Return of Pacific’s Dividend May Not Pacify Investors
Shareholders of giant Pacific Enterprises Corp. may have reason to believe that their long nightmare is almost over. The dividend should return on this stock sooner than later, some analysts believe--though the yield won’t be much at first.
Los Angeles-based Pacific, parent of Southern California Gas, said Monday that it agreed to sell its oil and natural gas properties to Hunt Oil of Dallas for $371 million.
That sale follows Pacific’s jettisoning of its sickly retailing division, Thrifty Corp., in September.
By shedding virtually all assets unrelated to its stable core business of natural gas distribution, Pacific is going back to basics. Unfortunately for its shareholders, the cost of straying from the basics in the mid-’80s proved to be enormous: Both the oil and gas assets and the retailing arm are being sold at huge losses.
Because of those losses, Pacific suspended the dividend on its common stock early this year--a massive blow to the firm’s 65,000 shareholders, especially the many retired individuals who have long depended on the stock as an income vehicle.
In its heyday of the late 1980s, Pacific paid an annual cash dividend of $3.48 a share, and the stock traded as high as $61.25 in 1987. By mid-1991, as the company’s diversification plan began to unravel, the annual dividend was slashed to $1.76. Finally this year, the company was forced to eliminate the dividend entirely.
The stock’s price has collapsed as the dividend evaporated and now stands at $19, down from $26.25 at the end of last year, though up from its low of $17.375 in late September.
For the shareholders who have hung on to Pacific this long, the only important question is the dividend: When does it come back, and how much will it be?
When the back-to-basics move began this year, Pacific’s chief executive, Willis B. Wood Jr., said the dividend would return when the firm’s restructuring plan was complete--largely meaning once the oil and gas and retailing units were gone.
Wood says that’s still the goal, but he can’t say specifically when he might ask Pacific’s board to reinstate the dividend. He adds, however, “it’s obviously a very high priority with me. . . . I want to go to the board as soon as possible.”
What’s the holdup? Pacific will still be saddled with heavy debt from its ill-fated diversification foray, even after retiring some of those loans with the proceeds from the sale of assets this year. Pacific’s long-term debt was $1.8 billion on June 30.
Foster Corwith, analyst at Dean Witter Reynolds in New York, says Pacific will have to reach agreement with its lenders to refinance or otherwise deal with retiring much of that debt in the next five years. That is what directors will have to weigh when deciding how much they can begin sharing with stockholders again.
Still, Corwith believes that the strength of Southern California Gas’ earnings will allow Pacific to reinstate some dividend by mid-1993. The utility has annual earnings power of $2 a share or more, Corwith says. Allowing for a debt repayment plan, he figures, Pacific could comfortably begin paying an annual dividend in the range of 60 cents to 80 cents a share.
Gary Hovis, analyst at Argus Research in New York, agrees that the dividend is likely to return by mid-1993. But he too says the annual payout will be under $1 a share, at least initially.
Obviously, beleaguered shareholders would welcome any dividend. But even a $1-a-share annual payment would mean a yield of just 5.3% on the stock at the current price of $19. With many other major gas utilities yielding 6% or better, a $1 dividend wouldn’t bring many new investors to Pacific--meaning the stock could be dead money for a long time to come.
What’s more, investors who have been loathe to sell their Pacific shares at a loss have to consider this: If you paid, say, $40 a share, a $1 dividend would be a yield of just 2.5% on your original investment. The dividend should rise over time, but it’ll be restrained by Pacific’s debt problems.
The bottom line: If you’ve held this stock forever, it may be worthwhile to think about selling at least some portion of your Pacific shares, and reinvesting in a utility stock that will both pay a decent yield now and increase your payout at a good pace over time.
California Muni Sale: The state will attempt to raise $1.3 billion today by offering general obligation bonds in its first sale of long-term bonds since the budget crisis that gained national publicity all summer long.
Investors’ reception of the bonds will be a good barometer of sentiment toward California: If buyers demand higher than expected yields, it will be a sign that there is still significant worry over the state’s long-term fiscal health.
In the third quarter, investors’ concerns about California were reflected in the performance of California-only municipal bond mutual funds. The average California-only fund gained 2.12% in the quarter, which counts both interest return and capital appreciation.
In contrast, funds that invest exclusively in muni bonds of other major states posted higher returns than California funds, as the accompanying chart shows.
Some of the disparity in returns would have been the result of higher yields on bonds of some other states and their municipalities. But for the most part, analysts say, the big difference was that California bonds didn’t appreciate at the same rate in the third quarter as other states’ bonds--because investors turned cautious about buying California debt at a time when the state’s economic woes were mounting.
Early estimates suggest that five-year California general obligation bonds to be sold today will yield about 4.75%. The 10-year bonds should yield around 5.65%. Those are attractive yields for a Californian in the maximum federal/state tax bracket of about 40%. A 5.65% California tax-free muni yield is the same as a 9.4% taxable yield in that bracket.
But keep in mind: If the state economy continues to sink, the value of its debt will sink as well. Before this recession is over, investors may be able to get even higher yields on California bonds--so it may be worth keeping a lot of powder dry.
California Munis Lagging Others
Returns on California municipal bond mutual funds lagged those of other major states in the third quarter and first nine months of this year, as California bonds appreciated less in value--a sign of investors’ concern about the state’s economic troubles. Figures listed here are total returns (interest earnings plus any capital appreciation).
Average total return: Single-state 3rd Nine muni bond funds Qtr. months Arizona 2.52% 7.01% Massachusetts 2.42% 7.08% New York 2.41% 7.41% Florida 2.28% 6.85% Ohio 2.20% 6.32% Minnesota 2.17% 6.13% California 2.12% 6.32% North Carolina 2.01% 6.42% General national munis 2.28% 6.66%
Source: Lipper Analytical Services
