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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 14780  
Subject: FKA: GSK Date: 2/11/2008 7:10 PM
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Glaxo Smith Kline stock (GSK) has fallen off a cliff, on high volume, over the past couple of days. Its dividend is now 5%.

The FDA has delayed one (approved) drug's introduction by 3 months, but is that a reason to clobber a good company?

Wendy (bought GSK today at 42.5)
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Author: rnam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7372 of 14780
Subject: Re: FKA: GSK Date: 2/12/2008 8:22 AM
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Would love to hear why you picked GSK and not one of the others which have been hitting 52-week lows, which I referenced in this post?

I already own JNJ, PFE, WLP and WAG as my health sector holdings and have been wondering which to buy. I am leaning towards a good foreign company, esp. strong in generics or devices. I like the prospects of Teva or Indian generic makers like Dr. Reddy and Ranbaxy, but can't decide if they are a good value.

http://boards.fool.com/Message.asp?mid=26368362

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7374 of 14780
Subject: Re: FKA: GSK Date: 2/12/2008 11:48 AM
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<Would love to hear why you picked GSK and not one of the others which have been hitting 52-week lows, which I referenced in this post?

I already own JNJ, PFE, WLP and WAG as my health sector holdings and have been wondering which to buy. >

I also already own JNJ and PFE.

A stock's dividend is a key factor in my choice. If the dividend is above what I could earn from a CD, I am not bothered by stock price movements, as long as the company's business remains stable enough to maintain the dividend. DH and I are retired, so dividends are a source of income for us...not an insignificant factor!

In my experience, good companies with strong dividends have a floor under the price. If the dividend is above the 10-year Treasury, the price will bounce back, as soon as market negativism disappears.

Now, let's look at the dividends of the stocks you mentioned, plus a few more.

GSK 4.8%
JNJ 2.62% (well, that's a little low, but tolerable from such a great company)
PFE 5.36%
WAG 0.92%
WLP 0.0
LLY 3.38% (this is worth putting on the list)
MRK 3.35%

I will keep an eye on LLY and MRK. I wouldn't consider WAG or WLP, because their dividends are way below my cutoff.

Wendy

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Author: hondodog Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7375 of 14780
Subject: Re: FKA: GSK Date: 2/12/2008 1:23 PM
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JNJ 2.62% (well, that's a little low, but tolerable from such a great company)

what you have not said, but probably have incorporated in your thinking is that stocks like JNJ which have a long history of increasing dividends at double digit rates offer excellent return to the long time holder....and when you get a discount to the normal price range, hard to turn down...enough long term value to overlook a relatively skimpy current yield.

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7376 of 14780
Subject: Re: FKA: GSK Date: 2/12/2008 1:43 PM
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<enough long term value to overlook a relatively skimpy current yield.>

Very well put!
Before buying a stock, I look at Mike Klein's BMW charts:

http://invest.kleinnet.com/bmw1/

JNJ has an average CAGR of 16.6%. It is currently at -1.82 RMS.

Wendy

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7397 of 14780
Subject: Re: FKA: GSK Date: 2/13/2008 2:45 PM
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A stock's dividend is a key factor in my choice. If the dividend is above what I could earn from a CD, I am not bothered by stock price movements, as long as the company's business remains stable enough to maintain the dividend.

A good rule of thumb is to buy stocks which are priced at levels
below their intrinsic value (IV). Sure, IV is hard to estimate, being
based on an imperfectly known present and a wildly uncertain future.
But, it's the only method which guarantees good long term results,
so doing it badly is much better than not doing it.

So, your comment is a succinct statement of a very dangerous fallacy.
It's a shame that it is so widely held. In short, only the present and
future earnings and assets matter in determining the value of a firm.
Why so? Dividends aren't income, they are solely a method of
shifting real income payments from one period to another. Raising the
dividend increases the short term at the expense of the long
term---the terminal value of the investment from its assets.
This time shift does not affect the intrinsic value one way or another,
so, at any given level of trend income, a change in the dividend yield
does not change the intrinsic value of the investment.
Real income comes from the underlying business, and its sustainability
and size are solely a function of the (trend) earnings thereof, not
from the timing and method that those earnings flow to the investors.

This isn't to say that dividends aren't rational. A firm should
reinvest only that portion of its trend earnings that it can invest
in such a way as to earn "excess" returns beyond the cost of capital.
The rest should be paid out as dividends. For most firms this means
the most rational choice is to pay out either all of the trend earnings,
or none. Sadly, few companies have management that insightful,
and for most firms dividends are a show of bravado, to keep the
investors on board, the price high, and the options in the money.

One might reasonably argue that increasing dividends is also a slight
predictor of management confidence (though they may be bluffing).
Management confidence may correlate with slightly rosier future, and
since management knows the firm better than anyone, there is a weak
case to be made that rising dividends may correlate with slightly
higher intrinsic value. But it is more like getting a memo that
says things are getting better. It might be true, and might not be.
In and of itself, the dividend itself has not changed the value.

