Friday, December 11, 2009
Since 1999 this dividend growth stock has delivered an average total return of 10.70% annually.
The company has managed to deliver a 11.70% average annual increase in its EPS between 1999 and 2008. Analysts expect McCormick & Company to earn $2.33 share next year, followed by an increase to $2.51/share in the year after that. The company is in the middle of a cost restructuring program, where annual savings have reached almost 56 million in 2008. In addition to that the company is trying to grow through acquisitions, which add to its diverse portfolio of consumer and industrial brands.
Although the Return on Equity is high at 23.90%, it is below its highs in the early 2000s. 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 an average of 11.10% annually since 1999, which is commensurate with the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1990, McCormick & Company has actually managed to double its dividend payment every six years on average.
The dividend payout ratio has consistently remained below 50% 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 the McCormick & Company is attractively valued at 17.8 times earnings, yields 2.90% and has an adequately covered distribution payment. I would look to enter McCormick & Company (MKC) on dips below $34.
Full Disclosure: None
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Wednesday, December 2, 2009
There are several ways that the market could correct itself. First, since the market is typically a strong indicator that predicts contractions and expansions in the economic cycle much better than most economists, the current upturn could be a forecaster of economic growth. This would lift earnings, decrease unemployment and bring valuations down to more reasonable levels, without causing any depression in stock market prices overall. If the market is ahead of itself however, it could stay flat for a period of time.
The second option is for the market to collapse and bring valuations to more reasonable levels. It seems that most investors and pundits believe that a severe decline in stock prices is in the cards over the next few months. Since few people seem to believe in the market rally however I strongly believe that it could easily continue.
The third option could be that the market doesn’t correct itself but keeps roaring higher, propelled by expectations of strong corporate earnings. When earnings rebound, stocks won’t look as expensive as they do today.
As a dividend investor I try to allocate some funds into purchasing several stocks every month. The main problem I have been having since July is that the same stocks are appearing on my buy screen for several months now. While it is always good to be able to purchase what you might consider the best dividend stocks in the world, history has definitely showed us that even the bluest of blue chips might not be bulletproof in the long run. It is concerning to add money to the same stocks each and every month, which could make a portfolio more concentrated and less diversified. Valuations are an important factor, which every dividend investor should implement as part of their entry criteria, in order to make sure that they don’t overpay for stocks. Overpaying for stocks could lead to substandard returns over time.
I screened the list of dividend aristocrats for dividend payout ratio of less than 50%, dividend yield of 3% and P/E of less than 20. I did relax the criteria a little bit to include stocks with ucrrent yields of 2.80% as well as those with payout ratios of up to 55%. The stocks which look promising right now include:
As a matter of fact, stocks could continue climbing the wall of worry far longer than anyone could stay sane. Disciplined dividend investors should stick to their strategies in the meantime and refuse to concentrate their portfolios or overpay for stocks. While keeping a portion of your portfolio in cash or fixed income might seem ludicrous given the low interest rates, it could provide some cushion to ones portfolio should the right stocks fall below the right entry prices.
If stocks were to keep going higher in a straight line and if Dow and S&P 500 reach all time highs in the process, by pushing valuations higher and higher, investors would probably be kicking themselves for “missing the boat”. As individual investors however, we are not rewarded based off short term performance, unlike mutual fund managers who have to be invested at all times. Thus, individual investors have an advantage over the pros right now since they could decide for themselves whether paying top dollar for adding to existing stock positions is worth it or not.
Back in 1990’s the stock market was in the midst of a strong bull run, which pushed valuations to stratospheric levels. Investors enjoyed double digit annual increases in stock prices and thus they didn’t care that rising prices pushed dividend yields to very low levels. Fast forward one decade and we are still where we were in the late 1990’s. Even strong blue chip dividend growers such as McDonald’s (MCD), Automatic Data Processing (ADP) and Pepsi Co (PEP) were yielding less than 2% each, which made them largely unsuitable for a dividend growth portfolio at the time.
In order to be successful, a dividend investor has to identify the right dividend growth stocks, establish positions at attractive valuations over time, reinvest dividends selectively and diversify across sectors, industries and continents. These sound strategies would ensure the long term survival of the individual investor even during the most adverse of conditions.
