Showing posts with label dividend analysis. Show all posts
Showing posts with label dividend analysis. Show all posts

Wednesday, February 4, 2015

The Energy Company I want to buy

The other day, I posted an article which discussed a few investments I have recently made. I had previously bought some ConocoPhillips in early 2015, at which point forward earnings expectations hadn’t really gone as low as they are now. In previous research I had mentioned that I was looking to adding more to my positions in Exxon Mobil, ConocoPhillips and potentially even Chevron.

You might be surprised to see that I have not added to any of my energy holdings. The reality is that stock prices have not fallen as much as the price of oil, which reduced future earnings power.

2015 EPS
$       2.92
$       1.59
$       4.28
$       4.73
$       2.76
$       4.29
Note: Data is as of Friday, Jan 30, 2015

The reduced prices on oil have resulted in lowering of the expected earnings for 2015 for ConocoPhillips (COP), ExxonMobil (XOM) and Chevron (CVX) of and $1.59, $4.29, $4.73. Since prices have fallen much less than earnings, those oil companies are now selling above 20 times expected earnings. In all three, the forward dividend payout ratios are very high.

I am well aware that cyclical companies appear cheapest at the top of the cycle when earnings are highest, and that they appear most expensive at the bottom of the cycle when earnings are lowest. However, I also want to knowingly avoid purchasing companies that cannot support their dividend out of expected earnings.

This essentially rules out further investment in ConocoPhillips for me, and potentially even Chevron which should sell below $95/share to enter value territory. For ExxonMobil, my ideal value price would be below $86/share. Given its low payout ratio, ExxonMobil looks like the ideal candidate to build out an energy position.

It also looks like many participants have not priced in low prices, and are acting as if low prices are a temporary event. In the case the drop is temporary, buying today makes a lot of sense. In case prices stay low for longer than expected however, share prices might reflect that new reality. Most importantly, shares in many companies seem slightly overvalued, despite going down in price. Of course, I am also well aware that I should not blindly look into next years earnings as well. As someone who plans on holding for 20 - 30 years, I expect that oil prices will recover at some point, which would result in higher earnings over time ( especially if production volumes increase). However, I also want to avoid situations where a short-term pain ( 1-2 years) causes a company to cut dividends - this would disqualify it right away for my strategy. As most of you are aware, my goal is to generate a defensible stream of dividend income, which grows above the rate of inflation. I am trying to avoid companies which might be prone to dividend cuts as much as possible.

ExxonMobil is the one oil company, where I want to build out a full position over time. I already own a lot of Chevron, which is one of the reasons why any additions there will be limited. Given the high payout ratio on ConocoPhillips, I might not be able to buy more however. When I am presented with new evidence, I believe that the smart thing to do is change my view and manage risk accordingly.

I did add to my ExxonMobil position early this week. I might take the plunge into more ExxonMobil sometime in March, especially if stock prices go lower from here.

Full Disclosure: Long all companies listed above

Relevant Articles:

Margin of Safety in Dividends
Not all P/E ratios are created equal
Why do I use a P/E below 20 for valuation purposes?
Are Energy Stock Values Today a Once in a Lifetime Opportunity?
Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)

Monday, March 3, 2014

How to think like a long term dividend investor

When most investors watch share prices fluctuate on a screen, it is easy for them to forget there are real businesses behind those share quotes, and not lottery tickets. It is also very easy to forget that price is what you pay, while value is what you get. Just because everyone is willing to pay only $56 for a share of Target, that doesn't mean that the value of the business in a going private transaction is $56. In reality, it could be much higher than that.

An investor should ask themselves the following questions, in order to better understand the business they are thinking of getting into:

1) What does the business do

In order to learn about a business, the logical first step is to realize what this business does. In the case of Target (TGT), you know that the company is a retailer, that sells things in retail stores with various formats and sizes. In the case of Exxon Mobil (XOM), the company owns fully or fractionally oil and gas wells, refineries and carbon transportation assets. Obviously, you need to understand the business and the industry the company is operating in, and take that into account when analyzing companies. When you evaluate Exxon Mobil you want to make sure that the company is able to replace existing reserves, in order to continue production and earn money. All Target cares about is bringing in traffic to its stores, staying relevant and keeping customer loyalty. Thus, always be mindful of industry specifics, when you try to choose between two businesses.

2) Who are the competitors? Are they relying too much on single customer or supplier?

In the case of Target, there are retail competitors all over the place. Wal-Mart (WMT) is a larger competitor, although Target appeals to individuals who earn more than the typical Wal-Mart client. Target also outspends Wal-Mart in the advertising front, in order to create a unique image that appeals to shoppers. The company also competes with the likes of (AMZN). This is one uncertainty that lies ahead for retailers – would their business model become obsolete by the emergence of the web. I think it is doubtful that physical store locations would not be used in the future, but the internet has brought a new threat to traditional retail. Target definitely has potential on the front however, which can mitigate some of those risks.

