Saturday, August 31, 2013
Friday, August 30, 2013
Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend champion has paid distributions since 1954 and increased dividends on its common stock for 31 years in a row.
The company’s last dividend increase was in March 2013 when the Board of Directors approved a 10.90% increase to 71 cents/share. The company’s largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).
Over the past decade this dividend growth stock has delivered an annualized total return of 10.80% to its shareholders.
The company has managed to deliver 11.20% in annual EPS growth since 2003. Analysts expect Air Products and Chemicals to earn $5.50 per share in 2013 and $6.08 per share in 2014. In comparison Air Products and Chemicals earned $4.66/share in 2012.
Air Products and Chemicals is expected to post growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia.
While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically.
The priorities that have been outlined in the latest annual report included increasing volumes in the merchant segment, plus executing new projects on time and budged in the tonnage segment, while focusing on plan efficiency improvements. In addition, the company is focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that would hopefully increase margins and returns. Other important priorities include focusing on the pricing and the right mix of productivity and cost reductions, in order to hit profitability and margin goals set for itself.
In recent weeks, activist investor Bill Ackman has built a 10% stake in the firm, with his goal likely to push management to improve performance. This could be achieved either by passing on cost increases to customers, cutting costs or a combination of both.
The return on equity has increased from 11% in 2003 to 22% in 2011, before slipping to 16% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 11.80% per year over the past decade, which is higher than to the growth in EPS.
A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven years on average.
The dividend payout ratio remained at or below 50% over the past decade, with the exception of two brief spikes in 2009 and 2012. 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, Air Products and Chemicals is slightly overvalued at 22.90 times earnings, yields 2.70% and has an adequately covered dividend. I would consider adding to my position in the stock on dips below $94.
Full Disclosure: Long APD
- Check the Complete Article Archive
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- Dividend income is more stable than capital gains
- Attractively valued dividend stocks to consider today.
- Not all P/E ratios are created equal
Wednesday, August 28, 2013
In my dividend investing, I focus on mostly companies with long streaks of dividend increases. A company can only afford to build a long streak of consecutive dividend increases if it generated a growing stream of excess cash flows.
A company that generates so much excess cash flows that it can not reasonably reinvest all of it into the business has possibly a high return on equity. Such a business needs only a portion of profits to be reinvested back to maintain and grow operations, leaving excess cashflows filling in the company treasury coffers. This growing pile of excess cashflows, allows companies to pay a rising dividend stream of decades to come.
Such a company probably has a product or service, which is unique, and provides value to customers. These products are typically characterized by strong brands, that carry a premium and consumers are willing to pay top dollar for. The competitive advantages of the company would likely be difficult to replicate because of patent protection, trademarks and know-how, customer relationships, difficulty to switch providers, scale that could be very expensive to replicate to name a few obstacles. This is what Buffett refers to as a company that has a wide-moat.
A long streak of dividend increases is not a slam dunk of course, as things can change over time. However, if you determine that the business has higher odds of continuing their profitability streak, and you can buy it at attractive prices, then it might be a good holding for the next several decades.
These companies could spend a lot of shareholders’ money on research, acquiring other companies or doing something else to try and earn even more. However, placing all excess profits back into the business alters the risk profile negatively. This is because you are moving from earning money from a relatively lower risk rate of profits that you earn in ordinary course of business, to taking somewhat of an educated gamble with shareholders money. If a company has a worth of $1 billion, and wants to acquire another firm for $100 million, it does not need to use reinvested profits. It might be better off to either take on debt or issue equity, particularly if its shares are overvalued. However, many times acquisitions do not work and are utter failures.
For example, in 2012 Microsoft (MSFT) wrote off its entire $6.20 billion purchase cost of digital ad company aQuantive. Some do work of course, and can lead to synergies and all the other buzz words meaning cost savings. However, it is difficult to have different cultures merged together, and it is also difficult to acquire companies that are from different industries. For example, during the 1960’s, the term “leisure” was a catchphrase, which demanded high P/E multiples. People were all supposed to work less because of advancements in technology, and therefore have more leisure. According to Michael O’Higgins in “Beating the Dow”: “a company that made surfboards and sold books somehow had synergy because they were leisure-related”.
As far as investing in R&D goes, or opening new locations, the return on investment is not guaranteed. If a tobacco company tries to create cigarettes with low nicotine levels, it might do so, but the new product could create negative associations to consumers. If Pfizer (PFE) spent $5 billion developing new drugs, there is no guarantee that the funds would result in new discoveries. In retail, if a company like Wal-Mart (WMT) doubles the number of stores overnight, this will not result in doubling of sales. This is because you need to take into effect cannibalization of sales from existing stores, legal restrictions from opening a store in certain locations, specifics of local markets as well as time it takes to research market and build a store.
For example, Coca-Cola (KO) could not reinvest all of its profits in the business, because for many decades it had multiple limitations. Prior to 1989’s fall of the Berlin Wall, it could not easily expand into the countries from the Soviet Bloc or in their ally countries. In addition, Coke products are not cheap for many people in countries like China, India, Russia and other developing countries. As more people in emerging markets become middle class, Coca-Cola would be able to deliver its product to them, using a network of bottlers. However, this would take time.
This could also mean that once companies reach a certain scale, profits are then returned to shareholders to do as they please. As an investor who plans to live off my nest egg, I highly prize companies that can shower me with cash on a regular basis. This is because dividend income is more stable than relying on stock prices alone. I value the stability and relative certainty in the amount and timing of dividend income, because it makes it easy to plan and budget my expenses. I do not want to worry whether I can afford one or two PBJ sandwiches if markets drop 50% tomorrow.
Many readers complain that I keep writing about the same stocks over and over again. The hidden truth is that there are only so many businesses in the US which are exceptional and publicly traded.
Johnson & Johnson (JNJ), together with its subsidiaries, engages in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend aristocrat has managed to raise distributions for 51 years in a row. Over the past decade, it has managed to reward shareholders with 11.70% in annual dividend raises on average. Currently, the stock trades at 16.50 times forward earnings, and yields 3%. Check my analysis of Johnson & Johnson.
McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend aristocrat has managed to raise distributions for 36 years in a row. Over the past decade, it has managed to reward shareholders with 28.40% in annual dividend raises on average. Currently, the stock trades at 17.40 times earnings, and yields 3.20%. Check my analysis of McDonald’s.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. This dividend aristocrat has managed to raise distributions for 31 years in a row. Over the past decade, it has managed to reward shareholders with 9% in annual dividend raises on average. Currently, the stock trades at 11 times earnings, and yields 2.90%. Check my analysis of Exxon Mobil.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend aristocrat has managed to raise distributions for 39 years in a row. Over the past decade, it has managed to reward shareholders with 18.10% in annual dividend raises on average. Currently, the stock trades at 14.60 times earnings, and yields 2.50%. Check my analysis of Wal-Mart.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend aristocrat has managed to raise distributions for 51 years in a row. Over the past decade, it has managed to reward shareholders with 9.80% in annual dividend raises on average. Currently, the stock is slightly overpriced at 20.50 times earnings, and yields 2.90%. Check my analysis of Coca-Cola.
Full Disclosure: Long KO, WMT, MCD, JNJ
- Check the Complete Article Archive
- The predictive value of rising dividends
- Strong Brands Grow Dividends
- Frequently Asked Questions (FAQ) About Dividend Investing
- Dividend Aristocrats List
Monday, August 26, 2013
There are two schools of thought when it comes to paying money for investments.
The first school of thought is that you should invest at such a good price, that even if you are wrong, you can still have a shot of making some money. This strategy follows undervalued companies, which could be hated because of a temporary setback. The risk however is that the earnings will decrease going forward, therefore causing the company to look overvalued in hindsight in the future.
Currently, shares of Microsoft (MSFT) and Intel (INTC) are undervalued. Microsoft is trading at 12.50 times earnings and yields 2.90%, while Intel trades at 12 times earnings and yields 4.10%. Many investors are fearful that the decline in PC sales will result in declines in profits for these two tech juggernauts. This could lead to steep losses for investors today. However, the prices are low enough that if profits can be at least maintained for the next decade, investors today will be able to generate good returns. In my opinion however, unless the companies manage to adapt to the new environment, the streak of dividend growth can only be continued for a few more years.
The second school of thought is that you should only focus on identifying great companies, and then trying to purchase them at a fair price, rather than focusing on buying the cheapest securities regardless of their quality. This strategy follows world class companies, which are usually loved by the market, because of their consistency in delivering results to shareholders. The risk with this strategy is that investors overpay so much for this consistent stream of earnings and dividends, that it sets them back by several years.
Currently, shares of companies like Colgate-Palmolive (CL) are trading at 24 times earnings, and yield 2.30%. The company is expanding sales and profits, and has strong brand products that demand premium pricing. Unfortunately, buying even a great company like Colgate-Palmolive at overvalued prices will result in low initial returns for the investor, even if fundamentals improve according to expectations. For example, shares of Wal-Mart Stores (WMT) were virtually unchanged for over a decade after trading at 40 times earnings in 1999. This is despite the fact that earnings quadrupled, and revenues more than tripled.
In my investing, I try to use the wisdom of the best and brightest before me, in order to come up with an investing strategy that fits me. I have followed the writings of Ben Graham, Phil Fisher, Warren Buffett, Peter Lynch, in order to come up with a variation that I can weave into a strategy, which will deliver my investment goals and objectives.
In my investing, I try to focus on companies which are attractively valued, yet have competitive advantages that would allow them to generate rising profits over time. This is therefore a blend of the two entry criteria listed at the beginning of the article. Another modification I am using is to be flexible with my purchases, depending on the specific market environment and specific company situation as well.
Whenever I look at a company I am considering for purchase, I always ask myself if I see this company being around in twenty years. If I do not believe that a company has the durable competitive advantage to last that long, and generate rising profits over time, I simply move on to the next firm. In this process, I am not worried that I might miss a great opportunity, if that results in lower probability of permanent capital loss. I would much rather miss out on the next Wal-Mart (WMT), than include the next Enron.
Sometimes however, the Wal-Marts of the world are available for everyone to scoop up, in plain sight. Yet, few investors are recognizing the opportunities. A few attractively priced stocks I am eyeing right now include:
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company trades at 14.30 times earnings, yields 2.50% and has raised distributions for 39 years in a row. The five year dividend growth is 13.50%/year. Check my analysis of Wal-Mart.
Target Corporation (TGT) operates general merchandise stores in the United States. The company trades at 15.10 times earnings, yields 2.50% and has raised distributions for 46 years in a row. The five year dividend growth is 20.50%/year. Check my analysis of Target.
McDonald's Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The company trades at 17.50 times earnings, yields 3.20% and has raised distributions for 36 years in a row. The five year dividend growth is 13.90%/year. Check my analysis of McDonald's.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company trades at 11 times earnings, yields 4.10% and has raised distributions for 13 years in a row. The five year dividend growth is 13.10%/year. Check my analysis of ConocoPhillips.
Full Disclosure: Long CL, WMT, WMT, TGT, MCD, COP
- Best Dividend Stocks for 2013, and beyond
- Buy and hold dividend investing is not dead
- How to define risk in dividend paying stocks?
- The predictive value of rising dividends
Saturday, August 24, 2013
Every week, I highlight a list of the five most read articles on Dividend Growth Investor website. I also highlight five articles on investing, which I hope will be interesting to readers. This week, I want to change that a little. I want to hear what were some of the investing articles you, the reader, found interesting. Feel free to comment below, or email me at dividendgrowthinvestor at gmail dot com.
In addition, I wanted to see if there are any topics on dividend investing, that you want covered. I would have to warn you however that because this website has been around since early 2008, chances are your topic of interest might have been covered partly or in full already. As a result, please check the archives first.
Last but not least, I wanted to give readers the opportunity to contribute a guest post on my site. I am interested in knowing more about your investment style. If you can contribute a general article on income investing, it would be helpful. There are only a few opportunities open at this moment for guest posts, so please hurry up. Before you hit the "Submit" button however, please think about what your target audience is, and how they can benefit from your advice. I would let you know if article will be posted or not.
Friday, August 23, 2013
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as walmart.com; and samsclub.com. The company is a member of the dividend aristocrats index, has paid dividends since 1973 and increased them for 39 years in a row.