Full Disclosure: Long positions in all of the securities above
Friday, October 9, 2009
SYSCO Corporation is a dividend champion as well as a component of the S&P 500 index. It has been increasing its dividends for the past 38 consecutive years. For the past decade this dividend growth stock has delivered an annual average total return of 6.20 % to its shareholders.
At the same time the company has managed to deliver an 11.20% average annual increase in its EPS since 2000. For the next two years analysts expect EPS to increase to $1.81 and $1.92 respectively. The main problem for the company right now is the slowdown in sales at US restaurants, which account for more than 60% of revenues for this food distributor. Other than that the growth prospects for the stocks exist not only through internal growth but also through acquisitions as well. Building regional distribution centers and better inventory management are two of several initiatives that the company is applying for internal growth. International expansion could also be another opportunity for Sysco.
The returns on equity have increased slightly over our study period to a very respectable 30.80% in 2009.
Annual dividend payments have increased by an average of 20.30% annually over the past 10 years, which is much higher than the growth in EPS. Some of it came from stock buybacks and some of it was a result of expansion in the dividend payout ratio.
A 20% growth in dividends translates into the dividend payment doubling almost every 3 and a half years. If we look at historical data, going as far back as 1975, we would see that Sysco has indeed managed to double its dividend payment every three and a half years on average.
Over the past decade the dividend payout ratio has more than doubled to 65% in 2008. While the dividend is well covered based off current cash flow/share, the company would most probably have to slow down or stop dividend increases until earnings growth picks up again. The stock buyback program could also be put on hold as a result of this as well. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
I believe that SYSCO Corporation is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 3.80%. The high dividend payout ratio makes this otherwise great stock a hold for the time being however. I would only consider investing in Sysco at this time as part of a dividend reinvestment program.
Full Disclosure: Long SYY
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Friday, October 2, 2009
US Bancorp’s (USB) CEO is reviewing the company’s dividend payout, after it paid off $6.6 billion in TARP money back to the US Treasury."You will see us take action in the near-term that will be favorable," to the dividend, the company’s CEO said. The company cut dividends in March by 88% and is currently paying a quarterly dividend of 5 cents/share.
BB&T’s (BBT) President and CEO Kelly King informed shareholders the bank will "revist dividend level as soon as appropriate". The company cut its dividend by 68% in May 2009 in order to be able to repay the US Treasury. In addition to that the Winston-Salem, North Calorila based banking institution sold $1.5 billion in stock.
JP Morgan’s (JPM) CFO was a little less optimistic about the future dividend prospects of his company, citing that the company’s goal is to restore dividend only if economy doesn't "double dip". Despite the fact that he is still cautious on restoring the dividend, the CFO said the bank could raise its dividend to $0.75-$1.00/share. The company cut its dividend by 87% to 5 cents/share in February 2009.
Analysts are also expecting Pfizer (PFE) to increase dividends as well in the near future. Deutsche Bank analysts expect Pfizer Inc to increase its dividend in December. Deutsche Bank sees an increase of 15 percent to 25 percent. Pfizer cut its dividend by 50% in January in an effort to conserve cash in order to pay for its acquisition of Wyeth (WYE).
While I am generally very skeptical about companies which cut distributions, I view companies that begin raising distributions within a year of the cut very positively. It is too early to get excited about the companies listed above however. As long as they fail to actually increase distributions by sending bigger checks to shareholders, then the prospect of them raising dividends is a pure speculation.
Full disclosure: None
- BB&T Corporation (BBT) Stock Dividend Analysis
- Should you sell after a dividend cut?
- Is Pfizer (PFE) a value trap for investors?
- US Bancorp (USB) cuts its dividend by 88%
Friday, August 28, 2009
V.F. Corporation has consistently increased dividends for 36 consecutive years. The company last announced a dividend raise in October 2008.
Over the past decade this dividend growth stock has delivered an average total return of 5.70% annually. The stock price decreased from its all time highs of $96.20 in 2007 to a multi-year low of $38.22 in 2008, before strongly recovering from its lows.
