Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Dividend investing for retirement -- Ignore unavailable to you. Want to Upgrade?

To: Tapcon who wrote (9857)	8/15/2011 12:09:44 AM
From: Jacob Snyder	Respond to of 34328

<Are there extenuating circumstances?> A few. If there is a one-time-only event that ruins profitability briefly (and I'm very sure it really is one-time), they might have a payout ratio over 100% (again, briefly, like a year at most). If they are in a cyclical industry, with high capital or R&D requirements, then, at the cycle trough, their payout ratio might be high. But the average payout ratio, over a long enough period to include both cycle highs and lows, shouldn't be over 60%. An example of this might be KLAC (semiconductor equipment), now paying 3.9%. When semi companies stop buying equipment, the equip companies (even industry leaders, even the ones that are monopolies or duopolies) often are unprofitable for 1-3 quarters. But the good companies in semi-equip (like KLAC, AMAT) have no debt, and go into downturns with big cash hoards, so they have no problem paying dividends through downturns. When companies have payout ratios over 100%, it's like borrowing money to do a stock buyback (which an amazing number of companies do, and they tend to do it most when stock prices are peaking). It's a sign of poor management. Over the longterm, no payout ratio over 100% is sustainable; this is simple math.

To: Tapcon who wrote (9857)	8/15/2011 12:53:19 PM
From: E_K_S	Read Replies (2) \| Respond to of 34328

Hi Tapcon - Re: Payout Ratio You should be aware that certain dividend paying companies are structured for tax purposes in certain ways that result in unusually high payout ratios. REITs, Master Limited Partnerships, and Energy Trusts, for example pay no corporate taxes as long as they distribute the bulk of their earnings (up to 90%) back to share and unit holders in the form of dividends. Some of these companies have high Payout Ratios due to large depreciation expenses and/or oil depletion allowances. A better calculation to use is adjusted funds from operations (AFFO). bestwaytoinvest.com From the article:"...In REITs and utility trusts, where there is a large amount of depreciation occurring on capital assets, the traditional dividend payout analysis is not an accurate measure to determine whether the distribution is safe. Instead, you have to calculate adjusted funds from operations (AFFO) per share to determine the payout ratio . Funds from operations is a non GAAP measure which adds back depreciation and subtracting gains from sale of depreciable property to earnings. AFFOO takes this step one further and is generally (because there is no uniform definition of AFFO) calculated as funds from operations minus capital expenditure....". ------------------------------------------------------------------------------------------------------------- Finally, some of these companies that show a high Payout Ratio (according to Yahoo Finance) really reflects a portion of that payout as "return of capital". This is true for both MLP's and Energy Trusts. To compare the relative payout ratios correctly, you first need to adjust the amount of the "return of capital" in the number. Therefore, it is not as simply comparing one payout ratio to another w/o looking first at the type of company structure (REIT, MLP & Energy Trust). When I evaluate Energy Trusts, I look at how the company is replacing their reserves. If they are paying out more money either as a dividend or return of capital and their reserves are not growing, this is a warning sign. I believe the last time I looked, ERF was growing their reserves faster than PWE. In fact I have been selling my PWE as their reserves were not being replaced as fast as they were being depleted in the most current year. Hope that helps. EKS