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

Friday, August 1, 2014

Hershey (HSY) Dividend Stock Analysis

The Hershey Company (HSY), together with its subsidiaries, manufactures, markets, distributes, and sells chocolate and sugar confectionery products, pantry items, and gum and mint refreshment products. The company has paid dividends since 1930 and has managed to increase them for 5 years in a row. Prior to the dividend freeze in 2009, the company was a dividend champion which had managed to raise dividends for 34 years in a row.

The company’s latest dividend increase was announced in July 2014 when the Board of Directors approved a 10.30% increase in the quarterly dividend to 53.50 cents /share. The company’s peer group includes Mondelez International (MDLZ), Nestle (NSRGY) and Mars. Hershey is one of the five world class dividend companies I plan to buy during the next bear market.

Over the past decade this dividend growth stock has delivered an annualized total return of 10.70% to its shareholders.

Please check the rest of the article on Seeking Alpha.



Full Disclosure: Long NSRGY and MDLZ and a put on HSY

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Friday, July 25, 2014

Should I invest in AT&T and Verizon for high dividend income?

Most readers are probably aware that it has been getting more difficult to find decent values in the current environment. When I ran my screens for valuation, I stumbled upon AT&T (T) and Verizon (VZ), which are telecom behemoths in the US.

AT&T (T) has increased dividends for 30 years in a row. In the past decade, it has managed to increase dividends by 4.90%/year. Between 1984 and 2014, the company has managed to increase dividends by 4.70%/year. The stock trades at 13.70 times forward earnings and yields 5.20%.  Check my previous analysis of AT&T.

Verizon (VZ) has increased dividends for 9 years in a row. In the past decade, dividends grew by 3%/year. Between 1983 and 2014, the company has managed to increase dividends by 3.50%/year. The stock trades at 14.40 times forward earnings and yields 4.30%.

The telecom industry in the US is very competitive. Companies like AT&T (T) compete with the likes of Verizon (VZ), Sprint and T-Mobile. In the past, almost all of the profits have been made by Verizon (VZ) and AT&T, at the expense of smaller competitors. An investment in AT&T and Verizon today would presume that the status quo would remain unchallenged, and that Sprint and T-Mobile would be kept weak forever. The service that telecom companies is essentially a commodity. Telecom companies are not utilities, because there is the possibility for switching the provider. Try moving to Saint Louis, Missouri, and then switching your gas, water or electric utility – you can’t. But anywhere in the US, you can switch to another wireless carrier, plus you have other alternatives and very low customer loyalty. There is nothing to stop a customer from switching to another carrier after their contract expires.

It also takes an enormous amount of capital to maintain and continuously upgrade a network that would cover 300 million people in dispersed area such as the US. Long gone are the days when telecom only meant providing voice calls between users in different locations. Now there are technologies such as 3G, 4G, LTE that require constant costly investment to upgrade network. Barriers to entry are steep of course, since it takes tens of billions of dollars to build a network. However, the main competitive advantages available to Verizon and AT&T are those of scale.

There is a risk of technological obsolescence, since new technologies are requiring that telecom companies engage in multi-billion dollars upgrades, merely to keep up with competitors. In addition, there are new technologies which could leverage existing network infrastructure but could be directly competing with telecom companies. For example, 20 – 30 years ago, the price of a long-distance call between New York and San Francisco would have been quite expensive. Today, I can call anyone in the world using Viber or WhatsApp for free, using wi-fi from a device that is connected to the internet.

Currently both AT&T and Verizon have the advantages of scale, which allows them to spread costs of upgrading and maintaining their network over larger pools of customers. This has allowed them to earn hefty profits, and pay the high dividends to shareholders. For example, if you want to advertise your service, it is much easier to outspend your competitor in advertising by spending twice as much as them when you have three to four times as much customers. On a per customer basis however, this advertising is still going to be cheaper.

Another advantage is the fact that in the traditional telecom model, it would be very difficult for someone to set up a new wireless network. This would take tens of billions of dollars to get the network equipment on tens of thousands of cell towers across the US, plus get valuable spectrum rights. Today however, it is quite possible that competing technology platforms might end up destroying value at the traditional telecom companies. Again, I am talking about WhatsApp and Viber. In addition, we do not know if the future doesn’t hold another technological breakthrough, which could replace the cellphone the same way the your landline has become obsolete.

