Sunday, October 17, 2010

RSY XII: Update, Div. MRH, Buy 100 LZ @ $112.51, Earnings Growth and Stock Prices


The above table is a snap shot of current holdings of the RSY model portfolio. RSY received an alert that the MRH dividend was added to the account, which was 9 cents per share with 400 shares for a total of $36.00 deposited. (Click on table for a clearer image.)

Since we are still sitting with cash on the sidelines {earning almost nothing} let us examine some possible moves to earn some healthy returns. We talked about the Lubrizol Corporation {LZ} on RSY before.
The Lubrizol Corporation {LZ} is a large-cap stock in the Chemical Manufacturing industry and has a strongbuy recommendation from Sabrient Systems. There is a lot of good things to say about the company and the purchase would allow the RSY portfolio to diversify more. But with such a low dividend yield at 1.29% and volatile prices then it may be best to hold off for now on this selection. The day's price range was over $3 and dividend payouts have been 36 cents per-quarter. This goes to show that even good dividend paying stocks need to be cautious about entry and exit points. It would take over two years in dividends to pay for a single day's swing in prices. For now RSY will add LZ to its watch list.

LZ has a lot of recent insider activity but most of it is related to exercise of options for officers of the company. Sabrient analysis states, "Top growth and momentum scores and an above-average value profile indicate strong performance in the market and earn LZ a Strong Buy rating." Even with an amazing Sabrient growth score of 94.4, it also boasts an impressive value score of 74.4. Earnings, balance sheet, and fundamentals scores all rank among the highest at 96.3, 85.7, and 91.3 respectively. The dividend is relatively low to what our goal is, but I think the RSY portfolio can achieve good safer returns with a strategy of using covered calls. The options market looks liquid enough for the portfolio with potential decent prices on writing covered calls.

RSY portfolio recommends a limit order of 100 shares of LZ at a strike price of $112.51 {GTC}. Just like the price movements on Friday being volatile, RSY hopes to catch it on a dip. Another price point might be to set the limit at $112.01 and hoping for another rapid drop during the day at some time.

Earnings Growth and No Cheese?
As individual investors, we have a limited number of choices to make. Daily we have no or little control over share prices, but we can decide when, and at what price to either buy or sell a specific stock at. Morgan Housel at Motley Fool spells this out in his article at 5 Companies That Doubled Earnings While Their Stocks Went Nowhere.
There are two important parts to successful investing: finding the right company, and finding the right price. In any market, singling out good companies isn't terribly difficult. They're usually well-hyped. But finding the right price can be painfully elusive. Thankfully, the pool of good companies selling at good prices today is about as deep as it's been at any time during the past decade.

While earnings growth is important to the RSY portfolio, we are also interested in how earnings growth helps propel growth in dividends per share. First let us eliminate the two non-dividend paying stocks on Morgan's list, being Google {GOOG} and WellPoint, Inc. {WLP}. Next looking at the 3 other stocks, I looked at dividend growth compared to changes in the price of the stocks. Over the last 10 years, Wal-Mart Stores {WMT} has increased dividend payouts from 6 cents per quarter to 30 cents most recently. The stock price has drifted in the range of around $45 to $60 and October 23, 2000 it closed at $47.31 compared to the close on last Friday of $53.35. Thus in the example of WMT, dividend payouts increased 400% while stock prices increased marginally. JOHNSON & JOHNSON {JNJ} has increased dividends from 16 cents to 54 cents while prices have gone from a closing price of $45.78 on October 23,2010 to a close on Friday of $63.75. Thus, an increase of nearly 250% on dividend payouts and the stock price increased to around 40%. MICROSOFT CORP {MSFT} started paying out dividends of 8 cents per share at the beginning of 2003 and on the most recent dividend payout paid 13 cents. Prices have increased marginally for around $24 to $25.54 on Friday's close. Thus, dividends increased over 60% and stock prices increased a measly 6.5%.

Mr. Housel provides 3 explanations for why there can be a disconnect between growth of earnings per share and stock prices. For RSY analysis, we were most concerned with dividend growth per share and stock prices.
1. The current valuation is too low.
2. The starting valuation was too high.
3. Future growth prospects have suddenly taken a nosedive.

For the first two, they most definitely question the validity of a strict interpretation of efficient-market hypothesis. As individual investors, we can only understand and take advantage of What the Market Wants. For the third point, RSY tries to pick solid performing stocks over the long-run that hopefully growth prospects will not be adversely affected by the systemic risks of the macroeconomy.



Links:
ETFs dividend yielding: pfm {attractive}/pid iro {not Etrade} {most attractive}/NFO {Neutral} {High-Dividend ETF List: Complete List from Stock-Encyclopedia.com}


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