Morgan Stanley goes to bat for dividend-paying stocks in a
U.S. equity research report this week. In a nutshell, MS argues the payout ratio
of dividend stocks is near an all-time low and could increase substantially from
here and still remain low by historical standards. In a week when ten-year
Treasury yields are breaching new historic lows, dividend yields are
increasingly attractive by comparison. And despite looming threats to dividend
taxation rates, there’s no compelling reason to bail on dividend stocks for that
reason at this point.
MS recommends investors continue to overweight utilities and health care,
despite the fact that the defensive sectors have now been the best performers
for the past three months. MS recommends underweights in consumer discretionary
and industrials, and says it’s removing Exxon Mobil Corp. (XOM) and Union Pacific
Corp. (UNP)
from its portfolio and adding AT&T Inc. (T), which moves MS to market-weight in
telecoms and underweight industrials.
Beyond that, MS lists some current high-yielding stocks that it labels safe
and “fundamentally and quantitatively attractive,” including Chevron
Corp. (CVX),
MetLife Inc. (MET),
Freeport-McMoRan Copper & Gold Inc. (FCX), Franklin Resources
Inc. (BEN), Cardinal Health
Inc.(CAH), Fifth Third Bancorp (FITB), St. Jude
Medical (STJ)
and Staples Inc. (SPLS).
Thursday, May 31, 2012
May 31, 2012, 9:18 AM.The Hidden Appeal of Dinky Dividends.
Don’t scoff at stocks with dinky dividend yields of 1% or so. Some of them
may hold the key to handsome total returns in coming years.
The broad case for dividend-paying stocks rests on surging demand for yield, combined with a tight supply of it. Over the next 20 years, as the baby boomers retire, the percentage of the U.S. population the age of 65 and up will double, according to the Census Bureau. Many investors will look to convert savings into income by purchasing investments with cash yields.
Meanwhile, America’s core “Fed funds” interest rate has sat near zero since December 2008. That’s designed to stimulate the economy, but it has also served to collapse investment yields.
Consider: A retiree who puts $1 million into 10-year U.S. Treasury notes, which hit a record low yield Thursday, generates a yearly income of about $16,000, versus an average $62,000 since 1953. Treasury coupons, unlike stock dividends, don’t grow.
The obvious response for stock buyers is to scoop up shares with high dividend yields, but there are two problems with that approach now. First, it has already worked too well. Last year, a simple strategy of selecting S&P 500 stocks with high dividend yields returned 18.5%, the highest return of more than 30 strategies tracked each year by Bank of America Merrill Lynch.
Second, there’s at least some chance that dividend taxes will jump after this year, when a 15% rate cap is set to expire (see “Preparing for a Dividend Tax Hike”). It’s unclear whether higher taxes would reduce long-term demand for high-yield stocks, but it could spook investors in the short term.
Savita Subramanian, a stock strategist at BofA, recommends shifting to a different dividend strategy: Rather than simply targeting high-yield stocks, favor those with potential for payment growth, even if their current dividend yields are modest.
That approach offers some advantages. Stocks with modest yields are less likely to be sold off on fears of a tax hike. And ones with fast dividend growth tend to be thriving companies, as opposed to some high-yielders, whose prices are low because their growth prospects have dimmed.
It might seem counterintuitive to react to today’s low yields by seeking out stocks with dividend yields of 1% or so. But if a company increases its dividend by 15% a year, payments to investors double every five years — and share prices often rise, too. Plenty of companies have room for such increases, judging by high levels of corporate cash and low spending on dividends as a percentage of profits.
The broad case for dividend-paying stocks rests on surging demand for yield, combined with a tight supply of it. Over the next 20 years, as the baby boomers retire, the percentage of the U.S. population the age of 65 and up will double, according to the Census Bureau. Many investors will look to convert savings into income by purchasing investments with cash yields.
Meanwhile, America’s core “Fed funds” interest rate has sat near zero since December 2008. That’s designed to stimulate the economy, but it has also served to collapse investment yields.
Consider: A retiree who puts $1 million into 10-year U.S. Treasury notes, which hit a record low yield Thursday, generates a yearly income of about $16,000, versus an average $62,000 since 1953. Treasury coupons, unlike stock dividends, don’t grow.
The obvious response for stock buyers is to scoop up shares with high dividend yields, but there are two problems with that approach now. First, it has already worked too well. Last year, a simple strategy of selecting S&P 500 stocks with high dividend yields returned 18.5%, the highest return of more than 30 strategies tracked each year by Bank of America Merrill Lynch.
Second, there’s at least some chance that dividend taxes will jump after this year, when a 15% rate cap is set to expire (see “Preparing for a Dividend Tax Hike”). It’s unclear whether higher taxes would reduce long-term demand for high-yield stocks, but it could spook investors in the short term.
Savita Subramanian, a stock strategist at BofA, recommends shifting to a different dividend strategy: Rather than simply targeting high-yield stocks, favor those with potential for payment growth, even if their current dividend yields are modest.
That approach offers some advantages. Stocks with modest yields are less likely to be sold off on fears of a tax hike. And ones with fast dividend growth tend to be thriving companies, as opposed to some high-yielders, whose prices are low because their growth prospects have dimmed.
It might seem counterintuitive to react to today’s low yields by seeking out stocks with dividend yields of 1% or so. But if a company increases its dividend by 15% a year, payments to investors double every five years — and share prices often rise, too. Plenty of companies have room for such increases, judging by high levels of corporate cash and low spending on dividends as a percentage of profits.
