OK, My Turn

[Dividend Watcher]

It's been a while since I updated my portfolios. I wanted to chime in on the "What did you buy today" thread but, with everything going on in my life, did not have time to write an intelligent post. Now that the long-awaited correction is here, I'm taking a pause to review both of our portfolios. I've done a little shifting my focus over the past couple months so some changes have been made around the edges. As I've been documenting it here, I guess it's time to catch up. First my portfolio.

I got tired of GE and the glacial changes taking place. It's been a little over a year since I first took a position in it and in that time they've spun off some of the financial assets (Synchrony), tendered an offer for Alstrom which has been bouncing around regulatory agencies around the world and had to make various proposed concessions to get the deal done, tried to sell the appliance division to Electrolux but that got shot down for now, are getting around to jettisoning more financial assets, and now they've frozen the dividend through at least 2016.

I understand full well that large companies (and there aren't too many this size) sometimes take years to reconfigure their operations. However, by my guesstimates, before GE becomes an industrial powerhouse again I could be retired and there's no guarantee where the price or the dividend end up by then. The dividend freeze was the icing on the cake, especially so soon after the cut during the Great Recession. Even a penny a quarter bump, as in AT&T, would've signaled more of a committment to shareholders than announcing a freeze. Since many industrials had started breaking down in June-July, I decided to start looking at my options. This was done in the beginning of August.

Emerson Electric (EMR) has taken a beating since spring as their sales to the oil patch have decreased along with the oil stock's capital investment programs. Additionally, they have currency headwinds and European capital spending cutbacks to deal with at the same time. The stock price fall accelerated in May and by the end of July it was trading at the same price it was called away from me over 3 years ago.

Eaton Corp. (ETN) was holding up until summer hit. By then, the currency issues along with reduced capital spending throughout the world were taking a hit in all divisions except for the auto/truck drive trains. Some posit that that sector is peaking also. I've always liked ETN despite its cyclicality. When they bought Cooper Industries in the Great Recession, I thought that was a diversifying add to their industrial portfolio. I missed buying ETN coming out of the recession and by the time I was convinced the Cooper purchase integration was going well, the price had gotten away from me. Another point in their favor was that for the last 15 years (as far back as I looked), ETN has never cut their dividend. Yes, they've frozen it during the tough times a couple times. When the CEO stated recently that acquisitions would slow down in the near future to pay down debt and defend the dividend, I at least took it to heart that they are shareholder-friendly. With actions to back it up in the past, at least as far as I looked, I tend to believe him.

There were others such as HON, ITW, FAST, PH and MMM that interested me but either the yield was too low, the P/E was too high, or both for this point in my life. With less than a decade to full retirement age, I've begun focusing more on yield and accelerating the compounding machine.

I won't get into an analysis of the financials here. Let's suffice it to say I was satisfied with EMR's long track record and both companies' payout ratio is reasonable at 40-50%. Even with a drop in earnings, it won't be horrendous.

With all that, I modeled what kind of dividends I could expect for the next 15 years. Afterall, my goal is a continuing income stream to help fund retirement.

For EMR and ETN, I used the lowest of either the 3/5/10 year dividend growth rate or analysts' estimates of EPS growth for the next 5 years. In addition, I froze ETN's dividend for 2 years beginning in year two since a freeze could be expected at some point. I allocated 60% of the proceeds for a purchase of EMR and 40% for ETN.

For GE, I used analysts' estimates for EPS growth of 7.7% since the 5 & 10 year dividend growth rate is abysmal with the cut. The 3 year rate of 14.9% is unsustainable for a company the size of GE in my opinion. I froze GE's dividend in the first year as they've already announced that was their intention.

Here are the results:

   

In early August, I sold GE. I banked the cash for a week or so until I could get a feel for how the market was responding. Of course, they continued dropping but with a trailing P/E of less than 14 for both and yields up around 3.7%, I was satisfied to make purchases. Lucky for me, with the further drops in price, I was able to add a couple more shares than I had modeled adding a little more to the expected income.

Of course, a lot could happen in the next 3-5 years so beyond that is all speculation. However, I think I'm on firm ground in saying that I will at least receive the same or higher income for quite a few years by swapping GE for a combination of EMR and ETN.

Looking at it today, I could've done much better waiting a few weeks. Who knew that Santa was coming in August this year. Who knows, it may get better yet.

For you younger folks interested in GE, this wasn't meant to dissuade you from being or becoming a shareholder. There are tons of good things that GE is capable of; their locomotives, steam and gas turbines, medical devices (their MRI machines are all over here), their big data collection to improve reliability both in rail and in power generation, and aerospace/nuclear/power plant expertise to name a few. If you have patience and/or buy at the right price, you could be well rewarded. Just not for me at this time.

To be continued . . .