Wednesday, July 5, 2017

Two Dividend Growth Companies Rewarding Shareholders With a Raise

I like to check the pulse of dividend growth companies by monitoring dividend increases. This is helpful as part of my monitoring process. Two recent increases caught my eye. These are two companies I have owned for many years. These companies seem to have different expectations about the future. The first one is optimistic, and this has been fueled by rising earnings. The second company seems to be running out of space to raise dividends, due to stagnating profits. As dividend investors we are looking for the companies in the first camp. Of course, a long investing career will surely bring in some investments that show initial promise, but ultimately may turn out to be duds. Our goal is to manage our portfolios to reach our goals, despite having the occasional dud, and keep staying the course.

The companies that recently raised their dividend include:

Medtronic plc (MDT) manufactures and sells device-based medical therapies worldwide. The company raised its quarterly dividend by 7% to 46 cents/share. This marked the 40th consecutive year of an increase in the dividend payment for this dividend champion. Medtronic's dividend per share has nearly quadrupled over the past decade and has grown at a 17 percent compounded annual growth rate over the past 40 years.

"Today's increase in our dividend demonstrates the confidence of the board and our management team in the strength of the company's cash flow generation and the ability to generate value for our shareholders," said Omar Ishrak, Medtronic chairman and chief executive officer. "We are committed to returning a minimum of 50 percent of our free cash flow each year through dividends and share repurchases, balancing the return of cash to our shareholders with disciplined reinvestment in our business to drive sustainable growth."

This is the type of message you want to hear from the CEO of a dividend growth company. As a dividend growth investor, I am looking for a business with a dominant industry position which grows earnings over time, and generates a lot of excess capital. This excess capital is then returned to shareholders in the form of rising dividends ( and sometimes share buybacks or special dividends). A minimum ten year track record of consistent annual dividend growth is a sign of a quality company to research further.

When you look at Medtronic’s earnings per share however, you need to remember that the figures are artificially depressed by several accounting type charges. The largest charge is the amortization of intangible assets, which reduces EPS figures by $1.05/year. This is a non-cash recurring charge that is purely an accounting phenomenon and is related to the amortization of definite-lived intangible assets, consisting of purchased patents, trademarks, tradenames, customer relationships, and purchased technology. This charge originated from the acquisition of Covidien in 2015 and was increased after the acquisition of HeartWare in 2016. After accounting for this charge, and a few others, the company’s earnings power comes out to $4.60/share. Medtronic is expected to earn $4.94/share in 2017. It is fairly valued at 18 times forward earnings (19.30 times adjusted P/Y earnings). The stock yields 2.10%. I have been a happy Medtronic shareholder for several years. Check my analysis of Medtronic for more information about the company.

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States. It operates in three segments: U.S. Retail, International, and Convenience Stores and Foodservice. The company raised its quarterly dividend by 2.10% to 49 cents/share. This marked the 14th consecutive year of annual dividend increases for General Mills. The dividend per share has grown at a rate of 10.40%/year over the past decade. Future dividend growth will likely come to a halt in the next several years, due to lack of earnings growth and the high dividend payout ratio at 71%. Check my analysis of General Mills for more information about the company.

Unfortunately, General Mills is facing some near term headwinds. Earnings per share hit $2.70/share in 2011, and have largely been flat ever since. The company earned $2.77/share in 2016. The analysts have been expecting forward earnings to exceed $3/share for 3 – 4 years in a row. Unfortunately, those projections have not turned out to be true, despite the fact that General Mills has repurchased 10% of its shares outstanding during this time period.

I believe that General Mills is a great company that will ultimately turn things around. However at this time, I will not be adding to this position. I will be holding on to my existing shares, but allocating the dividend elsewhere.

Full Disclosure: Long GIS and MDT

Relevant Articles:

The ten year dividend growth requirement
Rising Earnings – The Source of Future Dividend Growth
General Mills (GIS): A Reliable Dividend Growth Stock
Medtronic (MDT) Dividend Stock Analysis

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