3) At what price can I snag the business?

It is rare that a business like Target would sell at irrationally depressed price to a private owner. In a manic depressive stock market however, it is entirely possible. As an investor, your goal is to buy shares as cheaply as possible. I usually try to avoid paying more than 20 times earnings, and also look into sustainability and growth prospects when I have to decide between companies. It also helps to acquire positions in businesses when few participants are excited about their prospects. Currently, it seems that many are not so optimistic about Target, given the stolen credit and debit card numbers, and the failure in Canada. While it is quite possible that business deteriorates from here, or that the stock price falls further, I think that now is the time to start acquiring Target for my portfolio. I have been nibbling my way into the stock, and would keep averaging down by adding to my stake approximately in 2014, depending on prices for other securities and prices for Target stock of course. I chose to dollar cost average by making 10 - 12 smaller investments throughout the year, rather than 2- 3 larger ones.

If I can purchase Target at 15.20 times earnings and a yield of 3.10%, that could be a good entry price. Earnings and dividends would likely increase from here, and could easily end up doubling every 9 - 10 years. The fact that Target is smaller than Wal-Mart (WMT) actually creates an opportunity for better future growth, since international is still untapped. This assumes that you are a buyer with strong hands, who is not going to be scared away from stock price volatility or temporary business problems. If you think that the business will not be around in 20 years, then obviously it would not make sense to buy. I believe Target will learn from its mistakes, and will succeed, hence I am willing to put my money where my opinions lie.

Another quality dividend paying stock that many investors own is Coca-Cola (KO). If you buy Coca-Cola at $38, and keep getting a $1.12 in annual dividends that grow by 7%/year, would it matter if market price goes down to $20 or up to $60 in the next 5 years? Unless you plan on putting the dividend and any fresh capital back in the stock, you should pretend like the stock market is closed for the next five years, and spend your time with family, on your day job or your hobby instead. I recommend going to bars or the movies also.

4) What are business competitive advantages

With companies like Wal-Mart Stores (WMT), the competitive advantage is the scale of operations. The company is spending a lot of time with suppliers in order to negotiate lowest prices, and it is continuously investing in infrastructure such as distribution centers and technology, in order to bring costs to the lowest levels possible.

On the other hand, Target stores are cleaner than those of Wal-Mart, and provide a more enjoyable experience to the shopper. This comes at a price however, as prices for the same item are usually slightly more expensive at Target. However, if you want to get fresher fruit and vegetables, do not want to wait in lines that have more than 2 customers, and want a better shopping experience, Target is the place for you. Target delivers on a great store experience and a product that is exciting and unique. Target tries to create excitement in shoppers, and position its products on basis of innovation, on design, and on quality. If you are frugal like me, you would keep going to Wal-Mart to save a few bucks however. However, if you can afford to pay slightly more for a better and friendlier customer experience, faster checkout times, then Target is the place for you.

Customer loyalty is strengthened through the Red Card, which offers discounts to shoppers who frequent the store. It is a win-win for both customers and Target. Target also manages to keep customer loyalty with special discounts and deals from time to time.

Another item that appeals to some shoppers is the fact that Target is active in communities, and provides money to non-profits. Compare this to all the negative publicity that Wal-Mart gets for ruining mom and pop stores.

For companies like Exxon Mobil (XOM) for example, their strength is in their integrated scale of operations. Furthermore, the company is very wise on capital allocation decisions, and tries to generate an adequate return on invested capital for all projects, whether drilling for oil and gas wells, making acquisitions or returning money to shareholders through buybacks. This is an important quality for management to have, because it lowers the risk that they would do something to jeopardize shareholder profits by getting in a bidding frenzy and replacing reserves by paying top dollars for it.

5) Can the business earn more over time - what factors will drive it

The thing is that Target’s market is the US is close to its saturation point. Future growth in the US is still likely, but it won’t be as robust as in the past. Therefore, if it wants to generate more growth in the future, the company needs to expand internationally. The company is eyeing Canada and Latin America as its near term base for expansion. It actually seems to have not done so well with the launch of its Canadian operations, which has led investors to discount future growth prospects through a more skeptical lens. I believe that the company would learn from this experience, and hopefully use that in their future expansion plans abroad.

