Friday, January 29, 2010

Universal Corporation (UVV) Dividend Stock Analysis

Universal Corporation (UVV), together with its subsidiaries, operates as the leaf tobacco merchants and processors worldwide. It engages in selecting, procuring, buying, processing, packing, storing, supplying, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products. This dividend champion has raised dividends for 39 consecutive years.

Over the past decade, Universal has delivered a total return of 11.60% to shareholders.

At the same time earnings per share have grown by 1.50% on average since 2000. Analysts expect UVV to earn $5.25/share in 2010 and $5.63/share in 2011. This is an increase over the $4.32/share Universal earned in 2009. The slow growth in tobacco consumption worldwide and risk of increased taxation and regulation in the sector represent one of the major risks for the company going forward.

The annual dividend has increased by 4% annually over the past decade. A 4% growth in dividends translates into the distribution doubling every 18 years. The current quarterly dividend of $0.46/share is double what it was in 1993-1994. The latest dividend increase was for 2.20% in November 2009.


The return on equity has generally decreased from a high of 22% in 2000 down to 15.30% in 2009. I generally like to see a stable value of this indicator over time.

The dividend payout ratio has generally remained below 50%, with the exception of 2006 and 2007, which struck as outliers.

Overall Universal Corporation does appear to be attractively valued, trading at a P/E of 9, yielding 3.90% and having an adequately covered dividend. The main problem for the company is the slow earnings growth, and concentration in the tobacco industry, which comes with its own inherent risks. I already have exposure to the tobacco sector through my position of already, Altria (MO) and Philip Morris International (PM). However I would consider initiating a position in UVV on dips whenever I have extra cash on hand.

Full Disclosure: None
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Wednesday, January 27, 2010

Stocks with fluctuating dividends to avoid

Many investors who are looking for an income stream in retirement choose the relative safety of US Treasury bonds. While the coupon payments lose their purchasing power each year due to inflation, they are fixed and guaranteed by the US government. This makes budgeting expenses somewhat easier. With dividend stocks on the other hand, distributions are not guaranteed which is probably why pundits advise retirees to increase their asset location in fixed income instruments. This is despite the fact that for most US companies which pay dividends, distributions do not fluctuate.

Most companies try to get a following from long-term investors by enticing them with a stable or growing distribution over time. That way there is a greater chance that those investors would not sell even under the best or worst of circumstances. If dividend growers have a stable business model which allows them to pass on cost of increases to their customers while still earning a respectable return on capital, they could afford to raise distributions to their stockholders. Stocks that pay rising distributions could essentially provide investors with a real inflation adjusted stream of income, which is something that most fixed income securities do not provide. This makes it easier for investors to budget for their expenses, since their revenues would now be keeping up pace with inflation. One issue with these payers however is that they offer yields ranging from 3% to 5%, which is not enough for some investors.

Not all dividend stocks pay a stable distribution however. Some high yielding but speculative stocks which investors hold pay dividends which fluctuate from quarter to quarter. Companies which pay all of their operating earnings are typically the ones which pay fluctuating dividends. Examples include Canadian royalty trusts such as Pengrowth (PGH), PennWest (PWE) and shipping companies such as Nordic American Tanker (NAT). These stocks spot high yields most of the times, which might not truly reflect the yield on cost of original holders. Pengrowth Energy (PGH) for example yielded 15.30% at the end of 2007 while paying out a distribution of 22.70 cents monthly. Two years later it paid out a distribution of 6.70 cents/share, while yielding 8.40%. Obviously investors who purchased the stock in 2007 are not earning as much on their invested capital as they had originally planned to do- their yield on cost was 4.50% by the end of 2009.

Another example of this situation is Nordic American Tanker which has paid a quarterly distribution ranging from a low of 30 cents/share to a high of $1.88/share. Investors who relied on the high dividends which NAT paid must have been terribly surprised when the company announced a quarterly distribution of just 10 cents. Having limited to no visibility as to what the distribution might be next quarter could impose a strain on an already thin retirement budget.

The stocks which investors should concentrate on are the ones which pay a stable and growing distribution, which are adequately covered by earnings. That way investors’ portfolios would not be exposed to temporary fluctuations in earnings, which would affect the amount of dividend payouts. Companies, which pay consistent dividends, pay out up to a certain sustainable amount of their earnings to shareholders as dividends. They reinvest the rest in the business, which could bring in a solid foundation from which further growth in earnings and distributions is achieved. While there is always a risk that a company could slash or eliminate its distribution, few regular dividend growers do that unless they face unforeseen circumstances.
An example of such stock is Abbott Labs (ABT) has increased dividends for 37 consecutive years. Abbott Laboratories manufactures and sells health care products worldwide Check my analysis of the company.