The company’s last dividend increase was in March 2013 when the Board of Directors approved an 18.20% increase to 47 cents/share. The company’s largest competitors include Target (TGT) and Costco (COST)
Over the past decade this dividend growth stock has delivered an annualized total return of 5.30% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2004. Earnings per share have risen by 10.60% per year. Analysts expect Wal-Mart Stores to earn $5.30 per share in 2014 and $5.82 per share in 2015. In comparison Wal-Mart Stores earned $5.02/share in 2012. On average, Wal-Mart has also managed to repurchase approximately 4.08% of its shares outstanding each year over the past five years as well.
Wal-Mart has a wide moat, since it is the lowest cost retailer. Its sheer scale gives it a pricing advantage in negotiating with suppliers and its investment in technology allows it to gain further efficiencies across its value chain, thus offering lowest prices in a market. The company has recently refocused in strategy on maximizing return on investment from existing US stores, rather than focusing exclusively on square footage growth. By remodeling stores, and improving their ambiance, it could not only retain its shoppers but even attract different target groups. Its everyday low prices strategy in the US, allows the company to match prices by competitors on items that happen to have lower prices that Wal-Mart. It would take a competitor a considerable investment in a number of stores, distribution centers, technology and logistics in order to emulate Wal-Mart’s business model.
Its international segment however is expected to have low double digit growth in square footage, International currently represents an important opportunity for growth, as it only generates one third of the company’s revenues. Future growth in its international segment could come from acquisitions, as well as organic growth. Wal-Mart is just getting started in certain key markets such as China and India for example. The combination of rising populations, increasing per capita incomes and providing an efficient retailing experience, are some of the characteristics that could fuel growth in international.
The return on equity has remained consistently above 20%, and has increased to 23% by 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 18.10% per year over the past decade, which is higher than to the growth in EPS.
An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1976 we see that Wal-Mart Stores has actually managed to double its dividend every three years on average.
The dividend payout ratio has increased from 17.70% in 2004 to 32% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. 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, Wal-Mart Stores is attractively valued at 14.30 times earnings and has an adequately covered dividend but only yields 2.50%. In comparison, Target (TGT) trades at 15.40 times earnings and yields 2.50%.
Full Disclosure: Long WMT and TGT
- Target Corporation (TGT) - A high growth, attractively valued dividend stock
- The predictive value of rising dividends
- Dividend Investing – Science versus Intuition
- Eleven Dividend Paying Stocks I Purchased Last Week
- Attractively valued dividend stocks to consider today
Wednesday, August 21, 2013
Newton’s first law states that a body in motion at a constant velocity will remain in motion in a straight line unless acted upon by an outside force. While Newton lost a lot of money during the South Sea bubble in 1720 chasing hot stocks, he could have made a lot more simply by applying his findings to the world of investing in dividend stocks instead.
In my years of investing in dividend stocks, I have noticed that companies which consistently raise dividends every year tend to keep raising dividends going forward. Companies which sporadically boost dividends for short periods of time, only to freeze or cut them later tend to repeat this activity over and over throughout their corporate histories. Unfortunately, many dividend investors fail to learn from history. As a result, these investors hope for the best when dividends are kept unchanged or cut, and predict dividend cuts as the distribution is raised to record levels for many years.
The companies which tend to consistently raise dividends tend to have business models that deliver the type of sustainable earnings growth that supports dividend growth. These companies manage to expand their businesses by creating a plan and sticking to it, while capitalizing on long-term economic trends and keeping their business vibrant and innovative. In addition, many companies that have managed to achieve long streaks of dividend increases are owners of strong global brands, have strong competitive advantages and are able to deliver value added products or services, which are characterized by high quality. As a result, it would be very difficult for a competitor to steal away customers based on price alone. In order to steal customers away, a competitor would have to spend years losing money, before carving out a profitable niche in the industry. The high returns on equity result in businesses that generate so much in free cash flow, that they have to return some to shareholders. The high return on equity also translates into lower capital requirements to stay relevant or expand the business over time.
For example, Wal-Mart Stores (WMT) is known for its low prices. If another retailer tries to steal customers away, they would have to beat the efficient distribution network, scale and long-term relationships/deals that Wal-Mart has with suppliers. In addition, because Wal-Mart has so many locations, it can afford lose money in a given market in order to eliminate competition there.
Another example includes Colgate-Palmolive (CL) toothpaste. Customers who purchase this product do so in a repeatable manner, because they like the quality of the toothpaste. People’s teeth are important to them, which is why they would likely keep on purchasing the same brand of toothpaste even if prices were going up, rather than save money and purchase a cheaper product. That is especially true if the quality of the cheaper product is not perceived to be as high. In order to increase consumer awareness, marketers for the cheaper toothpaste would have to spend large sums of money convincing customers of the positive effects of their products. The cheaper toothpaste company would keep losing money for long periods of time, because people’s tastes do not change overnight. A company like Colgate-Palmolive (CL) would maintain its competitive position if it innovates constantly and betters its products, and mint cash along the way to distribute to shareholders.
The repeatable nature of the transactions for companies like Wal-Mart and Colgate-Palmolive is occurring millions of times every week. Because they are providing products to use in peoples every day’s lives, many such companies are able to predict how much they are going to sell within a few percentage points. As a result, the Boards of Directors are able to predict with a reasonable amount of certainty the amount of funds the company would be able to sustainably allocate in order to pay dividends over the next year. In addition, many companies in the US pride themselves on their long records of dividend payments or dividend increases. The dividend is typically seen as a “sacred cow”, and would only be cut or eliminated under dire circumstances. In addition, companies like Coca-Cola (KO) and Johnson & Johnson (JNJ) which have the culture of consistently boosting distributions, would continue doing so, as long as the business fundamentals support this move. Even short-term weaknesses in earnings would not lead to elimination of the dividend growth culture in such companies. A dividend freeze or a dividend cut however would probably mean that the wheels of fortune are turning at these companies. As a result, these companies would likely avoid taking such actions, unless absolutely necessary.
Full disclosure: Long WMT, CL, JNJ, KO
- Ten Dividend Stocks with High Returns on Equity
- Dividend Stocks for the next decade and beyond
- Strong Brands Grow Dividends
- Seven wide-moat dividends stocks to consider
- Avoid Dividend Cutters at All Costs
Monday, August 19, 2013
In a previous article I outlined the difficulties I am having in allocating new cash to my portfolio. However, I mentioned that I am comfortable holding the companies I own. This is because I believe that the companies in my dividend portfolio have excellent business prospects, and also have favorable business economics.
