Dips And Dividends
After holding a solid uptrend for most of 2013, stocks slid into a correction as the first quarterly reports disappointed. This could be the fourth straight year with market weakness developing in April and further stock price advances deferred to the fall. Despite three straight swoons in the spring, stocks then resumed their longer-range uptrend, doubling over the last four years.
Like football or soccer, solid defense becomes necessary when the other side has the ball. The mistake many investors make is to react to the anxieties brought on by market dips, selling stocks that should be held while anxiously grasping for apparent safety. The fruits of these fears show up in new quarterly reports showing mutual bond funds receiving $78 billion in new money despite record low yields.
Ten-year U.S. government bonds now yield 1.7%. In contrast, Apple (AAPL-$394) yields 2.7% on its initially resumed dividend declared last year. The company has $137 billion cash on hand, equal to $145 per share. The contrast for long-term investors is remarkable. $500,000 invested in low-yielding treasuries would come to $640,000 in 20 years. $500,000 in Apple beginning with today’s dividend yield and assuming annual 15% dividend growth would build to $1,250,000 in 20 years assuming that the price of the stock did not move up even one dollar.
Apple has been silent recently, which hasn’t helped its stock price, as choruses of its critics are fighting for media space like pigeons around a statue. It reports earnings on April 23 and will probably give some guidance on growth and dividends that should shore up its sliding.
Playing defense during pauses provides the opportunity for tuning and exploring new opportunities. With oil prices skidding, I sold Oceaneering, an oil services firm. I am retaining Chevron (CVX-$115) and Conoco (COP-$57) as asset plays with good yields. Refiners Phillips 76 (PSX-$57) and Calumet Specialty (CLMT-$36) are similar.
Healthcare is a growing sector, aided by forthcoming revenues from new legislation. I remain skeptical of young companies riding on promising but still unproven technologies. Their weakness lies in the threat of competition from the increasingly muscular big drug companies and biotechs. These may decide to compete with the new innovation or to initiate patent infringement litigation or to do both.
New legislation will lead to long overdue computerization of healthcare. This has not escaped investor attention and leading companies like Cerner and Athenahealth are trading at elevated valuations. Computer Programs and Systems (CPSI-$53) provides information technology services to over 650 community and rural hospitals.
Its sales are $183 million with earnings projected at $2.90 for 2013. CPSI recently increased its dividend to $2.04 annually, a current yield of 3.8%. There is no debt and management anticipates further dividend increases along with growth. It will announce quarterly earnings on April 26. This is a small but growing company in a sector destined to receive increased funds.
Low interest rates highlight utilities as another group with more value than bonds. These lower rates also reduce debt service costs while lower fuel prices reduce their operating costs. Duke Power (DUK-$73) and American Electric Power (AEP-$49) offer 4% yields. California’s Edison (EIX-$51) pays 2.6% now but has a better record of dividend increases. It is the parent company of Southern California Edison and, through subsidiaries, provides energy, including renewable energy, to parts of Europe, Australia and Southeast Asia.
Cheap shale gas discoveries have raised concerns regarding the viability of renewable energy. This can be seen in the 88% price drop of First Solar (FSLR-$37) from its overly optimistic peak of $317 five years ago. Decreasing costs with increasing competition decimated the company but its strong balance sheet, steadily increasing sales and global presence have created a turnaround candidate.
After years of losses, First Solar recently surprised Wall Street with 2012 earnings of $4.90, sending its stock from $28 to $41 in a single bound. Its overseas prospects keep First Solar as an interesting speculation. Apple and the others mentioned above are more solid buys.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/