Full Disclosure: Long ABT

Relavant Articles:

- Best Dividends Stocks for the Long Run
- High yield Canadian Royalty Trusts
- High yield stocks for current income
- The Dividend Investment Journey
- Dividends Stocks versus Fixed Income

Monday, January 25, 2010

Realty Income (O) Dividend Stock Analysis

Realty Income Corporation engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. Realty Income is widely known among its investors as the monthly dividend company. The company is a dividend achiever, which has increased its dividend for 15 years in a row by raising its monthly distributions several times per year. The company is one my best dividend stocks for 2010 list.

Over the past decade the stock has delivered a total return of 18% per annum to its shareholders.

Realty Income owned 2348 retail properties at the end of 2008. The company’s properties which are leased by 119 retail chains in 30 industries are located in 49 states. Most new properties acquired are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. The average remaining lease life was 11.9 years in 2008. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, occupants are also responsible for future rent increases based on increases in the consumer price index, fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Due to the stability of company's revenue streams and above average yield, the company might be a good pick for investors who are seeking current retirement income.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2008. Realty Income distributed $1.66 /share in 2008. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $355 million.

Over the past decade FFO has increased by 4.5% on average.


Over the past decade distributions have increased by 5.3% per annum. A 5% annual gowth in distributions translates into dividends doubling every 14 years. In 2009 the company has raised distributions by 1.10%.

The FFO payout ratio has increased to 90.80% in 2008, which is higher than the 86.60% to 81.50% average range over the past decade.

The main risk for the company is if occupancy rate decreases. About 3% - 4% of the company’s properties face lease expirations each year, which is why it has to be able to find new tenants. The company could try to sell properties which are not occupied currently however, which might be problematic in the current market for real estate. Another negative for the company is the fact that it typically expands its operations through additional sales of its common stock, which dilutes the stakes of existing stockholders.

While Realty Income acquired 108 new properties in 2008, so far in 2009 it has only acquired 3 new properties. Without new acquisitions, the company might not be able to increase distributions above the rate of inflation in the future.

The company owns and actively manages a diverse mix of properties, which provide a stable and dependable income stream for the company’s shareholders. Realty Income currently yields and has raised distributions and FFO’s for over 15 years in a row. I believe that Realty Income is a good addition to any dividend growth portfolio, since it provides growing income and also provides diversification into commercial real estate.

Full disclosure: Long O


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- Six Dividend Stocks for current income
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Friday, January 22, 2010

Busy week for dividend increases

January is typically a busy month for dividend increases. The past week has most probably accounted for the majority of the increases for the month already. Increasing a company’s dividend for another consecutive year reflects management’s strong financial position and their confidence in the long-term growth opportunity of the company. I have summarized the increases by several types – dividend aristocrats and achievers, Berkshire Hathaway Holdings and potential dividend achievers.

Dividend Aristocrats and Achievers

The dividend aristocrats list includes companies which have increased dividends for over 25 years in a row. It is equally weighted and re-balanced once a year. To become a dividend achiever a company must have increased its annual regular dividend payments for the last ten or more consecutive years.

Consolidated Edison, Inc. (ED), which provides electric, gas, and steam utility services in the United States, increased its quarterly dividend by 0.85% to 59.50 cents per share. Consolidated Edison, Inc. is a dividend aristocrat, which has increased its quarterly dividend for thirty-six consecutive years. The stock currently yields 5.10%. (analysis)

McGraw-Hill Companies (MHP), which provides information services and products to the financial services, education, and business information markets worldwide, increased its quarterly dividend by 4.40% to 23.50 cents per share. This is the 37th consecutive annual dividend increase for this dividend aristocrat. McGraw-Hill also announced that it will buy back over time the 17.1 million shares remaining in its share repurchase program approved by the Board in 2007. The stock currently yields 2.70%. (analysis)

Family Dollar Stores, Inc. (FDO), which operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States, increased its quarterly dividend by 14.80% to 15.50 cents per share. Family Dollar Stores, Inc. is a dividend aristocrat, which has increased its quarterly dividend in each of the past thirty-four consecutive years. The stock currently yields 2.00%. (analysis)

Polaris Industries Inc. (PII), which designs, engineers, and manufactures off-road vehicles, raised its quarterly dividend by 3% to 40 cents per share. This represents the 15th consecutive year of Polaris increasing its dividend. This dividend achiever currently yields 3.50%.

