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

Friday, October 31, 2014

Verizon (VZ): Another High Yield Telecom for Current Income

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. This dividend achiever has paid dividends since 1984 and increased them for 10 years in a row.

The most recent dividend increase was in September 2013, when the Board of Directors approved a 2.90% increase in the quarterly dividend to 53 cents/share.

The company’s competitors include AT&T (T), Sprint (S) and T-Mobile (TMUS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Please read the rest of the article on Seeking Alpha


Full Disclosure: Long VZ

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Friday, October 24, 2014

AT&T: A High Yield Telecom for Current Income

AT&T Inc. (T) provides telecommunications services to consumers and businesses in the United States and internationally. This dividend champion has paid dividends since 1984 and increased them for 30 years in a row. The most recent dividend increase was in December 2013, when the Board of Directors approved a 2.20% increase in the quarterly dividend to 46 cents/share.

The company’s competitors include Verizon (VZ), Sprint (S) and T-Mobile (TMUS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Read the rest of the article on Seeking Alpha

Full Disclosure: Long VZ

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Monday, October 20, 2014

United Technologies (UTX): A Diversified Dividend Powerhouse To Consider

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has paid a dividend since 1936 and increased it for 20 years in a row. Back in June 2013, when the Board of Directors approved a 10.30% increase in the quarterly dividend to 59 cents/share.

The company has managed to deliver a 10.20% average increase in annual EPS over the past decade. United Technologies is expected to earn $6.86 per share in 2014 and $7.52 per share in 2015. In comparison, the company earned $6.17/share in 2013.

United Technologies has consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 1.006 billion in 2004 to 916 million in 2014.

The annual dividend payment has increased by 14.40% per year over the past decade, which is higher than the growth in EPS. Future growth in dividends will likely match rate of increase in earnings per share, and be somewhere around 10%/year.

United Technologies has been able to generate a high return on equity, which has ranged between 19.70 in 2014 to 25.20% in 2008. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, United Technologies is attractively valued at 14.60 times forward earnings, and has a dividend yield of 2.40%. I recently added to my position in the stock, and plan on adding further this year, subject to availability of funds.


Full Disclosure: Long UTX and GE

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Friday, October 10, 2014

Visa: High Dividend Growth Stock To Consider

Visa Inc. (V), a payments technology company, operates as a retail electronic payments network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. The company went public in 2008, and has managed to pay and increase dividends ever since. I initiated a position in 2011, after witnessing the strong dividend growth, the attention of Berkshire Hathaway, and the fact that the stock was available at 20 times earnings

Currently, Visa is slightly overvalued at 20.50 times forward 2015 earnings, and has a low yield of 0.80%. If the company manages to earn $20 per share by 2020, and even if the P/E ratio compresses to 15 times by, the stock could provide very good returns to investors. Another plus is that dividend growth could result in very high yields on cost for Visa investors in 15 - 20 years. Of course, long-term growth is never certain, which is why I do not plan on adding to Visa unless I can buy it at 20 times forward earnings or less. However, I am willing to break my rules slightly, and accept 20 times forward earnings for 2015. If we get a more significant stock correction, I would be a buyer and will try to increase my position to a top 20 level ( meaning it will be in my top 20 portfolio positions by size).  


Full Disclosure: Long V

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Friday, October 3, 2014

Disney: A Wide-Moat Stock To Hold Forever

The Walt Disney Company operates as an entertainment company worldwide. The company operates in five segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive. The company is not a typical dividend growth stock, although it has paid dividends since 1957, and has never cut them. Disney is the type of company that raises dividends for a few years, then keeps them unchanged, after which it raises them again. Disney is also one of the 60 companies, which could be purchased commission-free using Loyal3, with as little as $10.

Currently, Disney is overvalued at 20.80 times forward earnings and a low yield of 1% . I really like the company, and I believe it has a wide moat. I have hesitated initiating a position in the company for the past 20 points, because of irrelevant factors such as low yield, while ignoring the company's strong competitive position. I would feel more comfortable initiating a position in the company at lower prices, which is why I am going to be monitoring it closely. While the economics and prospects for the business are amazing, I do not like to overpay for even the best businesses, nor do I want to chase share prices higher. I would be most happy to initiate a position below $84 - $85/share. I would be even more ecstatic if I could purchase shares at 15 - 16 times earnings, which is equivalent to a dip below $70/share. This is the type of company to hold forever.

Check the full article over at Seeking Alpha

Full Disclosure: None

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Friday, September 26, 2014

Chevron (CVX) Dividend Stock Analysis 2014

Chevron Corporation (CVX), through its subsidiaries, is engaged in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company operates in two segments, Upstream and Downstream. This dividend champion has paid a dividend since 1912 and increased it for 27 years in a row.