The company has managed to deliver a 6.80% average annual increase in its EPS between 1999 and 2008. V.F. Corporation is expected to earn $4.90 share in FY 2009, followed by $5.50/share in FY 2010. The company is currently experiencing some short term in demand, which has led to a drop in revenues. If this recession proves to be a short one, the company would certainly manage to hit its annual goals of 8% annual revenue growth. The company’s foreign operations do have the ability to generate strong revenue growth over time. Another part of V.F. Corp’s growth strategy entails buying brands that could utilize the company’s extensive distribution network and result in economies of scale to produce the new apparel brands at a lower cost.
The Return on Equity has generally remained stable around 17% with the exception of 2000 and 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 11.90% annually since 1999, which is higher than the growth in EPS. Much of the increase came from V.F. Corporation’s 90% dividend increase in 2006. If we take this big increase out of the dividend growth calculation, we would see that the company typically raises distributions by an average of 3% to 5% annually.
A 12 % growth in dividends translates into the dividend payment doubling every six years, whereas at a 4% growth rate it could take 18 years for the dividend payment to double. If we look at historical data, going as far back as 1986, V.F. Corporation has actually managed to double its dividend payment every eight years on average.
The trends in the dividend payout ratio have closely tracked short term EPS weakness in 2000 and 2001 by rising to disproportionate levels. It also fell to 24% before the company decided to drastically raise distributions by 90% in 2006. The ratio has largely remained under 50% over the past decade, which is a good sign. 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 V.F. Corporation is attractively valued, trading at 14 times earnings, yields 3.50% and has an adequately covered dividend payment. I would be looking forward to initiating a small position in V.F. Corporation (VFC) on dips.
Full Disclosure: No position at the time of writing
Wednesday, August 19, 2009
Due to the horrifying statistics of the overall bleak dividend picture, some reporters are claiming that dividend investing is dead. Just because you read it in the paper however, doesn’t mean it is true for everybody. While the overall statistics have been rather scary, the negative dividend news has been concentrated in the financial sector. Thus a well-diversified portfolio of income stocks should have performed well even during crisis.
Broad statistics on dividends could be misleading however as they focus on all companies, not just on the ones which have a proven track record of raising dividends. Even if the sky truly is falling down, there still are companies, which are generating enough cash flows and are confident enough in their business to increase distributions. In fact the dividend aristocrats index with its 52 components has seen 8 dividend cuts, one buyout and 32 dividend increases so far in 2009.
In addition to that, most dividend growth strategies tend to evaluate sustainability of dividends on a per issue basis, thus weeding out companies whose dividends are in peril. It really is a no brainer that a company, which generates enough earnings to cover dividend payments by a factor of 2 or 3, is much less likely to cut or eliminate distributions compared to a company, which pays out almost all of its cash flows out as dividends. This simple formula does exclude certain vehicles such as REITs for example, which are required to distribute almost all of their earnings as distributions to shareholders in order to maintain their tax status. Thus, these vehicles (such as REITs) should be evaluated using other criteria, which I would describe in a future post.
I have selected several prominent dividend growth stocks, whose earnings and cash flows provide adequate coverage for their dividends:
Investors should be cautioned that entry price does matter. Thus this list should only be considered as a starting point in the process of analyzing potential dividend stock candidates. Chances are that a dividend growth stock that manages to grow earnings is a likely candidate to continue growing distributions, which will increase yield on cost over time.
Full Disclosure: Long ABT, ADM, ADP, AFL, APD, CLX, EMR, FDO, GW, JNJ, MCD, MHP, MMM, NUE, PG, SHW, WMT
This post was featured on 10 Best Roundup for the Week of August 24, 2009 by blogger JLP from AllFinancialMatters.
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Wednesday, August 12, 2009
Intelligent dividend investors are not worried about short-term fluctuations in the markets however. They understand that if they follow a rigorous screening process and acquire a diversified mix of the best dividend paying companies in the world, their distributions would provide a positive return in any market. In a previous post I identified 12 attractively valued dividend stocks to acquire now. It is important however not to overpay for stocks, even those with exceptional moats, as this could lead to underperformance relative to their benchmark over time.
If the markets were truly overstretched, then a slight retracement from markets recent highs would be a welcoming sign for income investors, who are looking to exploit these conditions by acquiring great franchises on dips. Pockets of opportunity allow dividend investors to buy solid businesses at reasonable prices, decent yields and acceptable dividend growth rates.
