Monday, November 28, 2011

2011 Dividend Machines EARNINGS PER SHARE

Verifying balance sheetImage by s_falkow via Flickr
Dividend Machines – 2011 Earnings per Share
            An income investor’s sole investment goal is income but we all know that we want our income to flow from a reliable source.  In life there are no guarantees, therefore we must depend on the financial indicators that are consistent with an investment that will deliver safe and ever increasing income.  Earnings per share are, I think, the easiest and best indicator of a company’s profitability.

            Recently I discussed dividends, dividend increases and
option income on our fifty two 2011 dividend machines.   But do you know that some companies pay a dividend and may have even increased their payout without earning as much money as it pays you?  Over time, this will not work out well.  When you investment in a company that pays a dividend, you must assure yourself that the company can afford to pay the dividend.  

            I like to use earnings per share (EPS) as one of the four criteria I use to screen for dividend machines.   What are earnings per share?  Accounting students spend years learning the nuances of earnings.   The most obvious description is the amount of money a company has left after it deposits all the revenue and pays all the expenses then divide that number by the number of shares outstanding.  

            If a company earns a million dollars a year and there are one million shares owned by the shareholders then the earnings per share is one dollar.   Pretty simple!   If you “google” earnings per share you will learn a lot about income, net income, revenue, earnings etc.  You can go goofy trying to understand a very simple formula.  The reason is that companies can manipulate the numbers.  For instance some measures do not include taxes; some measures subtract the monies paid to preferred shareholders.   Some websites measure EPS based on already delivered earnings (trailing) and some base it on estimated future earnings.  It matters not if you are a conservative or aggressive income investor when you look at EPS.  Use the same measure every time.  Find a financial website you like and use their earnings every time. 

            Now let’s see how the earnings per share of our 2011 dividend machines stack up.  Individually you want every company to earn more than it pays you.  A company that earns $1.00 per share and pays out $.99 may need to be watched.  That very high payout ratio may mean trouble.  The company may not be able to increase the dividend.  On the other hand, you could just be looking at a bad period for the general economy or for a specific industry. 

Legget and Platt, (LEG) see post has the highest payout of the 52 dividend machines.  LEG earns $1.18 per share and pays out $1.12.   Eight stocks on our 2011 dividend machine list pay out 80 percent or more of their earnings.   Two of these are utilities; Duke Energy (DUK) see post, and Southern Companies, symbol (SO) see post.   Utilities and real estate investment trusts tend to pay out a lot of their earnings.  

Lockheed Martin, (LMT)  see post sports the lowest payout ratio.  LMT earns $7.98 per share per year and pays out $3.00.  Chevron, (CVX) see post is next with a payout ratio of 27.25%. 

 Based on 100 shares of each of the 52 dividend machines profiled in 2011, earnings per share were $15,819.    The payout ratio of the total portfolio is 52.49 percent.   This is a good aggregate payout ratio.   You need to look at each of the dividend machines you own and calculate the payout ratio. If your portfolio pays out, in the aggregate, greater than 70 percent, you might consider some changes.

Very Truly Yours,
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