TEG – What a Mistake !

TEG is a utility company which had been raising its dividend for last 51 consecutive years. It was one of most recent investment in which I had initiated a starter position. The company increased its 2009 dividends by approximately 7% to $2.68. However, the most recent earnings release has been quite an opposite of one would have expected from a dividend growth company. The earnings per share for 2008 was $1.64. At the same time, the company is projecting 2009 earnings per share in the range of $2.51 to 2.66. This is more than 100% payout factor. What is intriguing to me is why did the company raise the dividend just few days ago, when they knew it is not supported by the expected by the earning? This definitely leads to the issue of shareholder communication!

I do not have any control over the corporation’s management. I also do not have any illusion that we as individual investors can influence corporation’s decision making process. Instead, I looked at my own decision making process to understand where did I go wrong. We all make mistakes; the most important thing is how we deal with it. I learnt my lesson in less than a week.

I had been watching and following TEG for quite a long time, perhaps longer than 5 to six months. At that point in time, my investment process did not involve any risk-to-dividend measure. I determined a fair value at which I would be comfortable in initiating a starter position. When the price came within my fair value range, and company raised its dividend, I took a plunge. After all, raising dividend is a good thing. Isn’t it?

Since January 2009, I added risk-to-dividend measure in my investment process. I have been using this to look and review new investment. The mistake I made was I did not determine the risk-to-dividends for stocks in my existing watch list. Anyways, I already made a mistake; I cannot do any thing now. So I went back to understand if my measure would have raised the flag. At the end of December 2008, I back calculated my risk-to-dividend measure as 2.43 This is high risk category. As per my process high risk category does not warrant any investments. The factors that contribute in making it a high risk are payout factor, gross margin, operating margin, and EPS growth rate.

TEG Risk Number

Moving forward, I will do a proper due diligence and instill a discipline to follow the process. If there is something positive about this situation then it is that the process seems to work. As I am writing this, I read the news that GE also cut its dividend. It was also in my high risk category (with 2.75). In case of GE, I proactively reduced my position to less the impact of dividend cut.

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