The dividend, yield, and payout ratio figures shown on the pages of The Value Line Investment Survey require an explanation for the uninitiated reader. There are some differences between how we calculate certain figures and how Wall Street typically calculates them. This doesn’t mean that we are right and they are wrong, just that our method is different.
The dividend yield is one difference. Our yields are forward-looking and reflect any dividend increases that we expect over the next 12 months. This can result in a yield that is slightly above the figure that is computed in the usual way: by multiplying the most recent dividend by four, and dividing by the current share price.
What happens if we think a dividend reduction is possible?
In this case, we show a split dividend yield at the top of the page. The larger figure is the one we consider more likely. This is done as a warning to readers that, in our opinion, a dividend cut cannot be ruled out. Occasionally, we show a split dividend for a stock with no current dividend if we think a company’s board of directors might initiate a payout.
Dividends shown in our statistical array are dividends declared, but dividends displayed in our quarterly dividends box are dividends paid for a specific calendar year. Even for calendar-year companies, these figures can differ if a company’s board of directors declares a dividend in one quarter but pays it in the next one—something that is not uncommon. Once in a while, an annual dividend will look strangely high (or low) because a dividend declaration was switched from early one year to late the previous year, or vice versa. FirstEnergy (FE) had this situation in 2004.
We display a payout ratio that is different from how it is typically calculated by investors. Instead of taking dividends per share and dividing by earnings per share, we take dividends paid (both common and preferred) from the cash flow statement and divide by net profit. In the case of Hawaiian Electric (HE), this results in an unusually low payout ratio because the company’s cash flow statement does not reflect dividends that are paid through its dividend-reinvestment plan.
How do we make our dividend estimates and projections?
Many companies that are known for paying healthy dividends, such as utilities, have a stated goal for the dividend—either a payout ratio, a growth rate, or both. So, we can use this as a guideline. We make our forecasts in the context of expected earnings, cash flow, and capital needs for a particular company.
A few examples illustrate what we consider. The board of directors for FirstEnergy hasn’t raised the quarterly disbursement since 2007. Given the likelihood of declining earnings, we expect no change in the dividend in the near future. Consolidated Edison (ED) has a long record of boosting the annual payout by $0.02 a share, and we project that this modest growth rate will continue over the 3- to 5-year period. Wisconsin Energy (WEC) has stated a goal of approaching a 60% payout ratio by 2014. This would entail dividend hikes of more than 10% for each of the next two years, and we have reflected this in our estimates. Of course, a company’s expression of a dividend goal doesn’t necessarily mean that it will attain that goal, but management usually doesn’t make such a statement unless it is confident. Note that companies have much more control over their dividend level than they do with earnings or most other financial measurements.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.