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

Friday, July 24, 2015

ACE Limited (ACE) Dividend Stock Analysis

ACE Limited (ACE), through its subsidiaries, provides a range of property and casualty insurance and reinsurance products worldwide. It operates through five segments: North American P&C, North American Agriculture, Insurance, Overseas General, Global Reinsurance and Life Insurance. ACE Limited is a dividend achiever, which has raised dividends for 23 years in a row.

The most recent dividend increase was in May 2015, when the Board of Directors approved a 3.10% increase in the quarterly dividend to 67 cents/share. After reviewing the past history of dividend increases however, I wouldn’t be surprised if there isn’t another dividend increase this year.

The company’s largest competitors include American International Group (AIG), Travelers (TRV), and Berkshire Hathaway (BRK.B)

Friday, July 17, 2015

McDonald's (MCD) Dividend Stock Analysis 2015

McDonald's Corporation (NYSE: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, 2014, it operated 36,258 restaurants, including 29,544 franchised and 6,714 company-operated restaurants. McDonald's is a dividend champion that has increased distributions for 39 years in a row. McDonald's is one of the 60 companies which could be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in September 2014, when the Board of Directors approved a 4.90% increase in the quarterly dividend to 85 cents/share. The largest competitors for McDonald's include Restaurant Brands International (QSR), YUM! Brands (NYSE:YUM) and Starbucks (NASDAQ:SBUX).

Friday, June 26, 2015

Emerson Electric (EMR) Dividend Stock Analysis 2015

Emerson Electric Co. provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. Emerson Electric is a dividend king, which has raised dividends for 58 years in a row. There are only 16 dividend kings in the world.

The most recent dividend increase was in November 2014, when the Board of Directors approved a 9.30% increase in the quarterly dividend to 47 cents/share..

The company’s largest competitors include General Electric (GE), ABB (ABB), and Honeywell (HON)

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

Friday, June 19, 2015

Wal-Mart (WMT) Dividend Stock Analysis for 2015

Wal-Mart Stores Inc. (NYSE:WMT) operates retail stores in various formats worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has paid a dividend since 1974 and increased it for 42 years in a row. Wal-Mart is also one of the 60 companies, which can be purchased commission-free using Loyal3, with as little as $10.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 2% increase in the annual dividend to 49 cents/share. This was the second year in a row that Wal-Mart delivered a small dividend increase. It is likely that management does not expect high earnings growth in the next couple of years, given by the very low hike in distributions in 2014 and 2015.

The largest competitors for Wal-Mart include Target (NYSE:TGT), Costco (NASDAQ:COST) and Dollar General (NYSE:DG).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.30% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

Friday, June 5, 2015

Norfolk Southern (NSC) Dividend Stock Analysis

Norfolk Southern Corporation, together with its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods. As of December 31, 2014, it operated approximately 20,000 miles of road in 22 states and the District of Columbia. Norfolk Southern Corporation is a dividend achiever, which has raised dividends for 14 years in a row.

The most recent dividend increase was in January 2015, when the Board of Directors approved a 3.50% increase in the quarterly dividend to 59 cents/share. This was the second increase in a year however, and represented a 9.30% dividend growth over the same time in 2014.

The company’s largest competitors include CSX Corporation (CSX), Union Pacific (UNP), and Burlington Northern Santa Fe which is part of Berkshire Hathaway (BRK/B).

Over the past decade this dividend growth stock has delivered an annualized total return of 15% to its shareholders. Future returns will likely be lower, and will be dependent on growth in earnings and starting dividend yields obtained by shareholders at time of investment.

The company has managed to deliver a 10.70% average increase in annual EPS over the past decade. Norfolk Southern is expected to earn $5.94 per share in 2015 and $6.84 per share in 2016. In comparison, the company earned $6.39/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 412 million in 2005 to 312 million by 2015.

Railroads are an oligopoly in the US, as 80% of industry revenues are generated by BNSF, Union Pacific, Norfolk Southern and CSX. The first two operate largely on the west coast, while the last two operate largely on the east coast. Railroads compete for customers, but also share assets as well. They compete with trucks, pipelines, ships and aircraft for hauling goods. Trucking provides more flexibility in transporting goods, though they are more expensive. It makes sense to transport goods on long distances using a combination of rail and other modes of transport for maximum cost savings when moving goods.

Long-term growth for Norfolk Southern will be driven by the growth in US economic activity. When economic activity improves over time, this would translate into more goods being shipped in the country.

The railroad's best prospects are long-term. As Warren Buffett put it, an investment in railroads is an all-in wager on the economic future of the United States. Over time, the movement of goods in the United States will increase, and railroads like BNSF, Union Pacific, Norfolk Southern and CSX should get its full share of the gain. Railroads move goods across longer distances in a much more efficient way that long-haul trucks. This provides railroads a cost advantage.