AMC BUYOUT
NEW YORK (CBS.MW) -- J.P. Morgan Chase's buyout arm and Apollo Management
agreed Thursday to acquire and take movie-chain operator AMC Entertainment
private in a $2 billion transaction.
Shareholders of Kansas City-based AMC will get $19.50 a share in cash, translating into a premium of nearly 14 percent over AMC's Wednesday closing share price.
It also represents a 37 percent premium to AMC's closing share price of $14.22 on Monday, when news that a deal was in the offing leaked. The stock dropped 4 cents to $36.78 on Thursday.
After a morning trading halt, shares of AMC rose $1.96, or more than 11 percent, to $19.12. They earlier hit a 52-week high of $19.20.
The transaction includes $1.67 billion in cash, $349 million in assumed debt and $399 million in cash and cash equivalents.
J.P. Morgan Partners will own 50.1 percent of AMC, while private investment firm Apollo Management will own 49.9 percent.
AMC, a leading movie theater chain, currently operates 232 theaters in the United States and seven other countries. Senior management will retain their positions after the transaction is completed.
The AMC transaction is the latest bringing together a movie exhibitor company and a buyout firm.
In June, Bain Capital, Carlyle Group and Oaktree Capital Management agreed to buy Loews Cineplex Entertainment for $1.46 billion. And earlier this year, Madison Dearborn Partners bought out Cinemark theater chain for about $1.5 billion.
But shares of Regal Entertainment Group /quotes/zigman/303770/quotes/nls/rgc RGC -1.30% got little residual lift from news of AMC's deal. Centennial, Colo.-based Regal rose 18 cents, or 1 percent, to $18.17.
Earlier, Loews and AMC also engaged in merger talks that eventually went nowhere. See story.
The independent directors of AMC's board recommended the sale of the movie chain to investment vehicle Marquee Holdings. Apollo and Durwood Voting Trust, two shareholders of AMC, are also supporting the deal.
Pending regulatory and shareholder approval, the transaction is expected to close in the fourth quarter, at which time AMC's shares will no longer trade on the American Stock Exchange.
Lazard advised AMC's independent committee, while two law firms -- Polsinelli Shalton Welte Suelthaus and Richards Layton & Fingers -- served as legal counsel. Goldman Sachs /quotes/zigman/188479/quotes/nls/gs GS +0.93% and Skadden Arps Slate Meagher & Flom represented AMC.
Meanwhile, Citigroup Global Markets /quotes/zigman/5065548/quotes/nls/c C +1.54% advised Apollo. Latham & Watkins represented J.P. Morgan Partners and Wachtell, Lipton Rosen & Katz provided legal advice.
Also Thursday, AMC Entertainment said it earned $8.8 million, or 17 cents a share, in the first quarter ended July 1, compared with $2.7 million, or 7 cents, earned a year ago. The average estimate of analysts polled by Thomson First Call was for a profit 15 cents a share.
AMC's quarterly revenue rose 4 percent, reaching $489 million.
Shareholders of Kansas City-based AMC will get $19.50 a share in cash, translating into a premium of nearly 14 percent over AMC's Wednesday closing share price.
It also represents a 37 percent premium to AMC's closing share price of $14.22 on Monday, when news that a deal was in the offing leaked. The stock dropped 4 cents to $36.78 on Thursday.
After a morning trading halt, shares of AMC rose $1.96, or more than 11 percent, to $19.12. They earlier hit a 52-week high of $19.20.
The transaction includes $1.67 billion in cash, $349 million in assumed debt and $399 million in cash and cash equivalents.
J.P. Morgan Partners will own 50.1 percent of AMC, while private investment firm Apollo Management will own 49.9 percent.
AMC, a leading movie theater chain, currently operates 232 theaters in the United States and seven other countries. Senior management will retain their positions after the transaction is completed.
The latest
The AMC transaction is the latest bringing together a movie exhibitor company and a buyout firm.
In June, Bain Capital, Carlyle Group and Oaktree Capital Management agreed to buy Loews Cineplex Entertainment for $1.46 billion. And earlier this year, Madison Dearborn Partners bought out Cinemark theater chain for about $1.5 billion.
But shares of Regal Entertainment Group /quotes/zigman/303770/quotes/nls/rgc RGC -1.30% got little residual lift from news of AMC's deal. Centennial, Colo.-based Regal rose 18 cents, or 1 percent, to $18.17.
Earlier, Loews and AMC also engaged in merger talks that eventually went nowhere. See story.
The independent directors of AMC's board recommended the sale of the movie chain to investment vehicle Marquee Holdings. Apollo and Durwood Voting Trust, two shareholders of AMC, are also supporting the deal.
Pending regulatory and shareholder approval, the transaction is expected to close in the fourth quarter, at which time AMC's shares will no longer trade on the American Stock Exchange.
Lazard advised AMC's independent committee, while two law firms -- Polsinelli Shalton Welte Suelthaus and Richards Layton & Fingers -- served as legal counsel. Goldman Sachs /quotes/zigman/188479/quotes/nls/gs GS +0.93% and Skadden Arps Slate Meagher & Flom represented AMC.
Meanwhile, Citigroup Global Markets /quotes/zigman/5065548/quotes/nls/c C +1.54% advised Apollo. Latham & Watkins represented J.P. Morgan Partners and Wachtell, Lipton Rosen & Katz provided legal advice.
Also Thursday, AMC Entertainment said it earned $8.8 million, or 17 cents a share, in the first quarter ended July 1, compared with $2.7 million, or 7 cents, earned a year ago. The average estimate of analysts polled by Thomson First Call was for a profit 15 cents a share.
AMC's quarterly revenue rose 4 percent, reaching $489 million.
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