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Insights and Thoughts from Dorfman Value Investments

John Dorfman writes a syndicated column that appears weekly in the Omaha World Herald, the Pittsburgh Tribune Review and the web site Guru Focus. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.

Recent columns are archived here for your convenience.

Qualcomm and Foot Locker Offer Dividend Appeal

John Dorfman

Many people labor under the delusion that dividends are no longer important.

That’s simply wrong. Over the past 20 years, dividends – and the reinvestment of those dividends — accounted for 32% of the total return from stocks. And this in a time when many investors scorned dividends as obsolete!

Over the previous 50 years (September 30, 1937 through September 30, 1997), dividends directly and indirectly accounted for well over half of stocks’ total return.

Rising dividends not only put money in your pocket. They also testify that management believes a company’s prospects for growth are sustainable. They are a sincerity barometer that tells you management is putting money where their mouth is.

For a stock to have dividend appeal to me, it should display both an above-average yield and a rising dividend. Here are five stocks that I believe have dividend appeal.

Qualcomm

Qualcomm Inc. (QCOM), formerly a high flier, develops communications technology and licenses it to the makers of smartphones and other users. In the ten years through 2005 it provided its investors with a 32% annual return, but it has fallen on tougher times.

As a mature, slower-growing company, it sells for a more modest valuation than in its heyday – 13 times earnings now versus 36 times earnings in 2005. It now pays a dividend your Aunt Martha would like, 57 cents per share per quarter, for a 4.3% dividend yield.

GameStop

The whole world believes that GameStop Corp. (GME) is washed up. The company sells new and used video games and game equipment; much of that is now available on the Internet.

Well, maybe the stores days are numbered. But it may show decent results for longer than people think. Meanwhile, the stock sells for less than six times earnings, and offers a dividend yield of 7.6%.

GameStop’s revenue hit a peak of $9.4 billion in fiscal 2016 (its fiscal years end in January). That dropped to $8.6 billion last fiscal year, but analysts think it will rebound to $8.8 billion this year.

Foot Locker

Foot Locker Inc. (FL) shares have fallen five months in a row, dropping from $77 at the end of April to below $35 now. I don’t expect much positive action before year-end, because tax-loss selling will be heavy this year. (People want to lock in tax deductions now, figuring taxes may be lower next year.)

Come the first quarter of 2018, I think Foot Locker shares will stage a vigorous rebound. Foot Locker’s profit margin has actually been expanding, not shrinking, in recent years. Like all brick-and-mortar retailers, it faces Internet competition, but I think it can hang in there and compete successfully.

Pier 1

Sixteen Wall Street analysts follow Pier 1 Imports Inc. and not a single one recommends it. Shares in the Fort Worth, Texas, importer of home furnishings and knick-knacks hit $25 in late 2003, and approached that level in 2013 but fell short. Today the stock languishes below $5.

A strong dollar helps importers. Unlike many of my peers, I expect the dollar to be strong in 2017-2018. In addition, Pier 1 shares are so depressed that if anything goes right, it will be a pleasant surprise. I like he stock at eight times earnings and 0.2 times revenue, with a 6.8% dividend yield.

Stewart Information

Title insurers have been struggling in recent years. One reason is that during and after the financial crisis, people were moving less. I think that situation will gradually improve.

Although its earnings have been up and down in recent years, Stewart Information Services Inc. (STC) has steadily increased its dividend, from a nickel a quarter in 2010 to 30 cents a quarter recently. The yield is 3.2%

Track Record

This is the 18th column I’ve written about stocks with dividend appeal. One-year returns on the recommendations in the previous 17 columns have averaged 14.3%. That compares with 9.5% for the Standard & Poor’s 500 Index over the same periods.

Of the 17 columns, 14 were profitable but only ten beat the S&P 500.

Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.

Last year’s recommendations returned 16.3%, normally a good year. But the index was up 21.8% from October 11, 2016 through October 6, 2017. MetLife Inc. (MET) scored a 29.7% return. My other four recommendations, though profitable, trailed the S&P.

Disclosure: I own Qualcomm, MetLife and Stewart Information Services for one or more of my clients, though not personally.

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