Dividends and Buybacks: These Firms Make the Cut

NEW YORK (TheStreet) -- In a recent column I extolled the potential benefits offered by companies that are both paying dividends and buying back stock. Theoretically, neither action may make sense.

In the case of dividends, even at the low current dividend tax rates, the argument could be made that dividends are a waste of capital. Here's why: companies pay taxes on income then distribute a portion to shareholders, who in turn pay tax. Had the funds instead stayed with the company, less capital would have flowed to the government in the form of taxes paid by shareholders.

In the case of buybacks, the argument can be made that the company buying backs its shares must be out of productive ways to deploy its cash, that future growth opportunities must be limited. To a lesser extent, you could make a similar argument about dividends.

Of course, theory and practice quickly part ways, especially when it comes to investors, their behavior and attitudes toward having cash returned to them in the form of dividends. In my view, it's not just about the yield itself, but rather the growth in dividends. Unlike earnings, dividends can't lie. I like the confidence shown by management teams, those that are worth their salt and know what they are doing anyway, when they continue to increase the payouts.

In terms of share repurchases, when buyback programs are initially announced, the stock usually gets a boost. The problem here is that just because a company announces a buyback does not mean it will follow through. This can all be a head fake, and result in a loss of credibility for the company.

Putting it all together, I've screened for companies with the following attributes:
  • Minimum market cap: $2.5 billion
  • Increasing dividends for each of the past seven years
  • Minimum dividend yield of 2%
  • Decrease in shares outstanding of at least 5% in the past year.

That's a fairly stringent set of criteria, yet there were 19 names that made the grade.

The granddaddy of them all in terms of size is Exxon Mobil ( XOM). The oil giant has reduced shares outstanding by 5.1% over the past year, and currently yields 2.6%. The company has grown its dividend by 8.3% over the past seven years.

XOM Dividend Chart XOM Dividend data by YCharts

Intel ( INTC), which currently yields 3.4% and has reduced its shares outstanding by 5.1% over the past year also made the cut. The company still has nearly $13.65 billion in cash and short-term investments on the books.

INTC Dividend Chart INTC Dividend data by YCharts

Just one restaurant name qualified: Darden ( DRI). The company's dividend has grown from 4 cents quarterly in 2005 to 50 cents last month, for a solid 3.7% indicated yield.

DRI Dividend Chart DRI Dividend data by YCharts

Other companies meeting the criteria include Conoco Phillips ( COP); retailers Lowe's ( LOW), Walgreen ( WAG) and Safeway ( SWY); and aerospace and defense names Lockheed Martin ( LMT), Raytheon ( RTM) ), Northrop Grumman ( NOC) and L-3 Communications ( LLL).

Also included are railroad companies CSX ( CSX) and Norfolk Southern ( NSC) and insurers Travelers ( TRV), Chubb ( CB) and Assurant ( AIZ).

Rounding out the list are Ameriprise Financial ( AMP), McGraw-Hill ( MHP) and Becton Dickinson ( BDX).

My work is not done here yet. The next step will be to identify some smaller names that are also buying back shares and giving back to shareholders.

At the time of publication the author had no holdings in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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