Further, given the choice between two stocks currently priced in the
market at similar discounts to intrinsic value, one might rationally
have a preference for dividend-paying stock versus a non-dividend-paying
stock because of one's personal tax situation.

But, these are all pretty trivial issues, since one normally does best
simply buying the best business at the best discount to its value
after factoring in the range of uncertainties in the estimate.
If the selected investment doesn't pay the income stream you want (it will
always be too little or too much), buy or sell some stock from time to time.

A dividend can be well covered by earnings, not covered, a token, or total fiction.
But if/when a dividend gets cut due to bad operational results, you'll
get hit doubly: once because you get a cut in the dividend that you
have relied on so much, and once because everyone else who falls for
the dividend fallacy bails out at the same time, driving down the
price and wiping out a chunk of your capital as well. This pitfall
won't hit those who have kept their eye on the intrinsic value (which
flows from present and future earnings) rather than the yield.

I'm not saying this particular company isn't a good one, and it may
be both reasonably priced and profitable enough to maintain and raise
its dividend for many years to come. But the level of dividend they
decide on has absolutely no bearing on the intrinsic value, so you
should be aware that you are investing based on a spurious metric,
no more meaningful than the day of the week that the dividend is paid.
Assuming you apply a rational discount rate, changing the timing of
your earnings doesn't change the value a bit.

Just a thought!

Jim

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Author: CryingofLot49 Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7398 of 14780
Subject: Re: FKA: GSK Date: 2/13/2008 5:28 PM
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One might reasonably argue that increasing dividends is also a slight
predictor of management confidence (though they may be bluffing).
Management confidence may correlate with slightly rosier future, and
since management knows the firm better than anyone, there is a weak
case to be made that rising dividends may correlate with slightly
higher intrinsic value. But it is more like getting a memo that
says things are getting better.


Actually, constantly rising dividends have proved to be one of the few ways to outperform the market over time. This has been shown/proven by both academics and fund managers [who buy only said stocks].

The case is far from weak. It is strong, very.

Of course, this holds only for a portfolio, not any single name as we all know - I totally agree with you there.

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Author: TMFRichDad Big gold star, 5000 posts Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7399 of 14780
Subject: Re: FKA: GSK Date: 2/13/2008 5:28 PM
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In short, only the present and
future earnings and assets matter in determining the value of a firm.


Not exactly. For a going concern, the value of the business is equal to the cash flow stream that can be taken out of that business over its lifetime, discounted to present day at some appropriate rate. For a publicly traded company, there are two conventional ways in which shareholders can expect to receive that cash flow: dividends and share buybacks. To the extent that current earnings and assets enable a company to pay a current dividend or buyback shares you are correct.

For companies reinvesting 100% of earnings back into the business, they are theoretically growing at their maximum rate. Whether this is beneficial to shareholders or not depends on the rate of growth, how long the delay till dividends and/or buybacks begin, the amount of those eventual disbursements, and the desired rate of return (discount rate).

From my POV, I prefer a bird in the hand to two in the bush. I see nothing wrong with Wendy's approach in weighting heavily current yield in her selction process. Provided she gives due consideration to the company's ability to pay that dividend into the future, she is likely to acheive most satisfactory returns and substantially less risk than the market as a whole. Calculating the value of the business based on a conservative application of a dividend discount model would be even better.

Rich

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Author: CSOakes Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7401 of 14780
Subject: Re: FKA: GSK Date: 2/13/2008 9:41 PM
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I'm curious as to why nobody included BMY in the list of high yield pharmas? They haven't exactly been jacking the divy over the yrs but they do have a strong product- and pipe-line to feed the dividend and the yield is 5.2%. I know about the management and legal woes but those should be history and hopefully there won't be any more of the mortgage based security losses. Am I missing something else?
Charlie

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7404 of 14780
Subject: Re: FKA: GSK Date: 2/14/2008 7:25 AM
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Actually, constantly rising dividends have proved to be one of the few ways to outperform the market over time. This has been shown/proven by both academics and fund managers [who buy only said stocks].
The case is far from weak. It is strong, very.


Err, not that I know of, in absence of other analytical factors.
If the case is strong, it is hiding extremely well.
Consider: an equally weighted portfolio constructed of the 20 highest
dividend-yield stocks covered in the Value Line database (roughly, the
largest 1700 US firms), underperformed the S&P 500 total return by
-3.50% per year over the last 22 years, reconstituting and rebalancing
the portfolio quarterly, even if you assume zero trading costs and no
tax difference. It also underperformed for any reconstitution interval
from 1 month to 3 years. So, for me, the alleged outperformance
of high dividend payers just ain't so. If it is so, it's so well
hidden that it is entirely useless (or even backwards) in practice.

This begs the question: why do people think it is so?