AT&T has recently announced that it would be acquiring DirectTV (DTV). This could help it offer bundled services to customers at a greater scale. It could also pave the way for international expansion beyond TV for AT&T. AT&T could generate synergies from deal. Plus, DIRECTV could easily double earnings within five years $6 billion from current $3 billon. The company has grown through acquisitions in the past, which is why I believe integration risk to be low.

For both AT&T and Verizon, the dividend has not had a very good coverage out of earnings. I always require that there be a margin of safety in dividends when I analyze a dividend paying company. There is a high risk that the dividend be cut sometime in the next decade, given the competitive pressures, high payout ratios, constant requirement for new capital to invest, and commoditized type of service. If you add in the competitive pressures to the high payout ratio, one could see why I have not been excited about AT&T and Verizon as dividend growth stocks. The best probable scenario that I could see for AT&T and Verizon  income shareholders is that their dividend keeps up with the rate of inflation. Even during the past 25 years, the best that AT&T and Verizon could do was grow dividends by 3% - 4%/year. As a result, I would take a pass on both stocks. However, it could be a decent holding for someone who needs high current income for the next decade, and is fine that this income lose purchasing power over time.

An investor in a high yielding company company like AT&T could reinvest their dividends and grow dividends by the 5% dividend yield and the 1-2% organic dividend growth. This means that a holder of AT&T shares worth $30K will receive approximately $1,500 in annual dividend income, which would be then used to purchase 5% more shares. In the next year, the dividend will increase by 2% and the investor will earn the higher dividend on the increased amount of shares. If you rinse and repeat this exercise for 18 years, it is highly likely that the investor will be earning $5,000 in annual dividend income from this position. This is due to the power of reinvesting high dividends into more shares of a high dividend yielding stock that has some dividend growth. If I stop reinvesting dividends however, I income will lose purchasing power to inflation. The risk is also that a high dividend yield is due to a high payout ratio. If the business faces strong headwinds, this increases risk that dividend is cut if times get rough.

However, the opportunity cost of investing in an AT&T is a company like Coca-Cola (KO) or Johnson & Johnson (JNJ), which yield around 3% today, but grow dividends at 7%/year. Of course the 7% figure is very conservative and at the low range of my projections for those companies. In 18 years, I will be earning $5000 in dividend income, if I reinvest those growing dividends. In addition, once I stop reinvesting dividends and live off them, the dividend growth will protect purchasing power of income from inflation. To top it off, the portfolio would also have much higher appreciation potential relative to the AT&T centric portfolio. The drawback is that forecasting dividend growth over an 18 year period is tough, since no one knows what the world will look like in 2032.

In the matter of full disclosure, I do have a tiny position in Verizon, as a result of my investment in Vodafone (VOD) last year, which distributed those shares after selling their Verizon Wireless stake to Verizon. I think that Verizon owning 100% of Verizon Wireless is a good thing for the company, and could end up being accretive for long-term holders. I would probably hold this, since this tiny position is spread out in several tax-deferred accounts. At least I am able to reinvest those distributions automatically. Other than that, I am not planning on adding any money to either AT&T or Verizon, since I believe there are better uses for my capital. I usually invest for the next 30 years, which is why companies that have poor growth prospects are usually at the bottom of my list for purchase.

Full Disclosure: Long VZ and VOD

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Friday, July 18, 2014

American Realty Capital Properties (ARCP) Dividend Stock Analysis

American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. Since going public in 2011, this Real Estate Investment Trust has managed to increase its monthly dividends from 7.3 cents/share to 8.3 cents/share.

However the company has expanded very quickly, which is why I believe that it is difficult to do any quantitative analysis of its financials. This is because FFO/share has had a very different composition in 2011, 2012, 2013 and 2014, due to the rapid growth in assets under this REIT umbrella. As a result, I am going to share mostly a qualitative opinion on the REIT. I purchased a position in this REIT in early 2013, after which I have not added to it. The only exception is that I have some shares in a Roth IRA, where dividends are set to reinvest automatically. I bought the stock because I viewed it as something that is similar to investing in Realty Income in the mid 1990s, before the company became an established REIT.

The rapid growth of acquisitions however makes me ask myself, "Are they doing this for the shareholders, or are they doing it for the executives?". It is good to see the scale of operations, which makes it easier to get high profile deals with major corporations. If you are Red Lobster, and you want to do lease-salebacks on 1,500 restaurant locations, you prefer to deal with one landlord that has the capacity to deal in the billions, rather than deal with hundreds of small landlords. The benefits of scale make it easier for that landlord to spread their costs over a larger pool of properties, which results in immediate gains to shareholders, if acquisitions are done properly. Acquisitions have been highly accretive to American Realty Capital Properties shareholders, which have resulted in increases in FFO/share and dividends per share.

