Update General Electric in my Dividend Income portfolio

A very promising earnings report for income investors from General Electric (GE) this morning.

Earnings per share of 34 cents beat Wall Street projections by a penny. Revenue was up by 4% year to year (after accounting for the company’s sale of NBC Universal) to $35.18 billion versus the $34.7 billion Wall Street consensus. Sales of industrial equipment and energy infrastructure, the two drivers of growth in the post-financial crisis, were up 11% and 13%, respectively, for the quarter over the first quarter of 2011.

But most importantly for dividend investors—and I added General Electric to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on February 3, 2012—at GE Capital profits grew by 27% (after accounting for divestitures) to $1.8 billion. The Tier 1 capital ratio for GE Capital hit 10.4%. And in its conference call, the company said that, subject to approval from the Federal Reserve, it expects that GE Capital will resume paying a dividend (to General Electric) in the second half of 2012. Even after increasing its dividend four times, General Electric still pays only about half of the quarterly dividend it paid before the financial crisis. General Electric cut its dividend to the bone in 2009 to preserve capital at GE Capital as the financial crisis worsened.

Outside the GE Capital story, the best news in this quarter’s earnings report came on margins in the industrial and energy business that is the core of the reorganized General Electric. Read more

Don’t throw out the baby with the bathwater.

The adage is useful in wide swathes of life. It’s certainly helped me more than once or twice in raising two children.

But as investing advice it’s often just plain wrong. The truth is that some of the time you would do well to throw out the baby with the bathwater.

Take Spanish bank stocks. No doubt about it, you would have been better off getting rid of them all in your portfolio back when the euro debt crisis hit. For example, Banco Santander (STD), my favorite Spanish bank stock even now sold in New York as an American Depositary Receipt (ADR) for $14.04 on January 15, 2010. You could have sold all Spanish bank stocks then when a new Greek government revealed that the Greek budget deficit for 2009 was 12.7% instead of 3.7%, thanks to some deceptive accounting. You could have sold at $10.42 on November 15. In November the European Union decided to bailout Ireland. On April 18, 2012, Banco Santander traded at $6.37.

Or take solar stocks. You would have been better off selling everything in that sector back in December 2011 when it became clear that all the cash-strapped governments of Europe—and the Germans too—were going to cut solar subsidies in 2012. First Solar (FSLR), for example sold for $47.99 a share on December 7, 2011 but closed on April 18 at $21.38.

Or shares of natural gas producers. You would have been better off selling off the entire sector sometime after natural gas prices peaked in the summer of 2009. Shares of Chesapeake Energy (CHK) traded at $27.27 on September 28, 2009. They closed at $18.11 on April 18, 2012.

By better off, I mean simply that in these instances an investor would have lost a lot less money by throwing out the baby with the bathwater and selling everything rather than either holding on in the belief that the carnage would soon be over or that some stocks in the sector would manage to escape the general blood-letting.

So why don’t we all and always get this call right? Why, for example, am I sitting on shares of Banco Santander and solar cell producer Yingli Green Energy (YGE), for example, in my Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ and Dividend Income http://jubakpicks.com/jubak-dividend-income-portfolio/portfolios, respectively?

Because sometimes it’s hard to correctly identify the bathwater. And because sometimes it’s hard to know exactly how deep the bathwater will get. And sometimes because we want to make sure that we’ll be able to find the baby again when we want to.

Let’s see if recent history can teach us anything about doing a better job—by which I mean more profitable—with those babies and that bathwater. I think I’ve found five baby-and-the-bathwater rules worth considering for the next market crisis. Or for the next stage in any of the ongoing ones. Read more

Yum! Brands seems to have fixed its U.S. growth problem (it was called Taco Bell)

Yum! Brands (YUM) just can’t seem to get its two big growth engines, China and the United States, revving at the same time. Still yesterday’s earnings report shows good progress in getting growth going again at the company’s U.S. operations, especially the long-lagging Taco Bell franchise. Growth in China slowed with the Chinese economy but if you believe, as I do, that China’s growth rate is likely to pick up in the second half of the year, then that’s a problem for Yum! Brands that will fix itself.

For the first quarter earnings climbed to 76 cents a share (excluding one-time items.) That was 3 cents a share above Wall Street projections and a 40.7% increase from the first quarter of 2011. Revenue climbed 13% to $2.74 billion. Wall Street had been expecting revenue of $2.71 billion. First quarter 2011 revenue was $2.43 billion.

The big story was the 5% increase in same store sales in the United States led by the beginnings of a turnaround at the company’s Taco Bell franchise. Read more

I think you have to count Spain’s bond auction this morning as a success—especially relative to all the bad news in the last few days out of the Banco de Espana about the Spanish banking system.

In Paris an auction of French debt didn’t go quite so well—considering the relative level of worry about Spain and France.

Borrowing costs did continue to rise with the yield on the benchmark Spanish 10-year bond climbing to 5.743% from 5.403% at the last auction in January. But Spain sold 2.54 billion of 2- and 10-year debt. That was slightly above the 2.50 billion euro maximum target set for the sale and the bid-to-cover ratio, the ratio of bids from buyers to the amount of debt on offer, increased to 2.42 from 2.17 in January.

The auction of the 10-year bonds had been seen as a key test of attitudes toward Spanish finances since the maturity of the bond stretches beyond the date when Spanish and other European banks will have to pay back the 3-year loans they took out in December and February from the European Central Bank.

In Paris French President Nicolas Sarkozy breathed a sigh of relief this morning at the results of a French bond auction. Read more

Nothing wrong with the first quarter earnings numbers from Abbott Laboratories (ABT). In fact, I’d call them “strong” and “above expectations.”

In fact the only disappointment has been the market’s failure to put the higher price on the shares that I think they deserve. The company did report 13% earnings growth this morning and still the stock trades at a price to earnings ratio of just 12.4 on trailing 12-month earnings or 12.1 on projected 2012 earnings per share. The shares are up 9.23% in 2012. Not shabby but the gain does trails the 11.27% on the Standard & Poor’s 500. (Abbott Laboratories is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ That’s correct. But the stock is still listed as a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and that’s incorrect. I sold it out of that portfolio on February 3, 2012. I will fix this piece of bookkeeping later this week.)

My suspicion, as I’ve noted before, is that at least part of this lag is related to the breakup of Abbott Laboratories into two companies that’s scheduled for completion by the end of 2012. That move is intended to release the market value of some of Abbott’s real but overlooked strengths in nutritionals and diagnostics, for example. I think the split will indeed do that in, say, 2013, but in the meantime it seems to be damping gains in the stock. Could be that investors who would like to own the faster growing new drug company, post split up, or the medical devices/generics/nutritionals company would rather wait until they can buy exactly the piece that they want rather than having to sell off shares in the piece they don’t wish to keep. Read more