In order to capitalize on such opportunities, I have screened for companies, which have raised their dividends for more than 25 consecutive years. My criteria were are follows:
1) Stock has increased dividends for more than a quarter of a century
2) Price/Earnings Ratio of less than 20
3) Dividend payout ratio of less than 50%
4) Dividend yield is more than 2%, but no more than 3%
The companies, which I identified in the screen, are listed below:
(Open as a spreadsheet)
I require a 3% initial dividend yield before initiating a position in a stock. Thus the above-mentioned stock list should be acquired only on dips below the target price. Another strategy for enterprising dividend growth investors is selling cash secured puts on the stocks below, with strike prices close to the target price mentioned above. I have provided some explanation why I require at least some yield below.
Investors often overpay for stocks because of the recency phenomenon, where they discount double-digit growth indefinitely. This leads to purchasing stocks with unacceptably low dividend yields, high P/E ratios and rosy predictions for strong dividend growth for eternity. Such conditions are simply unsustainable.
Thus by buying a stock with a dividend yield of at least 3% an investor’s income is relatively well covered in a scenario where the company stops growing its distributions. With this margin of safety the investor still generates some dividend income until they manage to sell the stock and re-invest the proceeds in a more promising dividend growth stocks. With a 1%-2% yielder, it would take forever for our enterprising dividend investor to earn a reasonable dividend income if distribution growth slows down or grinds to a halt.
Full Disclosure: Long MHP, MMM, SHW and WMT
Tuesday, July 7, 2009
I believe that whether the bottom has been hit or not astute dividend investors should seize the opportunity that the current bear market offers. I ran a screen on the S&P Dividend Aristocrats index to identify attractively valued stocks using the following criteria: (source Yahoo Finance)
1. Dividend Payout Ratio is less than 50%
2. Price/Earnings Ratio is less than 20
3. Current Dividend Yield is at least 3%
There were 12 companies that made the cut. Check the list below:
(VFC) VF Corp (analysis)
(MHP) McGraw-Hill Companies (analysis)
(PG) Procter & Gamble (analysis)
(AFL) AFLAC Inc (analysis)
(CB) Chubb Corp. (analysis)
(ABT) Abott Laboratories (analysis)
(JNJ) Johnson & Johnson (analysis)
(MMM) 3M Co (analysis)
(DOV) Dover Corp. (analysis)
(EMR) Emerson Electric (analysis)
(SWK) Stanley Works (analysis)
(NUE) Nucor Corp. (analysis)
The thing that separates these companies from other dividend stock lists is that they have a tendency to increase their dividends consistently every year. With an average yield of 3.60% this list has generated an average dividend growth of 11% over the past decade. If history were to repeat itself over the next 6 –7 years, the average yield on cost should be double what you can get today. In the worst case I expect that the income stream growth from this list of stocks would at least match the rate of inflation over time.
Full Disclosure: I have positions in all stocks above except for VFC and SWK, which I plan on buy on dips. Trade stocks for free through Zecco.com, the Free Trading Community.
Thursday, July 2, 2009
Emerson Electric Co.has paid uninterrupted dividends on its common stock since 1947 and increased payments to common shareholders every year for 52 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 4.90% to its shareholders. The stock is down over 50% from its 2007 and 2008 all-time highs.
The company has managed to deliver an 8.40% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $2.35 for 2009 and $2.20 by 2010. This would be a decrease from the 2008 earnings per share of $3.11. The economic crisis is currently affecting the St. Louis based company, which recently announced a 25% decline in orders for the past three months. Emerson Electric does expect to restructure its operations in order to make them more cost effective. In addition to that the relative diversification of its revenue sources by continents and five major business segments should soften the fall in earnings. Another positive for the company is the fact that it focuses on new product introductions, which could add greatly to profitability. Strategic acquisitions could also add to the bottom line as well.
The Return on Equity has increased over the past decade from 22% in 1999 to 27% in 2008. The reason for the increase is managements implementing capital efficiency initiatives after a string of acquisitions. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 7% annually since 1999, which is slightly lower than the growth in EPS.
A 7 % growth in dividends translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1982, Emerson Electric Co. has actually managed to double its dividend payment every nine years on average.