I have spent thousands of hours poring through annual reports, press releases, analyst reports, looking at financial trends, and trying to understanding each respective business. As a result I am relatively familiar with the companies I own. While I monitor positions frequently, I am not pulling the sell trigger unless there is a dividend cut. I do reserve the right to sell if other activities happen, that could cause me to question the business prospects for the company. For example, I have sold companies before, when I found comparable securities at much better valuations. In those occasions, I have traded up either by obtaining better growth prospects, or better yields.
Of course, if the securities I sold became attractive again, I would purchase them at the lower valuations. Unfortunately, great securities are typically close to being fairly valued, and quite often stay overvalued for extended periods of time. As a result, it is fairly rare to find comparable securities with similar business characteristics, while selling at better valuations.
This exercise helped me reach a Eureka moment: My best ideas are already in my portfolio It is true that some of them are overvalued, and not worth adding to at current prices. However, I am perfectly fine holding on to these stocks and doing nothing for 20 – 30 years. My second “a-ha” moment was that for many of the companies I do not own, but would consider to be “best ideas”, I am already familiar with them.
For many of the companies I own, I would welcome the next recession as a buying opportunity. Other than that, the problem I would be facing is that fresh capital will be accumulating whether I contribute money or not. As a result, I would have to find more uses for the capital. Luckily, I am well-versed in the components of the Dividend Champion and Dividend Achiever lists. I keep scanning them for opportunity, and learning about each business that I find appealing. For me, an appealing business is one that I expect to be around in 10 -20 and even more than 30 years.
For example, I believe that Hershey (HSY) would be around for the next 30 years (and beyond), while delivering a product that customers associate with quality that they are willing to pay a rising price for. This pricing power will deliver rising profits and dividends for the company’s shareholders. Unfortunately, while holding on to this cash machine could be a smart long-term strategy for existing investors, the stock is overvalued at 25.70 times forward earnings for new investors. However, I would keep monitoring the company, and would love to initiate a position at the next hiccup of the enterprise or during the next recession.
I also believe that the products of Brown-Forman (BF.B) would be around for at least 30 years from now. The stock price is overvalued at the moment at 23 times forward earnings. However, I am not seeing a comparable alternative that is substantially cheaper, to make it worthwhile my time and effort to replace Brown-Forman with it. The other company needs to be comparable from a quality perspective, but from a valuation perspective needs to be both cheaper and also meet my entry criteria.
A few companies I already own, which I find attractively priced today include:
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. This dividend achiever has raised distributions for 13 years in a row. Over the past decade, it has raised dividends by 15.10%/year. Currently, the stock trades at 11.20 times earnings and yields 4.10%. Check my analysis of ConocoPhillips.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend achiever has raised distributions for 26 years in a row. Over the past decade, it has raised dividends by 9.60%/year. Currently, the stock trades at 9.70 times earnings and yields 3.30%. Check my analysis of Chevron.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This company has raised distributions since 2010. Currently, the stock trades at 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper.
McDonalds Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has raised distributions for 36 years in a row. Over the past decade, it has raised dividends by 28.40%/year. Currently, the stock trades at 17.40 times earnings and yields 3.20%. Check my analysis of McDonalds.
Wal-Mart Stores, Inc.(WMT) operates retail stores in various formats worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has raised distributions for 39 years in a row. Over the past decade, it has raised dividends by 18.10%/year. Currently, the stock trades at 14.60 times earnings and yields 2.50%. Check my analysis of Wal-Mart.
Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has raised distributions for 46 years in a row. Over the past decade, it has raised dividends by 18.60%/year. Currently, the stock trades at 16.10 times earnings and yields 2.50%. Check my analysis of Target.
Full Disclosure: Long BF-B, COP, CVX, DPS, MCD, TGT, WMT
- Check the Complete Article Archive
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- Buy and Hold means Buy and Monitor
- Should I buy dividend stocks now, or accumulate cash
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Saturday, August 17, 2013
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- What Does Early Retirement Look Like?
- Stock Analysis of Dr Pepper Snapple
- McCormick and Company: Decent Stock But No Margin of Safety
- I Can’t Seem to Stop Myself from Buying Nestlé
Friday, August 16, 2013
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend champion has paid dividends since 1911 and increased distributions on its common stock for 31 years in a row.
The company’s last dividend increase was in April 2013 when the Board of Directors approved a 10.50% increase to 63 cents/share. The company’s largest competitors include Chevron (CVX), British Petroleum (BP) and Royal Dutch (RDS.B). In late 2012, I replaced Exxon Mobil with a position in ConocoPhillips.
Over the past decade this dividend growth stock has delivered an annualized total return of 12.20% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 13.30% per year. Analysts expect Exxon Mobil to earn $8.02 per share in 2013 and $8.21 per share in 2014. In comparison Exxon Mobil earned $9.70/share in 2012.
Exxon plans to spend $38 billion/year in capital spending over the next five years. The company is targeting over 31 projects, which will deliver 1 million BOE/day by 2017. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa. Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years.
The company has also tried to increase its exposure to Natural Gas, through its E&P activities as well as the acquisition of XTO Energy three years ago. Unfortunately, natural gas prices have remained in the doldrums, which would affect profitability negatively. In addition, there are few factors that could lead to increase in natural gas prices in the America’s. One bright spot however includes the fact that foreign natural gas prices are more robust than the US ones however.
One important indicator for oil and gas companies is the reserve replacement ratio, which measures the amount of proved reserves added to a company's reserve base during the year relative to the amount of oil and gas produced. Exxon has been successful in maintaining a reserve replacement ratio exceeding 100% in recent years.
Over the past fifteen years, the company has consistently expanded its refining capacity. Refining however is a cyclical business, that is mostly been seen as a cash cow for major integrated producers over the past few years.
