Penobscot Investment Management Company Inc.

The Dow Jones Industrial Average (DJIA) finished the year strongly at 12,218 increasing 12.7% in the fourth quarter and 8.4% for the full year, including dividends.  After peaking at 12,811 in April, the DJIA fell 17% to 10,655 in October. The Federal Reserve Board’s subsequent efforts to support the economy and central bank intervention in Europe boosted investor confidence resulting in a positive year for key US equity market indices.

As a leading indicator, the strong fourth quarter for US equity markets suggests the possibility of continuing economic recovery domestically. Consensus among economists is that gross domestic product (GDP) will grow approximately 2% in 2012 comparing favorably with stagnant European economies. Unemployment in the US has declined slightly to 8.9%. Natural gas is an abundant energy source at its lowest price level in two years which may contribute to cost efficiencies for utilities and manufacturers. Gold rose 10.2% to $1,566 in 2011 reflecting persistent U.S. dollar weakness.

Individual and corporate balance sheets have improved during the last few years. With a stronger private sector, the economy has a higher probability of recovery when consumer spending increases. Meanwhile, the public sector is experiencing pressure from taxpayers, creditors and trading partners to balance budgets and contain spending. It is tempting to become optimistic about the beneficial effects on the economy of a stronger private sector; however, the public sector’s unavoidable choice of fiscal restraint may have a tempering effect on economic growth.

Within the DJIA, McDonalds (MCD) rose 31% and IBM (IBM) rose 25% in 2011. ExxonMobil, Johnson & Johnson and McDonalds have increased their dividends for more than twenty-five consecutive years. At Penobscot, we favor dividend growth over high dividend yield because dividend growth is the result of earnings growth. The trailing price to earnings multiple (P/E) of 13.2 for the DJIA is a reasonable valuation considering the many DJIA companies that are able to produce consistent earnings and dividend growth in this challenging economic environment. Our commitment to these high quality dividend paying growth stocks was rewarded in 2011, and if the economy continues to benefit from a stronger and more confident consumer, the coming year may be another rewarding year for investors as well.

Thank you for your continued confidence in Penobscot as your investment advisor, and we hope you enjoy a happy and healthy new year.