Berkshire Hathaway Holdings

These companies are owned by Berkshire Hathaway (BRK.A)

Wesco Financial Corporation (WSC), which engages in insurance, furniture rental, and steel service center businesses in the United States, increased its quarterly dividend by 2.40% to 42 cents per share. This is the thirty-seventh annual dividend increase for this dividend champion. The largest shareholder in the company is Buffett’s Berkshire Hathaway (BRK.A). The stock currently yields only 0.40%.

Washington Post Company (WPO), which operates as a diversified education and media company in the United States and internationally, increased its quarterly dividend by 4.60% to $2.25 per share. Washington Post Company also announced plans to buy back up to 750,000 shares. One of the company’s largest shareholders is Warren Buffett. Despite the fact that the company hasn’t raised dividends each year, it has been able to boost distributions every other year. However the stock currently yields 1.90%, and the dividend is not well covered.

Potential Dividend Achievers

These are the companies which could become members of the dividend achievers index if the keep raising annual distributions for the next few years.

Omega Healthcare Investors, Inc. (OHI), a self-administered real estate investment trust (REIT), which invests primarily in long-term healthcare facilities in the United States, increased its quarterly dividend by 6.70% to 32 cents per share. This is the first increase for the company since 2008. Omega Healthcare Investors, Inc. has increased its quarterly dividend in each of the past six years. The company had previously eliminated distributions for 2001 and 2002. The stock currently yields 6.00%.

Enterprise Bancorp, Inc. (EBTC), which operates as the holding company for Enterprise Bank and Trust Company that provides various banking products and services, increased its quarterly dividend by 5.30% to 10 cents per share. Enterprise Bancorp, Inc. has increased its dividends for 15 years in a row. However the company has been publicly traded only since 2005. The stock currently yields 3.70%.

ONEOK, Inc. (OKE), which engages in the purchase, transportation, storage, and distribution of natural gas in the United States and Canada, increased its quarterly dividend by 4.80% to 44 cents per share. ONEOK, Inc. is a general partner of ONEOK Partners L.P. (OKS) and has raised dividends for 8 consecutive years. The stock currently yields 3.70%.

ONEOK Partners, L.P. (OKS), which engages in the ownership and management of natural gas gathering, processing, storage, and interstate and intrastate pipeline assets, as well as natural gas liquids (NGLs) gathering and distribution pipelines, increased its quarterly distribution $1.10 per unit. This master limited partnership has increased its quarterly distributions in each of the past five consecutive years. The units currently yield 6.80%.

Spectra Energy Partners, LP (SEP), which engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States, increased its quarterly dividend from 40 to 41 cents per unit. This is the ninth consecutive quarterly distribution increase for Spectra Energy Partners, LP since it went public in 2007. This master limited partnership currently yields 5.30%.

Tiffany & Co. (TIF), which engages in the design, manufacture, and retail of fine jewelry., increased its quarterly dividend by 18% to 20 cents per share. In addition to that the company announced that it would be resuming its stock buyback plan. Tiffany & Co. has increased its annual dividend in each of the past eight years. The stock currently yields 1.50%.

Pall Corporation (PLL), which manufactures and markets filtration, purification, and separation products and integrated systems solutions worldwide, increased its quarterly dividend by 10.30% to 16 cents per share. This is the sixth consecutive dividend increase for Pall Corporation since the company cut dividends in 2002. The stock currently yields 1.50%.

Finish Line, Inc. (FINL), which operates as a mall-based specialty retailer in the United States, increased its quarterly dividend by 33% to 4 cents per share. This is only the second dividend increase from the company since 2007. The stock also currently yields only 1.40%, which coupled with the short history of dividend raises makes it a pass for now.
Summary

I like Con Edison (ED) as a stock better suited for current income. McGraw-Hill Companies (MHP) looks like an interesting position to add on dips below $31.30. Polaris Industries Inc. (PII) also looks like an interesting company that I would add to my list for further research.

Full Disclosure: Long FDO, ED and MHP

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- Buffett the dividend investor
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Wednesday, January 20, 2010

Dividend growth stocks are attractive buyout targets

Most of the companies which leave the dividend achievers or the dividend aristocrat indexes do so because of three reasons. Firtst, they might stop raising dividends because they needed cash for acquisitions. Another reason is that companies cut distributions because of poor economic conditions or need for cash in acquisition. The third reason why companies are booted out of these elite dividend indexes is because they are being acquired or have merged with another company.

Some of the best dividend stocks have raised distributions for many years in a row. This could only be achieved if they had a solid business model, and a durable competitive advantage which prevents barriers to entry and allows the company to maintain a loyal customer base. Dividend stocks could be found in many industries including pharmaceuticals, telecommunications, utilities, financial services and consumer staples to name a few.

