Monday, October 20, 2014

United Technologies (UTX): A Diversified Dividend Powerhouse To Consider

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has paid a dividend since 1936 and increased it for 20 years in a row. Back in June 2013, when the Board of Directors approved a 10.30% increase in the quarterly dividend to 59 cents/share.

The company has managed to deliver a 10.20% average increase in annual EPS over the past decade. United Technologies is expected to earn $6.86 per share in 2014 and $7.52 per share in 2015. In comparison, the company earned $6.17/share in 2013.

United Technologies has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 1.006 billion in 2004 to 916 million in 2014.

The annual dividend payment has increased by 14.40% per year over the past decade, which is higher than the growth in EPS. Future growth in dividends will likely match rate of increase in earnings per share, and be somewhere around 10%/year.

United Technologies has been able to generate a high return on equity, which has ranged between 19.70 in 2014 to 25.20% in 2008. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, United Technologies is attractively valued at 14.60 times forward earnings, and has a dividend yield of 2.40%. I recently added to my position in the stock, and plan on adding further this year, subject to availability of funds.

Full Disclosure: Long UTX and GE

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Friday, October 17, 2014

Two and a half purchases I made this week

This is going to be a short article. The purpose is to discuss how I was able to acquire shares in two companies this week. The third transaction is explained in more detail below.

The first company I purchased shares in included Eaton (ETN). Eaton Corporation plc operates as a power management company worldwide. The company has increased dividends for five years in a row. However, it has not cut dividends to shareholders but increased it every other year since 1983. The company has managed to deliver an 11.80% average increase in annual EPS over the past decade. Eaton is expected to earn $4.60 per share in 2014 and $5.34 per share in 2015. In comparison, the company earned $3.90/share in 2013. The annual dividend payment has increased by 13.80% per year over the past decade, which is higher than the growth in EPS. Currently, Eaton is attractively valued at 13 times forward earnings, and has a dividend yield of 3.30%. I initiated a position in the company in the past quarter, and have since added to it. I would be looking forward to adding to my position in the company in the coming years, subject to availability of funds, opportunity cost and valuation. Check my analysis of Eaton on Seeking Alpha.

The second company in which I purchased shares was Williams Companies (WMB). It owns the general partner interest in Williams Partners (WPZ) and Access Midstream Partners (ACMP) along with any limited partnership units in both MLPs. Those are pretty valuable, especially if the pipelines do manage to increase cashflows. Williams Companies is a dividend achiever, which has managed to raise dividends for 11 years in a row. The company has a pretty aggressive plan to increase dividends per share through 2017 and expects to pay $2.46 in 2015, $2.82 in 2016, and $3.25 in 2017. Given the current annual payment of $2.24/share, which translates to a roughly 4.70% current yield, I would be interested in the company even if growth slows down to 5% – 6%/year. But no, Williams Companies expects to grow dividends by 15%/year through 2017. Those projections are one of the reasons I initiated a position in the company a few months ago. Given that pipelines are under pressure in the past two weeks, I think prices are starting to get more attractive. I probably need to write a more detailed analysis of the company, so please stay tuned.

These purchases are relatively small, given that I didn’t expect to have enough funds till sometime in November. I might make another small purchase either next or the week after next week. The purchases I am trying to make are basically additions to shares of companies I own, in an effort to increase positions by taking advantage of decreasing prices.

The third transaction I did earlier did week involved some shares of Kinder Morgan Inc (KMI), which I sold in my taxable account and purchased Kinder Morgan Management LLC (KMR). Since I am replacing one security for another, I view this as a half “purchase”. Actually, since once the deal closes I will end up with KMI anyway, it shouldn’t even be considered a purchase. A few weeks ago, I discussed that there is an arbitrage opportunity, where by purchasing KMR shares, an investor who waits till the acquisition by Kinder Morgan Inc is complete, can end up with more KMI shares than purchasing them outright. This is because the price of KMR shares is lower than the conversion factor times the value of KMI shares. If that paragraph is making your head spin, read the whole article explaining the process.

On the plus side, Kinder Morgan Inc (KMI) announced it increased quarterly dividends to 44 cents/share, which is a 7.30% increase over the same rate paid in the same quarter last year. Unitholders of Kinder Morgan Energy Partners (KMP) will get a quarterly distribution of $1.40/unit, which is a 4% increase over the same distribution paid to unitholders in the same quarter last year. Given that Kinder Morgan Management LLC (KMR) is equivalent to KMP, minus the ominous tax structure of a partnership, and given its higher yield relative to Kinder Morgan Inc ( plus it is not taxable since I get shares "reinvested" without triggering any taxable liabilities to the IRS), I think that I made the right choice. Now if Kinder Morgan Inc (KMI) drops to $30 or below, I would replace my remaining position with Kinder Morgan Management LLC (KMR) shares.

