CAIM 2012 Outlook

CAIM 2012 Outlook
Catherine Head ShotSaying good-bye to 2011 has been an easy thing to do. It was another tough year for the financial markets, fraught with fear and doubt. Uncertainty in Europe and the United States, a tsunami in Japan, slowing emerging markets, and downgrades of U.S. and European debts were just some of the major worries

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Catherine Maniscalco Avery

CAIM specializes in creating and managing customized and fully diversified investment portfolios for private investors.
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January 26, 2012 |  Issue No.
In This Issue
CAIM 2012 Outlook
12 On The Money
Dividend Champs
Fourth Article

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CAIM 2012 Outlook

Saying good-bye to 2011 has been an easy thing to do. It was another tough year for the financial markets, fraught with fear and doubt. Uncertainty in Europe and the United States, a tsunami in Japan, slowing emerging markets, and downgrades of U.S. and European debts were just some of the major worries.  Read more >> The market careened like a roller coaster; up in the beginning of the year to a major correction in the fall.  With all the turmoil, the S&P 500 ended the year +2.2% with dividends, while the 10-year Treasury bond yielded a meager 1.87%.

As we begin 2012, many of the worries from 2011 join us. The United States will most likely grow, but at a pace so slow as to feel almost like we are in a recession. Europe remains a wild card and the market’s current upward movement suggests it has not accounted for a negative surprise overseas.

At home all eyes will be focused on Washington as we struggle with debt ceilings and anticipate the outcome of a presidential election in November.  In turn this means that uncertainty will continue to be a theme in the markets as investors lack the confidence to forecast not only the earnings, but what multiple should be paid for those earnings.   Historically, given the current low levels of interest rates and inflation, it would be correct to expect a multiple of 18x earnings. However, the uncertainty as to whether the S&P will be able to achieve these numbers in a slow growth environment, leads us to believe that the multiple could actually be in the range of 11x to 15x.

There are, however, 2 macro themes where we do find high levels of conviction. The first is a global deleveraging as governments worldwide and individuals (especially here in the U.S.) begin to focus more on paying down debt and saving.  A recent study by McKinsey (http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth) talked about the deleveraging process that occurred in Sweden and Finland in the 1990’s.  They noted that in the first phase of the deleveraging process, economic growth is negative or minimal and government debt rises. This phase can last several years.  It is our expectation that we will experience that same process here in the United States, especially a slow growth environment, for several years.

This leads us to our second macro theme, which is that in this scenario, dividends will continue to be an important source of return and yield. In 2011, nearly 100% of the S&P return was attributed to dividends. According to S&P, dividend increases reached $50.2 billion in 2011, an increase of 89.2%.  In our portfolios, 25 of our 29 stock holdings have increased their dividend, with the average increase being over 10%.  With corporations continuing to hoard cash in this uncertain climate, we expect these strong dividend increases to continue.   S&P notes that dividend payout ratios are currently near their lows at under 30%, compared to an historic average of 52%.  At CAIM, our focus will continue to be on cash rich companies with the capacity to increase their dividends to those historic norms.

 

We look forward to working with you in 2012.  Our best wishes for a healthy, joyful and prosperous year ahead!

 

separatorCatherine Avery on Channel 12’s ’12 On The Money’

Connecticut 12 News - 12 On The Money December 2011 with Catherine Avery
Connecticut 12 News – 12 On The Money December 2011 with Catherine Avery

separatorMarket Update – Dividend Champs 

The backbone of CAIM’s philosophy is investing in dividend paying stocks over a long time period.   The companies we favor have low levels of debt and strong cash flow, giving them the financial flexibility to grow both the dividend and the company’s earnings.   Read more >>

2011 has been a challenging environment for most stocks.  We have watched the market careen like a roller coaster as we dealt with both foreign and domestic issues.  Volatility is now the new norm (as we noted in our report, Total Return Investing: Dividends for an Uncertain World, May, 2011) but what we have been able to count on in our portfolios is the growth of dividends.  25 of our 29 holdings have increased their dividend this year.  The average stock in our portfolio has increased their dividend 10.6% in.

In this newsletter we would like to highlight three companies that have increased their dividend in excess of 10% in the 4th quarter of 2011.  These companies are truly dividend champs.
V.F. Corporation (VFC) is a global apparel company based in the United States. Wrangler, Lee, The North Face, Timberland are a few of their brands.  The stock currently yields 2.1%.   Their dividend has increased for 39 consecutive years and this year alone it increased 14%, from $.63 to $.72 a share each quarter.  Currently they have $8.73 in cash flow per share and only 29% debt.   VFC has had a strong year both in the U.S. and overseas.  They have fashionable, quality brands at reasonable price points.  Earnings are expected to increase 16% in 2012.
Emerson Electric (EMR) designs and sells product solutions for industrial, commercial and consumer markets.  Washing machine, air conditioning and industrial automation parts for the oil and gas industry are among the myriad solutions they provide.  This company is a dividend powerhouse showcasing 55 years of consecutive dividend increases, even in the most challenging economic climates.  With 29% debt to total capital and $4.40 in cash flow per share, they have increased their dividend by 16% this year. They currently yield 3.1%.
Microsoft (MSFT) develops licenses and sells software products. The company generates $3.03 in cash flow per share and has only 17% in debt. Their dividend increased 25% from $.16 to $.20 per share each quarter this year. Often regarded as a dinosaur in the software world, Microsoft is still a major player for business applications.  Windows 8 is expected to debut mid to late 2012 and will benefit the tablet market.  Xbox continues to be a strong gaming franchise.

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Disclaimer: NO CONTENT PUBLISHED AS PART OF THE CAIM LLC NEWSLETTER CONSTITUTES A RECOMMENDATION THAT ANY PARTICULAR INVESTMENT, SECURITY, PORTFOLIO OF SECURITIES, TRANSACTION OR INVESTMENT STRATEGY IS SUITABLE FOR ANY SPECIFIC PERSON.  TO THE EXTENT ANY OF THE CONTENT PUBLISHED AS PART OF THE BLOG MAY BE DEEMED TO BE INVESTMENT ADVICE, SUCH INFORMATION IS IMPERSONAL AND MAY NOT NECESSARILY MEET THE OBJECTIVES OR NEEDS OF ANY SPECIFIC INDIVIDUAL OR ACCOUNT, OR BE SUITABLE ADVICE FOR ANY PARTICULAR READER.  EACH READER AGREES AND ACKNOWLEDGES THAT ANY SPECIFIC ADVICE OR INVESTMENT DISCUSSED IN THE BLOG MUST BE INDEPENDENTLY EVALUATED BY THE READER AND HIS OR HER ADVISER IN VIEW OF THE READER’S INVESTMENT NEEDS AND OBJECTIVES.

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