FEATURED EXPERT: Charles B. Carlson
29-NOV-06
Charles Carlson, editor of the DRIP Investor newsletter, explains that the jumbo dividend increases by the likes of Home Depot, AFLAC, and McDonald’s reflect a number of trends on Wall Street. Find out how high the aforementioned companies are boosting their dividends and discover what this featured expert has to say about the trends on Wall Street.
Commentary from November 22
Home Depot (HD) recently boosted its dividend 50%. It was the second time this year the firm increased its dividend 50%. McDonald’s (MCD), the fast-food giant, is hiking its dividend nearly 50%, payable December 1.
AFLAC (AFL), the insurance company with that duck for a mascot, recently announced that it is lifting its dividend 23% on the December 1 payment and increasing the dividend another 16% in the March 1 payment. Those two increases amount to a 42% increase in the dividend from current levels. (As an aside, in all his years of investing, Charles Carlson have never seen a company announce two dividend hikes at one time.)
And Home Depot, AFLAC, and McDonald’s are just three of the many examples of big companies implementing big dividend increases.
What’s going on here?
The jumbo dividend increases by the likes of Home Depot, AFLAC, and McDonald’s reflect a number of trends on Wall Street. First, many retailers and restaurant chains are slowing expansion plans. One byproduct of slowing expansion is an increasing pile of money as a result of lower capital expenditures. However, a big cash stake can cause some unwanted attention. Companies know that hoarding cash makes them targets for private-equity firms and hedge funds. McDonald’s has already been the target of a activist hedge fund investor who would like to see the company basically be turned into a real estate investment trust. And rumors have been flying around Home Depot and how it might be takeover bait.
Thus, companies are paying out that cash to shareholders in the form of huge dividend hikes.
Is this trend of mega-dividend increases likely to continue? Perhaps, especially if investors continue to reward companies boosting their dividends. The Dow’s move to all-time highs reflects the strength in large-company stocks — precisely the types of companies shelling out these oversized dividend payments. And with the buyout spree still going strong, Carlson thinks you’ll see more big dividend payments.
One company that looks especially poised to drop a huge dividend payment on its shareholders is Wal-Mart (WMT). (Please note that all of the companies mentioned here — AFLAC, Home Depot, McDonald’s, and Wal-Mart — permit any investor to buy stock directly from the company, the first share and every share.)
Wal-Mart recently announced that it plans to slow the rate of store expansion. The firm already generates huge amounts of cash, and that cash haul should rise as the firm reduces spending on new stores. Wal-Mart currently pays a dividend at an annual rate of just $0.67 per share, or less than one-quarter of the company’s expected per-share earnings for fiscal 2007 ending in January. That the stock has been a laggard gives Wal-Mart management yet another reason to appease shareholders by cranking up the dividend.
Wal-Mart usually increases its dividend in April of each year. Carlson would be very surprised if the firm didn’t goose the dividend at least 20% for the April 2007 payment.-
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