In April 2014, the Board of Directors approved a 7% increase in the quarterly dividend to $1.07/share. Chevron’s peers include Exxon Mobil (XOM), ConocoPhillips (COP) and British Petroleum (BP).

The company has managed to deliver a 12% average increase in annual EPS over the past decade. Chevron is expected to earn $10.81 per share in 2014 and $11.37 per share in 2015. In comparison, the company earned $11.09/share in 2013.

The annual dividend payment has increased by 10.50% per year over the past decade, which is lower than the growth in EPS. Future growth in dividends will likely match rate of increase in earnings per share.

Currently, Chevron is attractively valued at 11.80 times forward earnings, and has a dividend yield of 3.30%. Overall, I believe that oil companies like Chevron have the quality of assets that generate strong cash flows, and quality of a management team, coupled with a dedication to sharing the wealth with shareholders through a commitment to dividend growth and share buybacks. While dividend growth rates might fluctuate from year to year, I am firmly believing that the investor with a 20 year horizon, who patiently accumulates and reinvests dividends, will reap the rewards in the future.

Read the full article on Seeking Alpha

Full Disclosure: Long CVX, XOM and BP

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Friday, September 19, 2014

Wal-Mart (WMT): The Time To Buy Is When No One Likes A Quality Dividend Company

Wal-Mart Stores Inc. (WMT) operates retail stores through three segments: Walmart U.S., Walmart International, and Sam’s Club. This dividend champion has paid a dividend since 1974, has consistent history of share repurchases. and increased it for 41 years in a row. Wal-Mart is also one of the companies, which could be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in February 2014, when the Board of Directors approved a 2% dividend increase to 48 cents/quarter. This was the slowest dividend increase ever for Wal-Mart Stores. It is likely that management does not expect high earnings growth in the next couple of years.

Wal-Mart has delivered a 9.10% average increase in annual EPS over the past decade. It is expected to earn $5.16 per share in 2014 and $5.64 per share in 2015. In comparison, the company earned $4.85/share in 2013.

Currently, Wal-Mart is attractively valued at 14.40 times forward earnings, and has a dividend yield of 2.60%. I believe that Wal-Mart has what it takes to be successful, and endure changes over the next 20 years. Unfortunately, the company is so large that its future profits growth might not be that high. The valuation is compelling, but the expected earnings per share growth is not going to exceed 6% - 7 % per year. That being said, I will hold on to my existing position, and might consider adding a little more this year, subject to availability of funds and other ideas.

Check the full stock analysis at Seeking Alpha

Full Disclosure: Long WMT and TGT

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Friday, September 12, 2014

Walgreen: A High Dividend Growth Champion To Consider

Walgreen Co. (WAG), together with its subsidiaries, operates a network of drugstores in the United States. This dividend champion company has paid a dividend since 1933 and increased it for 39 years in a row.

Over the past decade this dividend growth stock has delivered an annualized total return of 9.10% to its shareholders.


The company has managed to deliver an 8.40% average increase in annual EPS over the past decade. Walgreen is expected to earn $3.32 per share in 2014 and $3.87 per share in 2015. In comparison, the company earned $2.56/share in 2013. In the press release from Walgreen from yesterday, the company mentioned that it expects earnings per share to hit $4.25 - $4.60 by 2016.

Between 2004 and 2012 Walgreen has been able to reduce the number of shares from 1.032 billion to 880 million through consistent share buybacks. The acquisition of 45% of Alliance Boots increased number of shares outstanding to 955 million in 2013, and this figure is expected to increase further through 2015 due to the purchase of remaining interest in AB. The company’s Board of Directors also approved a new $3 billion stock buyback through 2016.

Currently Walgreen is attractively valued at 17.80 times forward earnings and a yield of 2.30%. Either way, I took advantage of the huge sell-off after Alliance Boots acquisition news and added a small number of shares to my existing position. I would be more interested in the stock on dips below $54/share.

Check the full stock analysis at Seeking Alpha

Full Disclosure: Long WAG, WMT

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Friday, September 5, 2014

McDonald’s (MCD) Dividend Stock Analysis 2014

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. As of December 31, 2013, it operated 35,429 restaurants, including 28,691 franchised and 6,738 company-operated restaurants. McDonald’s is a dividend champion which has increased distributions for 38 years in a row.

Over the past decade this dividend growth stock has delivered an annualized total return of 17.90% to its shareholders.

The company has managed to deliver 16.70% average increase in annual EPS over the past decade. I expect future growth in annual earnings and dividends to be in the range of 7% - 10% per year in the next decade.

