Cramer: Buy Watsco for the Dividend
Get used to hearing the word “dividend” from Cramer. Mad Money will be focusing for the foreseeable future on companies that return money to shareholders in the form of big yields. That cash payout is one of the few things investors can count on as we, most likely, head into a recession.
Well, the latest name on Cramer’s list of good dividend plays – which includes Merck, DuPont , Kimberly-Clark, Philip Morris International and more – is Watsco, paying 4.7%. Watsco’s the largest distributor of heating, ventilation and air-conditioning equipment and parts in the U.S., so it’s levered to housing, a sector Cramer thinks will finally bottom by June of 2009. Basically, the dividend means Watsco investors are getting paid to wait.
It’s true that housing just isn’t where those investors want to be right now, but Watsco is holding its own despite that sector’s woes. The company missed its latest quarter by 7 cents, but Cramer said that had more to do with cooler weather and hurricane interruptions than bad business. And even though Watsco lowered its full-year earnings-per-share guidance, margins were up by a full percentage point and cost-cutting is returning tens of millions of dollars to the company. That’s why, despite the quarter, both Piper Jaffray and Keybanc upgraded the stock Friday.
Watsco shouldn’t have any trouble maintaining the dividend – it gets 80% of revenue from replacement parts so it doesn’t need new-housing starts to stay afloat, and there’s $3 a share in cash in the stock, more than enough to meet the $1.80 per share the company pays out.
There’s even a good chance Watsco could up its payout, Cramer said. Just three quarters ago, the dividend was increased 12.5%. If the company did that again, the yield would jump to 5.3%.
But don’t jump in just yet. The stock rallied Friday, so investors might want to wait for a pullback. Cramer did say that a quarter of a position could be put on by those who just can’t wait because the dividend is already high. But investing in Watsco should follow the same model he’s suggested for all high-yielding stocks: Buy it as the stock price declines and the yield increases. Watsco trades at about $38 now. When it gets to $36, the yield will be up to 5%. Consider buying then. Another great opportunity comes once the stock gets to $32.70 and the yield’s up to 5.5%.
Remember: Even if the stock starts moving higher, you still win. So there are two ways to profit from Cramer’s dividend-focused strategy.
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