Money Advice Guide

Dividend is earnings distributed to the shareholders in the form of cash. Now, not all publicly-traded companies pay dividend. Most of the dividend-paying companies are profitable or have long history of profitability. This is key because in the long run, I believe profit will dictate stock price movement. Therefore, picking a good dividend paying stocks will pay off in the long run.

What is the criteria that you should be looking for in dividend paying stocks? Basically, we want our companies to maintain or increase its dividend payment for a long time. The following guidelines will help you in identifying the good dividend paying stocks.

Long History of Profitability. I prefer companies that have at least 3 years of profitable years before initiating dividends. Business tends to fluctuate and I want to make sure that the company is solidly profitable before they initiate dividend payments.

Average Payout ratio of less than 75%. Payout ratio is the ratio of dividend paid versus net earnings. For example Bank of America (BAC) gives out $ 2.00 per share of dividend while it earns $ 4.15 per share. This brings its payout ratio to 48%. Payout ratio of less than 75% ensures continued dividend payment even when business is less than stellar. Furthermore, the company will still have enough money to expand its business if needed to.

Predicted Earning Growth of at least 0%. That’s right. Earning should stay constant at the very least. If earning plunges, the dividend eventually will be cut. No, we do not demand earnings to grow by X amount. We just need it to be constant. If you calculate that a stock is already undervalued with earning growth of 0%, then it will be deeply undervalued when their earning is growing. When earning is growing, dividend payment will follow suit.

Net cash of at least $ 0. What I meant here is the amount of net cash that the firm has on its balance sheet. Net cash is calculated by subtracting cash & cash equivalent with long-term debt. When long term debt exceeds cash, the value of net cash will be negative. We prefer companies that have a positive net cash. This way, even when business falters, it still have enough cash to operate its business or perhaps continue its dividend payment.

Clean Bill of Health. This is important. Some companies meet all of the above criteria but its accounting is under investigation by the SEC. What good does it do? Therefore, make sure that the company in question has a clean book and SEC is not investigating its accounting practices.

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Tags: Common Stock, Fair Value, finance, Income Statement, investing, Net IncomeCommon Stock, Fair Value, finance, Income Statement, investing, Net Income

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As turnaround investors, I prefer to invest in companies that are down but not out. This is important because a lot of times, investors misunderstood the two. Often times, these two types of companies are trading near or at their 52 week low. But the similarity ends there.

Company that is Down. This is the company that experiences problem and it seems like it can weather the problem. It just needs time to right the ship and get back on track. How can we be certain that the company can weather the storm? The ultimate guideline is to look at the company’s balance sheet and income statement. Does the company have a positive net cash? Is the company expected to post a profit? If the answer is yes to both questions, then the company in question is most likely is just down, but not out.

Company that is Out. This is the company that experiences problem but its future existence might be in doubt. It might right the ship but by then it might be too late. As a result, shareholders will be wiped out and lose 100% of their investment. How can we be certain for the company that is out? Again, we have to check the ultimate guideline, which is the balance sheet and income statement of the company. Does the company have a negative net cash? Is the company expected to post a loss for the foreseeable future? If the answer is yes to both questions, then the company in question has the high probability of being out of business.

Using analogy without illustrations are confusing, in my opinion. Therefore, I will choose one company for each situation. Please do not treat this as a buy or sell recommendation. This is merely my observation as someone who had watched these companies for a while.

Pfizer Inc. (PFE) might be categorized as the company that is down. Stock price slumped to 8 year low this week due to weak sales of its drug franchises and tepid guidance. Management has refused to update guidance for 2006 and beyond due to uncertainty. So, let’s look at Pfizer’s balance sheet, shall we? The latest information on Pfizer shows that the company has $ 15 Billion of cash and equivalent and $ 5.517 Billion in long term debt. In other words, Pfizer has $9.5 Billion of positive net cash. How about earnings? Is Pfizer expected to post a loss? Nope, it is expected to post earnings of $ 1.95 per share for year 2005 or $ 14 Billion of net profit. Profit is plenty while balance sheet is solid. Pfizer clearly is a company that simply has a small bump in the road.

How about AMR Corp (AMR)? This is an excellent example of a company that is out. Looking at the balance sheet, AMR has a negative net cash of $ 9.5 Billion. What this means is that it has $ 9.5 Billion more long term debt than it has cash. Is AMR profitable? Not a chance. It is expected to post a loss of $ 4.36 per share for 2005 or $ 714 Million. It doesn’t look pretty. High amount of debt and big loss is the recipe for a company that is down. If AMR doesn’t turn its ship anytime soon, it might be forced to file bankruptcy.

To consistently make money, investors need to be able to differentiate the company that is down and company that is out. Weed out the company that is out and your investment return will be so much better.

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Tags: Common Stock, Fair Value, finance, Income Statement, investing, Net IncomeCommon Stock, Fair Value, finance, Income Statement, investing, Net Income

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