Despite the expectations for lower earnings and revenues for 2009 and 2010, I believe that the dividend payment would not be affected. The worst that could happen is that dividend growth slows down for the next two years, before resuming its 7% annual rate of increase. Despite being regarded as a cyclical company Emerson has raised distributions for over half a century, so a recession should not create a steep shift in the company’s dividend policy.
The dividend payout ratio remained below 50% for the majority of the past decade. The only exception was the 2001-2003 period, when profitability suffered from the economic downturn at the time 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 Emerson Electric Co. is trading at 13 times earnings and yields 4.00%. I believe that Emerson Electric Co.is attractively valued at the moment. I would be looking forward to adding to my position there.
Full Disclosure: Long EMR
Tuesday, June 30, 2009
Successful dividend investing is much more than picking the highest yielding stocks however. Recent history has shown that in most cases, the stocks with the highest yields are the first to cut distributions when trouble arises. In order to be successful at long-term dividend investing, one needs to find the right balance between dividend growth and dividend yield.
There are several stocks, which offer tempting current high yields, which are less likely to be sustained. Most of the companies mentioned below are members of the elite S&P Dividend Aristocrats index for now.
Avery Dennison Corporation is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products. The company last raised its dividend in 2007. Avery Dennison has been unable to cover its dividend payment over the past two quarters. Based off the past 4 quarterly earnings reports however Avery earned $2.16/share and paid out $1.64 in dividends per each unit of common stock. Avery ended its 32-year streak of consistent dividend increases in 2008.
M&T Bank Corporation (M&T) is a bank holding company. The Bank offers a range of commercial banking, trust and investment services to its customers. M&T Bank last raised its dividend in 2007 as well. M&T Bank paid out most of its earnings as dividends over the past 3 quarters and couldn’t cover its distribution in the latest quarter. The bank is also one of the financial institutions, which had taken funds from the US Treasury. M&T Bank took $600 million in TARP money back in December 2008. M&T Bank ended its 27-year streak of consistent dividend increases in 2008.
Leggett & Platt, Incorporated is a diversified manufacturer that conceives designs and produces a range of engineered components and products used in homes, offices, retail stores and automobiles. Leggett & Platt’s dividend was last raised in 2007, which ended the company’s 37-year streak of dividend increases. The company hasn’t been able to even cover its dividend payments by earnings for both 2007 and 2008 fiscal years.
Johnson Controls provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. The Company operates in three businesses: building efficiency, automotive experience and power solutions. The company last raised its dividend in 2007, ending its 33-year streak of consistent dividend raises. Even though Johnson Controls only yields 2.50%, which could hardly be justified as “high yield stock” per se, it has not been able to adequately cover its distributions from its earnings since Q4 2008.
This being said, due to the company’s diversification in location, products and clientele it should be able to withstand the current crisis in the automotive industry. The price of future growth could come at the expense of a dividend cut.
Just because companies have not been able to cover their dividends over the past few quarters doesn’t mean they would necessarily be cut; a rebound in corporate profits could push down payout ratios to more reasonable levels. The lack of dividend increases for more than one year however typically indicates that management does not see an improvement in the company financials over the next two years. Unless dividends are raised by the end of 2009 for the four companies mentioned above, they would certainly be dropped out of the Dividend Aristocrats indexes.
Full Disclosure: None
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Friday, June 26, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.10% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.
The company has managed to deliver a 10.90% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $3.05-$3.10 for 2009 and $3.25-$3.30 by 2010. This would be a nice increase from the 2008 earnings per share of $2.49. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time.
Some analysts believe that Coca Cola could follow arch rival Pepsi Co’s moves to acquire its own bottlers in an effort to gain more control over the production and distribution of its beverages in key markets. Coke holds a 35% interest in its largest manufacturer and distributor of Coca Cola products, Coca-Cola Enterprises In. (CCE). Coca-Cola Enterprises Inc. accounts for about 40% of Coke’s concentrate sales and 16% of the company’s worldwide volume, which makes it a likely target of acquisition, should Coca Cola decide to follow Pepsi Co’s strategy of buying back its bottling operations.