My guess is that any such tests used additional criteria. For example,
if you're thinking of a test which is constructed by considering the
degree of coverage of the dividend from earnings, the outperformance
evidently comes from the high earnings yield, not the dividend yield.
(If you require a high dividend yield and good earnings coverage,
you are essentially filtering on high earnings yield). For example,
if you consider only those firms with a dividend payout ratio of 40% or
less, then take the 20 stocks each quarter with the highest dividend
yield, you can outperform the S&P total return by about 5.0%/year.
But, you are implicitly requiring an earnings yield 2.5 times as
high as the dividend yield, which is the sole source of outperformance.
As seen above, the dividend yield itself does not predict outperformance,
so this good result is coming from the earnings: a low P/E ratio.
Performance among low-dividend low-P/E stocks is almost identical
to performance among high-dividend low-P/E stocks: A difference
of only 0.4%/year in the last 22 years, and it was the lower dividend
payers which did a touch better.

Simply put, high dividend payers (in absence of other analysis) tend to
have high dividends for a reason: the market bids down the price
because either the business or the dividend is likely to be unsustainable.
As a result, they tend to underperform the broad market.
If you know nothing about two firms other than their dividend yields,
the one with the lower yield is the better bet based on the evidence.
Admittedly, that's a big "if", but it's worth knowing.

But, the more important lesson is that dividend strategy does not affect the firm's true value.
For any typical firm able to reinvest capital at about the average cost
of capital, whether it pays out a dividend or not does not change the
firm's value at all. Axiomatically, the average cost of capital in an
economy is the same as the average return on capital, so using that
as a discount rate on the dividend payout results in the exact same
value when you add the discounted current value of dividend stream and
the terminal value. The dividend paying firm is smaller at the end,
but the whole stream of payments has the same current value.
One corollary of this is that, among typical firms unable to earn
a return on capital in excess of the going cost of capital, a growing
firm is worth no premium at all compared to one of a static size.
The new business will require new capital, which will be at a cost
exactly enough to offset any potential gain to existing shareholders,
through either reduced dividends or dilution.

Another corollary is that any firm which can invest new capital only at
a return lower than the prevailing cost of capital should always pay all
profits as dividends or stock repurchases, and any firm which can
invest at a higher return should pay no dividend and perhaps raise new capital.
A firm which can reinvest only a portion of its earnings at returns
higher than the average cost of capital should reinvest those, and pay out
the rest through dividends or buybacks. These are the strategies that
maximize intrinsic value and shareholder total return.
Sadly, few bosses know it.

Firms which have the ability to invest lots of new capital at high
returns are the very best ones to invest in. Some of these firms will
have management teams which agree with this analysis, and pay no
dividend at all. Think "Berkshire Hathaway".

Jim

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Author: Lammergeier40 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7405 of 14780
Subject: Re: FKA: GSK Date: 2/14/2008 10:41 AM
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Think "Berkshire Hathaway".

Exactly. Except maybe not the point you were trying to make.

Rather than think "Berkshire Hathaway doesn't pay a dividend, therefore I'm right" take a look at the stocks WEB actually buys, and their dividend policies.

USB
USG
BAC
WFC
JNJ
BUD
etc.

Petro China is long gone, but WEB commented specifically on the "40% of profits returned as dividends" policy as being a key factor in his decision to buy.

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Author: wishiwaspsychic Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7406 of 14780
Subject: Re: FKA: GSK Date: 2/14/2008 5:26 PM
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Jim,

I believe you may be missing Lot's qualifier of companies "constantly raising dividends" constituting those that outperform. The highest dividend yielders at any specific time are likely to include firms with unsustainable yields and/or firms in declining industries, and hence aren't necessarily going to do wonderful things.

The companies to which Lot refers are those that have increased dividends for 20+ years. Unsurprisingly, if a company has been able to increase its dividend every year for 20 years, its business has usually done pretty well, and its stock has typically followed suit. The trick, of course, is being able to determine which companies will be able to increase their dividend each of the next 20 years, which leads us back to the value/moat/reinvestment of capital debate.....

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Author: rnam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7407 of 14780
Subject: Re: FKA: GSK Date: 2/14/2008 7:03 PM
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Wendy,

Great pick and you probably paid less for it than Buffett.

http://www.bloomberg.com/apps/news?pid=20601103&sid=a9RU502sekrQ&refer=news

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Author: CryingofLot49 Big funky green star, 20000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7413 of 14780
Subject: Re: FKA: GSK Date: 2/15/2008 2:51 PM
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Sigh.

Mungo, you didn't read what I wrote very closely:

'Actually, constantly rising dividends have proved to be one of the few ways to outperform the market over time. This has been shown/proven by both academics and fund managers'


If the case is strong, it is hiding extremely well.
Consider: an equally weighted portfolio constructed of the 20 highest
dividend-yield stocks covered in the Value Line database


The case is quite strong, if you read what I wrote, and there's reams of evidence proving so.

What you wrote is not even *remotely* similar. In fact, it's almost painfully backwards because the firms with the 'highest' yield at a given point in time almost always lower their dividend [at some point] going forward because the div yield is high due to the distressed nature of the company. Think leveraged mtg company stocks, etc.

the alleged outperformance of high dividend payers just ain't so

No one alleged this but you.

Simply put, high dividend payers (in absence of other analysis)

If you must, at least try to rebut what I wrote by analyzing just that, not some other strawman I never mentioned. I promise to try to do the same.

Thanks!

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