While some investors believe that a company should plow back all of its earnings into the business, some of the most successful companies which incidentally boast a long record of dividend raises have proven otherwise. Companies such as Wal-Mart Stores (WMT) or Automatic Data Processing (ADP) have managed to not only grow their business successfully for many decades but also to reward long-term stockholders with a regularly rising payout. Maintaining a proper balance between overexpansion and rewarding shareholders is an important component of sound corporate policy, which takes into account the interests of a variety of stakeholders. Paying a dividend instills a discipline to managers, and thus makes them more careful about accepting projects which might not contribute to the bottom line.

The problem with many dividend stocks is that they could be attractive buyout targets by larger rivals or by companies which are looking to diversify into a new line of business. Shareholders usually receive a big premium which ensures that almost everyone makes a profit in the process. This doesn’t take into consideration the fact that a growing company might deliver much higher total returns if it stayed independent.

Two recent examples of solid dividend stocks which are in the process of being acquired are Cadbury (CBY) and Alcon (ACL). Both stocks are members of the elite international dividend achievers index.

Alcon (ACL) is one of the biggest players in the global market for eye-care products, specializing in surgical equipment and devices, contacts lens solutions and other consumer eye-care products. The company has raised dividends for 6 consecutive years. Swiss food giant Nestle purchased the company in 1977 for $280 million. So far Nestle is going to make about $40 billion in total from selling its whole stake to Novartis (NVS). The extra cash that Nestle would receive would be used for share repurchases or it could be used to bid for Cadbury (CBY).

Cadbury plc, (CBY) together with its subsidiaries, engages in the confectionery business worldwide. It has raised dividends for 12 consecutive years. The company's board has approved Kraft Food’s (KFT) acquisition of Cadbury. There were rumors that Hershey (HSY) and Nestle would likely team up to bid against Kraft for the maker of chocolate and gum.

Other notable dividend achievers which were acquired include Gillette, which was purchased by Procter & Gamble (PG) in 2005, Quaker Oats acquired by PepsiCo (PEP) in 2001 and Geico, which was acquired by Berkshire Hathaway (BRK.A) in 1996.

It is interesting to note that the companies which have been acquired have continued to deliver strong revenues and earnings for the companies which acquired them in the first place. In the event that a dividend achiever or aristocrat is being acquired by another dividend achiever or aristocrat in stock, it might be beneficial to keep the stock of the acquirer. The key factor is for the acquirer to keep raising distributions.

Full disclosure: Long ADP, PEP, PG and WMT

This article was included in the Carnival of Personal Finance #242 – Fun Tax Facts

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Tuesday, January 19, 2010

A Strong week for MLP distributions

I review the list of dividend raisers as part of my weekly reviews for possible additions to my portfolio. I require at least ten years of consecutive dividend raises, an adequately valued stock price and yield as well as a well-covered distribution. Several stocks raised their distributions over the past week. Almost half of them were master limited partnerships.

Linear Technology Corporation (LLTC), which engages in the design, manufacture, and marketing of linear integrated circuits worldwide, increased its quarterly dividend by 4.5% to 23 cents per share. Linear Technology Corporation is a dividend achiever, which has increased its quarterly dividend in each of the past seventeen years. The stock currently yields 2.90%.

Shaw Communications Inc. (SJR), which provides broadband cable television, Internet, digital phone, telecommunications, and satellite direct-to-home (DTH) services primarily in Canada and the United States, increased its quarterly dividend by 5% to 22 cents per share. Shaw Communications Inc. is an international dividend achiever. The stock currently yields 4.40%

Enterprise Products Partners L.P. (EPD) announced that the board of directors of its general partner declared an increase in the quarterly cash distribution rate paid to partners to $0.56 per common unit, or $2.24 per unit on an annualized basis. This distribution rate, which represents a 5.7 percent increase over the $0.53 per unit distribution rate declared with respect to the fourth quarter of 2008. This dividend achiever currently yields 6.80%.

Enterprise GP Holdings (EPE) owns the general partner of Enterprise Products Partners L.P.(EPD), as well as limited partner interests in the same entity. Enterprise GP Holdings raised its quarterly distribution to 53 cents/unit, which was 12.80% higher than the 47 cents/unit distribution for Q1 2009. The stock currently yields 5.20%.


CVS Caremark Corporation (CVX), which is a pharmacy services company, that provides prescriptions and related healthcare services in the United States, increased its quarterly dividend by 15% to 8.75 cents per share. CVS Caremark has regularly increased its quarterly dividend seven years. The stock currently yields 0.90%.