Today, the United States has half the usable track it had in 1970, though companies like BNSF are hauling much more freight than they did back then, and the American Association of Railroads estimates that freight loads will nearly double by 2035. That congestion—a signal of demand—means opportunity: Improve existing tracks and add new ones, and boost sales.

The economic moats around railroads are the billions of dollars it costs to build them and the fact that the rights of way they need are all but impossible to obtain today. Therefore, it is unlikely that a new railroad will be created, though other modes of transportation could chip away market share. However, given the fact that it costs 3 – 4 times lower to transport goods through a railroad than truck, railways have inherent cost advantage. This cost advantage could also allow railroads to raise prices, and still remain competitive. Railroads have some geographic advantage as well.

Furthermore, rail companies can increase profits by improving productivity. For example, using smart systems to optimize speed depending on terrain could generate significant fuel savings over time. Reducing the amount of time railcars sit idle, could also improve profitability (since using those assets more effectively reduces the need to buy too many railcars to begin with). Raising the length of trains could further boost productivity. Improving productivity reduces cost, and increases profitability over time.

Norfolk Southern transports raw materials, intermediate products and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2014): intermodal (22%); coal (21%); chemicals (16%); metals/construction (13%); agriculture/consumer products/government (13%); automotive (8%); and, paper/clay/forest products (7%).

Growth in Norfolk Southern will be aided by increase in intermodal traffic and chemicals. It will likely be hurt by decreasing demand for coal, which will decrease the amount of coal transported by rail. The company has invested heavily in intermodal operations. Intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation (rail, ship, and truck), without any handling of the freight itself when changing modes.

The thing to consider with railway companies like Norfolk Southern, Union Pacific or BNSF is that their fortunes are exposed to the cyclical fluctuations in demand for transportation. The downside is that these companies have substantial needs for capital, in order to comply with new regulations, replace track, locomotives and railcars and maintain their rail networks along the way. Maintaining their tens of thousands of miles of track is a cost that trucking companies do not have.

The annual dividend payment has increased by 17% per year over the past decade, which is higher than the growth in EPS. This was possible mostly due to the increase in the dividend payout ratio. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.

A 17% growth in distributions translates into the dividend payment doubling almost every four and a quarter years on average. If we check the dividend history, going as far back as 2002, we could see that Norfolk Southern has actually managed to double dividends almost every four and a quarter years on average. The item to add however was that in 2000 the company did cut its dividends by more than 50%. Therefore, just like we saw with Union Pacific, while the dividend is likely sustainable, this is a cyclical company which is more likely to cut distributions than your typical consumer staples or healthcare dividend stock. So even if you plan on holding for the next 100 years, there will be hiccups and dividend cuts are likely every one or two decades.

In the past decade, the dividend payout ratio has more than doubled from a low of 15.40% in 2005 to 34.70 in 2014. The high percentage in 2009 was mostly an aberration, as earnings seem to have been hit by the Great Recession. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Norfolk Southern has managed to grow its return on equity a little over the past decade, from 14.80% in 2005 to 16.80% in 2014. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, Norfolk Southern is attractively valued at 15.80 times forward earnings, and it has a decent current yield of 2.50%. I initiated a small position in the railroad, because it is easier for me to track companies when I have skin in the game. I am interested in Norfolk Southern on dips below $95/share. I recently also initiated a small position in Union Pacific (UNP), to which I also plan on adding on dips below $90/share.

Full Disclosure: Long UNP, NSC

Relevant Articles:

Union Pacific (UNP) Dividend Stock Analysis
The Value of Dividend Growth
Dividend Investors have an advantage over everyone else on Wall Street
How to be a successful dividend investor
How to get dividend investment ideas

Friday, May 29, 2015

Union Pacific (UNP) Dividend Stock Analysis

Union Pacific Corporation (UNP), through its subsidiary, Union Pacific Railroad Company, operates railroads in the United States. Union Pacific Corporation is a dividend achiever, which has raised dividends for 10 years in a row.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 10% increase in the quarterly dividend to 55 cents/share.

The company’s largest competitors include CSX Corporation (CSX), Norfolk Southern Corporation (NSC), and Burlington Northern Santa Fe which is part of Berkshire Hathaway (BRK/B).

Over the past decade this dividend growth stock has delivered an annualized total return of 23% to its shareholders. Future returns will likely be much lower, and will be dependent on growth in earnings and starting dividend yields obtained by shareholders. Investors should also not forget that the transportation sector is exposed to the cyclical nature of the economy, and would follow its short-term cycles pretty well.


The company has managed to deliver a 25.90% average increase in annual EPS over the past decade. Union Pacific is expected to earn $6.39 per share in 2015 and $7.15 per share in 2016. In comparison, the company earned $5.75/share in 2014. The high percentage since 2005 was caused by one-time events artificially depressing earnings, as earnings seem to have been hit by a one-time event.

Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 1.066 billion in 2005 to 883 million by 2015.