The Return on Equity has been in a decline after hitting a high in 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 10.10% annually since 1999, which is slightly lower than the growth in EPS. The company last raised its dividend by 8% in February 2009, for the 47th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1969, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% for the majority of 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 Coca Cola is trading at 20 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.5 and yields 3.40%. Check my analysis of Pepsi Co (PEP)
I believe that The Coca Cola Company is not as attractively valued at the moment as Pepsi Co. I would consider adding to my position there if it can cover its dividends at least two times by its earnings by the end of the year, and if the P/E ratio doesn’t increase above 20.
Full Disclosure: Long KO and PEP
Friday, June 19, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 5.40% to its shareholders. The stock has lost over two thirds of its value from its peak in 2000. The stock performance resembles the continued slide in Pfizer (PFE) stock right before the dividend cut in January 2009.
The company has managed to deliver an unimpressive 2.10% average annual increase in its EPS between 1999 and 2007. Earnings per share were a negative $1.89 due to several factors. One of the factors was a $4.46/share net impact associated with the acquisition of Imclone in 2008 for acquired IPR&D related to this acquisition. Another major item that affected earnings per share was a $1.20/share charge related to federal and state investigations regarding the drug Zyprexa. If it weren’t for these adjustments in earnings, adjusted EPS would have been $4.02, versus $3.54 in 2007. Analysts are expecting an increase in 2009 earnings per share to $4.20 and $4.50 by 2010. This is a rather steep increase from the range in which the stock’s earnings remained between 1999 and 2007. The most important factor for Elli Lilly and Co is their pipeline. The company’s future success depends upon its ability to discover and develop innovative new medicines that help people live longer, healthier, and more active lives.
The Return on Equity has been in a steep decline, falling from 54% in 1999 to 24% in 2007. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 8.20% annually since 1999, which is much higher than the growth in EPS.
An 8 % growth in dividends translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1974, Eli Lilly Company has actually managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% since 2002. 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 Eli Lilly and Co is trading at 8.20 times 2009 earnings and yields 5.70%. In comparison Pfizer (PFE) trades at a P/E multiple of 12.5 and yields 4.30%, Merck (MRK) trades at a P/E multiple of 10 and yields 5.50%, while Novartis (NVS) trades at a P/E multiple 11.60 while yielding 4.30%.
Full Disclosure: None
Friday, June 5, 2009
From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 5.90% to its shareholders. While the stock has largely remained flat for the majority of the past decade (except for the breakout in the stock price in 2007) most of the returns came from reinvested dividends.
At the same time company has managed to deliver an impressive 10.70% average annual increase in its EPS since 1999.
The ROE has consistently remained high, ranging between 57% and 475% over the past decade.
Annual dividends have increased by an average of 11.40% annually since 1999, which is slightly higher than the growth in EPS.
An 11 % growth in dividends translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1977, Colgate Palmolive has actually managed to double its dividend payment every eight years on average. Just a few weeks ago Colgate Palmolive boosted its dividend by 10% for the 46th year in a row. The dividend is very well covered at the moment.
The dividend payout has ranged between a high of 51% in 2006 and a low of 33% in 2002. One positive fact is that the payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Despite the low dividend payout ratio and low P/E ratio, I require a dividend yield of at least 3% in order to initiate a position in Colgate Palmolive. Currently the yield is at 2.80%, and price earnings ratio is 17.
In comparison Procter & Gamble (PG) trades at a P/E multiple of 12 and yields 3.40%, Kimberly-Clark (KMB) trades at a P/E multiple of 13 and yields 4.70%, while Clorox (CLX) trades at a P/E multiple 14 while yielding 3.60%.
I would consider initiating a position in Colgate Palmolive on dips below $58.66.
Full Disclosure: Long PG, KMB and CLX
Friday, May 8, 2009
At the same time company has managed to deliver an impressive 25.40% average annual increase in its EPS since 1999. The forecasts for the foreseeable future are for a 40% -50% contraction in the EPS in 2009 followed by an increase in EPS to a $6 to $6.50 range in 2010. The sheer scale of the company gives it economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US.
The ROE has consistently increased from less than 13% in 1999 to over 38% in 2008.
Annual dividends have increased by an average of 7% annually since 1999, which is much lower than the growth in EPS. Currently, the number of shares is lower than the number of shares at the time of the merger between Exxon and Mobil. The tremendous increase in commodities prices over the past decade has greatly contributed to the strength in earnings per share. A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1963, XOM has actually managed to double its dividend payment every eleven years on average. Just a few days ago Exxon boosted its dividend by 5% for the 27th year in a row. The dividend is very well covered at the moment.