Full Disclosure: Long TGT, WMT, XOM, KO

Relevant Articles:

How to choose between dividend stocks?
Two Dividend Machines I Purchased Last Week
Dividend Investors Should Ignore Price Fluctuations
Coca-Cola: A wide-moat dividend growth stock to buy and hold
How to retire in 10 years with dividend stocks

Friday, February 28, 2014

How to Generate an 11% Yield on Cost in 6 Years

A few years ago I shared the story of one small investment of a beginner income investor I met at the beginning of my own dividend journey. This story shows that anyone can start learning investing, no matter what age, level of money they can set aside. All that truly matters is having the right attitude that you can achieve anything you set your mind to, through hard work, persistence, patience and determination. Of course, the most important thing about dividend investing is to get started.

You do not need a lot of money to get started with dividend investing. One should never despise the days of small beginnings, and think that they need a large pike of cash before starting dividend investing. If you start slowly, even with a $10 investment, you are years ahead of most other individuals. Unless you are drowning in debt, you do not have any excuse to avoid investing in some of the strongest dividend paying blue chips today. With brokerages like Loyal3, it is possible to purchase shares in companies like Coca-Cola (KO), McDonald’s (MCD) or Wal-Mart (WMT) with as little as $10, commission free. Of course, you should increase the amounts you put to work for you as your level of income increases over time. Otherwise, you would need to spend a higher amount of time working prior to accumulating a sufficient nest egg.

So back in May 2008, my young friend opened an account with Sharebuilder with $40 that he had to his name. He paid a steep $4 commission, but managed to purchase 1.4196 shares of Realty Income (O) at 25.36/share. Being a poor college student, he was low on cash so he took advantage of a brokerage deal at Sharebuilder. As part of the deal, he received a $50 cash bonus for opening an account and making one investment. So after he made the investment, he essentially started playing with the house’s money, as he had no funds at risk after the rebate.

The next smartest thing this investor accomplished was selecting the "reinvest dividends" button at Sharebuilder. This meant that the first distribution of 20 cents that he received was immediately reinvested at a fractional share of Realty Income (O). That was 0.0084 shares to be exact. His latest distribution was 36 cents, which purchased 0.0093 shares. All in all, the investor’s number of shares has risen to 1.968 shares by January 2014.

He selected Realty Income because he liked the fact that it was a dividend achiever, which had raised distributions for 14 years in a row. The payout ratio was adequate, and there was possibility of further dividends growth down the road fueled by acquisitions and rent increases over time.

The beauty of dividend reinvestment is that it forces the investor to allocate cash back into the same security that paid it, through thick and thin. This eliminates emotion out of investing, and enables the investor to buy when prices are low, without second guessing themselves.

The power of compounding is further magnified, when distributions are received monthly, rather than quarterly or annually. That way, distributions are put to work for you much faster, and you end up taking of advantage of time in the market to a fuller extent.

The other advantage was that dividend payments were increased regularly between 2008 and 2014, which further turbocharged the compounding process. This was a rarity among REITs, many of which had to cut or eliminate distributions to shareholders during the Financial Crisis. The monthly dividend was increased from $0.137375/share in May 2008 to $0.1821667/share by December 2013 for Realty Income.

The high dividend yield from Realty Income of 6.50% in 2008 was also helpful in reaching to 11% yield on cost in 6 years. If you start with a high dividend initially, which is sustainable, and you reinvest this growing distribution monthly, you are turbocharging your dividend income growth exponentially. If you earn $65 on a $1000 investment, and you reinvest dividends at 6% without any growth, your dividend income is destined to double in 12 years, using the rule of 72.

However, the important thing is to not just focus on yield alone, but on the growth of the dividend payments. This is because during retirement, you will need to spend all of that dividend income on daily expenditures. Therefore, having your dividends increase above the rate of inflation is absolutely essential for you to maintain your standard of living. As a result, in my portfolio I have some high yielding stocks with lower growth, and some low yielding stocks with high dividend growth rates. However, the majority of my portfolio is in companies in the sweet spot, which have average yields ( around 3%) and average dividend growth rates ( around 7%).  Long-term investing is a marathon, not a sprint, so you need to search for assets that will provide high inflation adjusted growth for 2 - 3 decades in the future at the minimum.

The other lesson to learn is that this investment was not diversified at all. If our investor had put their money in American Capital Strategies (ACAS) in 2008, rather than Realty Income, they would not have benefited from the power of compounding. This is because American Capital Strategies eliminated distributions in 2008. Therefore, it is important to spread risk between at least 30 – 40 quality securities that have dividend growth potential. That way, if one or two of them cut or eliminate dividends, your overall portfolio income will not decline, but might even increase due to the dividend growth from the remaining components.

The lessons that this young investor learned, after watching a small amount of money compound for years, were worth every single penny. Based on the experience, the investor has been ultimately able to apply lessons learned in his investing for his future goals. As he got jobs after college, and earned promotions, he was able to put increasing amounts of funds to work. It would likely take him at least 2 decades before his dividend income becomes substantial enough for his level of spending, but luckily he is on the right plan to success.

