Bowing to "Dividend Aristocrats"

These outfits have increased their payouts for 25 years or more, and S&P's Joseph Lisanti says they're a good bet in the current market

Look for stocks of companies that regularly increase their dividends -- that's one bit of advice in the current market from Joseph Lisanti, editor of Standard & Poor's newsletter, The Outlook. Over the history of the S&P 500-stock index, he notes, about 40% of the total return to shareholders came from dividends and their reinvestment. That general approach should continue to hold, Lisanti thinks, even though the current yield on the S&P 500 remains below 5%.

S&P maintains a list of "dividend aristocrats" -- companies that have upped their dividends for 25 or more consecutive years -- and this list is available at www.standardandpoors.com, Lisanti says.

As for S&P's current recommendations on stocks with potential, with oil prices rising Lisanti says S&P has a strong buy on oil majors ChevronTexaco (CVX ) and Total ADS (TOT ) and on oil and gas drillers Nabors Industries (NBR ) and Patterson-UTI Energy (PTEN ).

These were a few of the points Lisanti made in an investing chat presented Feb. 22 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. AOL subscribers can find a complete transcript at keyword: BW Talk.

Note: Joseph Lisanti has no ownership interest in or affiliation with any of the companies under discussion in this chat except as noted.

Q: Joe, the stock market took a real plunge today [Feb. 22] -- what went wrong?

A:

Well, two factors are being blamed for much of the decline today. The first was the jump in oil prices to more than $51 a barrel on colder weather in Europe. The second was an announcement by South Korea that they would shift their foreign exchange reserves to a basket of currencies. This implies, to most people, that they will be selling dollars. Consequently, the dollar fell, oil prices rose, and investors got nervous.

Q: Did some parts of the market suffer more than others? Any bright spots?

A:

It was a bad day for most parts of the market. New York Stock Exchange breadth was 27 to 7 negative. Nasdaq breadth was 23 to 9 negative. And 29 out of the 30 Dow components fell. With oil prices up, some of the oil stocks gained today, and gold prices also were higher, making gold-mining stocks among the few winners.

Q: Which gold-mining stocks does S&P favor?

A:

We currently don't have buy recommendations on any of the gold stocks. The reason is that they have, for the most part, not participated in the advance that physical gold made in 2004. Many of the stocks had run up well in advance of physical gold, and we expect they will have to tread water for a little while longer before they will be attractive.

Q: Why is S&P's outlook on Payless Shoesource (PSS ) so bright?

A:

We upgraded the shares of PSS to strong buy (5 STARS), from buy (4 STARS), in early February, based on our opinion that the company's restructuring was progressing nicely. The restructuring included closing 8% of their stores, which had generated a $29 million operating loss in fiscal 2004 (January), as well as a reduction in their overall expense structure.

Q: Why does Home Depot (HD ) decline when it made its estimated profits for the quarter?

A:

Home Depot was under pressure today. It reported January-quarter earnings of $0.47, vs. $0.42 in the same period a year earlier. Those results were a penny shy of our estimate, and we assume a number of investors were disappointed.

Standard & Poor's, however, maintains a buy opinion on the shares even though we expect organic sales growth to slow modestly in fiscal '06 (ending January), due to a projected slowdown in the domestic housing market. We believe HD's strong free-cash-flow generation, sound balance sheet, and prospects for international growth make the shares attractive.

Q: Why does ChevronTexaco (CVX ) fall in the face of increasing crude prices?

A:

We like CVX and have a strong buy recommendation on it. Recently, hydrocarbon production fell 8.5% in the fourth quarter, in line with our forecast, on asset sales and weather-related disruptions in the Gulf of Mexico. We expect the shortfall will be short-lived. Some people, however, may be more worried about that and therefore are selling the shares.

Q: How about other energy stocks, especially Big Oil?

A:

Among the largest companies, in addition to CVX, we favor Total ADS (TOT ), which we rank 5 STARS. We also favor Exxon Mobil (XOM ), which we rank 4 STARS (buy). The other largest players are BP (BP ), Royal Dutch Petroleum (RD ), and Repsol YPF (REP ). We rank BP, RD, and REP as holds (3 STARS). In part, this is a valuation call, since we believe the shares of the stocks we currently recommend are more attractively priced.

Q: What do you think of housing? Hovnanian (HOV ), D.R. Horton (DHI ), Toll Brothers (TOL ), et al.?

A:

We currently have strong buy or buy recommendations on the following homebuilding stocks: Beazer Homes USA (BZH, 5 STARS); Lennar (LEN, 5 STARS); Standard Pacific (SPF, 5 STARS); and D.R. Horton (4 STARS).

In general, we believe the homebuilding sector will do very nicely because interest rates, though rising, remain fairly low. We believe Toll Brothers is currently fairly valued, as is Hovnanian. We rank both TOL and HOV as 3 STARS and would hold current positions.

Q: What's your opinion on the defense sector -- Boeing (BA ), Northrop Grumman (NOC ), United Defense Industries (UDI )?

A:

We have a hold recommendation (3 STARS) currently on Boeing and believe it's fairly valued at its current price. Northrop Grumman we rank as a strong sell (1 STARS). And we believe that most defense contractors will be facing difficult budget constraints in coming years, given efforts by the government to cut debt. Also, we believe the changing warfare strategies may continue to restrain defense budget growth to 2% to 4% per year.