The dividend payout has declined from a high of 74% in 1999 to a low of 18% by 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. The company has returned money to shareholders exclusively through share buybacks, which are typically not as consistent as increases in dividends.
Despite the low dividend payout ratio and low P/E ratio, I would need a dividend yield of at least 3% to initiate a position in XOM. I would appreciate it greatly if the company increases its payout of dividends over time at the expense of reducing its massive share buybacks. XOM has the potential to achieve an above average dividend growth over the next decade if oil prices increase over the next few year.
In comparison Chevron Corporation (CVX) trades at a P/E multiple of 5.60 and yields 4.00%, while British Petroleum (BP) trades at a P/E multiple 5 while yielding 8.40%.
I would consider initiating a position in Exxon Mobil on dips below $56.
Full Disclosure: None
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Friday, May 1, 2009
Chevron Corporation operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has been consistently increasing its dividends for 21 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered an annual average total return of 9.40% to its shareholders.
At the same time company has managed to deliver an impressive 25% average annual increase in its EPS since 1999. 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 could lead to lower earnings per share in 2009 to $4.70/share according to some analysts. After that expectations are for a recovery in earnings to at least $7/share.
Any analysis of earnings trends for an oil and gas producer such as Chevron would definitely depend of 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 2009 and 2010.
The ROE has consistently remained above 20% since 2003 after earlier volatility in this indicator in the early 2000s.
Annual dividends have increased by an average of 8.30% annually since 1999, which is lower than the growth in EPS. On the other hand however Chevron has been rewarding stockholders with share buybacks as well.
An 8 % growth in dividends translates into the dividend payment doubling almost every nine years. Since 1988 Chevron Corporation has actually managed to double its dividend payment almost every ten years on average.
The dividend payout has largely remained above 50% after 2003. Before that it did shoot up above 50% in 1999, 2000 and 2002. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Chevron Corporation is trading at a P/E of 5.60, yields 4.00% and has an adequately covered dividend payment. The forward P/E for 2009 earnings is close to 14. In comparison Exxon Mobil (XOM) trades at a P/E multiple of 8 and yields 2.40%, while British Petroleum (BP) trades at a P/E multiple 5 while yielding 8.40%.
I find Chevron attractively valued at current levels given its stable dividend growth history. If you are looking to add exposure to the energy sector for your dividend portfolio then CVX could just be the right stock for you.
Full Disclosure: Long CVX and XOM
Wednesday, April 29, 2009
Dividend growth stocks typically leave themselves some wiggle room in order to lessen the probability of a dividend cut due to earnings volatility. That’s why normal recessions don’t stop them from increasing distributions. They do pay out lower yields, but the dividend payments are stable, growing and you know that the cash, which the company generates, is also reinvested into the business. The balanced approach of rewarding shareholders while also growing the business is very appealing to income investors who are looking for an inflation proof form of dividend income. Investors who selectively purchase from the dividend aristocrats, dividend champions or dividend achievers lists are true visionaries who do not chase high current yield but look for stable, wide moat businesses which could generate enough earnings in order to support long term earnings and dividend growth in addition to expansion of the business. Nobody ever bought Wal-Mart (WMT) for its yield – yet it has been one of the best performing dividend growth stocks over the past 3 decades.
High Yield Canadian Royalty Trusts on the other hand pay all of their cashflows out as dividends. They grow by selling more units and diluting your stake. There is also some uncertainty about the tax structure of the income trusts after 2011. Currently there are imposed limits on the amount of units Canroys could sell in order to maintain their current status by 2011.
Many investors believe that CanRoys are the only solution that generates enough income for them to supplement Social Security. Actually you shouldn’t spend more than 4% of your portfolio every year. If you do, you are risking spending it all before you die, which is not a good solution for most retirees.
It’s great to receive a 12% yield on cost, but you have to ask yourself how sustainable is that payment? What if the dividend is cut by 50%? Then you are only making a 6% yield on cost. If you are a retiree who is living off their portfolio, spending up to 4% of your portfolio would leave some unused balances to be reinvested and provide some buffer in bad years. If you need an income trust yielding 20% in order to retire, then you don’t have enough money to stop working.
