Monday, November 18, 2013

How to read my weekly dividend increase reports

As part of my process for uncovering undiscovered dividend gems, I focus on the list of companies that have increased their dividends. I usually look at the list of dividend increases for the week, and try to outline certain basic pieces of information such as amount of new dividend payment, percentage increase in distribution as well as what the new yield is going to be. After I obtain this information, I dive into valuation and trends in earnings per share and dividends per share. In addition, I check length of dividend increases, and rate of dividend increases over the past decade. There are two resources I use to check dividend increases:

Street Insider

WSJ Online

Whenever I review dividend stocks on my site however, I always try to analyze the information at a high level and reach out a conclusion on what to do next. Sometimes however, the conclusions I reach might need a little bit of extra information to be deciphered. Below, I have added a few short outcomes for my high level reviews of dividend increases.

1) Add subject to availability of funds

This is the highest review rating that I would assign to a stock. This means that I find the stock to be attractively valued at the moment and to have excellent future growth prospects. It also means that I have already analyzed the stock. This future growth would likely boost earnings, dividends and share prices. Unfortunately, I have a limited amount of funds to allocate each month. As a result I end up purchasing somewhere between one to three individuals securities per month. As a result, even if I find a stock attractively valued, I would not purchase it if there are other stocks that are cheaper at the moment.

2) Add on dips

This includes situations where I find the company to have excellent growth prospects for earnings and distributions, but the valuation is a little too rich for my taste. I have a strict entry criteria where I would never ever pay more than 20 times earnings for a company’s stock. In addition, I typically try to invest in companies which yield at least 2.50%. Sometimes a stock might yield more than 2.50%, but trade at more than 20 times earnings or yield less than 2.50% and trade at less than 20 times earnings. I typically require that both the P/E be below 20 and the yield be above 2.50%. Sometimes simply by waiting, a company could increase dividends, which would take the stock to my entry criteria. Wal-Mart (WMT) was such example in 2011- 2012. I monitor the shares every week, and would consider initiating or adding a position once the entry price is hit.

For example, in the past week, Automatic Data Processing raised its quarterly dividend by 10.30% to 48 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion.  Over the past decade, ADP has managed to boost distributions by 13.10%/year. The new yields is 2.50%, but unfortunately it trades at above 20 times earnings. Therefore, I would consider buying it at prices below $63/share, which corresponds to a P/E of 20 times forward earnings of $3.15/share. The company has strong competitive advantages in dealing with small and mid-sized businesses, and should benefit if interest rates increase, as it's float would generate more cash. Check my analysis of ADP for more information about the company.

3) Research

This view covers situations where I find a company which is attractively priced, and has raised distributions for at least ten consecutive years. However, I might not have researched the company in detail yet. I typically like to see not only good valuation, long history of dividend increases and a ten year dividend growth above the rate of inflation, but also good earnings prospects. I like to get a feel of the company’s business, and determine whether the company can sustain future earnings and dividend increases. I try to be a disciplined investor, which is why I require to analyze a company in detail, before initiate a position in it. In addition, if I haven’t analyzed a stock that I already own for about one year, I would likely also put it on my list for further research.

For example, Sysco recently increased dividends by 3.60% to 29 cents/share. I owned Sysco (SYY) for several years, until I decided to pull the plug a couple years ago, since I saw earnings plateaued since reaching a high of $1.81/share in 2008. This meant that most of the dividend growth was running on fumes, meaning through expansion of the dividend payout ratio, which is never desirable. Last time I analyzed the stock in 2011, I still had hopes management can turn the ship around, and increase earnings per share. Shortly after they announced another pathetic dividend increase, I realized dividend growth might be going on borrowed time. I would need to do a more detailed research on the company, and determine if it can increase earnings.

