Time to Forgive a Failed Tech Stock? Corning and its Surprising Dividend
Two 19th Century industrial companies – Corning Glass Works and Pittsburgh Plate Glass -- joined forces 75 years ago to produce glass blocks, which were in vogue as architectural adornments for modern houses and office buildings.
Corning (GLW) and PPG Industries (PPG) went separate ways -- Corning into the growth-oriented information technology boom and PPG into a value-based line of glass and coating products. Now they’ve come together again, this time in a capital strategy that is very much in vogue: dividend yield.
Both companies are paying a yield that tops the 2% dividend rate of the benchmaker S&P 500. But yield-seeking investors choosing between them face the new reality of income investing in the post tech boom era.
After World War II, PPG stuck to industrial products in glass and coatings. Corning became a darling of the information technology boom, based on its production of fiber optic cable and, more recently, glass for mobile communication devices. The results were predictable. Corning became a much riskier stock that PPG, as indicated by their betas – a measure of stock price volatility compared to the stock market.
Corning's dividend was trimmed in 2007. Its reputation is still under repair.
PPG, in turn, produced steady share price gains and established an uninterrupted record of annual dividend increases.
Things have changed. After holding at 5 cents per share since 2007, Corning’s quarterly dividend rate is up 60% this year to 8 cents a share. Management, in its first-quarter 2012 conference call, pledged that its growth strategy “will not impact our ability to increase dividends or buy back additional shares.” Corning's pledge has a foundation. With similar dividend yields, Corning’s payout ratio – the proportion of net income being distributed as cash dividends – is more conservative than PPG’s.
Cash from operations, the preferred source of dividend payments, is more robust at Corning.
Yet Corning, unable to shed its tech bust heritage, is selling at a bargain relative to book value.
Similarly, Corning looks cheaper on the basis of PE ratio.
Dividend-based value investing is broadening its reach into previously unfriendly territory.
Filed under: Company Analysis