American Realty Capital Properties currently yields approximately 7.90%. American Realty Capital Properties yields more than Realty Income (O) or National Retail Properties, Inc. (NNN) or W. P. Carey Inc. (WPC). These other REITs yield 4.90%, 5.50% and 4.30% respectively.  This is because investors view it as a higher risk play than the other triple-net REITs. Investors probably see a higher chance of a dividend cut from American Realty Capital Properties than say Realty Income (O) or National Retail Properties, Inc. (NNN) or W. P. Carey Inc. (WPC). On a side note, each one of those other REITs has managed to boost dividends for over a decade, placing them in the ranks of the dividend achievers list I regularly screen for ideas. ARCP on the other hand has only increased dividends for four years in a row, and therefore does not have a long track record.

The investment in American Realty Capital Properties is mostly an investment in management. I believe that the management is highly competent, and is working for the benefit of shareholders. Management has an extensive track record in dealing with real estate, as well as integrating companies that have been acquired. However, there is always the risk that management develops an ego, which could be disastrous for shareholders. It is one thing to get from $100 million in assets to 15 billion in assets. It is quite another thing to actually manage a portfolio of assets successfully and generate value for shareholders that way.

However, if there are issues in integrating new companies acquired, this could result in losses for shareholders. If you have high degrees in leverage, and no room for error, a botched acquisition could turn out to be very costly.

The other risk is that management is trying to get to be the largest triple-net REIT because they have huge egos, and because a huge size of assets under management could result in larger compensation for executives. For example, if you manage a REIT with $100 million in assets, you can probably command a salary in the hundreds of thousands of dollars per year. However, if you are now managing a REIT with $10 billion in assets, your compensation could be in the tens of millions of dollars, and having a smaller percentage impact on the organization than the lower compensation at $100 million in assets.

The risk with empire building and executive ego is that management ends up purchasing lower quality assets, accepts lower rates of return and gets in bidding wars that could result in unprofitable locations for the REIT portfolio. If you are an executive, you get much more respect if you manage a $10 billion dollar REIT than the executive that manages a $100 million dollar REIT.

I am not very happy about the proposed management compensation plan from a few months ago, which entitled the CEO to quite a handsome compensation package, provided that the shares return at least 7%/year. Given the fact that current yield is at 8%, this meant that the goal of management was to extract money from the business for their own gain, rather than work for the benefit of shareholders.

When I bought the shares in 2013, I believed that the company can develop to be the next Realty Income. It has so far developed a big scale, has managed to do a lot of deals in the process, and is very undervalued relative to competitors Realty Income (O), W. P. Carey Inc. (WPC), National Retail Properties, Inc. (NNN). However, it is yet to be seen if assets were integrated successfully in order for synergies to be generated. I want to see some clean financials, which would make it easier to do a quantitative analysis that would allow me to compare performance between quarters and years. I am also curious to see where management takes the REIT, after achieving such big scale so rapidly. While I would keep holding on to my shares for as long as the dividend is maintained, I am not sure about adding fresh money there. Of course, if shareholder fears are overblown, this REIT could deliver excellent performance going forward, given the fact that shares have been so beaten down.

Full Disclosure: Long ARCP and O

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Friday, July 11, 2014

Deere & Co (DE) Dividend Stock Analysis

Deere & Company (DE), together with its subsidiaries, manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. The company is a dividend achiever that has paid dividends since 1937 and managed to increase them for 11 years in a row. The company’s peer group includes CNH Industrial (CNHI), Caterpillar (CAT) and AGCO Corp (AGCO)

The company’s latest dividend increase was announced in May 2014 when the Board of Directors approved a 17.60% increase in the quarterly dividend to 60 cents /share. "Deere is well-positioned to benefit long-term from global trends that hold great promise for the company's customers and investors," said Samuel R. Allen, chairman and chief executive officer. "Our dividend increase reflects our confidence in Deere & Company's ability to generate strong cash flow throughout the cycle. We remain committed to our plans for profitable growth and for returning cash to shareholders."

Over the past decade this dividend growth stock has delivered an annualized total return of 12.10% to its shareholders.


