繼續整理學習美國投資書《終極股息投資攻略》第6章，作者來自美國基金評級公司晨星(Morningstar)。
Earnings Durability
By this point, you might decide you would just as soon look for more obviously secure dividends elsewhere. (That's what makes the Compass example worth considering.) But before we condemn this salt miner to the realm of questionable dividends, let's reconsider two basic dividend insights: (1) Dividend rates are sticky and (2) dividends send signals. These points raise a key question: Why would Compass pay dividends at the rate of $1.28 annually if it couldn't always earn that much?
The stability of earnings from one year to the next is certainly a relevant issue for dividend safety, especially for companies with very high debt loads (much higher than Compass). If a bad year happens to coincide with major debt maturities or some other call on cash, the dividend may be slashed.
But if stability is relevant to dividend safety, durability--the ability of average earnings to cover dividend payments over the long run--is much more so. Durability implies that the firm can take a financial punch in one year and come back swinging the next. Durability implies an earnings stream that, if not quite predictable in any one year, can be relied upon over a series of years, during which short-term fluctuations should average out.
My durability checkpoints are less quantitative than those for earnings stability, but if anything they're easier to appraise.
The first is sustainable competitive advantages, also known as economic moats. As I discussed in Chapter 3, an economic moat enables a business to generate returns on equity well above the required return on that capital. In doing so, an economic moat also shields a company's earnings and cash flow from competitive pressures.
Let's revisit United Parcel Service's (UPS) dividend in this context. With a dividend rate of $1.68 a share annually and a book value of $14.52 per share, UPS would have to earn a return on equity of at least 11.6 percent ($1.68 divided into $14.52) just to fund its dividend. If competitors could flood the market with blue, yellow, and purple trucks to run UPS's brown ones off the road, they would--probably at returns much less than the 25 percent or so UPS generally earns. But they can't; UPS's competitive advantages are simply too strong. We find that economic moat doesn't just enable large returns on equity; it shields shareholder dividends from competitive threats as well.
I require an economic moat around every business in which I invest for income. To do otherwise would be to leave my dividend stream subject to the unfavorable acts of competitors, a risk I'd just as soon avoid. Over the long term, an eroding competitive position can threaten a dividend whose payout ratio once appeared reasonable.
My second durability checkpoint is long-term demand. Even as the economy grows overall with time, some industries fail to participate. Demand for wire-line telephone connections, to cite one example, grew rapidly in the 1990s as households added extra lines for dial-up Internet modems, faxes, even phones for the kids. Then came the advent of cellular phones, DSL Internet service, and cable services of all kinds. Traditional wireline connections are now declining at a single-digit clip. Even though these firms' competitive standing hasn't eroded to the point where their moats have disappeared, falling demand will invariably lead to falling profits.
Finally, I look at liquidity. A company's liquidity--the cash it has plus any cash it has ready access to--is always relevant to the payment of dividends. Earnings and cash flows will fluctuate from quarter to quarter and year to year, and a pile of existing cash or ready access to credit can help smooth out those variations. But if a company lacks liquidity, the stability of earnings becomes much more important than long-term durability.
From an earnings durability point of view, Compass stacks up surprisingly well.
1. There's no doubt the firm has an economic moat--its existing mines are just short of irreplaceable assets, and it's highly unlikely that any substitute product will come along that is cheaper or more effective at getting rid of ice.2. While Compass's earnings could fall more than 32 percent in a given year--and we can't rule out a couple of dry or warm years in a row--would mere weather patterns change the firm's ability to earn acceptably high profits in a normal year? Of course not; not only does the firm's economic moat protect its profit-making potential in a normal year, but when it does snow, the highway department has no choice but to send out the salt trucks.Compass's management is extremely well aware of the impact of weather on its business. Even though management is reluctant to offer an EPS outlook for any particular year, the firm regularly discloses estimates of the impact of above- or below-average weather trends on revenue and operating profits during the winter quarters. Using these figures, it's relatively easy to ascertain where the average earning power of the business is at any point.3. In addition to its cash balances, Compass has access to as much as $125 million in short-term borrowings through a revolving credit line, only $28.5 million of which was drawn at the end of 2006. This borrowing capacity would be sufficient to pay about nine quarters' worth of dividend payments with no earnings at all. No major debt maturities are on the horizon, either. (Better yet, Compass will soon have the option of refinancing some of its high-rate debt early, probably at much lower interest rates.)Were we to focus solely on short-term earnings stability, Compass's payout ratio of 68 percent might seem too high. By definition, a lower payout ratio always implies greater dividend safety than a higher one. But a broader look at the durability of long-term earning power confirms the signal that management is sending through the dividend itself: Compass may not be a gold mine, but salt mines just might be more profitable.
All things considered, Compass's 68 percent payout ratio looks entirely appropriate. We've got a margin of safety for short-term earnings instability, but the long-run profit stream is a highly durable one. I recommended these shares to Morningstar DividendInvestor subscribers in April 2005 and haven't regretted it. (How could I? Since then Compass has raised its dividend twice by an average annual rate of 7.9 percent.)
Compass's high payout ratio sends one additional signal: Management is determined to use shareholders' funds wisely. In a cash-cow business, the temptation to make acquisitions and increase assets and revenue quickly is enormous, even if these moves would almost certainly prove a poor use of retained earnings. Taken in isolation, the fact that Compass has adopted a high-payout policy may or may not imply an insecure dividend stream, but it speaks volumes about the firm's devotion to rewarding shareholders.
