Pricey Dividend Could Get Trimmed

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1 TABLE OF CONTENTS The Chopping Block 1 Scorecard 2 Portfolio 3 Performance 4 Reader Feedback 5 Pricey Dividend Could Get Trimmed By David Peltier In a followup from the previous issue of the Dividend Stock Advisor, R.R. Donnelley (RRD) declared its latest 26-cent quarterly dividend (12.7% yield) on April 1. Investors at the close of trading April 13 will qualify for the June 1 payment. Despite the continuation of the company s payout for another quarter, I don t believe the dividend is sustainable given R.R. Donnelley s declining earnings and hefty debt load. With that in mind, I still believe the payment will be cut by the end of the year. New Find Corporate Executive Board (EXBD) is my next addition to the Chopping Block. At Thursday s closing price of $14.99, the stock yields 11.7%. The company paid its latest 44-cent quarterly dividend March 31. That said, I don t believe management will be able to afford too many more dividends at this rate. That s because the business consultant is expected to earn just $1.27 a share in 2009, or 72% of the annual dividend cost. This represents a 38% falloff from the previous year and marks the second straight earnings decline, following a period in which Corporate Executive Board had posted positive earnings growth every year since its initial public offering (IPO) a decade ago. The company does have a strong balance sheet, with $29.7 million (85 cents a share) of cash and no debt. That said, the dividend costs Corporate Executive Board $60 million year alone. With that in mind, I expect that the current payout will be cut within the next year. Not all stocks with high yields are at risk of a dividend cut. Check out my recent video about why I believe the 6% yield from office-equipment supplier Pitney Bowes (PBI) is secure. (Scorecard appears on the next page)

2 The Dividend Advisor Scorecard Rating Company Yield Raised Dividends New Payment Former Payment Freq. Must-Own Date Air Products (APD:NYSE) 3.0% $0.45 $0.44 Q 3/27 Pepsi Bottling Group (PBG:NYSE) 3.0% $0.18 $0.17 Q 6/2 Raytheon (RTN:NYSE) 3.1% $0.31 $0.28 Q 4/2 Lowered Dividends CoBiz Financial (COBZ:Nasdaq) 0.6% $0.01 $0.07 Q 4/29 Jackson Hewitt Tax Service (JTX:NYSE) 0.0% $0.00 $0.18 Q N/A Masco (MAS:NYSE) 3.8% $0.075 $0.235 Q 4/6 Oxford Industries (OXM:NYSE) 5.2% $0.09 $0.18 Q 4/9 StellarOne (STEL:Nasdaq) 1.1% $0.04 $0.16 Q 5/6 Wausau Paper (WPP:NYSE) 0.0% $0.00 $0.085 Q N/A Legend: Stocks in the scorecard are rated -- Attractive or -- Avoid. These ratings are David Peltier s opinion of the stock, relative to its industry peers, and do not imply a buy or sell recommendation. Frequency: A: Annual; Q: Quarterly, M: Monthly, S: Semiannual, BM: Bimonthly, X: Special. 2

3 The Model Portfolio In a year when dividends of S&P 500 companies are expected to fall 23%, it s becoming increasingly difficult to find secure payouts. The benchmark Dow Jones Dividend Select index has also struggled in 2009, posting a total return of % year to date. That said, I continue to closely follow the universe of income-paying stocks and steer readers toward names that consistently outperform, while indicating which payouts to avoid. There hasn t been a lot of news flow in the model portfolio companies of late, but this is just the calm before the storm. First-quarter earnings season begins in a couple of weeks and as a reminder for readers, I will provide a full preview and review of each quarterly report for the model portfolio stocks, including the conference call information. Company Updates California Water (CWT) fell more than 4% over the past two weeks, closing Thursday at $ The company was downgraded to neutral March 24 at the brokerage Janney Montgomery, based on valuation. While I continue to believe the company can grow earnings in 2009 given its recent rate increase, readers should wait for a pullback to take the dividend yield back above 3% before buying new shares. Kraft Foods (KFT) hosted its annual analyst meeting in New York on March 27. The company projected long-term annual earnings growth of 7% to 9%, aided by 4% organic sales growth. Despite poor execution in recent quarters, I believe the company will be able to achieve these goals with new product offerings and continued cost-cutting. With that in mind, I believe the stock remains attractive to purchase at Thursday s close price of $22.97, for its 5.05% dividend yield. World Wrestling Entertainment (WWE) moved 16% higher over the past two weeks, closing Thursday at $ There was little news out about the company over that period, though it s worth noting the company s single largest live event -- Wrestlemania -- is occurring this Sunday. While this will have a larger impact on second-quarter results, I maintain that the stock is attractive to hold into the first-quarter earnings report for its attractive 11.6% dividend yield. Dividend Reminder AT&T (T) declared its latest 41-cent quarterly dividend (6.2% yield) on March 27. Investors at the close of trading April 6 will qualify for the May 1 payment. 3