The company has managed to deliver a 21.30% average increase in annual EPS over the past decade. Deere is expected to earn $8.55 per share in 2014 and $7.73 per share in 2015. In comparison, the company earned $9.09/share in 2013.


Deere also has an impressive record of consistent share repurchases. Between 2004 and 2014, the number of shares declined from 506 million to 379 million.

I have been biased against Deere, because it looks like a cyclical company, which managed to get lucky and ride a profitable trend over the past decade. As most of you are aware of, the past 10 – 15 years have been characterized by the rapid growth in emerging economies, which has lifted the boats of a lot of other companies. I am afraid that Deere might keep capitalizing on the those emerging markets, but at some point in time, it would have to go back to being a cyclical company with cyclical earnings. This could be a decade down the road, or could occur within the next few years. As a dividend growth investor, my goal is not only to find a cheap stock with a good dividend, but also a company that can grow earnings over time. If earnings per share are not increased over the next decade, most of dividend growth will come from increases in the dividend payout ratio, which is seldom a good sign for dividend income stability. I simply do not view Deere as the type of set it and forget it dividend growth stock that I can pass on to my heirs. That being said, it could still be a profitable investment for someone who buys today, given the low valuation, even if earnings do not increase by much. That would be true, as long as earnings per share do not decrease.

Long-term prospects could be brighter than I imagine however. An increasing world population should continue to exert pressure on food supplies, which in effect could raise the demand for new efficient farm machinery. However, if commodity pricing pressures farmer’s profits, demand for equipment could soften.

New products could be another boost for farming equipment, as is a cycle to upgrade old equipment over time, in an effort to boost productivity. The company has strong position in North America, with an established brand name and a 50% market share, which should provide it with a good scale of operations.
I also like the fact that management seems very shareholder friendly, as evidenced by their commitment to dividend growth over the past 20 years, the consistent share buybacks, and the fact that operations are run pretty well. For example, the finance division has pretty low loan losses, which is encouraging and shows that proper credit evaluation is being done before lending money to farmers.

I also like the fact that the largest shareholders is Cascade Investments LLC, which is the holding company that holds the investment portfolio of Bill Gates. I have been reading some about Bill Gates, and have found that his holding company is managed by Michael Larson, who is a very successful value investor.

The annual dividend payment has increased by 16.30% per year over the past decade, which is lower than the growth in EPS.

A 16% growth in distributions translates into the dividend payment doubling every seven years on average. If we check the dividend history, going as far back as 1989, we could see that Deere has actually managed to double dividends every eight years on average. What makes this analysis tricky however the fact that the company cut dividends in 1982 is, and the annual dividend didn’t exceed the 1982 highs till 1990. The annual dividend from 1982 didn’t really double until 2005.

Over the past decade, the dividend payout ratio has mostly remained low below 25%, with the exception of 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.

Deere has managed to increase return on equity from 30.60% in 2004 to 41.30% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock looks cheap, as it trades at a forward P/E of 10.40 and a current yield of 2.60%. I believe that the business is more exposed to economic cycles than the typical dividend growth stock that I usually focus on. However, when a business is cheap, it can still generate shareholder value even if there is only a small improvement. With Deere, the $8 billion share buyback could be one catalyst that could result in better returns going forward. As a result, I initiated a small position in the stock this week.

Full Disclosure: Long DE

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Friday, June 27, 2014

Occidental Petroleum (OXY) Dividend Stock Analysis

Occidental Petroleum Corporation is engaged in the acquisition, exploration, and development of oil and gas properties in the United States and internationally. The company operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing and Other. This dividend achiever has paid dividends since 1975 and has managed to increase them for 12 years in a row.

The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 12.50% increase in the quarterly dividend to 72 cents /share. The company’s peer group includes Exxon Mobil (XOM), Imperial Oil (IMO) and Hess (HES).

Over the past decade this dividend growth stock has delivered an annualized total return of 18.10% to its shareholders. This was due to the fact that the stock was really cheap a decade ago, coupled with the fact that earnings and dividends per share increased rapidly.


The company has managed to deliver a 13.50% average increase in annual EPS over the past decade. A large portion of the earnings growth occurred in 2004. The rest of the decade has been characterized by fluctuating earnings. Occidental Petroleum is expected to earn $7.15 per share in 2014 and $7.26 per share in 2015. In comparison, the company earned $7.34/share in 2013.