Exxon is one of the most consistent repurchasers of stock I have seen, dedicating $5 billion/quarter for this activity. As a result, the number of shares outstanding has decreased from 6.954 billion in 1999 to 4.485 billion in 2013. However, this has resulted in a stingy dividend payout policy, and below average yields compared to its peers. The company has been able to purchase a large quantity of shares without looking at price, and I have argued that in essence shareholders would have been better off just receiving special distributions. However, in 2012 the company started raising dividends much faster than its peers. Hence, it seems to be changing course, which should bode well for investors.
The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2003 and 2008, and then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 9% per year over the past decade, which is lower than to the growth in EPS.
A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1974 we see that Exxon Mobil has actually managed to double its dividend every ten years on average.
The dividend payout ratio has remained below 50% for the majority of the past decade. Up until 2011, Exxon Mobil had a stingy dividend payout, where it focused its excess cash flows towards stock buybacks. Starting in 2012 however, the company seems to be changing course, and is increasing distributions much faster than peers. 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, Exxon Mobil is attractively valued at 9.30 times earnings, yields 2.80% and has an adequately covered dividend. In comparison, peer Chevron (CVX) trades at 9.10 times earnings and yields 3.40%. If the amount of attractively valued dividend stocks keeps dwindling, I might initiate a position in Exxon again.
Full Disclosure: Long CVX, COP, RDS/B
- Check Out the complete Archive of Articles
- Spring Cleaning My Dividend Portfolio
- Exxon Mobil’s Stingy Dividend Payout
- Are Dividend Investors Benefiting from Stock Buybacks?
Wednesday, August 14, 2013
In my early days as a dividend growth investor, I focused exclusively on the list of dividend aristocrats. It included 50 or so solid blue chips, each of which had managed to boost dividends for at least a quarter of a century. I liked the fact that this was a short list, which made screening for potential candidates for inclusion in my portfolio very easy.
As I kept digging however, I learned more about the historical changes in the S&P Dividend Aristocrats Index. I was very surprised to learn that some companies had been eliminated from the index, despite the fact that they kept increasing distributions. I also noticed that there were many companies which had raised dividends for over 25 years in a row, yet they were never included in the index, for whatever strange reason. Luckily, I had found the dividend champions lists, maintained by David Fish. While his list is as complete as possible, I would still advise income investors to get their hands dirty with as much information as possible, before eliminating an idea from their list for further research due to a low streak of consecutive dividend increases.
For example, I have noticed that a few companies were booted out of the Dividend Aristocrats index because of spin-offs or because they split into two or more separately traded companies.
Altria Group (MO) was able to spin-off its Kraft Foods division in 2007. Shareholders in Altria received shares in Kraft for each share of Altria stock they held. In 2008, this was followed by the spin-off of Phillip Morris International (PM), which represented the international tobacco business of Altria Group.
Shareholders of the legacy Altria Group received one share of Phillip Morris International (PM) as well as a share of the new Altria Group (MO), which focused exclusively on the domestic cigarette business. The legacy Altria Group has managed to boost distributions for over 42 years in a row. After the two spin-offs however, the company was eliminated from the dividend aristocrats and the dividend achievers indexes.
However, shareholders who purchased Altria in early 2007, and went through the two spin-offs actually enjoyed increases in their total dividend incomes in every year since then. The growth in total dividend income was helped by annual dividend increases by Phillip Morris International (PM) and Altria Group (MO) in every year since 2008. Kraft Foods stopped boosting dividends in 2008 however, and maintained them flat for a period of 3 years, before the company itseld split into two separately traded parts – Mondelez International (MDLZ) and Kraft Foods Group (KRFT). In general, Altria Group (MO) should have never been removed from any of the lists of dividend growth stocks. I was positively surprised by the fact that Dave Fish had included the company in his list of Dividend Champions. The point of this story is that investors should not use a mechanical approach to screening for stocks, but utilize their knowledge in order to identify opportunities that others less knowledgeable investors might have missed.
In May 2012, ConocoPhillips split into two separately traded companies: ConocoPhillips (COP), which focused on Exploration and Production for Oil and Natural gas and Phillips 66 (PSX), which focused on Refining and Marketing for crude and natural gas. The legacy ConocoPhillips company was paying a quarterly dividend of 66 cents/share, and had raised dividends since 2002. On the surface, through June 2013 it seemed that the company had not raised distributions since the 20% boost payable in March 2011. Shareholders as of April 30, 2012 received one share of the new upstream focused ConocoPhillips (COP) as well as half a share of the downstream focused Phillips 66 (PSX). However, although the new ConocoPhillips maintained its quarterly dividend of 66 cents/share, this was technically a dividend increase, since it was coming from a lower base. Some dividend investors didn't see it that way however, and worried about the perceived "lack of dividend increase". Most recently however, ConocoPhillips raised quarterly distributions to 69 cents/share.
Abbott Laboratories is another company that recently split into two separately traded companies - Abbott (ABT) and Abbvie (ABBV). It seems that as of this writing, the Dividend Aristocrats index has not removed both companies from its ranks. However, I cannot find any mention in the Dividend Champions list. Dividend growth investors should keep both companies on their radars, and add to their portfolios under the right circumstances.
Full Disclosure: Long MO, PM, KRFT, MDLZ, COP, ABT, ABBV
- Check Out the complete Archive of Articles
- S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
- Dividend Aristocrats List
- Dividend Champions - The Best List for Dividend Investors
- Should dividend investors hold on to Abbott (ABT) and Abbvie (ABBV) following the split?
Tuesday, August 13, 2013
Charlie Munger is the long-term business partner of Warren Buffett, the legendary chairman and CEO of Berkshire Hathaway (BRK.A) (BRK.B). Munger is the deep thinker who has managed an impressive record with his investment partnership, at Wesco Financial and Daily Journal (DJCO). Munger overcame huge obstacles in his life, including death of his son and divorce to make billions of dollars. Munger is the one who changed Buffett’s perspective on business and investing from cigar butt type investments to buying quality companies trading at fair prices. Munger is a genius and has achieved a lot of wealth in the process.
However, sometimes even accomplished people such as Charlie Munger venture outside their level of expertise, and start making statements that sound weird.
I am referring to his comments on energy independence (source: Morgan Housel & this video)
“Oil is absolutely certain to become incredibly short in supply and very high priced .. The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization. And what responsible people do with a Confucian ethos is suffer now to benefit themselves and their families and their countrymen later. The way to do that is to go very slow in producing domestic oil and not mind at all if we pay prices that look ruinous for foreign oil. It's going to get way worse later ...