4) Monitor

I usually add a stock on the list for further monitoring if the company has not raised dividends for ten years in a row or if it is too far away from my entry criteria. For example, a company that has raised distributions for 6 years probably has approximately three to four years before I could add it to my portfolio. As a result, I will monitor the rate of dividend increases, and if it gets closer to becoming a dividend achiever, I might add it to my list for further research. Another scenario includes situations where a company yields only 1% or so, and as a result it would not make sense to analyze it or put it on my list to purchase on dips, because it would require a 60% decrease in share price to even get there. A case in point is Costco (COST), which yields 1% and has only raised distributions for ten years in a row. Another company I am actively monitoring is Becton Dickinson (BDX), which yields slightly less than 2%, but has a relatively low P/E ratio of 17.50 times forward earnings and plenty of growth ahead.

5) Hold

I typically tend to avoid the remaining companies that have boosted distributions. I place them under a hold rating, but this is similar to do not touch. Some stocks could move from that hold category into stocks that should be researched. Other stocks could also move from being darlings to being just holds. The world of dividend investing is an ever evolving one, which is why investors need to keep their eyes close to the pulse of the market by following weekly dividend increases.

An example of such a stock is MDU Resources (MDU), which recently increased quarterly dividends by 2.90% to 17.75 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Unfortunately, over the past decade the dividend has been increased by 4.90%/year and the current yield is only 2.30%. The companies in this position are decent holds for current income, especially if you bought it at lower prices. However, you might also consider whether you might get better dividend growth and yield prospects elsewhere.

Full Disclosure: Long WMT and ADP

Relevant Articles:

Check the Complete Article Archive
How to Uncover Hidden Dividend Gems
The Tradeoff between Dividend Yield and Dividend Growth
A long streak of dividend growth is an indication of a business with exceptional fundamentals
Three stages of dividend growth

7 comments:

  1. You sold your SYY? When? This means you are not long SYY any more? I must have missed that.
    Joe

    ReplyDelete
  2. I did sell it this year. I never really talked about my personal trades I make until early 2013 actually. I am starting to change that. If you are subscribed to my mailing list, you get my list of holdings quarterly.

    I am going back and forth on talking about investments I have made. I think it is better to talk about a stock, give some pros and maybe a few cons, then say if I own it.Then people can make their own decision after researching it.

    If I say I buy SYY, then you always risk having someone following you blindly. This is dangerous, as I make a lot of mistakes. And I know I will make more mistakes in the future years. Always do your homework before making an investment!

    ReplyDelete
  3. This is the first I've heard of the website Street Insider. Seems great. It also includes dividend history like dividata.com

    ReplyDelete
  4. I'm surprised you have never mentioned consdiered TAL International Group -- or maybe you have and I missed it.

    TAL has a current yield of 5.2 percent on a share value of $53.77. It has a P/E of 12.2 and EPS of $4.36.

    TAL has raised its dividend 13 times in the past 15 quarters and has raised every year since 2006 in which time the dividend has increased 240 percent.

    I realize that the seven-year period since 2006 does not comply with your requirement that a company raise for 10 years, but in applying such a rigid yardstick you have missed out on a huge runup in yield and, meanwhile, the shares has soared.

    I have 250 shares of TAL and would certainly add to them before considering Becton Dickinson @ $108.

    Your thoughts?

    ReplyDelete
  5. Hi Ken,

    I think we have discussed TAL International before ( or maybe it was someone else). However, I do not know much about this stock. One thing that I notice by checking dividend history is that the company cut dividends to the bone in 2009. Therefore, it has only increased dividends for 4 years or so, not since 2006. I usually try to avoid companies with cyclical dividends that go up when things are good and are slashed when things are not good.

    As for BDX, if it can fall by 20% from here, I would likely be a buyer.

    Thanks for reading!

    ReplyDelete
  6. Do you take 52 week high and lows into consideration?

    ReplyDelete
  7. I essentially check prices in relation to "value (aka P/E, earnings trends, ROE, DPR and DPS trends etc)

    Thus company can be undervalued if it sells at 52 week high, or overvalued even if it sells at a 52 week low. But I don't look at those.

    ReplyDelete

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