Duncan Energy Partners L.P. (DEP) engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs) and petrochemicals in the United State.. Last week this master limited partnership increased its quarterly distributions by 4.10% to 44.50 cents per unit. Duncan Energy Partners L.P. has only raised distributions since 2007. The stock currently yields 7.10%.

Genesis Energy, L.P. (GEL), which operates through four divisions: Pipeline Transportation, Refinery Services, Industrial Gases, and Supply and Logistics, increased its quarterly distributions to 36 cents per unit. Genesis Energy, L.P.is has raised distributions since 2003. The stock currently yields 7.30%.

Epoch Holding (EPHC), which is a publicly owned investment manager, increased its quarterly dividend by 66.70% to 5 cents per share. This is the second dividend increase for Epoch Holding since the company started paying dividends in 2007. The stock currently yields 1.80%.

Fifth Street Finance Corp. (FSC), which is a fund specializing in mezzanine investments., increased its quarterly dividend by 11.10% to 30 cents per share. Despite the high current yield of 9.30%, Fifth Street Finance Corp. has a short and erratic dividend history.

Right now, Linear Technology Corporation looks like an attractively valued dividend stock. I would add it to my list for further analysis.

Full Disclosure: None

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Saturday, January 16, 2010

Interesting Dividend and Investing Sites to Consider

I read dividend investing stories every single day. A very good compilation of articles on many aspects of incoem investing could typically be found on Seeking Alpha, which is one of the largest blog aggregators on the web.

http://seekingalpha.com/tag/dividends

Another useful website for daily investment ideas is James Altucher's column on Daily Finance. From his bio page "James Altucher is a columnist for DailyFinance. He writes for The Wall Street Journal, was the founder of StockPickr, and formerly wrote and appeared in videos at TheStreet.com. He is the author of numerous investment books, including Trade Like A Hedge Fund and Trade Like Warren Buffett."

The two best dividend blogs ( besides Dividend Growth Investor of course) that I check almost daily include Dividends Value and The Dividend Guy blog. These bloggers are also real investors, which let you observe their decision making process, which has helped them generate several thousand in annual dividend incomes.

For news items, I typically check TickerSpy, which has categorized press releases and other items neatly by ticker symbol.

One of the best value investing blog aggregators is Gurufocus. Besides blog posts related to value investing, the site also includes information about the recent moves of famous vaule investors such as Warren Buffett or Mohnish Pabrai.

Friday, January 15, 2010

Brown-Forman Corporation (BF-B) Dividend Stock Analysis

Brown-Forman Corporation engages in the manufacture, bottling, import, export, and marketing of alcoholic beverage brands. This dividend aristocrat has increased distributions for the past 26 years. For the past decade this dividend growth stock has delivered annualized total returns of 10.80 % to its shareholders.


The company has managed to deliver a 9.50% average annual increase in its EPS between 2000 and 2009. Analysts expect Brown-Forman to earn $3.10 per share in 2010 and $3.30/share in 2011. Over half of company’s sales are coming from international markets, which is one of the primary fuels of growth in earnings and revenues. A large chunk of company’s revenues are derived from its Jack Daniel’s Tennessee Whiskey line. This could be an issue if alcohol consumption shifts significantly to wine and beer.

The Return on Equity has been rather stable after rising in the beginning of the decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 9.80% annually since 1999, which is in line with the growth in EPS.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1985, Brown-Forman has actually managed to double its dividend payment every eight years on average. The company last raised its dividend in November 2009.

The dividend payout ratio has remained mostly stable having never exceeded 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Brown-Forman is attractively valued at 17 times earnings and has an adequately covered distribution. The main issue with this dividend investment is that it yields only 2.30%. I would consider initiating a position in Brown-Forman on dips below $40.

Full Disclosure: None

Wednesday, January 13, 2010

Buffett the dividend investor

Warren Buffett is the most successful investor of our time. The student of legendary value investor Ben Graham took on value investing to a whole new level by transforming the small textile mill Berkshire Hathaway (BRK.A) into a diversified conglomerate with interests in insurance, utilities, jewelry sales, newspaper publishing and many others.

Buffett is a closet dividend investor. One aspect of Buffett’s value strategy that many investors seem to miss is the fact that the Oracle of Omaha is a fan of companies which distribute a portion of their excess earnings back to Berkshire. This allows Buffett to re-invest the proceeds into new companies, which lets him further compound his invested capital.

Most of the companies which Berkshire has invested have been characterized by having wide moats, or durable competitive advantages. This is also the foundation behind some of the best dividend stocks out there. Only a company with a strong competitive advantage could afford to raise prices to consumers, which translates into higher earnings and ultimately into long-term dividend growth. Not having a large need of capital infusions is another important aspect of strong dividend growers.

