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Goldman Sachs Group, Inc. (GS)’s Dividend Picks: Cars, Banks, and Oil

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Goldman Sachs Group, Inc. (NYSE:GS) recently became the most bullish broker on Wall Street when it increased its year-end price target on the S&P 500 to 1,750. Trying to predict future stock prices is often a fruitless endeavor, so I don’t take these price targets seriously. But Goldman also recommended dividend stocks as among the few attractive income-generating opportunities available today. In a previous article I went through three of the 10 dividend picks that Goldman Sachs Group, Inc. (NYSE:GS) put forward — Western Union, Philip Morris, and AT&T Inc. (NYSE:T) — and today I’ll look at three more.

An auto dividend

Ford Motor Company (NYSE:F) has the distinction of being the only major U.S. auto manufacturer to refuse government bailout funds during the financial crisis and the first to resume paying a dividend. Ford Motor Company (NYSE:F) began paying a dividend back in 1956, and up until 2006 quarterly payments occurred uninterrupted. But big losses in 2006 caused first a cut and then a suspension of the dividend altogether, and the financial crisis that soon followed forced Ford into survival mode.

But auto sales have recovered, with J.D. Power & Associates forecasting that 16 million vehicles will be produced in 2013, a number not reached since 2002. In 2012 Ford began paying a dividend once again, and after four quarterly payments of $0.05 per share, the dividend was doubled in January of this year. The stock now yields about 2.7%.

There are a few problems with Ford Motor Company (NYSE:F), though. From 2002 through 2006 the dividend wasn’t increased at all, and the current dividend is now at that same level after the increase earlier this year. Those expecting serious dividend growth may need to temper their expectations. In addition, Ford’s balance sheet isn’t the cleanest. Although the company has $51 billion in cash and short-term investments the company’s debt total’s $107 billion. Most of this debt is attributed to Ford’s Financial Services arm, with only about $14 billion in automotive debt.

Because of this debt the company pays quite a bit of interest, a total of about $3.8 billion in 2012, with $713 million of this attributed to the automotive debt. Ford also has sizable pension obligations, further muddling the balance sheet. Along with these big interest payments are big capital expenditures. In 2012 capex totaled $5.5 billion. Interest and capex eat up an awful lot of the company’s cash flow.

I expect that the company will be a bit more cautious this time around in an effort to avoid a dividend cut like we saw in 2006. I don’t think Ford will be the kind of company that meaningfully raises its dividend every year. As a dividend growth stock, Ford just doesn’t fit the bill.

A low-yielding bank

Goldman Sachs Group, Inc. (NYSE:GS) likes U.S. Bancorp (NYSE:USB) as a dividend stock, but I think there are better banks out there. In fact, my Ultimate Dividend Growth Portfolio, which you can track here, contains three other banks – Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and BB&T.

U.S. Bancorp (NYSE:USB) has one the highest returns on assets of any bank, but its dividend yield is low at just 2.2%. This compares to Wells Fargo’s 2.98% yield, JPMorgan Chase & Co. (NYSE:JPM)’s 2.83%, and BB&T’s 2.80%.

There is room for dividend growth, though. U.S. Bancorp (NYSE:USB)’s payout ratio based on 2012 EPS is just 27%, and from 2003 to 2007 the dividend grew at an annualized rate of 17%. Like most banks the dividend was slashed during the financial crisis, and the current dividend is still nowhere near the peak levels.

Wells Fargo & Co (NYSE:WFC), for example, has a payout ratio of just 36% and a much higher yield. With the dividend growth prospects similar, the higher yield makes Wells Fargo & Co (NYSE:WFC) a superior dividend growth stock. JPMorgan Chase & Co. (NYSE:JPM) has a payout ratio of 29%, and BB&T 34%. The dividend growth prospects for U.S. Bancorp are just not good enough to justify the low yield.

There’s a balance between yield and growth, and U.S. Bancorp doesn’t have it.

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