An Old Friend Remains Strong

12/08/2006 12:00 am EST

Focus:

Kelley Wright

Managing Editor, Investment Quality Trends

While warning of debt-laden coming clouds in the merger and acquisition business, inveterate investor Kelley Wright steers investors to a tried-and-true, solid company that is financially strong and--for years--has offered a consistent and healthy payout.

"Lost in all the talk about Black Friday and Cyber Monday is the conspicuous consumption taking place in the land of mergers and acquisitions. Year-to-date, $3.5 trillion has changed hands. Bank of America (BAC) acquires US Trust from Schwab for $3.3 billion; a group of leveraged buyout firms reached a deal to acquire Clear Channel Communications (CCU) for $19 billion; Sam Zell, with Blackstone Group, agreed to take Equity Office Properties (EOP) private for $20 billion. Not to be outdone, Freeport-McMoRan has offered to pony-up $26 billion to buy copper producer Phelps Dodge (PD).

"Call it what you will, but debt is still debt, "the albatross that hangs around a company's neck," according to Geraldine Weiss. The reality of leveraged buyout debt is that it goes on top of existing debt, which doesn't do wonders for a company's credit rating. Oh the things that are done in the name of increasing shareholder value.

"If your investment goals and objectives require you to achieve both long-term growth of capital and income, Home Depot (HD NYSE) offers excellent current value and upside potential. It recently increased its annual dividend from $.60 to $.90 per share, or $.225 per quarter. With trailing 12 months earnings of $2.93 per share, the payout percentage moved from 21% to 31%, still well below our preferred payout level of 50% of earnings or less.

"At the recent price of $37 per share, the new dividend yield is around 2.40%, significantly above HD's historic undervalued yield of 1.0%. This latest dividend increase also highlights why Home Depot has earned our much sought after "G" designation for spectacular dividend growth.

"Home Depot represents excellent historic value. While a current yield of 2.40% may appear paltry when compared to some of the higher-yielding financials and utilities, we remind you not to overlook the magic that takes place with a consistently rising dividend trend. We purchased HD in our model portfolio at Private Client on June 1, 2003 at $31.56 per share, with an annual dividend of $.28 per share, yielding .088%.

"Based on our purchase price, our dividend yield has risen to about 2.85%, a 300% increase. Combined with the 6.0% per year annual price appreciation, Home Depot has delivered an excellent compounded return that has far exceeded the level of inflation.

"Home Depot fits the profile of a bedrock position that every enlightened investor should have in their portfolio."

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