Big Dividend Hikes Will Bring Only More Big Dividends (GPS, KMB, JPM, GE, DOW, CSCO, AAPL, MMM, DVY)

Everyone, or at least most everyone, loves dividends.  While some investors love share buybacks, dividends seem to be the new way we are seeing for companies to reward shareholders.  The good news is that many big companies are raising their dividends after the 2009 wave of dividend cuts.  Two of our recent picks for dividend hikes, Gap Inc. (NYSE: GPS) and Kimberly-Clark Corporation (NYSE: KMB), have raised their payouts just this week.  These two just beg the question about which other companies will join in on the dividend hike brigade.  We have given odds on three companies we continue to expect dividend hikes in 2010.  These are J.P. Morgan Chase & Co. (NYSE: JPM), General Electric Co. (NYSE: GE) and The Dow Chemical Company (NYSE: DOW).

We have also given odds of Cisco Systems Inc. (NASDAQ: CSCO) starting to pay a regular dividend and even a one-time dividend, as well as handicapping whether Apple Inc. (NASDAQ: AAPL) will pay a one-time dividend.

Gap Inc. (NYSE: GPS) is soaring after earnings today, but it also raised dividend its and announced a stock buyback plan.  The dividend was raised to $0.10 from $0.085 per quarter.  Gap was one of our secondary group stocks we predicted would hike dividends.  We noted, “It may be a safe bet that the company will take the payout to $0.10 per quarter…”

Kimberly-Clark Corporation (NYSE: KMB) was also one of the greatest dividend leaks out there.  As we predicted, and as many others expected as well, the company raised its payout this week.  We had noted earlier in the month, “If the company juices its payout ratio, then that $0.60 dividend may rise to $0.70 or $0.75.”  On Tuesday, the company raised its dividend to $0.66 per quarter from $0.60 previously.  Our take is that the only reason the payout was not even higher was because the company is leaving a cushion for more payout hikes down the road.  With Thomson Reuters estimates of $4.94 EPS in 2010 and $5.35 EPS in 2011, there is plenty of room for future dividend increases.

We are also revisiting some of our recent dividend picks and handicapping which stocks we think will be increasing their dividend payments in 2010.  Here are some odds that dividend hikes are coming in 2010:

First on the list is J.P. Morgan Chase & Co. (NYSE: JPM).  CEO Jamie Dimon has not been committed to bumping up his dividend immediately.  If anyone can tell the market to be patient it is Dimon.  He also said the US is out of the woods for a double-dip recession and the company just this week warned that a new wave of foreclosures is coming.  Still…. J.P.Morgan is one of the top candidates for raising its dividend in 2010.  If any bank can do the ‘return of the dividend’ then it is JPMorgan.  The $0.05 per quarter dividend compares to the old dividend of $0.38 per quarter.  This dividend won’t jump back up near to $0.38.  But taking the dividend to $0.10 per quarter will get Dimon’s common stock back to a whopping 1% yield.  If the FOMC does raise rates, Dimon might not have a choice.  Thomson Reuters expects $3.02 EPS in 2010 and $4.75 EPS in 2011.  If those are hit it could  potentially go back closer to the old dividend, but let’s not get carried away.  It seems there is well above a 50% chance that the dividend is going to at least $0.10 per quarter.

General Electric Co. (NYSE: GE) is next on this list.  The DJIA component and conglomerate cut its dividend last year when it was falling like a troubled bank.  The old $0.31 dividend was cut to $0.10 and the company recently declared its same $0.10 dividend.  GE does offer a competitive yield today at 2.5% and is in-line with competing conglomerates.  There is just one problem, other competitors including 3M Co. (NYSE: MMM) have juiced up their dividends all since the start of 2010.  The pressure is on.  CEO Jeff Immelt and CFO Keith Sherin have both kicked the can down the road further rather than closer on the dividend issue, but this choice is one that the market may start to demand for them.  If GE wants to get its stock closer to $20.00, it may need to reward holders with a dividend of $0.15 or thereabouts.  With Thomson Reuters estimates of $0.99 EPS in 2010 and $1.20 EPS in 2011, it has ample dividend coverage.  A double-dip recession is a huge risk for GE, and that is why we are handicapping this at 60% rather than 90%.