Investing $40 is not much different than investing $40,000 or $400,000, if you have the right attitude and you focus on learning the correct process for achieving your goals. The difference is that you can easily replace $40, but $40,000 or $400,000 would take a long period of time to replace. Therefore, you need to spend the time and learn the right lessons early on, and then use this knowledge as your means increase over time. If you learn how to avoid doing dumb things to your portfolio, you would have dramatically increased your chances of achieving your goals one day.

Full Disclosure: Long O, MCD, WMT, KO

Relevant Articles:

Reinvesting Dividends Pays Off
Do not despise the days of small beginnings
How to buy dividend stocks with as little as $10
Margin of Safety in Dividends
Six lessons I learned from the financial crisis

Monday, October 3, 2011

Best Dividend Stocks of 2011, Q3 Update

Dividend stocks offer the best of both worlds – capital gains along with a recurring quarterly cash income stream. The positive about dividned stocks is most evident during turbulent market conditions, when investors suffer from volatility and lower stock prices. Most of the quality dividend stocks have hardly moved during the turmoil that started several months ago, caused by fears about a double dip, unemployment and defaults by sovereign countries. The cash dividend serves as an added bonus, as it provides a cushion against further declines in the stock price.

Back at the end of 2010, I was asked to selected the best stocks for 2011, as part of an ongoing competition between several investment site publishers. You can read the reasons behind my four selections in this article. The four stocks I selected included:

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company raised its dividends by 20.30% this year. Yield: 3.70%. 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 operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company raised its dividends by 5.60% this year. Johnson & Johnson has raised distributions for 49 consecutive years. Yield: 3.50%. Check my analysis of the stock.

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units: Beauty and Grooming, Health and Well-Being, and Household Care. The company raised its dividends by 9% this year. Procter & Gamble has raised dividends for 55 years in a row. Yield: 3.40%. Check my analysis of the stock.

PepsiCo, Inc (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. The company raised its dividends by 7.30% this year. PepsiCo has raised dividends for 39 consecutive years. Yield: 3.20%. Check my analysis of the stock.

Overall, my dividend stock picks not only outperformed the growth stock selections, but are also outperforming the S&P 500 year to date. The year-to-date results are listed below:

Dividend Growth Investor +3.39%

At the same time, S&P 500 index delivered a negative total return of 8.70% so far in 2011. It is reassuring to see quality dividend stocks maintain their value and sending investors cash through dividends, despite the market volatility.

Full Disclosure: Long PM, JNJ, PG, PEP

Relevant Articles:

Friday, September 10, 2010

Altria (MO) Dividend Stock Analysis

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. The current state of the company was finalized after a 2007 and 2008 spin-off of Kraft Foods (KFT) and Philip Morris International (PM). Because these divisions accounted for over two-thirds of the company’s profit before the spin offs, the dividend payment had to be prorated for the legacy US tobacco business. As a result it appeared to be lower than before, while in reality an investor in Altria in early 2007 would have not only maintained but also increased their dividend income. If the dividend record of the old Altria was continued to these days, an investor would find out that the company has raised distributions for 43 consecutive years. This tobacco stock was the best performer in the S&P 500 for the 50-year period from 1957 to 2007.

Currently the company is trading at a low P/E of 13.60, yields 6.70% and has a dividend payout ratio of approximately 80%. The current annual dividend is $1.52/share, and has been raised twice this year. The company earned $1.54/share in 2009 and is expected to earn $1.90/share in 2010 and $2/share in 2011. Altria has a target dividend payout ratio of 80% of earnings per share. This means that the company can afford to pay a dividend of $1.60 by next year, and increase of about 5%. Since 2005, earnings per share from continuing operations attributable to Altria Group have increased by 6% annually.

The economics of the tobacco business are really interesting. Most of the revenue generated from sales go to Federal and State governments, while the cost of the actual product is very small relative to its sales price. The demand is inelastic. When prices for products increase, the increase more than offsets the decrease in consumption caused by the price. This leads to increase in revenues for the cigarette manufacturer.

Supposedly even Warren Buffett liked the economics of the tobacco business in the 1980’s when he said: "I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.” However the increased regulatory actions against tobacco companies have prevented him from investing in the industry since “investments in tobacco are fraught with questions that relate to societal attitudes and those of the present administration...I would not like to have a significant percentage of my net worth invested in tobacco businesses."

