There were several companies over the past week, which raised dividends to shareholders. I isolated six of those companies, which have managed to increase dividends for at least a decade.
In general, I look for companies that:
1) Have raised dividends for at least a decade
2) Have managed to grow earnings per share over the past decade
3) Are available at attractive valuations
This is a quick and dirty method that I use to determine if a company is worthy of further research or whether I should throw it away from further consideration.
This is a qualitative characteristic which is important, because only a certain type of business will have the dependability to manage to grow dividends per share every single year for at least a decade. I then try to analyze further whether dividend hikes were supported by growth in earnings per share over the past decade. I do this in order to determine if this dividend growth was supported by growth in fundamentals, rather than by merely increasing the dividend payout ratio. After a company that passes this test, I check if it has an attractive valuation. Otherwise, I may place an alert if the stock price falls below a certain level. If the stock is attractively valued, I will analyze it and determine if it is a buy.
The companies include:
CMS Energy Corporation (CMS) operates as an energy company primarily in Michigan. It operates through three segments: Electric Utility, Gas Utility, and Enterprises. The company raised its quarterly dividend by 7.20% to 33.25 cents/share. This marked the 11th annual dividend increase for this dividend contender. Over the past five years, CMS energy has raised its annual dividend at a rate of 8.10%/year. The company has also managed to grow earnings per share from $1.23 in 2008 to an estimated $2.02 in 2016. Currently, the stock is overvalued at 20.90 times forward earnings and yields 3.10%. I would put it on my list for further research, in case its valuation gets compelling.
Consolidated Edison, Inc. (ED), through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States. The company raised its quarterly dividend by 3% to 69 cents/share. This marked the 43rd annual dividend increase for this dividend champion. Over the past decade, Consolidated Edison has raised its annual dividend at a rate of 1.50%/year. The slow dividend growth was due to slow growth in earnings per share and the high dividend payout ratio 78%of a decade ago. Earnings per share grew from $2.54 in 2006 to an estimated $3.97 for 2016. Currently, the stock is selling at 18.40 times earnings and yields 3.80%. Due to the slow growth in earnings and dividends, I view the stock as a hold at best.
Fastenal Company (FAST), together with its subsidiaries, engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. It offers fasteners, and other industrial and construction supplies primarily under the Fastenal name.
The company raised its quarterly dividend by 6.70% to 32 cents/share. This marked the 18th annual dividend increase for this dividend contender. Over the past decade, Fastenal has raised its annual dividend at a rate of 19.60%/year. This was supported by the growth in earnings per share from 66 cents in 2006 to an estimated $1.71 for 2016. Currently, the stock is overvalued at 30 times forward earnings but yields 2.50%. I like the story, and I would consider initiating a position on dips below $34 - $35/share. Unfortunately, my buy limit order to buy Fastenal stock has been sitting patiently for quite some time.
Realty Income Corporation (O) is a publicly traded real estate investment trust which makes investments in commercial real estate. The REIT raised its monthly dividend by 4% to 21.05 cents/share. The monthly dividend company has raised dividends to its shareholders for 23 years in a row. Over the past decade, Realty Income has raised its annual dividend at a rate of 4.70%/year. I like the slow and steady nature of this defensive business model, where you rent out commercial properties to a diverse list of tenants, under long-term leases with built in rent escalation clauses. Long-term readers do know that we require a decent valuation before entering a buy order. Currently, the stock is overvalued at 20.70 times forward FFO and yields 4.20%. I would consider Realty Income attractively priced on dips below $51/share.
Linear Technology Corporation (LLTC) designs, manufactures, and markets a line of analog integrated circuits worldwide. The company raised its quarterly dividend by 3.10% to 32 cents/share. This marked the 25th annual dividend increase for this dividend champion. Over the past decade, Linear Technology has raised its annual dividend at a rate of 7.90%/year. Linear Technology has steadily raised earnings per share from $1.39 in 2007 to an estimated $2.18 for FY 2017. Currently, the stock is overvalued at 28.60 times forward earnings and yields 2.10%. The company is expected to be acquired by Analog Devices (ADI), and the deal is expected to close by the end of 2017. As a result, it makes sense to look elsewhere.
Alliant Energy Corporation (LNT) operates as a utility holding company that provides regulated electricity and natural gas services to residential, commercial, industrial, and wholesale customers in the Midwest region of the United States. It operates through three segments: Electric, Gas, and Other. This marked the 14th annual dividend increase for this dividend contender. Over the past decade, Alliant Energy has raised its annual dividend at a rate of 7.40%/year. Over the past decade, Alliant Energy has managed to deliver an anemic growth earnings from $1.45/share in 2006 to $1.69 in 2015. The company is expected to earn $1.88/share in 2016. Currently, the stock is close to being overvalued at 20 times forward earnings and yields 3.30%. As a result of the high valuation, and the lack of consistent earnings growth, I would give the stock a pass at this time.
Full Disclosure: Long O
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- How to read my weekly dividend increase reports
- Not all P/E ratios are created equal
- Why do I use a P/E below 20
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