The best way for investors to get their fair share of the profits
A shareholder’s just rewards are dividends and share buybacks, says a U.S. advisory whose four examples include a favorite Canadian stock.
When you buy a stock, you own a piece of that company.
In practice, acting like you own the company won’t get you very far — unless you’re Mr. Warren Buffett, who usually does a company when he invests in it.
Still, you are supposed to receive a share of the company’s profits.
And companies have different ways of sharing the wealth with you, says a leading Wall Street advisory.
But when Dow Theory Forecasts paraphrases President John F. Kennedy with the phrase, “Ask what your company can do for you,” it has a specific answer in mind.
Dividends and share buybacks.
As the stock market and the economy have pulled out of financial crisis and recession, both of these rewards have been on the rise again.
The advisory discusses the relative merits of dividends and share buybacks and features four stocks that “give back” generously. One of them is a Canadian stock it has had on its buy list for some time.
Raising per-share profits
Ostensibly, shareholders are entitled to a slice of the company’s profits. “In practice, companies reinvest most of that money, and the benefits of ownership accrue mostly in the form of price appreciation.”
In other words, companies indirectly share their success with you in the form of capital gains. You share the risks as well as the profits.
But when companies issue dividends, they share the wealth directly. Those benefits are easy to grasp. Share buybacks, on the other hand, “don’t have the tangible feel of dividends,” says the advisory.
Yet they raise the value of the shares simply by reducing them. “Profits are most commonly discussed on a per-share basis, and a decline in the number of shares will boost per-share growth.”
Look at IBM (NYSE-IBM), the advisory states. Its net income rose 9 per cent in the December quarter. Meanwhile, it repurchased enough stock to reduce its share count by more than 6 per cent for the fiscal year. Thus is per-share profits rose by an impressive 16 per cent.
This stock is both a Focus List Buy (best buy for the next 12 months) and Long-Term Buy (best buy for the next 24 months). It trades today at $162.96 and yields 1.5 per cent on its $2.60 dividend.
An optimistic picture
In the December quarter, stocks on the S&P 500 Index paid out almost $55 billion in dividends, the highest quarterly total in two years. For the year, total payments were $206 billion. That was a raise of 4.5 per cent, although this is still less than the totals in 2007 and 2008.
Share buybacks “paint an even more optimistic picture.” Last year, companies on the S&P 500 spent $207 billion more buying back shares than they collected by issuing new shares, reports the advisory. That’s almost double the amount in 2009. As with dividends, the totals still do not match the high water mark of 2007.
Yet if the economy keeps on growing and corporate profits rise with it, you can expect to see a lot more where these increases came from.
The advisory highlights three more stocks that are sharing the wealth with investors. We’ll begin with the Canadian entry.
Dividend up, shares down
Just a week ago, we mentioned Rogers Communications (TSX-RCI.B; NYSE-RCI) when this advisory featured it as one of only two foreign stocks it has as a buy (see Daily Buy-Sell Adviser, February 10).
Now it highlights this stock again for its magnanimity with investors. Indeed, the company raised its dividend yesterday by 11 per cent, to $1.42. It is yielding 4 per cent.
At the same time, the shares have slipped on the revelation that the company gained fewer new mobile phone customers in the last quarter. On the other hand, it had a record quarter for smart phones.
The share count has also dropped 7 per cent in the past year. Rogers carries a lot of debt, says the advisory, but it still has plenty of liquidity with $3.6 billion in cash.
The advisory points out that Rogers holds 30 per cent of Canada’s cable TV market and 37 per cent of the wireless market. Only 70 per cent of that market has been served, compared to 95 per cent in the U.S.
The advisory has consistently recommended this stock through the bouts of bad news that seem endemic to the mobile phone business nowadays. Trading at $34.67, it is a Buy and Long-Term Buy.
At a crossroads
The other two “profit-sharing” stocks are familiar U.S. names. Information technology giant Hewlett-Packard (NYSE-HPQ) returned more than $9 billion to investors through dividends and share buybacks in fiscal 2010.
Its dividend is conservative. It hasn’t been raised for more than a decade. But the company has cut into the share count in 20 consecutive quarters. The share price in turn has gone up by 72 per cent. The company joined the mobile wars with the release of its Palm tablet computer last week. Trading at $48.88 and yielding 0.6 per cent on its $0.32 dividend, it is a Buy and Long-Term Buy.
Unlike H-P, Wal-Mart Stores (NYSE-WMT) has raised its dividend for 37 consecutive years. The 16 per cent growth rate in the payout is well above the growth rate for sales or operating profits. Share buybacks have also reduced the share count by 6 per cent in the past year.
Wal-Mart is at a crossroads, the advisory states. Sales growth in the U.S. is waning and price reductions no longer have the desired effect. The company will push deeper into Canada, open more stores in Brazil, explore the Philippines and launch multiple web sites in China and Latin America.
While all this is going on, the stock trades at $54.65 and yields 2.2 per cent on the $1.21 dividend. It is a Long-Term Buy.
You may have a very limited ownership in the firm, but a wise company will ensure that you get your fair share of the profits, and then some.
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