The Dow Chemical Company (NYSE: DOW) is another company we expect to start getting back to some more normalized dividend payouts.  CEO Andrew Liveris took a personal hit after indicating many times in 2008 that the dividend was not going down, yet the recession pinched off its business faster than you could blink.  He had to cut the quarterly payout of $0.42 down to $0.15 per quarter.  Business has started to normalize here but the company is not at peak earnings by any measure.  Earlier this month, Dow Chemical declared its same $0.15 dividend,  The Thomson Reuters estimates for earnings are $1.49 in 2010 and $2.47 for 2011.  The company is not likely to recommit anywhere close to that full former dividend of $0.42 but getting its dividend back to $0.20 or a bit higher in the coming quarters would begin the road to recovery and give it a 2.8% yield.  The reason that the company won’t go back to its old payout rate is because of the risks inherent in a double-dip recession scenario.  Liveris would probably rather jump off the roof than to raise a dividend and then shortly have to go back and explain again why the company needs to save money.  This stock spent much of 2006 to 2008 in the $40’s, well north of its $28.50 area today.  We give better than 50% odds that Dow will boost its dividend this year… Just don’t expect a massive boost.

Cisco Systems, Inc. (NASDAQ: CSCO) is only 3% short of 52-week highs.  CEO John Chambers has shown over and over how he can grow revenues, make acquisitions, invent technology and expand existing technology, and on and on.  Whether the stock is at $20 or at $25 does not matter.  The old tech bubble days share prices north of $60 do not matter.  But what does matter is despite the notion that Cisco has ramped and ramped revenues.  Although it has spent billions upon billions of dollars repurchasing shares of common stock, Cisco has been dead money for long-term investors if you average out the share prices over the last 8 years or so.  The company has close to $40 billion in cash and equivalents and its margins are running north of 64%… He won’t do it, but Chambers could in theory pay out almost $7.00 as a one-time dividend and just start all over on the cash growth.  Thomson Reuters is expecting $1.54 EPS in 2010 and $1.72 EPS in 2011 (July-end), and the company could easily pay out $0.06 per quarter to get to a 1% yield.  If it would refrain from buybacks, it could juice that payment to $0.15 per quarter and get closer to a 2.5% yield.  There is no way to know what Chambers will do.  But 2010 needs to become the year Cisco paid a dividend.  Maybe it will even do a one-time dividend of $1.00 or $2.00 per share plus a continual dividend.  Based upon how entrenched Chambers is in his job and based upon how he has said that is something for a later date, we give under a 50% chance for odds-making of this.  But as far as what Cisco SHOULD do, we give this a 100% bogey.

Just don’t bother telling this notion that investors love dividends to Steve Jobs.  Just yesterday at the Apple Inc. (NASDAQ: AAPL) meeting, Apple’s CEO said that he does not see a dividend payment of any sort at this time.  Jobs is sitting on almost $40 billion in cash and investments and he brings in cash flow galore every quarter.  He could take 75% of that cash and would be able to pay a cash dividend of roughly $33.00 per share…. close to 16.5%, and in perhaps the last year of low taxes on passive income.  Based upon what Steve Jobs said, we’d only give a 20% chance of a one-time dividend payout in 2010.

The iShares Dow Jones Select Dividend Index Fund (NYSE: DVY) is ‘The Dividend ETF’ we use to go after the higher-yielding dividend stocks.  That ETF is meant to track the price and yield of the Dow Jones Select Dividend Index.  By mandate is required to keep about 90% assets in securities of the underlying index and depositary receipts of securities of the underlying index.  Its dividend is sporadic because it clips various coupons throughout each quarter.  That yield is currently just shy of 4% and at $44.17, the 52-week trading range is $25.92 to $45.08 for the ETF.

There are some risks to calling for dividend hikes.  First, a double-dip recession is a big risk.  Many data points to some recovery and at least some normalization of the business climate.  Some are pointing to caution ahead.  Valuations of stocks became stretched in late 2009 and into the start of this year.  We also have no real clue what the new bank and systemic risk regulations will look like and we have no expectation of what healthcare reform and taxes will look like in 2011 and beyond.  Many companies can likely sell the notion to holders that dividend hikes need to be delayed to save and conserve cash for when hard times return.  Still, these are the ones we have picked for higher dividends this year.  We have given odds what the chances of a dividend hike will be.  Stay tuned for any changes to those odds based upon new data in the coming weeks and months.

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JON C. OGG