Currently, the stock is attractively valued at 16.70 times earnings and a current yield of 3.50%. There is an increasingly negative sentiment toward the company. I believe McDonald’s will overcome its problems, and reward patient shareholders who have a long-term horizon. I also find it easier to buy shares in a company when there is some known hang-up, which keeps price depressed. I would be even more excited if shares fell further from here, because this would mean more shares and more dividend income for every dollar I put to work. I have been adding to my position in the stock slowly throughout 2014.



Full Disclosure: Long MCD and YUM

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Friday, August 29, 2014

Starbucks: The Next Dividend Growth Success Story

Starbucks Corporation (SBUX) operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company initiated its dividend in 2010, and has been growing distributions rapidly since then. While the company has only managed to increase dividends for four years in a row, I believe that it has the potential to reach dividend achiever status, and have the growth story to become as successful for its dividend growth investors.

Currently, I find Starbucks to be overvalued at 28.70 times forward earnings and a low yield of 1.35%. Starbucks is a growth company, which will likely grow earnings per share by 12% - 15%/year over the next decade, which somewhat justifies the low yield and optimistic valuation. Unfortunately, I cannot get myself to pay more than 20 times earnings for a company, because I know that things could go wrong to derail even for the best crafted plans. If the company stumbles, or if stock markets finally decide to cool off a little bit during the next bear market, that would be the best opportunity to acquire a stake in this otherwise fine company. The third option for me would be to sell a long-dated put with a strike as far out as January 2016 with a strike of $70, earn a premium of $5, and pay an effective entry price of $65 per share if called out. If not, and the stock price explodes from here, I would at least earn some premium.

Check the complete analysis at Seeking Alpha

Full Disclosure: Long MCD and NSRGY

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Friday, August 22, 2014

PepsiCo (PEP) Dividend Stock Analysis 2014

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 42 years in a row. PepsiCo is also one of the 60 companies which could be purchased commission-free using Loyal3, with as little as $10.

The company has managed to deliver 7.70% average increase in annual EPS over the past decade, while the annual dividend payment has increased by 13.50% per year over the past decade, which is higher than the growth in EPS.

Currently, the company is attractively valued as it sells for 19.70 times forward earnings and yields 2.90%. It is slightly more expensive than Coca-Cola, which sells for 19 times forward earnings and has the same yield. The pure play on North American soda is Dr. Pepper Snapple (DPS) is cheaper at 17 times forward earnings and a current yield of 2.70%. I like PepsiCo, but it is selling at the highest point I would be willing to put money at. As a result, I would likely not put money there, unless valuation gets better or unless I run out of other ideas.



Full Disclosure: Long PEP, KO, DPS

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Friday, August 15, 2014

Procter & Gamble (PG) Dividend Stock Analysis 2014

The Procter & Gamble Company, together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Care and Family Care. This dividend king has paid dividends since 1944 and has managed to increase them for 58 years in a row.

The company’s latest dividend increase was announced in April 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 64.36 cents /share. The company’s peer group includes Colgate-Palmolive (CL), Kimberly-Clark (KMB) and Clorox (CLX)

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.

Currently, the stock is attractively valued at 17.70 times earnings and yields 3.20%. Procter & Gamble is already one of my ten largest holdings, which is why further additions there would be less likely for me. I do like the company, and believe it to be one of the few great corporations to hold forever.

Check the full analysis at Seeking Alpha.

Full Disclosure: Long PG, CLX, CL, KMB

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Wednesday, August 6, 2014

Johnson & Johnson (JNJ) Dividend Stock Analysis 2014

Johnson & Johnson (JNJ), together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. This dividend king has paid dividends since 1944 and has managed to increase them for 52 years in a row.

The company’s latest dividend increase was announced in April 2014 when the Board of Directors approved a 6.10% increase in the quarterly dividend to 70 cents /share. The company’s peer group includes Novartis (NVS), Pfizer (PFE) and Covidien (COV).

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

Currently, the stock is attractively valued at 17.80 times forward earnings and a current yield of 2.70%. I last purchased shares of the stock in 2013, and the only reason I am hesitating to add more is because the company is one of the five highest weighted in my portfolio.

Check the full analysis at Seeking Alpha

Full Disclosure: Long JNJ

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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

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
Realty Income - A dependable dividend achiever for current income
Are we in a REIT bubble?
How to Generate an 11% Yield on Cost in 6 Years
Undervalued Dividend Stocks I purchased in the past week

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

Relevant Articles:

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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

Relevant Articles:

Why Warren Buffett purchased Exxon Mobil stock?
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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

Relevant Articles:

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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
Four High Yield REITs for current income
Are we in a REIT bubble?
My Dividend Retirement Plan
Realty Income (O) Raises Dividends by a Record 19.20%

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