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2010's Dividend Cuts and Increases

Christine Benz

Christine Benz: Hi, I am Christine Benz for Morningstar.com.

Where have some of the biggest dividend increases occurred for the year-to-date, and which companies have been most aggressive about cutting their dividends?

Here to discuss those questions with me today is Josh Peters. Josh is editor of Morningstar DividendInvestor.

Josh, thanks so much for being here.

Josh Peters: Christine, thanks for having me on.

Benz: So, you prepared a handy list here, Josh, and let's start with the good news, the companies that have been jacking up their dividends for the year-to-date. GE is close to the top your list in terms of dollar amount that they are dishing back to shareholders. What's your take on how that affects the company's attractiveness?

Peters: Well, for my purposes this has made the stock a lot more attractive. GE handed out one of the biggest dividend cuts in history here a little bit over a year ago, year and a half ago, at the depths of the financial crisis.

GE had said that "we're not going to cut the dividend; we're not going to cut the dividend" practically right up to the day in that they actually did it. Dividend dropped from $1.24 a share to $0.40. And once you have a move like that, then you're just hoping the company can stabilize its financial condition and earnings can stabilize, and we saw those factors actually fall into place pretty quickly.

I don't think GE by the middle of last year was in any real danger of having any kind of a serious financial problem, but the question comes, when does the business really start to pick itself up off the ground, and when does the dividends start to come back? Those are questions that could linger on for years, perhaps. But GE sort of decided to rush and demonstrate its commitment to putting more cash back into shareholders' pockets very quickly, raising its dividend 20% here over the summer.

This really came out of the blue as far as I was concerned, a very pleasant surprise, and it really does highlight that they really do feel I think that they let their shareholders down, specifically in the matter of the dividend cut; they want to bring that back strongly and start to affirm that commitment right away. And talk is cheap, but here they are actually walking the walk, and it also increases the yield on the stock to where it is a little over 3%, which is I think quite competitive, especially for a company that's still kind of at the bottom of the cycle.

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Benz: Right. So, J&J another one on your list, another company like.

I want to talk about a company that you have not bought for any of your portfolios that's UnitedHealth. It made a big dividend increase. Can you talk about that one?

Peters: Yes, in percentage terms it's just off the chart. It was I think something like 1,500%. What's changed here is that the company for many years had very small dividend. It's not uncommon for companies that really would just assume not pay anything at all to pay literally a couple of cents a share on an annual basis, just so that technically they are dividend-paying stock and then money managers whose portfolio requirements demand that they only purchase dividend-paying stocks can buy those stocks. Waste Management, a company that now has a very attractive dividend policy in place, had this kind of token dividend payment up until a couple of years ago.

But for UnitedHealth, its business is generating a lot of cash, a lot of earnings. Certainly, there are a lot of uncertainties around it going forward, where health-care reform, how exactly the laws that were passed earlier this year will affect the business as they unfold.

The dividend yield that the stock is providing, though, is not terribly compelling, kind of in a market average two percentage type of area. I mean, is it a plus? I think so. Is it enough of a plus that now UnitedHealth should stand out on a dividend investor's buy list? I think we're a long way away from that yet.

Benz: So, last but not least, Josh, I want to talk about who the biggest dividend cutters have been for the year-to-date, and also whether you saw any red flags there in advance of hearing that they were going to cut their dividends?

Peters: Yep, I'll tell you that it's a great contrast, 2010 versus 2008 and 2009 in that there aren't very many dividend cutters. The numbers are very small and the total numbers of dollars in play are relatively small. That's really quite the relief.

In these cases, I mean it's really just a bunch of little one-off circumstances that have really led to dividend cuts here in 2010. Frontier Communications cut its dividend 25% in order to help finance the acquisition of a big set of rural telephone lines from Verizon. They telegraphed that well in advance...

Benz: ...pardon the pun...

Peters: ... telegraph, telephone, telecom, they signaled, shall we say, that well in advance. But I mean you could also see to that the market wasn't really believing the old dollar a share dividend rate because the stock had a yield that was usually in the 9%-10% range even before the company announced the deal with Verizon. You know, that's definitely a red flag.

Valero refining, here's your classic no-moat deep-cyclical stock that can just produce a tremendous amount of cash if the conditions are just perfect, but in the case oil prices having come way up from their bottom, but gasoline demand, other refined product demand not having improved as much, [Valero] had to resort to a dividend cut.

And then Blackstone Group, here is one that I'd kind of looked at for a while and said, "I don't really know what drives dividend policy for this company." They are very large operator of private equity investments, very well-known, obviously, big deal-making names like Steve Schwarzman, and these distributions are in part how senior partners in the firm are compensated, but it's not the kind of situation where I'd say this is a steady cash-generating business that can fund a reliable dividend going forward. It's going to be very variable. It's going to depend on all sorts of financial market conditions; essentially, you buy a company like this, and you're doubling and tripling up on your market risk because everything about the business and the stock is all interrelated with the rest of the financial markets. So, when they reduced their distribution, I really wasn't all that surprised. It didn't really look like something that was sustainable, and it proved not to be.

Benz: And not the kind of company you wanted to own in any case?

Peters: Yeah, I mean plain-vanilla is really I think the best way to go. You know, when you're looking at utilities, packaged-food companies, real estate investment trusts, the things that you can kind of reach out and touch, things that you can identify with how the business actually operates, that's a much easier way to invest.

If you can say that the most critical issue, say about Valero, is what are refining spreads, called crack spreads. If you can figure out what that is and make a forecast about the difference between gasoline prices and oil prices and all these other factors, then maybe you can make a go of the investment there. I think that for most investors, especially those who are looking to just collect a good income from their portfolios and see it grow, these are unanswerable questions that are probably best left to more speculative investors.

Benz: Well, thanks, Josh. Always great to hear your insights.

Peters: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.