The oil in the ground that you're not producing is a national treasure ... It's not at all clear that there's any substitute [for hydrocarbons]. When the hydrocarbons are gone, I don't think the chemists are going to be able to just mix up a vat and create more hydrocarbons. It's conceivable that they could, I suppose, but it's not the way to bet. We should spend no attention to these silly economists and these silly politicians that tell us to become energy independent.
Let me pose a question for you. It's 1930. Oil in the United States is in glut. We have cartels to get the price up to $0.50 a barrel. Everywhere we drill we find more oil in our own country; everywhere we drill in Arabia we find even more.
What would the correct policy of the United States have been in that time? Well, the correct policy would have been to issue $150 billion of very long-term bonds and cart 150 billion barrels of Middle Eastern oil into the United States and throw it into our salt caverns and leave it there untouched until the current age.
It's easy to see that in retrospect, but who do you see who ever points this out? Zero. We have a brain-block on this issue. We should behave now to do on purpose what we did on accident then.”
I read this statement, and I understand his idea in theory. In reality, it seems very stupid. Of course the risk is that maybe i am so simple minded, that i do not understand the wisdom of those words.
First, the size of the US economy was about $100 billion in 1930. So it would have been tough to borrow 150 billion, which would have been 1.5 times the size of economy. I am sure that if this were done in 1930, many people would have been unhappy about this debt deal. It would have also been difficult for a country to sell a debt issue of that size, without shaking the markets and raising its interest rates. The backlash from voters would have been ever worse, as it would have been seen that this is effectively enslaving future generations with interest payments on oil that won’t be used for years. Remember when everyone proclaimed the end of the US as we know it in 2008, when we had the $700 billion in TARP funds? How would you like it if the US government decided to borrow 15 trillion today and buy oil to be used in 100 years?
Second, this idea is nonsense because it introduces the concept of leverage. Leverage is a dangerous tool, that can lead to total destruction of capital even if you are 100% right. A country that instantly leverages itself by borrowing an amount that is 1.50 times the size of its economy is levering itself, and thus leaving it highly susceptible to short term fluctuations in macroeconomic factors. To put it in simple words, things don’t go up or down in a straight fashion. For example, if you were smart enough to recognize the genius of Buffett in 1972, and bought Berkshire Hathaway on margin that very same year, you might have little to show for your forecast. This is because the price of Berkshire stock fell by more than 50% between its 1972 high and 1975 low. An investor on margin would have been forced to sell at the depths of the market crash of 1974, in order to cover margin loans. Munger should have known better, because his friend Rick Guerin did exactly that leveraged experiment, and sold Berkshire at $40/share in 1974.
So back to the thesis on US taking a $150 billion loan to buy oil in 1930. Even if the country somehow managed to convince creditors that it can afford to take this loan, it would have still bankrupted the country. That’s because GDP fell by 40% between 1930 and 1933, and recovered by 1937. GDP in current dollars was 103.6 billion in 1929 and 91.20 billion in 1930. In 1933, GDP was 56.40 billion, and in 1937 it was 91.90 billion. A country with a GDP of 100 billion, that takes 150 billion loan, has a Debt to GDP ratio of 1.50. A country with a GDP of 50 billion and a 150 billion loan has a Debt to GDP ratio of 3.
If this deal that Munger proposes had been done, the US would have been bankrupt by the depths of the Great Depression. Then the oil would have probably had to be sold for pennies on the dollar, simply to repay the debt.
Even if US withstood the harsh realities of great depression, and kept paying off the debt, it would have been much more difficult to raise money to fight Hitler. Between the end of 1940 and the end of 1946, Federal Debt as a percentage of GDP increased from 44.20% to 108.70%. The increase was because money was needed to fight the enemy. Without winning World War II, the US could have either ended up as a communist country or simply ended up as a Fascist country.
Further, the oil booms of early 20th century, created a lot of rich people, and developed US economy. The growth in GDP from that, has created a ripple effect that has made all of us richer. This is due to increase in science and technology, and due to providing work for people and lifting them out of poverty.
Munger sounds like a lot of other smart and accomplished people, who say that something cannot be done any more at end of their careers. I am specifically referring to his comment about scientific progress. Let’s go through some examples of successful people making predictions:
Ben Graham said one cannot profitably research stocks anymore in 1976. This was false as his prodigy Buffett proved him wrong, as he was picking GEICO at rock bottom prices. Buffett has also bought shares in Washington Post (WPO), Interpublic (IPG) and other companies at rock bottom prices a few years earlier, after analyzing them.
Munger is saying that science and technology cannot help in discovering oil. First of all, the current US energy revolution is helped by improvements in tech. High oil prices will provide companies with incentives to invent technologies to drill for oil in far reaching places. If prices go higher, i can bet scientists will find that you can make oil and gas in a lab.
Oil is important for energy. But also for other items like plastics, pharmaceutical and other everyday life uses. We can use energy from sun, but not to make plastics. However, chances are that the scientific and technological progress will identify ways to deliver cheap energy and everyday items at low prices some time in the future. Thus, I am not at all worried that oil will run out or that we will go back to living in caves.
Saving all oil so US can use it 100 years later is similar to what Buffett says" like saving sex for old age".
Munger is still investing legend, and I would likely never reach same level of wealth as him. However, he might be best suited to stick to doing investments, rather than discuss macroeconomics. Of course, if your goal in life is to make money in investments, you might not be the best person to make long-term predictions. If Munger is not senile, then his idea could be meaning that oil companies could be good long term investments.
I am happy to be owning Chevron (CVX), ConocoPhillips (COP) and Royal Dutch (RDS.B) ( ranked in order of my happiness holding these companies). The companies yield 3.20%, 4.10% and 5.30% respectively. The moral of this story is that as individual investor, you are the one ultimately responsible for allocating capital. You should not rely 100% on judgement of others. Outsourcing your investment decisions to others could be costly. Also, if you are an investing legend, stick to being an investing legend.