That said, we do like Elbit Systems (ESLT ), which we rank 4 STARS. We also like Goodrich (GR ) a maker of aircraft components, which we also rank 4 STARS.

Q: I'm betting on companies that grow dividends. What's the outlook for S&P stocks that pay vs. don't pay?

A:

Dividend-paying stocks tend to do best when the market is weak or trending sideways. Right now, 378 stocks in the S&P 500 pay dividends. That's up 7.7% from the end of 2002. We project the dividend payment per share on the S&P 500 to rise in 2005 to $21.80, which is up 12.1% from 2004.

Through Feb. 14, dividend payers have averaged a 0.64% total return for 2005, vs. a loss of 5.01% for the nonpayers in the S&P 500. Last year, payers in the 500 outperformed nonpayers, returning 18.35%, vs. 13.65% for the nonpayers. Even though we predict that the S&P 500 will end the year at 1,300, this is a relatively modest gain, and we do expect the dividend payers will again outperform the nonpayers.

Q: Joe, do you like Pfizer (PFE ) at this level?

A:

We rank Pfizer 3 STARS (hold), even though an FDA panel recently voted to allow the company's Celebrex Cox-2 inhibitor to remain on the market. We expect the drug's sales to fall some 40%, to about $2 billion in 2005. While we expect more aggressive cost-cutting by Pfizer, we still expect per-share earnings to decline modestly this year. Consequently, we don't advise adding to positions in Pfizer.

Q: Over into telecom -- what do you think of Verizon (VZ ), BellSouth (BLS ), and SBC Communications (SBC ) for the next 12 months?

A:

Our favorite in that group is Verizon, which we rank 4 STARS. Our view is that the planned purchase of MCI (MCIP ), pending approvals, is a better transaction for Verizon than the recently announced deal by SBC to acquire AT&T (T ). In our view, VZ has a successful record of wireline integrations. However, there's merger risk given the possibility of an improved bid for MCI by Qwest (Q ), as well as regulatory review and integration challenges.

We consider VZ's fundamentals to be stronger than those of peers. We rank SBC as a hold (3 STARS). With its generous dividend yield of more than 5%, we would hold the shares for their total return potential. BellSouth we rank as 2 STARS (sell). The recent planned transactions by Verizon and SBC leave BellSouth in a precarious position as a stand-alone entity.

Q: With Wal-Mart (WMT ) trading at 21 times earnings and growing over 15% bottom line, why does it keep going down?

A:

First, some disclosure -- I own shares of Wal-Mart. The shares trade significantly below our analyst's 12-month target price of $62, based on discounted cash-flow and p-e analyses. The shares have been under pressure because the company's primary customer demographic is adversely affected by rising oil prices.

We expect that as oil prices stabilize and the economy improves, more people will choose to spend their dollars in the retail space. As the world's largest retailer, we believe Wal-Mart stands to benefit.

Q: Is Microsoft (MSFT ) or Cisco (CSCO ) worth buying at these levels?

A:

Another disclosure -- I own shares of MSFT. Our analysts currently have strong buy recommendations (5 STARS) on both MSFT and CSCO. They believe that MSFT's strong balance sheet and high quality of earnings, as well as the fact that the shares are trading at a discount to peers on a p-e/growth basis, make MSFT attractive.

For Cisco, we don't expect the company to be negatively affected by any short-term delay in orders from telecom companies. We do note that approximately two-thirds of Cisco's service-router business comes from outside the U.S. So the merger activity among U.S. telecom service suppliers should not affect it. We also believe the networking business is improving.

Q: What else does S&P like among the tech stocks?

A:

Among the hardware makers, we currently have strong buy (5 STARS) recommendations on Dell (DELL ) and IBM (IBM ). In the communications-equipment market, in addition to Cisco, we have strong buy recommendations on PowerWave Technologies (PWAV ) and Qualcomm (QCOM ). Among Internet software and services companies, we like ValueClick (VCLK ) and WebEx Communications (WEBX ), both of which we rank 5 STARS. In the computer storage area, we like EMC (EMC ), which we also rank 5 STARS.

Q: Back on energy -- what price for oil in 6 to 12 months? Are drilling companies worth buying, and which ones do you like?

A:

We think that oil prices will settle a little bit lower than they are now. By yearend 2005, we expect they will be in the $35 to $40 a barrel range. Even so, that's high enough to entice additional drilling activity. Our current favorites in the oil and gas drilling industries: Nabors Industries (NBR ) (5 STARS) and Patterson-UTI Energy (PTEN ), which we also rank 5 STARS.

Q: Does S&P have any general advice for investors at this time of, at best, modest growth in the stock market?

A:

It's always difficult when stocks are appreciating at a slower pace than many people think should occur. That said, remember that the average annual total return over the last three-quarters of the century in the S&P 500 has been a little more than 10%. We think one of the best approaches in this type of market is to buy stocks of companies that regularly increase their dividends. This way, as you hold the shares, your returns will increase, and the yield on your initial investments should continue to grow.

Even though the yield on the S&P 500 remains below 2%, it's good for investors to remember that about 40% of the total return over the history of the index was due to dividends and their reinvestment.

Q: What's the best way to find companies that increase dividends?

A:

We have a list of companies that have regularly increased their dividends for 25 or more consecutive years. We call the group "dividend aristocrats." The list is on our Web site -- if you search under "dividend aristocrats," you will find the list.

Edited by Jack Dierdorff

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