Michael Formuziewich

Leon Frazer is a single style dividend growth manager. We have followed this investment discipline for over 70 years. Below are some reasons why we invest in dividend paying companies: (Part 2)

 4.  Earnings can be manipulated. A simple internet search on “how companies can manipulate earnings” yields many hits, from the use of “non-recurring” expenses, accelerating revenues, delaying expenses, changing the depreciation method used and so forth. Likewise, the balance sheet can be manipulated through the use of off balance sheet financing, synthetic leases, inventory manipulation and on and on. We believe that most companies, especially larger well established companies strive to be honest in presenting their results but there is no guarantee that some facet of any company’s results haven’t been manipulated to show the outcome management desires. If you also consider that management’s compensation is often tied to meeting certain financial ratios it is easy to understand why they may want to present results in a way that increases their chances for a larger bonus. Ultimately, a dividend payment can’t be manipulated. Once the dividend is paid the company has no way to “fake” it or take it back or make it smaller. For us, this is definitely a case of “a bird in the hand is better than two in the bush”.

5.  Our long-term focus on the ability of a company to continue to pay and increase their dividend leads us to analyze a company on a long-run basis, not based on next quarter’s results. We believe trying to accurately forecast what the Price to Earnings, Price to Cash Flow (or any other multiple) is going to be next year is impossible. We don’t know what the price of any stock will be next year; it could be up 10% or down 20% or anything in between. However, dividends are much more predictable. Management will increase dividends based on their long-term outlook for their company, not based on the most recent stock price movement. Aligning the way we analyze companies with the way management views their prospects makes a lot of sense to us.

6.  It has been our experience over the past 70 years that investing in dividend paying stocks also provides capital protection in bear markets. It is our belief that a combination of factors are at work here: 1) Dividend paying companies are often stronger, more mature companies who can weather a recession, 2) As the stock price of dividend paying companies goes down, the yield goes up – this inverse relationship makes these companies more attractive to income investors as the price goes down and 3) Many of the dividend paying companies we like operate in industries that we consider backbone industries (pipelines, financials, telecommunications, utilities) – even in a recession people still need to use the services they offer, thus providing a measure of comfort in the ability of these companies to survive (and even thrive) during a recession.

For Part 1 Click Here



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