The other half I transaction I did was the fact that I replaced most of my position (90% or so) in ONEOK Partners (OKS) in my taxable account with the general partner ONEOK Inc (OKE). There are multiple reasons for the switch. The first reason is that if you like an MLP, the best returns in terms of dividend growth and capital appreciation are always derived from investing in the general partner. Thus I believe that OKE will do better than OKS over the next decade. I also made a mistake by chasing yields in the first place in 2011, when I sold OKE to buy OKS. Chasing yield on my part is not the smartest thing to do. I discussed this mistake in a previous article I posted a few months earlier. I needed to fix the mistake, once I identified it. Another reason for the change is that I need to simplify my life, as I will no longer have to do K-1 forms. They are not that difficult for me to do, and ONEOK Partners (OKS) does a really good job in showing you what forms to file with the IRS. However, if I am no longer in charge of the DGI portfolio ( due to death, disability, insanity etc), I know that this would make it more difficult for whoever inherits the dough. Thus, I used the sell-off in the pipeline sector to get in on the general partner, which declined much faster and much more than the limited partner units. On the surface, it sounds crazy that I replaced a 5.80% current yield for a 4% current yield. The thing of course is that the second yield is expected to grow by 10%/year, while the first higher yield would grow much slower. Over time, investing in the general partner interest will likely achieve better yields on cost. For the time being, I am still going to keep the remaining ONEOK Partners (OKS) in my IRA however.

Full Disclosure: Long ETN, WMB, KMI, KMR, OKE, OKS

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Wednesday, October 15, 2014

Top Dividend Growth Stocks of the past decade

Dividend growth investing is sustainable when derived from consistent earnings growth. In its true form, successful dividend growth investing is characterized by instances where annual earnings and dividend growth are almost identical. In addition, companies that exhibit such traits tend to have their current yields being in the same range of 2% - 3% during prolonged periods of time. Ordinary yield chasing investors tend to ignore such companies, because they lack the patience or forward thinking to care for high future yields on cost or strong total returns. As a result, many of these companies offer low current yields, which tend to stay low for extended periods of time. The lucky investors who purchased such securities however are able to generate high yields on cost over time.

I selected the fifteen dividend champions which have achieved the highest ten year dividend growth rates:

Yrs Consecutive Div Increase
10 Year Annual Div Growth
P/E Ratio
Div Payout Ratio
Stock Analysis
Becton Dickinson & Co.
Computer Services Inc.

Donaldson Company

Helmerich & Payne Inc.

Lowe's Companies
McDonald's Corp.
MSA Safety Inc.

Nucor Corp.

Raven Industries

T. Rowe Price Group
Target Corp.
W.W. Grainger Inc.

Walgreen Company
Wal-Mart Stores Inc.

High dividend growth does not make companies automatic buys. Investors need to evaluate each company in detail, and understand where future growth will come from. A solid plan with concrete deliverables communicated from the company is just one instance of something that could propel solid dividend growth going forward. Other variables that could translate into high earnings and dividend growth include taking advantage of favorable demographic trends in healthcare, baby boomers needs for retirement saving, and the rise of the emerging markets middle class.

Investors should also take with a red flag companies whose dividend growth has been slowing down considerably in the past five years or less. Nucor (NUE) rode the boom in steel prices in the first half of the decade, only to reach a plateau at the onset of the financial crisis of 2007 – 2009. The dividend growth has been miniscule for the past five years.

Investors should also look into the valuation of each company, prior to investing. Purchasing even the best company in the world that is guaranteed to boost earnings and dividends for the next 10 years could still lead to losses, if investment is made at very high valuations. Investors in Wal-Mart Stores (WMT) in 1999 and Coca-Cola (KO) in 1998 can certainly attest to this fact.

However, a booming business can be rewarding eventually even for the most unlucky investors, provided they are true long-term investors. Great businesses like Wal-Mart and Coca-Cola are attractively priced today, and have managed to record better sales, profits and dividends since hitting all-time-highs at the end of the last millennium. If they can continue pushing forward, their investors will eventually make good profits.

Full Disclosure: Long WMT, KO, NUE, LOW, AFL, BDX, MCD, TGT, WAG

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Monday, October 13, 2014

Canadian Banks for Long Term Dividend Growth

Last week, I added to my holdings of the largest Canadian Banks. I initiated a position in those five banks in early 2013, and then added some more in late 2013. If prices make sense, and I have money to invest, I will likely make another investment sometime in 2015. The banks include:

Bank of Montreal (BMO) provides various retail banking, wealth management, and investment banking products and services in North America and internationally. It has operations in the US, in the form of BMO Harris Bank. Bank of Montreal has paid dividends since 1829. Over the past decade, Bank of Montreal has increased dividends per share by 5.90%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009, 2010 and 2011.Earnings per share have increased by 4.10%/year over the same time period. The bank sells for 12.50 times earnings and yields 3.80%.

The Bank of Nova Scotia (BNS) provides various personal, commercial, corporate, and investment banking services in Canada and internationally. It operates in four segments: Canadian Banking, International Banking, Global Wealth & Insurance, and Global Banking & Markets. This is the most international Canadian bank, as it has services in Caribbean, Latin America, Central America, and Asia. Bank of Nova Scotia has paid dividends since 1834. Over the past decade, Bank of Nova Scotia has increased dividends per share by 7.50%/year. And that’s despite the fact that the annual dividend was left unchanged in 2010. Earnings per share have increased by 7.10%/year over the same time period. The bank sells for 12.40 times earnings and yields 3.80%.

