Monday, October 5, 2015

Dividend Machine Dividend Cuts

I was going to write an article on dividend cuts in my model portfolios but I could find only two:  PBI, Pitney Bowes and LDR, Landauer.  

I picked each of these stocks as I compiled the 2011 portfolio.  I have compiled 5 portfolios so far that include 95 stocks.  Two out of 95 symbols profiled so far with a dividend cut makes for a boring article.  I will look next at dividend growth rates but for the purpose of reviewing failures, let's take a look at PBI and LDR.

Pitney Bowes, symbol PBI

Since my model portfolios are long only so that I can measure this strategy, I cannot "sell" PBI.  I do not reinvest dividends as these portfolios are designed to deliver income that you spend.  I don't include the dividend income in the gain because the income is for spending.  I follow the capital gains and losses as well as dividend yield and dividend growth. 

It is of some interest to look at our failures especially when you have to hold them.   Here are the Dividend Fundamentals of this failed pick. 

I am encouraged by the fact that earnings per share (EPS) exceed dividends paid out.  I am discouraged by the debt to equity ratio (D/E.)  One can see that while PBI cut the dividend in half, and took on a lot of debt to survive, PBI continued to pay something. 

Since the dividends paid out are only 35% of earnings, one could conclude that PBI is trying to pay off their massive debt.  

The 2011 portfolio holds a very shaky but improving stock in PBI.

Landauer, symbol LDR

Landauer's Dividend Machine fundamentals are so similar to PBI except for one very big measure and that is earnings per share.  LDR's earnings are struggling and not even keeping up with the dividend payout.  With a D/E (debt to equity) ratio of 11+, I would be very worried about this stock.  But Landauer's turn around is more recent than PBI's and perhaps it will survive and return to Dividend Machine status.


Lessons from History of PBI and LDR

I look back at these two stocks picked for the 2011 Dividend Machine portfolio and I see that PBI had a strong history of good Dividend Machine fundamentals.   They earned more than they paid out.  Their dividend growth was vigorous and their debt under control until 2012 when everything fell apart as the result of a change in their industry and a challenge to share holder control.  They could be considered a modern metaphor of the "buggy whip company." Yet, PBI has found a way to regroup and enter the "enterprise" space.  I think they have a chance to return to being a good Dividend Machine.  I do not think enough of PBI to buy it.

Like PBI, Landauer had a strong history of earnings greater than dividends and dividend growth but a look back makes me think I used wrong information to evaluate their balance sheet.   D/E ratio was higher than I would accept today and then something happened in 2013 and 2014 that resulted in a major hit to earnings and an increase in debt. 

The other 93 stocks are paying out at quite a nice clip and I will look at them more carefully in future articles.

In summary, when you are trying to invest in stocks that will pay dividends over time without fail, I would suggest that the four criteria I use for Dividend Machines works about 97.95% of the time.


Disclosure: No positions