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10-30-2014, 07:30 PM
(This post was last modified: 10-30-2014, 07:32 PM by rapidacid.)
RGR pays a variable dividend of 40% of EPS. The company reported earnings after the close yesterday and got slaughtered because revenue dropped off a cliff.
For the TTM the total dividend paid out was $2.26 / share.
If Q3 numbers were identical for the next 3 quarters there would be a total dividend paid out of $0.56 / share over the next year, all because of the variable dividend.
This is from the Q3 transcript:
Quote:Andrea James - Dougherty & Company LLC, Research Division
No, it's very helpful. Just one more. Do you expect to change your dividend strategy? It is sort of rare isn't it to do a variable dividend? And I'm just wondering if you just anticipate kind of just going that road for the near future?
Michael O. Fifer - Chief Executive Officer and Director
No, I don't anticipate changing it. And I'm frankly surprised that more -- big companies haven't adopted it. Because it sure makes a lot of sense. Let's go back to when we started the dividend, back in the first quarter of '09 and I think at the time, we figured the dividend we could pay, reasonably after forecasting our cash flows and needs was about $0.06 a share. And had we done that and acted like most companies no matter how good our results grew, we would have maybe raised it $0.01 a share per year or every other year. And so, maybe it would be a whopping $0.10 a share by now or $0.12 a share. Well, that dividend has gone up pretty high per quarter, even last quarter, which was a very disappointing quarter, second quarter was about $0.45 a share. And this quarter, it's $0.14 a share. So it's still quite a bit more than had we started at $0.06 and done it the old fashion way. And of course, over the years, there have been some spectacular quarters up in that $0.50-plus per share. And since '09, we've dividended out $10.45 per share, and it probably would only been a couple of bucks or less, if we'd started at $0.06. So I think it's a really great program and more companies owe it to their shareholders to adopt it.
I've found myself agreeing in the past that it does make sense to pay out a static percentage for the dividend. If earnings drop the company won't be financially stressed to meet its dividend "obligation" if the dollar amount was static rather than the % of EPS.
Thoughts?
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My thoughts are if a company has that variable of earnings and can't plan their business reasonably enough to cover their payments to shareholders I probably don't want to own them long term.
I owned RGR for about a year and sold it for a 70% gain in the beginning of February when I saw earnings were about to plateau, and that with their dividend policy the payouts were going to do the same.
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(10-30-2014, 08:16 PM)EricL Wrote: My thoughts are if a company has that variable of earnings and can't plan their business reasonably enough to cover their payments to shareholders I probably don't want to own them long term.
I agree with this but on the other hand I also think it's smart of management to not to overextend themselves and promise more than they can handle to keep the business in operation.
However, it could also mean that the business is too cyclical and/or unpredictable for them to plan for that. That's the reason why I've never looked at the auto manufacturers as an investment. That's why I took a close look at DE's history before buying. That also is a cyclical industry. CALM went to that policy in the Great Recession and I sold them at the time.
Personally, I've come to the mindset that I find it angering that senior management generally gets a pay raise every year, sometimes (most of the time?) even better than the rest of the employees. As one of the owners, I expect my "paycheck" to increase also. I can handle a freeze for a while if the reasoning makes sense but bouncing up and down is not for me.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
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This question really gets to the heart of dividend growth investing. While paying out a fixed percentage of earnings makes complete sense for the reasons others have mentioned, if you want a continually growing stream of dividends, it really puts the focus squarely on earnings. Dividends only grow if earnings grow.
Personally, I like a company that is committed to growing the dividend, and so long as earnings are generally growing over time, I don't mind at all that the payout ratio fluctuates so as to keep my dividend stream growing smoothly. That is, if earnings are growing, but in a "bumpy" way, I'd rather get a dividend that grows smoothly (via a fluctuating payout ratio) than a dividend that also bumps up and down with earning (in order to maintain a static payout ratio).
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(11-01-2014, 11:24 AM)Kerim Wrote: This question really gets to the heart of dividend growth investing. While paying out a fixed percentage of earnings makes complete sense for the reasons others have mentioned, if you want a continually growing stream of dividends, it really puts the focus squarely on earnings. Dividends only grow if earnings grow.
Personally, I like a company that is committed to growing the dividend, and so long as earnings are generally growing over time, I don't mind at all that the payout ratio fluctuates so as to keep my dividend stream growing smoothly. That is, if earnings are growing, but in a "bumpy" way, I'd rather get a dividend that grows smoothly (via a fluctuating payout ratio) than a dividend that also bumps up and down with earning (in order to maintain a static payout ratio).
This.
Just as a customer expects value for the price they pay for their goods/services regardless of the financial state of the company or whatever else, so does the investor. As a dividend growth investor, I expect the companies that I own to pay me a consistently rising dividend, not a "whatever they're going to pay me today" dividend.
Don't get me wrong. I'm not demanding that all companies cater to my specific dividend needs to their detriment. It's a practice that makes complete sense and I would completely understand why a company would adopt it. But a truly great business's dividends should grow consistently, not fluctuate. And if the earnings are fluctuating so much that the dividend is going all over the place, then perhaps us dividend growth investors should look elsewhere. Even with a variable dividend, the earnings of a great company should consistently grow (allowing it to consistently grow its dividend).
And I'm with Kerim: Even if a company has a bumpy couple of quarters or a year in regards to earnings, I'd rather the payout ratio fluctuate rather than the actual dividend itself. Most dividend investors have different payout ratios that they are comfortable with, but none of us like a shrinking dividend.
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