Occidental Petroleum has a record of consistent share repurchases. Between 2006 and 2014, the number of shares declined from 860 million to 801 million.

In early 2014, the company announced a few strategic initiatives, which will be catalysts for investor returns in the next five years or so. First, the company is selling off assets, and using the proceeds to buy back stock.

Second, the company is planning to spinoff its assets in California as a standalone company. Spinoffs have historically done really well for investors on average, because management is able to better focus on the underlying business after separation.

Third, the company is trying to focus on its remaining US assets and squeeze out mid to high single digit production growth. If oil and gas prices do not fall significantly from present levels, this could translate into much higher earnings per share.

Last, but not least, the company has put dividend growth as its second most important priority. The first priority is obviously maintaining production. Next priorities include growth, share repurchases and acquisitions.

The annual dividend payment has increased by 17.30% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade.

A 17% growth in distributions translates into the dividend payment doubling every four years on average. If we check the dividend history, going as far back as 2005, we could see that Occidental Petroleum has actually managed to double dividends every four and a half years on average. Prior to 2002 however, the dividend was unchanged for 12 years in a row at 12.50 cents/quarter, after a very steep dividend cut in early 1991. Between 1981 and 1990, the quarterly dividend was unchanged at 31.25 cents/share. All historical data has been adjusted for stock splits. The company had also suspended dividends in 1972 – 1974. Based on the spotty dividend growth history, I am not so sure whether Occidental Petroleum has ingrained in it a culture of consistent dividend increases. If not, the past decade of consistent increases could be mostly a byproduct of the rising oil and gas prices, rather than a shift in the dividend culture.

Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. 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 return on equity has been on a steep decline over the past decade, which to me is a warning sign. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 13.40 and a current yield of 3%. I hesitate on initiating a position in Occidental Petroleum, because I already have ownership in ConocoPhillips, Exxon Mobil, Chevron, British Petroleum and Royal Dutch Shell. That being said, the company could be a good investment for those who like to follow spin-offs, and possibly other investing strategies.

Full Disclosure: Long XOM, COP, CVX, BP, RDS/B

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Friday, June 20, 2014

What Attracted Warren Buffett to IBM?

Back in 2011, Warren Buffett invested billions of dollars in IBM. This move by the Oracle of Omaha surprised many, since he is widely known to avoid technology stocks. Of course, these people do not know that Buffett made millions investing in a tech start-up in the 1950s. Currently, his company Berkshire Hathaway (BRK.B) holds a 6.30% stake in IBM.

Buffett and his partner Charlie Munger acquire businesses that are (1) Easy to understand (2) Have durable moat (3) Run by able and honest management and (4) Fairly priced.

The business of IBM is relatively simple to understand. It provides IT support services to companies on a global scale. Over half of revenues are recurring. The company is divided in five segments: Global Technology Services, Global Business Services, Systems and Technology, Software and Global Financing. International operations generate almost two-thirds of revenues.

Per Buffett’s comments, it is tough for companies to change auditors, lawyers and IT consulting firms like IBM. Once you have established the relationship, you will keep using their services for many years.

The business is managed by honest and able managers, who are setting up goals, and executing their strategy accordingly. One of the reasons why Buffett invested in IBM in the first place was the fact that management had outlined their plan to earn $20/share by 2015. In that plan, it is evident how exactly they would achieve that. In addition, the management was able to transform IBM from a company focused on hardware, into a firm that focuses on software, services like consulting and IT solutions.

The thing that appeals to me is the fact that management returns a lot of excess cash to shareholders in the form of dividends and share buybacks. IBM is a dividend achiever which has rewarded long term investors with an increase for 19 years in a row. In addition, IBM has managed to consistently buy back stock, through thick and thin, unlike other corporate boards. The company has managed to retire a significant chunk of outstanding shares over the past 20 years, and has managed to accomplish that at pretty attractive valuations as well.

The main concern investors have is about flat or declining total sales. This could be an issue, since you can only cut costs and streamline so much out of your bottom line. Of course, if the company can manage to get rid of businesses that generate revenues but do not have solid margins like hardware, and focuses more on software and services, which have much higher margins, this could translate into a win for the bottom line. While revenue growth is important, it is equally important to actually improve the profits, which is where dividends are paid from. Mindless acquisitions or chasing revenue is usually not a good strategy, although at some point in time revenues at IBM do need to start picking up.