The company is a dominant player in the US tobacco market, with a 50% market share in 2009. This mature market is in decline however, and as a result future growth in earnings per share could be difficult to materialize. They would likely come from efficiencies related to restructuring, such as the closure of its Cabarrus facility as well as the integration of smokeless tobacco company UST, which Altria acquired in 2008. Altria expects the UST acquisition to be accretive in 2010. Altria also expects to generate an estimated $300 million in UST integration cost savings by the end of 2011. Altria also expects to achieve approximately $290 million in additional cost savings by the end of 2011 for total anticipated cost reductions of $1.5 billion versus 2006. (Source)

The issues that prevent some investors from purchasing Altria stock are potential liabilities related to possible unfavorable judgments against the company. There were 129 cases pending against the company at the end of 2009 for example. Back in the late 1990’s for example the company’s stock price was hammered on fears that lawsuits could potentially wipeout Altria. In reality it is doubtful that the company would go under, since its tax revenues are needed to fill the empty state and local coffers.

Altria Group, Inc. also held a 27.3% economic and voting interest in SABMiller plc at December 31, 2009. The stake in the company was worth $12.70 billion at year end, which was higher than the 5 billion the investment is recorded on Altria’s books.

I view Altria as a hold if held on its own. If investors also own a share of Phillip Morris International (PM) for every share of Altria (MO) that they own, I would only then view Altria as a buy. Phillip Morris International (PM) owns the international operations of Altria and was spun off in 2008 as an independent company. The reason for that is that the risk of potential ban on tobacco products in the US which might jeopardize US tobacco businesses, is higher for Altria than Phillip Morris International. In addition to that, PMI has much greater growth prospects than Altria.

Full Disclosure: Long KFT, MO and PM

Relevant Articles:

- Altria Delivers Another Smoking Hot Dividend Increase
- Altria (MO) - a recession proof high yield dividend stock
- Philip Morris International versus Altria
- 2010’s Top Dividend Plays

Friday, July 9, 2010

Family Dollar Stores (FDO) Dividend Stock Analysis

Family Dollar Stores, Inc.(FDO) operates a chain of self-service retail discount stores for low to lower-middle income consumers in the United States. The company is a member of the S&P Dividend Aristocrats index, after raising distributions for 34 consecutive years.

Over the past 10 years this dividend stock has delivered an annual average total return of 9 % to its shareholders. After peaking at 44 in late 2003, the stock fell all the way down to 15 in 2007, before recovering all the way to 40.

At the same time company has managed to deliver an impressive 8.40% average annual increase in its EPS over the past nine years. Analysts expect EPS to increase to $2.60 in FY 2010, followed by an increase to $2.95 in FY 2011. Increases in sales will be driven by expanding the current store count by 2%, as well as increasing same store sales as price conscious consumers purchase the company's value-priced assortment of everyday necessities.
The once cash-only stores now accept PIN-based debit card payments in most locations. Food stamp and credit card acceptance is also being rolled out.
The company has benefited from the recent financial crisis, as some middle-class consumers have traded down to its store locations for everyday items. Family Dollar also drives traffic through limited time offerings as well as stocking up on treasure hunt items which creates customer excitement.

The ROE has been hovering in the 18% - 21 % range over the past 10 years, with the exception of a brief dip in 2005 and 2006.

Annual dividend payments have increased over the past 10 years by an average of 10.10% annually, which is higher than the growth in EPS. A 10% growth in dividends translates into the dividend payment doubling almost every seven years. If we look at historical data, going as far back as 1976, FDO has actually managed to double its dividend payments every five years.

The dividend payout ratio expanded slightly over the past decade but remained under 30% throughout the period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

FDO is attractively valued with its low price/earnings multiple of 16.30. The current dividend yield of 1.60% however is low for my taste. I would consider adding a partial position on dips below $31.

Disclosure: Long FDO

Relevant Articles:

- Wal-Mart (WMT) Dividend Stock Analysis

- A dividend portfolio for the long-term

- Three Dividend Strategies to pick from

- Busy week for dividend increases

Friday, June 11, 2010

Royal Dutch Shell – An Undiscovered Dividend Gem

Royal Dutch Shell Plc (RDS.A)(RDS.B) operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. The company is not on any dividend indices, despite its long history of consistent dividend increases.
Over the past decade this dividend stock has delivered an annual average total return of 5.10% to its shareholders.

There are two classes of shares – A and B(RDS.A and RDS.B). For US investors it is a much better option to invest in the B shares, since those do not come with a 15% withholding tax from the Dutch government. You could here about the difference between A and B shares. In addition to that, each Royal Dutch Shell American Depository Receipt (ADR) is equal to two shares, traded on London or Amsterdam.

At the same time the company has managed to deliver a 1.10% average annual increase in its EPS since 2000. The increase in prices of crude oil and natural gas definitely helped with earnings. The rapid fall of energy prices in late 2008 and early 2009 and weak global demand led to a 52% decrease in earnings per share in 2009 to $4.09. For fiscal year 2010 analysts expect earnings to increase by 41% to $5.75/share. Analysts also expect earnings per share to rise 25% from there to $7.16/share by FY 2011. The company is in the process of selling or closing unprofitable refineries it owns, which weigh in on its margins. It has also cut 10% of its global workforce, which added to other cost savings initiatives led to $1 billion in savings. The company is increasing its Canadian Oil Sands production, and doubling its Liquified Natural Gas capacity in Russia and Qatar.