Looking at the current portfolio holdings of Berkshire Hathaway, there companies. Of them seven are dividend aristocrats, one is an international dividend achiever and almost all of the rest pay a dividend except for six companies. Even some of Buffett’s core holdings such as GEICO and General RE, which he has acquired, were members of the elite dividend achievers index.

Berkshire Hathaway is expected to make about $1.3 billion in dividends from its publicly traded holdings. In addition to that Berkshire is expected to earn fat dividends from its investments in preferred stocks in General Electric (GE) and Goldman Sachs (GS) as well.



A major tenet of Buffett’s investment philosophy is buying a holding through thick and thin forever. It is especially interesting to note how much income his investment in Coca Cola (KO) and the Washington Post (WPO) generate. Berkshire’s average cost basis in Coca Cola is $6.49/share. With an annual dividend of $1.64/share Buffett is generating an annual yield on cost of 25.3%. This means that every 4 years he gets paid exactly what he paid for the stock 20 years ago. Buffett’s basis in Washington Post is $6.15/share. With a current dividend of $8.60, Berkshire’s yield on cost is 139.80%.

Full Disclosure: Long KO, JNJ, MTB, PG, WMT

This article was included in the The 241st Carnival of Personal Finance

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Monday, January 11, 2010

Valuing Dividend Stocks

Few investors these days seem to grasp the idea that stocks represent fractional ownership of real businesses. This is especially difficult to understand as electronic trading has become widespread, and it is now possible to buy and sell stocks and derivatives on these equities within seconds from the comfort of your home. While as a dividend investor I typically look for stocks with a consistent stream of earnings, which translates into a long history of dividend growth, I am always on the lookout to learn something new as well.

While earnings power is essential, it is also important to understand that a business or its assets do have some value, whether as a whole or as a sum of its parts. Most of the times when there is a merger or an acquisition of a company, investors get a price for their holdings from the acquirer. Thus they are able to monetize their partial ownership rights, and their stocks rise in value in the process. Other times the market undervalues companies which hold on for too long to liquid assets, because of the fear that excess cash in the hands of management might not lead to improved financial condition over the long term.

One such company was Magic Software Enterprises Ltd. (MGIC). Magic Software Enterprises Ltd. is an Israeli company which develops, markets, and supports software development and deployment technology and applications. Back in December the company announced that its board of directors has declared a cash dividend in the amount of US$0.50 per share and in the aggregate amount of approximately US$16.0 million. The stock increased in value from $1.87 to $2.23/share after the announcement. The stock is already trading ex-dividend however, which means that investors who purchase the stock today would not be able to receive the special distribution.

At the end of the third quarter of 2009, Magic Software held cash and cash equivalents worth $36.85 million and had total liabilities worth $14.21 million. This was worth approximately 55 cents/share, and that’s without including any of the company’s receivables, fixed assets, intangible assets and the company’s ability to generate future earnings. In addition to that the company has been profitable in 2007 and 2008 and is on schedule to earn money in 2009. What might have triggered the need for special dividend was the sale of the company’s office building for $5.20 million in cash in early December 2009.

At the end of the day it is important to understand that stocks represent fractional ownership of real tangible businesses. An important component of success in investing is also finding the best opportunities at bargain prices as well in addition to diversification and dividend reinvestment. Thus I believe that even if we have another lost decade, there would be plenty of opportunities for investors to make money and for companies to unlock their intrinsic value through dividend raises or special dividends.

Some of the companies which have been able to create consistent value for shareholders over the past few decades include Automatic Data Processing (ADP) and Emerson Electric (EMR). Both stocks currently trade at attractive levels and have well-covered dividends.

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This dividend aristocrat has raised dividends for 35 years in a row. The stock is trading at 16 times earnings and yields a comfortable 3.20%. The company has a ten year average dividend growth rate of 14.50% per year. Last year ADP raised distributions by only 3%. When the business recovers however, the company would be able to grow distributions in the low double digits. The book value of the assets is $11.23/share.(analysis)

Emerson Electric Co., (EMR) a diversified global technology company, engages in designing and supplying product technology, as well as delivering engineering services and solutions to various industrial, commercial, and consumer markets worldwide. This dividend aristocrat has boosted distributions for 53 consecutive years. The stock is trading at 19 times earnings and yields 3.10%. The company has a ten year average dividend growth rate of 6.50% per year. When the world economy recovers, the company’s diversified business operations should be able to support a dividend growth in the high single digits. The books value of the assets is $11.33/share.(analysis)

Full Disclosure: Long ADP and EMR

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Friday, January 8, 2010

3 dividend increases, more expected in January

Standard & Poor’s just reported that 2009 was the worst year for dividends, with the number of dividend increases falling by 36% to 1191. The number of companies slashing dividends rose by 631% to 804 issues. After taking a big bath in 2009 however, dividends are expected to have a stellar year in 2010. Several companies kicked off the new year with dividend raises. I have also highlighted several companies which have a long track record of consistent dividend growth which are expected to boost distributions in January.