The stock is trading at a pretty low P/E ratio of 10.20 forward earnings, which is the lowest in over a decade. In addition, IBM is spotting its highest yield in years at 2.40%. I own a little of the stock, and plan on adding to my position in my Roth IRA in 2014. Obviously, many investors have low expectations for the company, which explains the depressed stock price. Hence, this could provide some nice returns to contrarian investors. However, I also like Accenture (ACN), since it has much better cash flow generation capabilities and revenue growth that IBM lacks. Accenture is selling at 18.30 times forward earnings and yields 2.20%.

Full Disclosure: Long IBM and ACN

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Friday, June 13, 2014

Realty Income - A dependable dividend achiever for current income

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. This dividend achiever pays monthly dividends to shareholders, and has managed to increase them each year since going public in 1994. Many investors purchase REITs for high current income, stability of revenue streams, and diversification opportunities.

In an earlier article, I discussed the items I look for in Real Estate Investment trusts. I will cover those items in the stock analysis below.

The company has managed to increase its Funds from Operations (FFO)/share from $1.47 in 2003 to $2.41 by 2013. At the same time, dividends per share increased from $1.18 in 2003 to $2.15 by 2013. The FFO payout ratio has increased from 80% to 89% over the same time period, which is not something I would like to see. However, this ratio has been going down since hitting a high of 94% in 2010.  As you can see, there was a big jump in FFO/share and dividends per share in 2013, as a result of the $3.2 billion acquisition of American Realty Capital Trust. In addition, the company also invested $1.5 billion in 459 properties throughout the year.

Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
FFO
2.41
2.02
1.98
1.83
1.84
1.83
1.89
1.73
   1.62
  1.53
1.47
DPS
 2.15
 1.77
1.74
1.72
1.71
1.66
1.56
1.44
1.35
  1.24
1.18
DPR
89%
88%
88%
94%
93%
91%
83%
83%
83%
81%
80%
Occup
98.2%
97.2%
96.7%
96.6%
96.8%
97.0%
97.9%
98.7%
98.5%
97.9%
98.1%

The other metric I like to look at with REITs is occupancy ratios. As Realty Income has been expanding over the past decade, it is important to see that this has not resulted in additions of properties to mask a deterioration in existing locations. The occupancy levels dropped during the financial crisis, but then recovered and are close to where they were last year.

The Realty Income of today is much larger and more diversified that the Realty Income of 2003. The top ten tenants account for less than 45% of revenues:


The record low interest rates have been a boon for Real Estate Investment trusts. Investors have fled the sector, attracted by high yields relative to US Treasuries and CD’s. Realty Income has been able to sell $750 million worth of ten-year notes in 2013 at 4.65%/year, which is pretty low. However, this influx of capital has led to many companies competing for assets, which pushes the initial yields on those properties lower. As a result, when debts need to be refinanced in a decade from now, and interest rates increase substantially, it is quite possible that those result in lower profits down the road on those issues. This could be of particular concern since rents usually increase at slightly less than the rate of inflation. Another potential concern I see is the increased deal making in the sector, in an effort to build the largest triple-net company out there. With Realty Income, this is not an issue, although it is a risk I am watching carefully.

Of course, the risks that I am presenting are just something to watch out for. I truly believe that there is much more growth ahead for Realty Income. This would be fueled by property acquisitions that provide incremental free cash flow to grow dividends into the future. Historically, the company has done a good job in evaluating tenants, and filing in occupancies by getting new tenants or selling those properties.

The company has managed to earn a cap rate of 7.10% on its 2013 property acquisitions and a cap rate of 7.20% on its 2012 property acquisitions. This compares well relative to the interest rates on notes sold in 2013, and the average interest rate on its $3.20 billion in notes payable of 4.90%. In addition, it compares well to the 5.30% interest on its $755 million in mortgages payable. The company finds the cash necessary to grow by issuing common stock, preferred stock and debt to investors. Therefore, it is essential that there is a positive spread between cap rates on property investments and cost of capital.

I really like the stability of the long-term triple-net type leases that Realty Income uses to rent out its properties. The average lease term for the 3896 properties at the end of 2013 was 10.80 years, which should translate into stability in cashflows that are used to pay the monthly dividends to shareholders. Those leases provide for rent escalations over time, and also make the tenants pay for maintenance expenses, taxes, insurance, utilities.