Any analysis of earnings trends for an oil and gas producer such as Royal Dutch Shell would definitely depend on the future prices of energy commodities over the next few years. Nevertheless the dividend is sustainable at current levels and there definitely is some room for dividend growth in 2011 and beyond.

Returns on Equity decreased to 9.50% in 2009, after a few years of consistently being above 15%. Year over year this indicator will fluctuate, due to the changes in the value of oil and natural gas. The company should be able to generate sufficient average returns on equity in excess of 15% in the long run.

Annual dividend payments have increased by an average of 12% annually in US dollar terms since 2000, which is higher than the growth in EPS. The reason for this is that earnings have a much higher volatility than dividend payments.
A 12% growth in dividends translates into the dividend payment doubling every six years. Since 1988 Royal Dutch Shell has actually managed to double its dividend payment almost every eleven years on average. The company last raised its quarterly dividend by 5 % to 84 cents/share in 2009.

The reason why the company has not been included on any dividend indices is because it was a result of the merger of Royal Dutch with Shell in 2005. It switched from paying dividends in pounds and euro to paying dividends in US dollars. This probably ended the continuity in many stock databases as it required a manual input from analysts. Per the table below, Royal Dutch Shell has managed to boost distributions at least since 1993.

The dividend payout ratio has followed the trend in earnings and returns on equity. It largely remained below 50%, until it rose to 75% on a temporary dip in earnings in 2009.. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The fact that Royal Dutch isn’t on any of the international dividend growth indices shows you that enterprising dividend investors should keep their eyes open at all times while searching for opportunities everywhere. Overly relying on mechanical rules, just like relying solely on your judgment, might be a recipe for disaster. While many successful dividend investors have some mechanical aspects to their trading, they also utilize their judgment in order to select the best dividend stocks in the world.

Currently the company is trading at a P/E of 11 and yields 6.70%. In contrast shares of British Petroleum (BP) trade at a P/E of 6 and yield 9.20%, while Chevron (CVX) and Exxon Mobil (XOM) trade at P/E ratios of 11 and 14 respectively and yield 3.90% and 2.90%.

Full Disclosure: Long BP,CVX,RDS-B and XOM

Relevant Articles:

- Chevron Corporation (CVX) Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
- 3M Company (MMM) Dividend Stock Analysis
- Chevron (CVX) Raises Dividends; MLPs follow suit

Friday, May 7, 2010

3M Company (MMM) Dividend Stock Analysis

3M Company, together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications.

3M Company is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 52 consecutive years. Over the past decade this dividend growth stock has delivered an annual average total return of 7.90% to its shareholders.

At the same time company has managed to deliver an impressive 7.70% average annual increase in its EPS since 2000. In 2009 earnings per share fell by 7.60% to $4.52. The expectations for 2010 are for increase EPS to almost $5.15/share and an increase in EPS to $5.69 in 2011. Over the long run however, earnings for this conglomerate are relatively diversified which is a decent buffer during recessions. As the economy rebounds, revenues and profitability would improve. The company also invests almost 6% of its revenues in research and development each year, in order to deliver new products to consumers worldwide. Future growth is expected to also come from acquisitions as well as growth in emerging markets such as China and India. Sales are increasing partly due to strong demand of coatings for TV and Computer displays as well as demand for masks in response to the H1N1 virus.

The ROE has remained largely between 29% and 38% with the exception of a temporary dip in 2001 to 23%. After two years of declines in this indicator, I expect that increased profitability would lift returns in 2010.

Annual dividend payments have increased by an average of 6.50% annually since 1999, which is lower than the growth in EPS. Most recently the company increased its dividend by 3% to $0.525/quarter. MMM typically enjoys a slow dividend growth during tough economic conditions, while compensating with stronger dividend growth during boom times. 3M’s dividend is safe, given the strong cashflows that the company generates from its diversified businesses.

A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. Since 1973 3M has actually managed to double its dividend payment on average almost every nine years.

The dividend payout has steadily decreased over the past decade; due to the fact the dividend growth was much slower than earnings growth. Currently the payout is at 45% which is a sustainable level. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

3M is currently attractively valued. The stock trades at a P/E of 19.50, yields 2.40% and has an adequately covered dividend payment. I would be a buyer of 3M on dips below $84.