4 Dividend Advisor Model Portfolio Company & Ticker California Water CWT Consolidated Edison ED Hillenbrand HI Kraft Foods KFT Kimberly-Clark KMB Mercury General MCY Mercury General MCY T. Rowe Price TF PRTAX Reynolds American RAI Reynolds American RAI AT&T T Open Date Cost Basis per Share Annual Yield Ex-Dividend Date Current Price % Gain/Loss (excl. dividends) Total Return 5/13/05 $ % 2/5/09 $ % % 1/24/03 $ % 2/13/09 $ % % 3/12/09 $ % 3/13/09 $ % 5.79 % 8/31/07 $ % 3/23/09 $ % % 11/11/05 $ % 3/4/09 $ % % 3/6/09 $ % 3/12/09 $ % % 2/4/04 $ % 3/12/09 $ % % 3/21/03 $ % 2/27/09 $ % % 3/6/09 $ % 3/6/09 $ % % 8/31/07 $ % 3/6/09 $ % % 8/22/08 $ % 4/7/09 $ % % World Wrestling Ent. WWE 11/14/08 $ % 3/11/09 $ % 4.19 % World Wrestling Ent. WWE 12/8/06 $ % 3/11/09 $ % % TheStreet.com Dividend Advisor - Performance Total Average Return 7.73% Performance results listed here reflect values of stocks as of the close of the most recently completed trading day, including dividends paid, but do NOT take into account interest earned or commissions. Results are updated 2009 YTD Return -1.02% overnight and posted prior to the market open the following business day. The Total Average Return figures reflect changes since inception on 1/24/2003. *The DVY is the ishares Dow Jones Select Dividend (DVY:NYSE) exchangetraded 2009 YTD Return on DVY* % fund. (If you have any questions or comments for David, please send an directly to him. He welcomes your feedback.) 4

5 Reader Feedback Question: I am a new subscriber and I would like to begin a couple of my own positions based on those in the model portfolio. If you had to choose two or three stocks to purchase now, which ones would you begin with? Thanks. -- P. Z. David Peltier: In no particular order, I believe that Hillenbrand (HI), AT&T (T), Reynolds American (RAI), World Wrestling Entertainment (WWE), Kimberly-Clark (KMB) and Consolidated Edison (ED) are all attractive to purchase at current levels. That's already a diversified group, as would be any combo you were to choose from that list. While I don't formally rank the stocks in the model portfolio, I will often comment on which names I recommend for purchase at current levels, as well as others I believe that readers should wait for a pullback before buying. 5

6 Contact Info Reader Feedback and Questions: Reader Feedback and Questions Please send an directly to David. Again, please direct all account-related inquiries to customer service Subscription/Account Info Please or call TSCM (8726) Monday - Friday, 8 a.m. to 6 p.m. ET; or outside the U.S. and in Canada, call Legal Information TheStreet.com Dividend Stock Advisor is written by David Peltier, a contributor to The Dividend Stock Advisor who maintains The Dividend Stock Advisor model portfolio and is a research associate at TheStreet.com. TheStreet.com is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. TheStreet.com Dividend Stock Advisor and model portfolio contain the authors' own opinions, and none of the information contained therein constitutes, or is intended to constitute a recommendation by Mr. Peltier, any contributor, or TheStreet.com that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results are not necessarily indicative of future performance. An editorial employee of TheStreet.com, Mr. Peltier is restricted from owning individual securities other than stock or options in TheStreet.com. However certain of TheStreet.com's affiliates and employees may, from time to time, have long and short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in TheStreet.com Dividend Stock Advisor and may take positions inconsistent with the views expressed. 6