I do not foresee dividends growing faster than 4%/year, unless of course another big accretive acquisition is made. This would be fueled by acquisitions as well as annual increases in rents from the properties that the company owns throughout the US.

Overall, I like Realty Income, and intend to hold my position for as long as possible. However, I would like to receive a higher starter yield on an investment in this REIT. Currently, the REIT yields 5.10%, although the yield was as high as 6% in December 2013. Given the low growth expectations, paying a lower entry price might be helpful in generating good returns from Realty Income. This is particularly true given the fact that W.P. Carey (WPC) and American Realty Capital Properties (ARCP) yield 5.50% and 8% respectively.

Full Disclosure: Long O and ARCP

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
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Friday, June 6, 2014

Baxter International (BAX) Dividend Stock Analysis

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend paying company has paid dividends since 1934 and has managed to increase them for 8 years in a row. Up to 1998, the company was a dividend aristocrat that had increased dividends for 42 years in a row. However, after a few spin-offs, the dividend was frozen until 2006.

The company’s latest dividend increase was announced in May 2014 when the Board of Directors approved a 6% increase in the quarterly dividend to 52 cents /share. The company’s peer group includes Medtronic (MDT), Becton Dickinson (BDX) and C.R. Bard (BCR).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.30% to its shareholders.


The company has managed to deliver a 9.20% average increase in annual EPS over the past decade. Baxter International is expected to earn $5.13 per share in 2014 and $5.44 per share in 2015. In comparison, the company earned $3.66/share in 2013.

Back in March 2014 the company announced that it was in the process of splitting into two parts. One will be focusing on developing and marketing biopharmaceuticals, while the other will be focusing on medical devices. The biopharmaceuticals division will be spun-off to existing Baxter shareholders some time in 2015. There are a few benefits to the split, including ability for management to focus on the distinct businesses of biopharmaceuticals and medical products, which will bring new and existing product offerings and drive innovation across the franchises.

Baxter’s BioScience and Medical Products businesses enjoy leading positions based on a number of competitive advantages. The BioScience business benefits from continued innovation in its products and therapies, consistency of its supply of products, and strong customer relationships. The Medical Products business benefits from the breadth and depth of its product offering, as well as strong relationships with customers and patients, including hospitals and clinics, customer purchasing groups, pharmaceutical and biotechnology companies, and the many patients who self-administer the home-based therapies supplied by Baxter.

Baxter’s competitive advantages include its portfolio of patents, strong brands, economies of scale, and strong R&D pipeline of new products. These allow the company to maintain its competitive position, maintain pricing power, and prevent rivals from gaining market share at the expense of Baxter.

Growth could come from new product innovation, strategic acquisitions, growth in emerging markets, and expansion in manufacturing capacity. Currently, approximately 20% of sales are derived from emerging markets. This is expected to reach 30% of sales by 2017. In 2013, the company acquired Gambro AB, who is innovator in in-center hemodialysis and acute renal care products. This would improve Baxter's economies of scale and product breadth.

The annual dividend payment has increased by 12.40% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. Going forward, I expect dividends to grow by less than 9%/year.

A 12% growth in distributions translates into the dividend payment doubling every six years on average. If we check the dividend history, going as far back as 1983, we could see that Baxter International has actually managed to double dividends every eight years on average.

Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. 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 return on equity has increased from 10.80% in 2004 to 26.10% in 2013. The values in 2004 were unusually depressed due to one-time accounting charges. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 14.50 and yields 2.80%. Given the scarcity of quality dividend payers available at attractive values today, I am considering initiating a position in the company, subject to availability of funds.

Full Disclosure: Long MDT and BDX

Relevant Articles:

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S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
How to invest when the market is at all time highs?
Should I buy dividend stocks now, or accumulate cash waiting for lower prices?

Friday, May 23, 2014

ConocoPhillips (COP) Dividend Stock Analysis 2014

ConocoPhillips (COP) explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has paid dividends since 1934 and has managed to increase them for 13 years in a row.

The company’s latest dividend increase was announced in July 2013 when the Board of Directors approved a 4.50% increase in the quarterly dividend to 69 cents /share. The company’s peer group includes Exxon-Mobil (XOM), British Petroleum (BP) and Royal Dutch Shell (RDS/B).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its shareholders.


The company has managed to deliver a 6.20% average increase in annual EPS over the past decade. ConocoPhillips is expected to earn $6.28 per share in 2014 and $6.17 per share in 2015. In comparison, the company earned $6.43/share in 2013.