It is also important to learn another thing about risk. As you grow older, you might end up doing decisions that could be very costly. By not being flexible, you can stick to your Citigroup (C) stock in 2008, because it paid you dividends for many years prior to that. This is the reason why I have the automatic rule to sell after a dividend cut. If I have diminished mental capacities in 2040, it would be easier for someone managing my otherwise long-term investments to follow a rule based guideline. I am also considering whether a low risk index fund wouldn't be a good situation, given the lack of interest in managing investments on the part of my descendants. This is something that came to me, as I was thinking about this article. I need to do a little more thinking, and would try to share my findings with you.
Of course, given the long-term nature of my dividend paying holdings, I am fairly confident that a fun-loving DGI trust-fund baby that only collects dividend checks and doesn't sell anything, will likely do well for the next 50 years. My dividend portfolio is built so that it can generate healthy amounts of cash, with low upkeep required.
In summary, I believe that Munger should be sticking to doing investments, rather than solve economic issues. I still find him of the best investment minds of the past 100 years, and plan to keep learning about his investment style.
Full Disclousre: Long CVX, COP, RDS.B
- Check Out the complete Archive of Articles
- How Warren Buffett made his fortune
- How to Generate Energy Dividends Despite the Peak Oil Non Sense
- Warren Buffett on Dividends: Ideas from his 2013 Letter to Shareholders
- Warren Buffett’s Dividend Stock Strategy
Monday, August 12, 2013
For many equity investors these days, risk is usually defined as an unfavorable fluctuation in stock prices. This means that an investor who purchased Coca-Cola (KO) at $40/share, and observes the price decline to $30/share, had a $10 unfavorable move in the price against them. This view on risk could be adequate for investors whose investing timeframe is in days or months. The problem with defining risk with stock market volatility however, does not make much sense for long-term investors.
As a long-term investor, I focus on identifying companies with strong fundamentals, and good business prospects, which I then try to accumulate at attractive valuations. I then monitor long-term business trends, read annual reports, and check to see if the company is earning more and paying out more in dividends. As a result, the data points I use are in “years”, rather than days or months. If you expect to hold a company for 20 years, focusing on a decrease from $40 to $30 is relatively immaterial. In my investing, I usually avoid focusing on price fluctuations, except as a tool to uncover cheap stocks to buy. Of course, if this drop is because of some material information that could affect the long-term prospects of the business, you need to evaluate whether you want to add or liquidate your position. However, if this drop is because stock prices are simply going down in tandem, chances are that you are not getting much from this information.
For me, risk is defined as a situation where I lose my all of investment capital. When I lose my investment capital, I would be unable to make more investments and earn more money from it. This permanent loss of capital is usually associated with situations such as business failure from the company I invested in. This would mean that not only would I lose out on a portion of my dividend income, but would also be unable to replace it because the capital base has dwindled significantly. This is why it is important to diversify my investments, in order to reduce the impact on my capital base from the effects of one company failing. If the stock I own merely goes from $40 to $30, but the fundamentals are unchanged I would not see that as a risk, but rather as the cost of doing business. Therefore, deteriorating fundamentals are a much larger risk to your capital and dividends than stock price fluctuations alone.
I believe that prices are what you pay, but value is what you get. Over the next 20 - 30 years that you hold dividend paying stocks, you will likely suffer big declines in stock prices on several occasions. This could be due to a lot of factors like recessions, wars, oil shocks, as well as a lot of company specific factors. The goal is to start with the facts first, such as a news release or an annual report for example, rather than focus on prices alone, and avoid making decision on rumors and opinions which are not grounded by facts. It is also important to be mentally prepared for declines in prices, and not panic and do something stupid like selling everything.
I would consider selling only after a dividend cut, in order to avoid acting on noise. The reason behind this rule is two-fold. The first reason is that companies do not grow to the sky in a straight-line. There are roadblocks along the way. At the time these roadblocks occur, it is very difficult to evaluate if they will result in a permanent loss or not. When Johnson & Johnson (JNJ) had issues in one of its subsidiaries in 2010, many investors feared the worst. Since then however, the company has managed to clean up operations, and succeeded. If you had sold back then, you would have missed out on the opportunity. As a result, any negative news might be scary at the time, but in the grand scheme of things, could be simply considered noise. This is why I note these negative events, but might refrain from selling off my position. I have also sold when I found valuation to be too high, but I have had mixed results from this scenario.
Second, in my analysis of companies, I have noted that when a company cuts dividends after it has paid and increased them for decades, it is usually admitting trouble. However, there is more trouble ahead, because boards typically make their decisions on whether to increase or cut distributions based on the business prospects for the next 2 – 3 years. In the Johnson & Johnson case above, the company was experiencing some issues, however they kept raising the dividend and kept earning more per share. This indicated that the problems are not as huge as expected.
Of course, selling after a dividend cut is not effective 100% of the time. However, it is a fail-safe mechanism, that can allow an investor to have a reasonable confidence that selling at this event will leave them with some capital. This capital can then be deployed in other attractive opportunities that will generate rising streams of income. In addition, selling after a cut removes any guesswork of whether the negative events you are learning about the company are noise or not. It should also be a wake-up call for the investor who “falls in love” with a company, and could expect to rationalize themselves out of selling a company with deteriorating fundamentals.
In conclusion, I define risk in dividend investing as an event that leads to total destruction of capital, from which my dividend income would be reduces or eliminated. In order to reduce this risk, I am diversifying my portfolio, and have a hard sell rule of disposing of a stock after a dividend cut. This would protect my dividend income, and allow me to enjoy the fruits of my labor in my golden years.
Full Disclosure: Long KO and JNJ
- Dividend investing timeframes- what's your holding period?
- Dividend Investors Should Focus on Valuation, not Just Dividend Yield
- Opportunity Costs for Dividend Investors
- High Yield Dividend Investing Misconceptions
- Replacing dividend stocks sold
This article was featured in the Carnival of Personal Finance, Back to School Edition
Friday, August 9, 2013
Target Corporation (TGT) operates general merchandise stores in the United States. The company is a dividend champion, which has paid dividends since 1965 and increased them for 46 years in a row.
The company’s last dividend increase was in June 2013 when the Board of Directors approved a 19% increase to 43 cents/share. The company’s largest competitors include Wal-Mart Stores (WMT), Dollar Tree (DLTR) and Costco (COST).
Over the past decade this dividend growth stock has delivered an annualized total return of 7.60% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2004. Earnings per share have risen by 9.40% per year. Analysts expect Target to earn $4.36 per share in 2014 and $5.46 per share in 2014. In comparison Target earned $4.52/share in 2012.