Full Disclosure: Long MMM

Relevant Articles:

- Four Prominent Dividend Growth Stocks with rising yields on cost
- Ten Dividend Kings raising dividends for over 50 years
- Where are the original Dividend Aristocrats now?
- 29 stocks with sustainable dividends

Monday, May 3, 2010

United Technologies (UTX) Dividend Stock Analysis

United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide.
United Technologies is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend achiever, which has been consistently increasing its dividends for 16 consecutive years.

Over the past decade this dividend stock has delivered an annual average total return of 9.70% to its shareholders.

At the same time company has managed to deliver a 9.80% average annual increase in its EPS since 2000. Analysts are expecting an increase in overall earnings per share in 2010 to $4.60 and $5.30 in 2011.
The company is operating under 6 divisions, each of which provides different types of products or services. Its businesses include Carrier heating, air-conditioning and refrigeration solutions; Hamilton Sundstrand aerospace and industrial systems; Otis elevators and escalators; Pratt & Whitney engines; Sikorsky helicopters; and UTC Fire & Security systems. The company also operates a central research organization that pursues technologies for improving the performance, energy efficiency and cost of UTC products and processes.
United Technolgies is well positioned to ride any major megatrends such as emerging markets growth and demand for clean energy solutions and would also be positioned well for economic rebound due to its diverse offerings. One of its divisions, Hamilton Sundstrand, has been involved in the Boeing’s 787 Dreamliner project, by delivering nine systems that contributed to the successful first flight of the airplane.

The return on equity has remained largely between a low of 20% in 2005 and a high of 25% in 2008.

Annual dividends have increased by an average of 15.80% annually since 2000, which is much higher than the growth in EPS.A 15 % growth in dividends translates into the dividend payment doubling almost every five years. Since 1970 United Technologies has actually managed to double its dividend payment almost every eight years on average.

The dividend payout had largely remained below 30% over the past decade. In 2009 there was a spike in this ratio to 38% due to the impact of the recession on earnings per share and the 10.40% dividend increase last year. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

United Technologies is currently attractively valued. The stock trades at a P/E of 18, yields 2.30% and has an adequately covered dividend payment. I would be a buyer of UTX on dips below $68.

Full Disclosure: Long UTX

Relevant Articles:

- Four notable dividend increases
- Best Dividends Stocks for the Long Run
- United Technologies (UTX) Dividend Stock Analysis
- Estimating future Dividend Growth

Monday, April 26, 2010

Universal Health Realty Income Trust (UHT) Dividend Stock Analysis

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company is a dividend achiever and has raised distributions for 22 consecutive years.

Over the past decade this dividend stock has delivered a total return of 16.70% per annum to its shareholders.

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). Over the past decade FFO has increased by 1.10% on average. Future growth in funds from operations could come from acquisitions or increase in rents. Universal Health Realty Income Trust earns bonus rents from the subsidiaries of UHS, which are based on the excess over base amounts revenue that these facilities generate. There were no acquisitions in 2009, although the company did make a few acquisitions in 2010 and 2008.

Fifty-one percent of UHT’s revenues are derived from leases to Universal Health Services. UHT’s advisor is a subsidiary of UHS, and all officers of Universal Health Realty are employees of UHS, which could create conflicts of interest. In addition to that over $32 million dollars in long-term debt are expected to mature in 2010. The company expects to refinance almost $12 million dollars of its maturing loans, which carry market interest rates. Another portion of the debt maturing in 2010 for $7 million could be extended for an additional three years to 2013. A construction loan for almost $13.5 million at a very low rate could be extended for up to one additional year. The company also has $48.8 million of outstanding borrowings under the terms of its revolving credit agreement which matures in January 2012.

Over the past decade distributions have increased by 2.90% per annum, which was higher than the growth in FFO. A 3% annual growth in distributions translates into dividends doubling every 24 years. In 2009 the company raised quarterly distributions by 1.70%. Dividends of $2.38 per share were declared and paid during 2009, of which $1.94 per share was ordinary income and $.44 per share was a return of capital distribution.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 85%, which was the first decrease in this indicator since 2004. Overall the FFO payout has increased from 72% in 2000 to 85%, which was due to distributions growing faster than funds from operations. A lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.

Overall I find UHT Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 13, which is in the low range when compared to the past five years. This REIT yields 6.80% and has an adequately covered dividend.

I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

Full Disclosure: Long UHT

Relevant Articles:

Monday, April 5, 2010

PepsiCo, Inc. (PEP) Dividend Stock Analysis

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company is a member of the S&P Dividend Aristocrat index, after raising distributions for 38 years in a row. Most recentlyPepsiCo raised its quarterly dividend payment by 7% to $0.48/share. Dividend author Dave Van Knapp has included the company in his most recent book "The Top 40 Dividend Stocks for 2010".

The stock has returned a 7.60% average annual return over the past decade, fueled by the company’s strong growth in earnings.

