03-28-2013, 08:29 PM
(03-27-2013, 03:07 PM)bobbyboy1970 Wrote: Can you explain a little better why you say what you said about intel, mo, and aflac? Seems like a set rule about not getting into a stock wioth a payout ratio above a certain level would be more simple. Thanks!
As KeithD very rightly pointed out, Intel is in a rough industry -- change can come quickly and without warning in the tech space, and a leading company today may be left in the dust tomorrow. I happen to think that Intel is going to be just fine (it is one of my larger positions), but still, I like the margin of safety that a lower payout ratio provides for a company like that. It gives the company some flexibility and free cash flow to use as needed to keep pace in a volatile market. More importantly, it says to me that they will be able to continue paying, and increasing the dividend through the potential ups and downs they'll face in the market.
Altria (MO), on the other hand, operates in a much more stable business environment. Sure, commodity prices can fluctuate, and tobacco companies face constant threat and pressure from litigation, regulation, and laws designed to discourage smoking. But these are headwinds that are well known, well understood, and that can be priced into the stock. MO is a mature and stable company with a much more predictable cash flow. In a case like this, I am comfortable with a higher payout ratio. As I mentioned, MO specifically targets a payout ratio of 80 percent. I'm not worried that MO might need the cash for other things, and when MO does need to change course and respond to the market, it should require the same kind of capital that an Intel might need.
In Aflac's case, I'd like to see them increase the rate of dividend growth some, as the percentage of earnings paid to shareholders is on the low side -- below 25 percent. I think AFL is a well-managed company, and they may be using the cash to stabilize or improve its investment portfolio or in other ways that I do not understand. But given the low payout ratio, recent increases have felt stingy to me.
If you are just getting started investing in DG stocks, a firm rule about not investing in stocks with a payout ratio above a set limit might be useful to keep you focused on safe or conservative stocks that should form the core of your DG portfolio. Once you are more comfortable and are looking to diversify your holdings, such a rule might keep you away from great stocks like MO.