5 Large Cap Stocks With Dividend Potential

Given the current macroeconomic risks facing investors, including low yields on Treasuries until at least 2014, extreme stress on European banks and governments, and a slowdown in China's economy, yield-seeking investors must search for companies that have the capability and incentive to increase dividends, with the potential for capital appreciation and limited downside. In such a scenario, investors could also look at companies that may initiate dividends.

However, a strategy of finding new and increased dividend payers is tricky, since companies are loathe to part with their cash hoards, given: (1) the macroeconomic headwinds, (2) diminished access to financing through banks and capital markets, and (3) adverse tax consequences of tapping their reserves of overseas cash that could otherwise be employed to pay dividends. A repatriation tax holiday that would allow companies to bring back some of their overseas cash may be a catalyst for dividend increases but not in 2012, given that the presidential elections make any corporate tax reform unlikely.

The following five large capitalization, multi-national companies are a starting point for identifying potential dividend paying stocks for a diversified portfolio:

Cisco Systems (CSCO) initiated its first-ever quarterly dividend of $0.06 in March 2011, and offers a current yield of around 1.2%, and a share price at around $20. Cisco's historical operating cash flow and free cash flow growth are appealing at 4.8% and 9.5%, respectively, but I look for constrained cash flow until gross margin returns closer to its historical average of around 65% from the trailing twelve months at 61%, and operating margin moves closer to its historical average of around 23% from the trailing twelve months at about 17%.

Cisco has plenty of room to increase its dividend, given the low payout ratio of around 21%, but I anticipate a dividend increase at the earliest in 2013 after the elections, when Washington might address the repatriation tax issue. Improving its profit margins will also be supportive for materially increasing the likelihood of a dividend boost.

Ford (F) reinstated its quarterly dividend at $0.05 in January 2012, and has a current yield of about 1.6% at a recent price of about $13. Although Ford's financial position is improved from the depths of the financial crisis in 2009 and it has only $1 billion in debt maturing in 2012, the auto industry is still cyclical and Ford has exposure to struggling Europe. Because of these factors and the macroeconomic factors previously cited, I believe a dividend increase in 2012 is very unlikely for Ford.

Also, I do not believe that support for increased dividends is likely to come from improved profitability, as both gross margin and operating margin for the trailing twelve months are above historical levels. However, it is notable that once the headwinds clear, Ford does have room to increase its dividend, given that the current dividend is below both the historical payout ratio and the historical dividend yield. Ford's long-term payout ratio has been about 16% compared to the current level of about 13%, while the long-term dividend yield has been about 3.7% compared to the current yield of about 1.6%.

General Motors (GM) has not paid a dividend since the Initial Public Offering when it emerged from the government "bailout", and I do not anticipate that it will do so in 2012. Although General Motors now has a strong balance sheet and leaner operations due to government support and concessions won in the bankruptcy proceedings, I do not expect a dividend initiation in the foreseeable future, primarily because of the overhang of holdings by the U.S. Treasury, Ontario and Canadian governments, and the United Auto Workers. As each of these entities gradually reduces its holdings of General Motors securities as planned, I think the prospect for initiating a dividend increases, given the improving auto markets in North America and Asia.

General Motors has relatively less exposure to Europe than other car makers; thus it may see improved profitability and cash flow sooner, especially if Europe is unable to steer successfully through its banking and sovereign debt issues. However, any marked slowdown in China will have an outsized impact on General Motors relative to its competitors.

Intel (INTC) currently has a dividend yield of about 3.2%, and a share price of about $27. With a payout ratio of about 35% compared to a historical payout ratio of about 35%, Intel does not have much upside to dividend growth at current earnings levels. Also weighing against a possible dividend increase in my opinion is the current dividend yield, which is consistent with the long-term dividend yield of about 3%. Intel's gross and operating margins for the trailing twelve months are above the long term averages thus I believe it is not likely that further profitability improvement will occur to improve cash flow and support a dividend increase.

Despite these factors weighing against a dividend increase, a dividend increase could occur in 2012 if earnings growth acts as a catalyst. Dividend growth has been about 23% annually, with increases each year since 2003, while earnings per share have grown by 26% annually over the same period, indicating that Intel is able to grow its dividend without increasing its payout ratio.

However, Intel would need to boost its payout ratio to increase its dividend in 2012 because I agree with analysts expectations that earnings will be flat in 2012. Earnings should be flat in 2012 because Intel will be investing in capital projects and acquisitions to execute its planned transition from the PC market to the mobile computing market. Intel's purchase of Infineon's wireless chip business in 2010 is one step in the process. I do look for a dividend increase in 2013 when analysts project earnings growth of about 8%, which is likely given Intel's dominance in the server market which will benefit from the emergence of the cloud computing trend.

Microsoft (MSFT) shares trade at about $30, with a dividend yield of about 2.6%, which exceeds the long-term average of about 2%. Microsoft has increased its dividend each year since 2003, with the average annual increase just under 27%, while the current payout ratio at about 25% is in line with the long-term average. I agree with analysts' estimates that earnings growth will be flat for the year ended June 30, 2012, because Microsoft's revenue mix is trending to lower margin Server and Business Application software.

Given that Microsoft's dividend yield and payout ratio are at or above long-term averages and that earnings are not expected to grow in fiscal 2012, I rate the prospects for a dividend increase in the first half of 2012 as low. Additionally, I do not anticipate improvement in profit margins because gross margin and operating margin for the trailing twelve months are consistent with long-term averages and are thus not likely to lead to improved cash flow and dividend increase.

Earnings are projected to grow by about 11% in 2013, which I believe is reasonable given Microsoft's growing Entertainment and Device division and a pickup in the PC market from the global economic recession. This makes the second half of 2012 and the first half of 2013 a more likely time-frame for a dividend increase.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.