”—it can’t, in a sense, be counted on near-term.

One company that’s a standout in the current environment is Kinder Morgan, Inc. (KMI), which is going through a major corporate reorganization. Acquiring its related master limited partnership (MLP) entities, it is now the fourth-largest domestic oil company by market capitalization.

This corporate reorganization is a rejection of the MLP business model, but also an opportunity for management to shed non-core assets. (See “This Company’s $70.0-Billion Acquisition a Boon for Investors.”)

What I like about Kinder Morgan is that … Read More

Why I Expect a Big Boost in This Company’s 2015 Dividend Payout

By for Profit Confidential

Company 2015 Dividend PayoutEven with the recent price retrenchment, there’s not a lot of value circulating in this stock market. Everything’s already gone up and the capital gains have been great the last few years. But it’s still a slow-growth environment in the global economy, and despite a very accommodative monetary policy, stocks can’t go up forever without experiencing a meaningful retrenchment.

Company earnings are pouring in and there have been some disappointments. But for a lot of mature large-cap businesses, this is a reflection of their industries’ cycles. Large companies in mature industries don’t grow by very much more than the low single-digits.

Which is why a company’s dividends are so important in a stock market that’s at a high but offering little value.

It’s difficult to imagine stocks this year serving up double-digit returns on the back of 2013’s standout performance.

And investor sentiment has changed, too, with oil prices being the catalyst for the recent “deflation worry” sell-off. (See “Is This Stock Sell-Off Just a Blip?”)

The stock market’s existing winners are the way to go going into 2015. There’s plenty of cash in company coffers for more dividends and more share repurchases. It’s a formula that’s worked for large corporations over the last several years, and there’s no reason why it won’t keep working in a slow-growth environment.

Texas Instruments Incorporated (TXN) had a good quarter. The company beat Wall Street consensus, producing substantial double-digit gains in comparable earnings on eight-percent year-over-year revenue growth.

Texas Instruments achieved a new record in gross margin as both analog and embedded processors (which comprise just over 80% of the company’s total sales) … Read More

Why Stock Buybacks Will End Up Being a Terrible Investment for Companies

By for Profit Confidential

Great Stock Buyback MirageIn these pages, I have been very critical about stock buybacks by companies on the key stock indices. I see them as nothing more than a form of financial engineering used to manipulate per-share corporate earnings…and a bad investment for the companies buying their stocks back.

According to data compiled by Bloomberg and the S&P Dow Jones Indices, companies on the key stock indices are expected to spend $914 billion on share buybacks and dividends this year. Looking at it from their corporate earnings perspective, public companies will be paying out 95% of what they earn. (Source: Bloomberg, October 6, 2014.) Look at it this way: for every $100.00 of corporate earnings, they are paying out $95.00.

Almost $2.0 trillion has been spent by public companies on stock buybacks since 2009.

When companies increase buybacks, all else unchanged, they show an increase in their per-share corporate earnings. Some of the biggest names in key stock indices are doing this. FedEx Corporation (NYSE/FDX) was able to increase its per-share corporate earnings by seven percent, almost all directly related to its stock buyback program (reducing the amount of shares it has outstanding).

Why do I think stock buybacks are bad?

Over the past few years, companies on the key stock indices, by buying their own shares back and removing them from the market, have created a mirage that business is good because their stock prices are rising.

But business isn’t better. If the S&P 500 companies are spending 95% of their corporate earnings on share buybacks and dividends, it means they are spending very few dollars on growing their business.

According to … Read More

These Market Leaders Soon to Be Pushed Aside?

By for Profit Confidential

Company’s Numbers Forecasting a Change in the CycleMy favorite pharmaceutical company for long-term investors is still Johnson & Johnson (JNJ), for now.

This business has managed to produce very good financial growth in recent history and its share price has appreciated exceptionally well considering this is a DOW stock, especially over the last two years.

Large-cap companies can’t avoid the business cycle and they can’t avoid industry-specific trends. For pharmaceuticals in particular, the drug development cycle can be very long-winded.

Last quarter, Johnson & Johnson produced exceptional growth in its pharmaceutical business, which is the company’s largest contributor to revenues.

But while Johnson & Johnson’s share price has done extremely well, even over the last few months, it very well could be that this company’s operating momentum is about to change.

Wall Street earnings estimates for the upcoming quarter (the company reports October 14) have been ticking higher, but total sales growth in 2015 is currently very modest. Earnings growth in 2015 is expected to improve by mid-single digits over all of 2014.

Last quarter, company management said that it would not be able to maintain the exceptional sales growth in its pharmaceutical division going forward. We may see this result in next week’s report. (See “Drop in This Company’s Stock Price Makes It Very Attractive Now.”)

On the stock market, equity securities can experience their own business cycles as investors trade in a herd mentality.

Institutional shareholders can actually get tired or bored with a particular company. Johnson & Johnson has an exceptional track record of wealth creation with capital gains combined with dividend growth.

But from 2002 to 2012, the company just traded sideways on … Read More

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