Those overpriced dividends

Some say that dividend stocks are in a bubble: hungry for yield, income folks have been rushing out of zero debt paper and piling into juicy corporates like telcos and tobacco driving up the shares of these fine companies into overbought territory.

The point is well taken because names like MO, T or VZ are trading way above their 200 DMA and in some cases way above the short term 20 day moving average – an unsustainable price action.

The PE line (orange) is steeper then Altria’s stock appreciation (blue line)

Yesterday’s intraday price reversal in Verizon (VZ) and today’s sell off in that name, someone told me, looks like a major top in that name, if not all dividends, is in.

Does this mean that cash has run out of these names or that cash is sensing that rates may be on the way up – given various cliffs that are ahead of us.

Time will tell but take Altria (MO), for example.

An air-tight corporation and a star in anyone’s portfolio but the rate of increase of MO’s PE exceed the rate of increase in its stock price (orange line in chart above).

This means that MO’s “expansiveness” has grown at the higher rate then its stock price – definitively a worrisome development.

Of course, for folks who got in on these names in 09 or so, a good sell-off in dividends would be a good opportunity to get some more.

More broadly, however, if dividend names are nearing their bullish run, then what is the theme that will replace them, if any?

Funds selling high dividend stocks

Money managers including T. Rowe Price, Bank of New York Mellon and AllianceBernstein are dumping some of the highest paying dividend stocks after a bullish run up in price fueled by investors hungry for yield.

“People are so focused on yield that they are willing to pay 14 to 16 times earnings,” for these high dividend stocks, says David Giroux, portfolio manager of T. Rowe Price.

Utilities and telecom stocks are trading 14 to 16 times 2012 earnings estimates versus 11 for S&P. Utilities had 5.5% yield and telecoms 4.2%. AT&T recently increased its dividend.

“Why is the P/E multiple so high? It’s because investors are not focusing on price valuations… they are only enamored by the yield,” says Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
 
Grohowski has cut exposure to utilities and master limited partnerships.