Since the year 2000, PepsiCo has managed to deliver a 9.90% average annual increase in earnings per share. The company has also managed to implement a share buyback where it purchased almost 1.7% of outstanding stock on average each year since 2001. After it acquired Pepsi Bottling Co. and PepsiAmericas the company's Board of Directors also authorized the repurchase of up to $15 billion of PepsiCo common stock through June 2013. At current prices this represents approximately 14.40% of the stock outstanding.

Analysts are expecting EPS growth to $4.17 in FY 2010, which would be a 10.60% increase in comparison to FY2009 EPS of $3.77. The expectations for FY 2011 are for EPS to reach $4.65, which would be an 11.50% increase.

Earnings growth could come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods.
Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section.

The return on equity has remained largely above 30%, with the exception of 2004, when it fell to as low as 22%.

Annual dividend payments have increased by 13.60% on average since 2000, which is much higher than the growth in earnings per share.

A 13.60% growth in dividends translates into the dividend payment doubling almost every five years. Since 1979 PepsiCo has actually managed to double its dividend payment every six years on average.

The dividend payout has remained below 50%, with the exception of a brief increase in 2008. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

PepsiCo (PEP) is a reliable dividend stock, which is attractively priced at the moment despite its forward yield of 2.90% being a tad lower than my entry requirement of 3%. My ideal entry price for PepsiCo would be $64. Dividend Investors waiting for better prices should weigh in the risks of waiting for a better price, versus the risk of missing out completely on any upside action if the company doesn’t go below $64/share.

Full Disclosure: Long PEP
Relevant Articles:

Friday, February 26, 2010

Colgate-Palmolive (CL) Dividend Stock Analysis

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company recently increased its quarterly dividend by 20.40% to 53 cents/share. This is the forty-seventh consecutive dividend increase for Colgate-Palmolive, which is a dividend champion.

Over the past decade this dividend stock has returned 4.30% per annum.

Earnings per share have increased by 11.10% on average since 2000. Since 2000 the number of shares outstanding has decreased from 625 million to 525 million, or an average decrease of 1.90% annually. Analysts estimate that EPS would grow by 9.80% to $4.80 in FY 2010. FY 2011 EPS are expected to increase by 11.40% from there to $5.35.

Sales outside North America accounted for two-thirds of the company’srevenues. The company’s strong competitive advantages in the oral healthcare field plus the low capital requirements have enabled it to generate high returns on capital.

Returns on Equity have been truly phenomenal, having never fallen below 80% since 2000.

Annual dividends have increased by 11.80% on average over the past decade, which is slightly higher than the growth in earnings.

A 12 % growth in dividends translates into the dividend payment doubling every six years on average. If we look at historical data, going as far back as 1976, Colgate Palmolive has actually managed to double its dividend payment every eight and a half years on average.

The dividend payout ratio has consistently remained below 50%, with the exception of a brief spike to 50.80% in 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The company trades at a P/E of 18.80 times earnings and has an adequately covered dividend payment. The current yield of 2.60% is below my 3% entry threshold. If we look at the yield from the past decade however, CL has yielded more than 3% only during the lows in early 2009. Because of this I initiated a position in Colgate recently. I would look forward to add to this position on dips below $71, which would be my ideal entry price.

Full Disclosure: Long CL
Relevant Articles:

Friday, February 12, 2010

Diageo (DEO) Dividend Stock Analysis

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. The company offers a range of premium brands comprising Smirnoff vodka, Johnnie Walker scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, J&B scotch whisky, Tanqueray gin, and Guinness stout. Diageo is an international dividend achiever, which has raised distributions for over a decade.

The company has delivered annualized total returns of 12.4% on average.

Earnings per share have increased by 10% on average since 2000. EPS growth has been aided by a decade of share buybacks, which shrank the number of outstanding stock by a quarter. Emerging markets account for one third of company’s revenues. This is where many brand name consumer companies are currently experiencing growth. In 2009 Diageo earned $4.14/share. Analysts expect the company to earn $4.62 and $5.04 per share in 2010 and 2011 respectively.

The annual dividend payment has been increased by 6.80% on average, which is lower than the growth in EPS.

Return on equity has increased from 22.30% at the beginning of the study period to a very impressive 42% in 2009.
The dividend payout ratio has been volatile, and largely remaining above 50% during our study period. Currently this indicator sits at 55%.

Diageo currently trades at a P/E of 16, yields 4.20% but has a dividend payout ratio of 55%, which is a little bit higher for my taste. Other than that I like the company, the strong brand names it owns and its ability to raise dividends through thick and thin. I never really pulled the trigger on Diageo (DEO) since I analyzed it in 2008. I would try to initiate a position in the company on dips as soon as I have funds available.

Full Disclosure: None
Relevant Articles:

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
Relevant Articles:

Popular Posts