Pentair, Inc. (PNR), which is a diversified industrial manufacturing company primarily in the United States, Europe, and Asia., increased its quarterly dividend by 5.60% to 19 cents per share. Pentair, Inc. is a dividend champion, which has increased its quarterly dividend in each of the past thirty-four consecutive years. The stock currently yields 2.20%.

Robbins & Myers, Inc. (RBN), which supplies engineered equipment and systems for various applications in energy, industrial, chemical, and pharmaceutical markets worldwide, increased its quarterly dividend by 6.25% to 4.25 cents per share. This is the fourth consecutive dividend increase for Robbins & Myers, Inc. since 2006. The stock currently yields only 0.70%.

Calumet Specialty Products Partners, L.P. (CLMT), which produces and sells specialty hydrocarbon products in North America, increased its quarterly dividend by 1.10% to 45.50 cents per unit. This is the first distribution increase for Calumet Specialty Products Partners, L.P. since the company cut distributions in2008. The units currently yield 9.80%.

Five dividend aristocrats, which have a long track record of raising distributions, are expected to boost distributions in January as well.

Bemis (BMS) has raised its dividend every January over the past two years. This dividend growth stock has been raising dividends for 26 consecutive years and has a 5-year dividend growth rate of 6.60%. The stock currently yields 3%. (analysis)

Cintas (CTAS) has raised its dividend every January over the past seven years. This dividend growth stock has been raising dividends for 26 consecutive years and has a 5-year dividend growth rate of 10.10%. The stock yields 1.80%.

Consolidated Edison (ED) has raised its dividend every January over the past seven years. This dividend growth stock has been raising dividends for 35 consecutive years and has a 5-year dividend growth rate of 0.90%. The stock currently yields 5.30%. (analysis)

Family Dollar Stores (FDO) has raised its dividend every January over the past seven years. This dividend growth stock has been raising dividends for 33 consecutive years and has a 5-year dividend growth rate of 9.70%. The stock currently yields 2%. (analysis)

McGraw-Hill Companies (MHP) has raised its dividend every January over the past seven years. This dividend growth stock has been raising dividends for 36 consecutive years and has a 5-year dividend growth rate of 8.50%. The stock currently yields 2.70%. (analysis)

Full Disclosure: Long ED, FDO and MHP

Relevant Articles:

- What Dividend Growth Investing is all about?
- Dividend Aristocrats List for 2010
- Inflation Proof your income in retirement with Dividend Stocks
- Bristol-Myers Squibb, Two other companies raise dividends

Wednesday, January 6, 2010

Five Consumer Stocks for 2010

With the expectations that the financial crisis appears to be over, investors have bid up stocks to the highest levels in over a year. There’s a lot of optimism in the news, including major banks repaying TARP money, unemployment stabilizing, and major economies rebounding. If economies rebound, then consumers would be able to start spending more on everyday items, trading up from generic brands to brand name products.

The companies which could benefit from this include Johnson & Johnson (JNJ), Procter & Gamble (PG), McDonald’s (MCD), Wal-Mart (WMT) and Coca Cola (KO). They all have durable competitive advantages, which has allowed each company to become a member of the elite dividend aristocrats index after raising distributions for over a quarter of a century.

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company has increased distributions for 47 consecutive years. I would be a buyer of KO below $54.66. Check my analysis of the stock.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The world’s largest retailer has a 35 year record of annual dividend raises. I would be a buyer of WMT on dips. Check my analysis of the stock.

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. The golden arches has raised dividends for 33 years. I would be a buyer of MCD as long as it trades below $73. Check my analysis of the stock.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company has boosted distributions to shareholders for 47 years in a row. I would be a buyer of JNJ below $65.33. Check my analysis of the stock.

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has rewarded stockholders with dividend increases for 53 consecutive years. I would be a buyer of PG below $58.67. Check my analysis of the stock.

Even if the recovery is characterized by lower consumer participation, these stocks should benefit, particularly because their revenue streams are stable and globally diversified. A decline in the stock market would present a great opportunity to initiate or add to positions in the global powerhouses.