ConocoPhillips does not have a record of consistent share repurchases. Between 2007 and 2014, the number of shares decreased from 1.646 billion to 1.24 billion.

ConocoPhillips is forecasting growth in production in the range of 3% - 5%/year through 2017. This would be driven by the company’s 16 billion annual capital expenditures plan. The goal is to reach a reserve replacement ratio of 100%. The growth areas include Australia’s LNG project, Lower 48 growth in the US, North Sea, Malaysia and Canadian Oil Sands operations. The nature of the oil business is such, that for every barrel of oil pumped out of the ground, your reserves decrease by one barrel. With advancements in technology however, it is possible to obtain more oil from existing and new wells than before. In addition, oil and gas companies spend large amounts of money on seismic activity studies, in order to increase their chances of striking oil.

Over the past four years, the company has sold off a lot of assets, raising billions of dollars in the process. Examples include selling off its stake in Lukoil, and selling off its stake in the Kashagan project in Kazakhstan. In addition, the company spun-off its downstream business Phillips 66 (PSX) in 2012 to shareholders.

The reason why ConocoPhillips appeals to me is the fact that most of its oil and gas production is derived from stable places such as US, Canada and Europe. Places in Asia Pacific, Middle East and Africa accounted for just 19% of oil and 12% of NGL and 21% for Natural Gas. Given the rise in nationalist governments that are not friendly to foreign oil companies, the location of majority of producing wells in stable countries makes it much less likely that those would be nationalized. In addition, management is focused on growth through high-margin projects, and does not focus on growth for growth sake. It is good news for me as a shareholder to have a management team which focuses on maximizing owner returns by pursuing higher margin projects, and disposing of lower margin ones..

The annual dividend payment has increased by 15.70% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. Going forward, I expect dividends to grow by 6% - 7%/year

A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. This dividend amount is adjusted for the spin-off of Phillips 66 in 2012.  If we check the dividend history, going as far back as 1989, we could see that ConocoPhillips has actually managed to double dividends every eight years on average.

The dividend payout ratio has increased from 12% in 2004 to under 42% by 2013. 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 return on equity has decreased slightly from 21% in 2004 to 18% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 12.40 and yields 3.50%. I would consider adding to my position on dips, and subject to availability of funds.

Full Disclosure: Long COP, XOM, BP, RDS/B

Relevant Articles:

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Friday, May 16, 2014

Genuine Parts Company (GPC) Dividend Stock Analysis

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, the Dominican Republic, Mexico, and Canada. This dividend king has paid dividends since 1948 and has managed to increase them for 58 years in a row.

The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 57.50 cents /share. The company’s peer group includes W.W. Grainger (GWW), Autozone (AZO) and Advanced Auto Parts (AAP).

Over the past decade this dividend growth stock has delivered an annualized total return of 14% to its shareholders.


The company has managed to deliver an 8% average increase in annual EPS over the past decade. Genuine Parts Company is expected to earn $4.60 per share in 2014 and $4.93 per share in 2015. In comparison, the company earned $4.40/share in 2013.

Genuine Parts Company does have a record of consistent share repurchases. Between 2004 and 2014, the number of shares decreased from 176 million to 156 million.

Future growth could be driven by acquisitions, expansions in same-store sales and somewhat by adding new locations. The company’s near term prospects should be aided by sales growth, triggered by the expansion in the US economy. It should also be able to leverage its distribution networks to increase sales in acquired companies. Margins should also be higher on cost cutting and higher volumes. Longer term the company could benefit from increased complexity of vehicles and the rising number of automobiles. The company seems to be very conservative in its finances and has a low level of debt coupled with strong cash flow from operations to fund future dividend increases. The industry will force a lot of smaller competitors out, which could result in more opportunities for Genuine Parts Company. Long-term growth will be driven by internal growth and acquisitions.

The annual dividend payment has increased by 6.20% per year over the past decade, which is lower than the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. If we check the dividend history, going as far back as 1983, we could see that Genuine Parts Company has actually managed to double dividends every ten years on average.

The dividend payout ratio has decreased slightly from 53% in 2004 to under 49% by 2013. 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 return on equity has been on a rise from 16.30% in 2004 to 21.60% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently, the stock is attractively valued, as it trades at a forward P/E of 19 and yields 2.70%. I would consider initiating a position on dips, and subject to availability of funds.

Full Disclosure: None

Relevant Articles:

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