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.

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

The Biggest Risk This Coming Earnings Season

By for Profit Confidential

Biggest Risk This Coming Earnings SeasonFinancial reporting is ramping up and what corporations actually say about their businesses is the best market intelligence available to investors.

Acuity Brands, Inc. (AYI) is in the business of making lights for indoor and outdoor applications. Based in Atlanta, it’s highly likely you’re already using this company’s products without even knowing it.

The business of manufacturing lighting is not front-page news, but that doesn’t matter because for this company, it’s a very good business to be in.

Acuity just announced another quarter of double-digit growth and the company’s outlook remains strong, based on solid activity in the renovation and retrofit markets.

According to the company, its latest quarter produced 15% in total sales growth, hitting $668.7 million. Earnings and earnings per share increased 22% to $54.8 million and a record $1.26 per share, respectively.

Driving the company’s growth is the adoption of LED lighting, which now represents approximately 40% of Acuity’s total sales. Plus, management reported a 17% overall comparative quarterly gain in total sales volume, and the company’s cash position improved substantially in its most recent quarter.

So business conditions for Acuity are pretty good. Company management expects the North American lighting market to grow by the mid- to high single-digits in the upcoming year.

Corporate reporting, while only at a trickle as earnings season is just about to begin, has mostly been decent so far.

There have been good numbers from Bed Bath & Beyond Inc. (BBBY), NIKE, Inc. (NKE), Carnival Corporation (CCL), FedEx Corporation (FDX), Steelcase Inc. (SCS), and Paychex, Inc. (PAYX).

Of course, share prices have already gone up tremendously and good earnings are playing … Read More

Mature Company Serving Up Grand Slam Results

By for Profit Confidential

Mature Company Serves Up Grand Slam ResultsThere’s a lot the stock market has to deal with these days, but that’s par for the course. Uncertainty, risk, and fear are basic components of equities these days. But good businesses are good businesses and NIKE, Inc. (NKE) hit a grand slam with its latest quarterly earnings.

This company’s been doing well for a number of quarters and this is a mature brand we’re talking about, not a fast-growing startup.

The momentum began before the World Cup, culminated in its previous quarter, and now, the company just produced another top-notch batch of financial results. The stock shot nine points higher on the news to a new all-time record-high.

According to NIKE, its first fiscal quarter of 2015 (ended August 31, 2014) saw total sales grow 15% to $8.0 billion. The company also owns the “Converse” label and that division’s sales grew 16% in the most recent quarter to $575 million.

NIKE has a good amount of cash on its books and the company spent $819 million buying back its own shares in its first quarter. Since September of 2012, the company has spent approximately $4.2 billion buying back its own stock at an average cost of $67.74 a share, which, as it turns out, has been a very good investment (for the company and shareholders alike). About $3.8 billion over the next two years is left in the share repurchase authorization.

As for its bottom line, NIKE’s earnings grew 23% to $962 million, or 27% on diluted earnings per share to $1.09.

One of the things that NIKE does is it comments on future orders. According to the company, … Read More

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