Full Disclosure: I have positions in every company listed above

Relevant Articles:

- Dividend Aristocrats List for 2010
- McDonald’s (MCD) Dividend Stock Analysis
- TARP is bad for dividend investors
- Six things I learned from the financial crisis

Monday, January 4, 2010

2010’s Top Dividend Plays

Back in late 2008 I was invited to participate in a stock picking competition, where the goal was to pick the best stocks for 2009. The picks that I selected were Kinder Morgan (O), Realty Income (O), Con Edison (ED) and Philip Morris International (PM).

The reason for the selection of these stocks is that each of them paid an above average yield and was trading at attractive valuations. Another reason was that the dividend was well covered from cash flows for all stocks. The most important reason was that two of them, Kinder Morgan (KMP) and Con Edison (ED) were natural monopolies, which had a toll booth type business model with stable cash flows. Philip Morris International’s (PM) business model is characterized by having a globally recognizable brand product, which is addictive and for which consumers are willing to pay higher prices each year. Realty Income (O) also has a rather stable revenue source, since it typically provides long-term leases to its tenants. I do like the companies enough, that I also have a position in them. Including a company on a stock list without having a position there, shows what the real opinion of the author on the stock really is.

The time has come to reveal how the stocks fared in 2009, and also pick the best stocks for 2010. As a long term dividend investor my holding period is forever. Thus I would select the same picks mentioned above as my top picks for 2010. I would explain the reasons behind each selection below:

Realty Income (O) has consistently increased dividends several times per year since it was listed on the NYSE in 1994. This dividend achiever owns 2348 retail properties, which are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, tenants are typically responsible for future rent increases based on increases in the consumer price index (typically subject to ceilings), fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2008. Realty Income distributed $1.66 /share in 2008. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $355 million. Realty Income currently yields 6.50% .Check my analysis of the stock.

Kinder Morgan (KMP) operates a toll-road-like network of diversified and primarily fee-based assets generated a tremendous amount of stable cash flow. This dividend achiever is largely immune to fluctuations in commodity prices and has enough in distributable cash flows per unit to cover distributions, which are expected to increase to $4.40/unit in 2010 up from $4.20 in 2009. Future growth in one of the largest MLPs in the US will be fueled by projects such as the Midcontinent Express Pipeline, Rockies Express-East and Kinder Morgan Louisiana Pipeline. Distributable cash flow includes each period’s earnings before all non-cash depreciation, depletion and amortization expenses, including amortization of excess cost of equity investments, to be an important measure of our success in maximizing returns to our partners. Kinder Morgan’s partnership agreement requires it to distribute 100% of net cash (cash receipts minus cash disbursements less changes in reserves) to unitholders on a quarterly basis. Check my analysis of the partnership.

Consolidated Edison (ED) is a regulated utility which provides electric service to 3.3 million customers and gas service to 1.1 million clients in New York city and Westchester County. The company is a natural monopoly in its geographic area, and thus is able to generate strong and steady revenue streams and enjoy a healthy balance sheet. Do not let the high payout ratio of 70% scare you from the stock – this utility has been able to maintain this high payout of 70% on average over the past decade, while still affording to grow the distributions by about 1% each year. This dividend aristocrat has been able to increase dividends in each of the past 34 years. Check my analysis of the stock.

Philip Morris International (PM) was spun out of cigarette maker Altria Group (MO) in 2008, in order to separate potential US legal liabilities from the international tobacco operations. The company is the largest cigarette manufacturer in the world, with a 15.6% market share worldwide. The company’s strategy includes organic growth and growth through acquisitions. Philip Morris International (PM) is in the middle of expanding its sales to China, which represents about one-third of the global tobacco market. The company has announced its intent to repurchase up to $13 billion of its shares over the next two years. In addition to that it has raised distributions twice since it became a separate public company in 2008. Check my analysis of the stock.

The four stocks generated a total return of 26.48% in 2009. The picks from the other bloggers participating in the contest, as well as their performance could be found below:

Intelligent Speculator: 81.55%

WildInvestor: 70.15%

Where does all my money go: 56.14%

The Financial blogger: 44.62%

Four Pillars: 35.26%

Dividend Growth Investor: 26.48%

Million Dollar Journey: 20.27%

My Traders Journal: 0.18%

Zach Stocks: -8.80%

It is important to understand that while these four stocks have the necessary characteristics to grow their distributions over time, they are simply chosen for illustrative purposes only. A real portfolio should include at least 30 different companies from a variety of sectors, sizes and continents. For a list of the best dividend companies for the long run, check here.

Full disclosure: Long KMR, O, PM, MO and ED

Relevant Articles:

- Best High Yield Dividend Stocks for 2009
- Best Dividends Stocks for the Long Run
- Why do I like Dividend Achievers
- Six Dividend Stocks for current income

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