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

The rout in the Treasury market continues: Yields on the 10-year note close at 2.38%, up from just 2% a little more than a week ago

Last week’s inflation numbers with the Consumer Price Index rising a steeper than expected 0.4% in February to push the annual headline inflation rate to 2.9% haven’t done anything to put the bond market in a better mood.

On March 16, the day of the inflation announcement ,10-year U.S. Treasury notes fell taking the yield to 2.31% at noon New York time. That was a huge change from Monday, March 12,  when the benchmark U.S. 10-year Treasury yielded just 2%.

This week hasn’t begun any better. The 10-year Treasury note fell in price (which means they climbed in yield) for the ninth straight day. The yield on the 10-year Treasury rose to close at 2.38%, the highest yield since October 28, 2011.

Last week’s inflation numbers reminded bond buyers that at 2% or even 2.3%, 10-year Treasuries are losing ground to inflation. Read more

That didn’t take long.

Hours after the Federal Reserve announced on March 13 that US Bancorp (USB) was one of the 15 financial companies that had passed its annual stress test (for more on the stress test and winners and losers see my post http://jubakpicks.com/2012/03/13/four-financial-companies-actually-fail-the-federal-reserves-stress-test/ ) and could therefore go ahead with its plans to raise dividends and increase its share buyback program—the Minnesota-based bank did exactly that. The board of directors approved a 56% increase in dividends to a quarterly 19.5 cents a share (78 cents annual dividend) payable on April 16 to shareholders of record on March 30. (US Bancorp is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/  )

The board of directors also authorized a new stock buyback plan of up to 100 million shares through March 2013. (The bank has 1.91 billion shares outstanding before the buyback.)

The new annual dividend of 78 cents a share takes the yield on US Bancorp shares up to 2.48% from the current 1.61% at today’s price of $31.48 (as of 12:30 p.m. New York time).

I added this stock to my picks on March 26, 2010 in anticipation that the bank would work to restore its pre-Lehman payout level and that the bank was in a strong capital position that would allow it to pick up market share in its core businesses.

I think that thesis still has a way to run. I’d raise my target price on these shares, currently at $33, to $35 by October 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of US Bancorp as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

The U.S. Federal Reserve will make big headlines this week—just not at tomorrow’s (March 13) meeting of its Open Market Committee. The Fed body that sets short-term interest rates is expected to leave rates just where they are at 0% to 0.25% and put a damper on whatever hopes for a third round of quantitative easing the financial market may still have.

In other words, business as usual Tuesday.

Thursday is a very different matter.

That’s the day when the Federal Reserve is scheduled to announce the results of its annual stress test on U.S. banks. The Fed is expected to give the go ahead for big dividend increases at banks that cut their dividends after the Lehman bankruptcy and that have been prohibited from raising dividends back to former levels since then by the Fed’s rulings that they hadn’t built up capital reserves to withstand another financial crisis.

Dividends at the 19 largest U.S. lenders will climb 30% in 2012 from 2011, according to Wall Street estimates. The biggest jumps, analysts project will occur at Wells Fargo (WFC) and Citigroup (C). Citigroup now pays a nominal one-cent a share quarterly dividend. Wells Fargo’s current quarterly dividend is 12 cents a share for a yield of 1.75%. Overall, estimates Barclays Capital, banks (excluding investment banks such as Goldman Sachs (GS) and Morgan

Stanley (MS)) will raise their payout ratios from 24% of earnings in 2011 to 48% of earnings in 2012. The dividend yield on the KBW Bank Index (BKX) is now just 1.8%, about half the 2007 level.

The stress test asked banks to model their capital ratios if unemployment hit 13% and housing prices slumped another 20%.

Bank of America (BAC) will be absent from any Fed announcement. After getting its request to raise its dividend rebuffed by the Fed in the last stress test, the bank didn’t ask to raise its dividend or stock buyback in this round.

Western Gas Partners (WES) hit my target price of $40 a share on January 23. The stock kept going up to $46.12 on March 1. And now it looks like it’s pulling back a bit with the rest of the market.

Sell? Hold? What have I been waiting for? My gain on Western Gas Partners was 22.6% as of the close on March 6 from November 16, 2011 when I added it to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

The master limited partnership’s fourth quarter earnings report on February 27, actually. I’ ve been waiting to see what the partnership’s list of growth projects looked like.

As I’ve noted about Kinder Morgan Energy Partners (KMP) and ONEOK (OKS) in my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/  master limited partnerships grow their cash flow (and hence their distributions to investors) by borrowing money and then investing it in projects with returns above their cost of capital. So two things really matter to investors in a master limited partnership: First, Is money cheap or expensive, and, second, Does the partnership have a good list of opportunities for investment?

Right now money is cheap. Very cheap. So master limited partnerships with a long list of viable investment opportunities should be able to grow cash flow and distributions at a hefty rate.

For the full year of 2011, Western Gas Partners showed in its fourth quarter report, distributable cash flow climbed 4% to $2.33 a partnership unit. (EBITDA—that’s earnings before interest, taxes, depreciation, and amortization–increased by 19% from the fourth quarter of 2010 due to an increase in natural gas and, especially, natural gas liquids flowing through the partnership’s pipeline system.) That increase in cash flow was good enough to enable the company to raise its quarterly distribution by 4.5% from the payout in the third quarter to an annual $1.76 a unit. (The year-to-year increase comes to 16% from the fourth quarter of 2010.) At the March 6 closing price that’s good for a yield of 3.98% for 2012–if the partnership doesn’t raise distributions in the quarters ahead.

But what I was happiest to see was big increase in cash-earnings assets and plans for assets. Read more