Investing in stocks is risky business. That's why it's always nice to find a company that makes a habit out of rewarding you for taking on that risk of ownership. The most common ways companies do this are through dividends and share repurchases.
But some companies can hide behind a veil of dividends and appear more generous than they really are. To figure out which companies on the Dow Jones Industrials Average (INDEX: ^DJI ) are the stingiest with their cash, I looked at the total cash they had returned to shareholders over the past five years and divided it by their total earnings over the same period so see who was holding the most back.
The results were surprising. Two of the companies have huge dividends that top the average yield on the Dow, and the third isn't far behind. But remember, this isn't as cut-and-dried as having a great yield; it's about how much these companies paid us relative to what they could have afforded to shell out.
% Earnings Returned (5 Years)
Dividend Yield (%)
|Chevron (NYSE: CVX )||44%||3.6|
|JPMorgan Chase (NYSE: JPM )||51%||3.6|
|Caterpillar (NYSE: CAT )||54%||2.1|
To put this stinginess into perspective, over the past five years, the Dow as an index paid out 91% of earnings on average. That figure stands in stark contrast to Alcoa, which paid out 306% of its earnings over the past five years. As investors, we should be calling for a bit more of that cash.
Since all three of the companies we're looking at have strong yields, I'd look at share repurchases. These companies are downright cheap right now. JPMorgan Chase and Chevron both trade for less than 8 times earnings, and JPMorgan also comes in at a price-to-book ratio of 0.7. Caterpillar trades for 11 times earnings, and the world is its oyster. I expect the long-term growth of emerging markets to be a huge boon to them, and I'm not the only one: Analysts expect a long-term growth rate of 17.5%.
While I'm bullish on Caterpillar in the long run, it won't have a smooth trip. Mining-equipment maker Joy Global (NYSE: JOY ) recently cautioned about slower growth in China because of limited "economic catalysts," a key market for both companies. While that may be true, China's "slow" growth still rang in at 8.1% recently. Boo-hoo. The keen investor would have seen the corresponding dip in Caterpillar's price as a buying opportunity for the long run.
As optimistic as I am about Caterpillar in the future, it's still not one of The Stocks Only the Smartest Investors Buy. Instead, I've put a lot of my money in the same sector as Warren Buffett, and you can, too. But we have more flexibility in the space than he does. Read about where Buffett wishes he could put his cash in our analysts' free report.