Dividends May Be Our Saving Grace

08/23/2012 7:45 am EST

Focus: DIVIDEND

Jim Trippon

Editor-in-Chief, China Stock Digest

The economy is sluggish, earnings are being lowered for coming quarters, and there's an election in a few months which means businesses are hanging fire, so what an investor to do? Stick to dividends, says Jim Trippon of Dividend Genius.

A report on CNBC.com by Jeff Cox suggested that the market has been factoring in a Romney victory in the November presidential election, citing Morgan Stanley chief equity strategist Adam Parker. Parker maintains that the only reason for the US equity averages to rise would be a bet by investors that Republican challenger Mitt Romney would defeat incumbent president Barack Obama in November.

Parker’s note to clients otherwise forecasts a downbeat scenario for the markets, forecasting a year-end price target for the S&P 500 at 1,214, which would be 12% off from its current level.

There are a couple of notable names which stick out as worthwhile dividend performers, and although they don’t get a lot of notice in the financial media, they are well followed by professional money managers and savvy individual investors.

One such company, Genuine Parts (GPC), which is the parent company of NAPA Auto Parts and also produces electrical parts, industrial replacement parts, and an assortment of other related materials, has shown strong earnings and continues to grow.

The company has a $9.5 billion market cap, does $12.7 billion in annual revenue, and earned $3.71 a share in the last 12 months. It also pays a dividend that will yield 3.2% on an annualized basis.

Genuine Parts has been growing revenue at 7% or 8% annually, and boosted its earnings guidance. This is a solid, growing company despite the sluggish economy that delivers an excellent yield.

The article goes on to quote Parker as detailing the bleak conditions right now for equities. There is the ongoing Eurozone debt crisis, which Parker says isn’t going to be solved, so there won’t be economic growth from Europe in the near future, as well as the relatively weak earnings picture for US equities right now, which won’t save the markets even with earnings beats.

Then there are the accommodative policies from both the European Central Bank as well as the US Federal Reserve, neither of which has done much either for economic growth or equities.

Growth Picture Sluggish
Ultimately—and this sometimes takes a long time, as long-term investors point out—earnings drive stock prices and market averages. Last week’s report that economic growth in the US slowed to 1.5% during the second quarter led to concerns about a stalling economy, even the possibility of recession.

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Although the Commerce Department revised its figures for first-quarter GDP growth which estimated it at 2% instead of the earlier 1.9% figure, that gives little solace to investors. The numbers point to an economy that’s growing very slowly.

The earnings season, which has been ongoing in July, has been mixed. While the number of “beats,” which is the number of companies whose actual earnings exceed estimates, has been reasonable, earnings beats are often a product of fairly easy estimates rather than outstanding earnings reports.

More telling has been the disappointing results of some of the bellwether stocks, such as Alcoa’s (AA) opening report of flat earnings, and global fast-food behemoth McDonald’s (MCD) miss.

Additionally, high flyers such as Chipotle Mexican Grill (CMG) has seen its sails trimmed by investors who’ve dropped the stock from its lofty $442 share price down to $291, not because earnings weren’t robust, but because they weren’t enough. More than that, investors are concerned about growth going forward.

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Economy and Elections
The 1.5% second-quarter GDP growth was the weakest since the third-quarter rate of 1.3% last year. More troubling, the heart of the economy—consumer spending, which makes up roughly 70% of US economic activity—also grew at just 1.5%, down from 2.5% in the first quarter. While most economists have revised growth projections downward, few are calling for the economy to slip into another recession.

Still, the comments by Parker point out that some investors are grasping for any bullish signs. Those that see a Romney win are banking on a friendlier business environment from a fiscally conservative Republican, but the view that Romney’s election is a sure thing is anything but universal. Polls differ greatly on the outcome, with one online investors poll showing an Obama reelection a 57% probability, with other polls showing Obama with a narrower lead or a dead heat.

While Sam Stovall was quoted in the earlier CNBC piece as saying that a market rally between now and the election would seem to indicate a Romney victory in the minds of many investors, Stovall pointed out that actually the opposite is true. Such market rallies historically favor the incumbent a large majority of the time. So November’s outcome is still clearly uncertain.

So all these conflicting signals leave the market situation unclear for investors. Despite the possibility of weaker profits, however, some corporations such as ExxonMobil (XOM) have increased their dividends. Both first- and second-quarter earnings were less than stellar for the oil giant, yet it raised its quarterly payment to 57 cents per share from 47 cents.

That doesn’t mean that dividend increases are going to be universal, but it does show the underlying strength of some of the dividend payers, particularly the blue chips. Remember, hundreds of companies have amassed large piles of cash that they’re not deploying through additional hiring or acquisitions.

So even in a sluggish, uncertain economy, the dividend picture is still compelling. And that means the opportunity to profit, regardless.

Related Reading:

Why Fixed Income Still Makes Sense

A Simple Way to Track Dividend Income

Annuities Can Solve the Retirement Crisis

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