Canadian Imperial Bank of Commerce (CM) provides various financial products and services to individuals, small businesses, and commercial, corporate, and institutional clients in Canada and internationally. The company operates through three segments: Retail and Business Banking, Wealth Management, and Wholesale Banking. Canadian Imperial Bank of Commerce has paid dividends since 1890. Over the past decade, Canadian Imperial Bank of Commerce has increased dividends per share by 4.40%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009 and 2010. Earnings per share have increased by 4%/year over the same time period. The bank sells for 11.30 times earnings and yields 4%.

Royal Bank of Canada (RY), a diversified financial service company, provides personal and commercial banking, wealth management, insurance, investor, and capital markets products and services worldwide. This is another bank that has operations in the US. Royal Bank of Canada has paid dividends since 1870. Over the past decade, Royal Bank of Canada has increased dividends per share by 10.60%/year. And that’s despite the fact that the annual dividend was left unchanged in 2009 and 2010. Earnings per share have increased by 11.10%/year over the same time period. The bank sells for 13.20 times earnings and yields 3.50%.

The Toronto-Dominion Bank, (TD) provides financial and banking services in North America and internationally. The company also has significant operations in the US. The Toronto-Dominion Bank has paid dividends since 1857. Over the past decade, Royal Bank of Canada has increased dividends per share by 10.10%/year. And that’s despite the fact that the annual dividend was left unchanged in 2010. Earnings per share have increased by 9.70%/year over the same time period. The bank sells for 11.30 times earnings and yields 3.80%.

Overall, I like the fact that Canadian Banks didn’t cut or eliminate dividends during the 2007 – 2009 financial crisis. Instead, they kept them steady for a few years, and have been increasing them for a few years now as well. I don’t believe this was due to dumb luck, but because there were stricter lending practices, than what we had in the US prior to the Great Recession.

In the grand scheme of things, I am bullish on Canada in the very long-term. An investment in all banks is a bet that Canada will be a developed country in 30 – 40 - 50 years (after that – I don’t care). It is a bet that its economy will gradually grow over time, the number of people will increase, and that Canadian people and businesses will need the services of a financial institution. I think that the Canadian government has its house in order, and that the relatively more open immigration system will encourage faster population growth.

It seems that most of the banking in Canada is done through one of those five largest banks. There are a few smaller ones, but I chose to only focus on the larger entities. Once a consumer starts using the services of one of the banks, they get used to it, and the switching costs are high. Once you establish that relationship with the bank and a banker, chances are that you will do checking through it, manage your investments, use credit cards and take on loans like car or mortgage on a house. Therefore, I believe they have competitive advantages, and scale of operations.

That being said, I have no idea whether there will be a financial crisis in Canada in the next 5 – 10 years. It is possible that one of the largest five banks fails during the next major recession. That’s fine, because the ones left standing will pick up the business and do better. This is why I am putting equal amounts of investment in each bank. No matter how the economy does, banking needs to get done, meaning that one of those five banks will get business. Again, as a long-term investor, my holding period is in the decades. I know growth is not going to be smooth year over year, which is why I am fine with encountering bumps along the road. This will help me build out my positions at cheaper prices.

It is also possible that earnings on those banks do not do that well over the next decade. That’s fine, since I am essentially getting paid anywhere between 3.50% and 4% annually to hold on to those banks. I think that even if earnings do not grow that much, dividends per share will grow enough to maintain purchasing power of my income. This is why I am slowly putting money once per year in those banks, in case I get the timing of the purchases wrong. Actually, even if I get the timing wrong in the next five years, that’s ok. It is ok, because I am investing for the next 30-40-50 years, not for the next five months. I have a conviction behind those ideas, which is why I would not hesitate to average down, if prices are much lower than today come 2015.

Full Disclosure: Long all companies listed above

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Friday, October 10, 2014

Visa: High Dividend Growth Stock To Consider

Visa Inc. (V), a payments technology company, operates as a retail electronic payments network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company went public in 2008, and has managed to pay and increase dividends ever since. I initiated a position in 2011, after witnessing the strong dividend growth, the attention of Berkshire Hathaway, and the fact that the stock was available at 20 times earnings

Currently, Visa is slightly overvalued at 20.50 times forward 2015 earnings, and has a low yield of 0.80%. If the company manages to earn $20 per share by 2020, and even if the P/E ratio compresses to 15 times by, the stock could provide very good returns to investors. Another plus is that dividend growth could result in very high yields on cost for Visa investors in 15 - 20 years. Of course, long-term growth is never certain, which is why I do not plan on adding to Visa unless I can buy it at 20 times forward earnings or less. However, I am willing to break my rules slightly, and accept 20 times forward earnings for 2015. If we get a more significant stock correction, I would be a buyer and will try to increase my position to a top 20 level ( meaning it will be in my top 20 portfolio positions by size).  

Full Disclosure: Long V

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