Future growth would likely be focused on expanding same-store sales and renovating existing stores, rather than simply by opening a large number of locations. Future growth could be realized by the increased penetration of the RED Card, which the company’s cashiers keep promoting to customers. This decreases expenses related for transactions processing of other credit cards. Another venue for growth that could increase the number of customer visits is the remodeling of its stores, which would add fresh foods to the stores. The company is targeting middle-class and upper income consumers, which are more interested in quality and diversity of product offerings, rather than simply looking at the lowest prices. It has in essence managed to differentiate itself from Wal-Mart (WMT), while also retaining its status as a discounter.
The company also is on track to bring the number of stores in Canada to 125 by 2013, which could increase long-term profits. Currently, the costs associated with jumpstarting its Canada operations have been dilutive for earnings, and would be for the next few years.
Target Stores has a goal of earning $8/share by 2017, which would be driven by 5% sales growth in US, share repurchases, store openings in Canada, as well as square footage growth. Risks to growth include worsening of the economy, failure to execute its strategy of effectively differentiating itself from arch rival Wal-Mart as well as credit card risks.
The return on equity has remained consistently in a tight range between 15% and 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 18.60% per year over the past decade, which is higher than to the growth in EPS.
An 18.60% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1974 we see that Target has actually managed to double its dividend every five and a half years on average.
The dividend payout ratio has increased from 13 % in 2004 to 29.20% in 2013. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. 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, Target Stores is attractively valued at 16.90 times earnings and has an adequately covered dividend but only yields 2.40%. In comparison, rival Wal-Mart (WMT) trades at 15.10 times earnings and yields 2.50%. Target could be a decent addition to a portfolio on dips below $69; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.
Full Disclosure: Long WMT
- Check Out the complete Archive of Articles
- Rising interest rates affect all businesses, not just dividend paying ones
- Your Retirement Income is on Sale!
- Dividend Growth Investing is a Perfect Strategy for Young Investors
- Lower Entry Prices Mean Locking Higher Yields Today
Wednesday, August 7, 2013
In many articles on dividend investing, I have typically focused on objective factors that I use to screen for dividend stocks. I typically look for a company which has managed to boost dividends for at least ten consecutive years that trades at a price to earnings multiple below 20 and yields at least 2.50%. I also like to see a sustainable dividend payout ratio. I have come up with this set of entry criteria, after evaluating hundreds of dividend stocks.
However, once this screen spits out a list of companies for further research, I spend hours looking at each individual candidate. I look at trends in earnings, returns on equity, revenues, valuation trends and dividend growth from as far back as the beginning of time. I also try to evaluate whether the company has what it takes to keep earning more for the foreseeable future, and maintain its policy of regularly boosting dividends. The more I research dividend stocks, the more subjective the process begins to look like. For example, my guess as to whether Coca-Cola (KO) will be able to sell more product at higher prices and generate higher revenues and profits between 2013 - 2020 is as good as yours. At the same time, while Intel (INTC) is undervalued right now, and has an above average yield and a sustainable dividend payout ratio, I am still unsure about initiating a position in the company. My guess is that future dividend growth might be limited by the volatility in earnings as the company is struggling to gain market share in the mobile semiconductors market.
At the end of the day, I realize that a large portion of investments I make are based on my personal opinions and biases. These come from years of experience investing, as well as working in different fields such as technology, energy, education, professional services etc. This is what makes investing such a unique and challenging field – at the end of the day there are two people with completely opposite views, who both think they are geniuses, but only one of them is going to make money on the transaction. The point which I am trying to make is that just like any other skill, investing is best learned through practice and not by simply reading about it. After all, I would much rather go to a doctor who has several years of practice than visit a doctor who just graduated from medical school.
In addition, through experience I have been able to learn more about companies business models, gain familiarity with their products, and make an educated guess about their future. For example, I have been able to identify several companies which were outside of my entry criteria and invest in them despite the clear violation with my rules. A very helpful tool I use is the list of dividend increases every week. It helps me identify companies that are exhibiting strong momentum in dividends, fueled by a growth in earnings. That is how I have been able to identify companies like Yum! Brands (YUM), Visa (V), Phillip Morris International (PM), Family Dollar (FDO) and Kinder Morgan Inc (KMI). While these companies either had low current yields or short streaks of dividend increases, the common factor behind each one of them was an attractive valuation, as well as the potential for strong earnings and distributions growth. I liked the prospects for each company after analyzing it, and was able to identify the drivers behind future growth through my analysis.
For example, for Phillip Morris International (PM), I liked the fact that the company had exposure to the growing emerging markets. I also liked the fact that its business was not exposed to the litigation risk in the US. In addition, I liked the fact that company was gaining market share through innovation , strategic acquisitions, and had diversified operations worldwide. Check my analysis of PMI.
With Yum! Brands (YUM) I liked the fact that the company was beating McDonald’s (MCD) in international expansion particularly in China. The company has had some issues in China recently, but I believe those to be temporary.
With Visa (V) I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade. In addition to that, Visa was cheaper than Mastercard.
With Kinder Morgan (KMI), I liked the fact that it owned general partner interest in two growing master limited partnerships. This meant that the company was poised to capture much higher distributions growth than the underlying assets, because of valuable incentive distribution rights. I also like the fact that the company's CEO has almost all of his net worth in Kinder Morgan, which aligns his interests with those of other shareholders.
I am not saying that investors should blindly purchase any stock that they think would deliver strong results in the future. What I am trying to depict in this article is the fact that investors need to have some method of identifying strong candidates for further research. However, they also need to be flexible, and identify opportunities which their strategy might not catch. In addition, I do not believe that investing is a black and white process, which is why experience is the best strategy for the enterprising dividend investor for the long term.
Full Disclosure: Long PM, V, YUM, KO, FDO, KMI
- Check Out the complete Archive of Articles
- Don’t chase High Yielding Stocks Blindly
- My Entry Criteria for Dividend Stocks
- The Importance of Corporate Governance for Successful Income Investing
- Rising interest rates affect all businesses, not just dividend paying ones
This article was featured in the Carnival of Wealth, Perseid Meteor Shower Edition
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