Dividend Growth investors tend to purchase the aristocrats and the achievers primarily for their smoothly growing dividend payments. Stock prices are volatile enough to stomach, thus a dependable and a growing stream of dividends is providing a safety cushion even during the worst bear markets over the past 70 years. If you also have volatility in dividends, then retirees can’t safely live off their investments.
An income investor should not concentrate only in the sectors, which are traditionally the best yielding ones. For example dividend investors have traditionally bought utilities and financials for their stable yields. The 2007-2009 financial crisis has pretty much left financials out of the income investor’s radar screen.
Canadian Income Trusts were very popular among income investors up until 2006 when Canada decided to gradually phase out the Income trust structure by 2011. Since then trusts have cut dividends across the board as their stock prices have collapsed.
Pengrowth Energy Trust (PGH), which engages in the acquisition, ownership, and operation of working interests and royalty interests in oil and natural gas properties in Canada, currently yields 15.80%. The current monthly distribution of $0.081/share is 63% lower than last year’s payment.
Penn West Energy Trust (PWE), which engages in acquiring, developing, exploiting, and holding interests in petroleum and natural gas properties and assets, yields 21% at the moment. The most recent monthly distribution of $0.187/share is 44% lower than last year’s payment.
Advantage Energy Trust (AAV), which operates as an oil and natural gas exploration and development company, has discontinued distributions according to its most recent March 20 press release.
Harvest Energy Trust (H T E), which engages in the exploitation and development of petroleum and natural gas properties in western Canada, has reduced its monthly distributions by 87% over the past year to $0.039/unit. The trust currently yields 11.50%.
The lesson to learn is not to put all your investments in one basket, such as one sector for example.
Remember the story of the tortoise and the hare – the slow and steady wins over time, not the hit or miss approach.
There are many dividend aristocrats whose dividends are safe and would be growing over the next several years. A sample list of dividend aristocrats, which have been growing payments for over 25 years include:
Mcdonald’s (MCD), which franchises and operates McDonald’s restaurants in the food service industry worldwide, has been a consistent dividend grower for 32 consecutive years, currently yielding 3.50%. (analysis)
Pepsi Co (PEP), which manufactures and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide, has rewarded shareholders with dividend increases for 36 consecutive years. The stock currently yields 3.30% ( analysis)
Johnson & Johnson (JNJ), which engages in the research and development, manufacture, and sale of various products in the health care field, has increased dividends for 46 consecutive years. The stock currently yields 3.60%. (analysis)
Full Disclosure: Long JNJ, PEP, MCD and WMT
This article was included in the Carnival of Personal Finance: Birthdays Edition Weakonomi¢s
Friday, April 24, 2009
The companyis a component of the S&P 500 and is a dividend aristocrat, which has been consistently increasing its dividends for 37 consecutive years. Most recently Abbott raised its quarterly dividend payment by 11% to $0.40/share.
At the same time company has managed to deliver an impressive 7.60% average annual increase in its EPS since 1999. Analysts are estimating an increase in EPS to $3.65 in 2009 and $4.10 by 2010.
The ROE has largely remained between 12% and 28% after falling from its 1999 highs over 34%.
Annual dividends have increased by an average of 8.80% annually since 1999, which is higher than the growth in EPS. A 9 % growth in dividends translates into the dividend payment doubling almost every eight years on average. Since 1986 Abbott Laboratories has actually managed to double its dividend payment almost every six years on average.
The dividend payout ratio has largely remained above 50% over the past decade, with spikes in 2001 and 2006 caused by lower earnings. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Abbott Laboratories is trading at a P/E of 14, yields 3.60% and has an adequately covered dividend payment. In comparison Bristol Myers Squibb (BMY) trades at a P/E multiple of 8 and yields 6.10%, while Johnson and Johnson (JNJ) trades at a P/E multiple 11 while yielding 3.50%.
I like the strong product pipeline of the company, as well as the potential for new launches. There could be some generic competition for some of Abbott’s products but overall the forecast for future revenue increases is quite rosy. The recent acquisition of Advanced Medical Optics exposes the company in the rapidly growing market for LASIK and Cataract procedures. I am considering initiating a position in Abbott on dips.
Full Disclosure: None
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