Railroads are an oligopoly in the US, as 80% of revenues are generated by BNSF, Union Pacific, Norfolk Southern and CSX. The first two operate largely on the west coast, while the last two operate largely on the east coast. Railroads compete for customers, but also share assets as well. They compete with trucks, pipelines, ships and aircraft for hauling goods. Trucking provides more flexibility in transporting goods, though they are more expensive. It makes sense to transport goods on long distances using a combination of rail and other modes of transport for maximum cost savings when moving goods.

Long-term growth will be driven by the growth in US economic activity. When economic activity improves over time, this would translate into more goods being shipped in the country.
The railroad's best prospects are long-term. As Warren Buffett put it, an investment in railroads is an all-in wager on the economic future of the United States. Over time, the movement of goods in the United States will increase, and railroads like BNSF or Union Pacific should get its full share of the gain. Railroads move goods across longer distances in a much more efficient way that long-haul trucks. This provides railroads a cost advantage.

Today, the United States has half the usable track it had in 1970, though companies like BNSF and Union Pacific are hauling much more freight than they did back then, and the American Association of Railroads estimates that freight loads will nearly double by 2035. That congestion, which is a signal of demand, means opportunity for railroads to improve existing tracks and add new ones, and boost sales.

The economic moats around railroads are the billions of dollars it costs to build them and the fact that the rights of way they need are all but impossible to obtain today. Therefore, it is unlikely that a new railroad will be created, though other modes of transportation could chip away market share. However, given the fact that it costs 3 – 4 times lower to transport goods through a railroad than truck, railways have inherent cost advantage. This cost advantage could also allow railroads to raise prices, and still remain competitive. Railroads have some geographic advantage as well.

Furthermore, rail companies can increase profits by improving productivity. For example, using smart systems to optimize speed depending on terrain could generate significant fuel savings over time. Reducing the amount of time railcars sit idle, could also improve profitability (since using those assets more effectively reduces the need to buy too many railcars to begin with). Raising the length of trains could further boost productivity.

Union Pacific operates the longest network of railroad track in the US, with over 32,000 miles. 2013 freight revenues are derived by Intermodal (20%), Agricultural (16%), Autos (10%), Chemicals (17%), Coal (19%), Industrial Products (18%).

The annual dividend payment has increased by 20.30% per year over the past decade, which is lower than the growth in EPS. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.

A 20% growth in distributions translates into the dividend payment doubling almost every three and a half years on average. If we check the dividend history, going as far back as 1980, we could see that Inion Pacific has managed to double dividends almost every nine years on average. The item to add however was that in 1998 the company did cut its dividends by more than 50%. Therefore, while the dividend is likely sustainable, this is a cyclical company which is more likely to cut distributions than your typical consumer staples or healthcare dividend stock.

In the past decade, the dividend payout ratio has ranged between 20% in 2006 and a high of 33% in 2014. The high percentage in 2005 was mostly an aberration, as earnings seem to have been hit by a one-time event. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Union Pacific has managed to substantially improve return on equity over the past decade. During out study period, this indicator increased from a low of 7.80% in 2005 to a high of 24.40% in 2014. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, Union Pacific is attractively valued at 18.10 times earnings, though it has a low current yield of 2.10%. I initiated small position in the railroad, because it is easier for me to track companies when I have skin in the game. I would be more interested in Union Pacific on dips below $90/share. I also initiated a small position in Norfolk Southern (NSC), to which I also plan on adding to on dips.

Full Disclosure: Long UNP, NSC

Relevant Articles:

Warren Buffett Investing Resource Page
Norfolk Southern Corporation (NSC) Dividend Stock Analysis
Lifecycle of the dividend investor
- How to turbocharge dividend growth
How to find long term dividend stock ideas

Friday, May 22, 2015

TJX Companies (TJX) Dividend Stock Analysis

The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer in the United States and internationally. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX Europe. TJX Companies is a dividend achiever, which has raised dividends for 18
years in a row.

The most recent dividend increase was in March 2015, when the Board of Directors approved a 20% increase in the quarterly dividend to 21 cents/share.

The company’s largest competitors include Ross Stores (ROST), Kohl’s (KSS) and Target (TGT).

Over the past decade this dividend growth stock has delivered an annualized total return of 20.40% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 17.10% average increase in annual EPS over the past decade. TJX Companies is expected to earn $3.30 per share in 2016 and $3.71 per share in 2017. In comparison, the company earned $3.15/share in 2015.



Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 983 million in 2006 to 704 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to buybacks, I will take what I can.

Future growth in earnings per share will be driven by opening new stores, increasing same store sales, increasing margins, lowering costs and repurchasing shares.

I like the fact that TJX has a better scale in number of stores, purchasing agents and contacts, relative to its close rivals. This could translate into better bargaining power with suppliers, lower prices and high margins. The company has 900 buyers and 17000 vendors it works with.

The company sells branded quality fashion at discounted prices. It has a wide demographic reach and global sourcing capabilities. The type of company like TJX can prosper even during a difficult economic conditions, since it offers discounted branded fashion products to consumers.

Same store sales will be increased by attracting more traffic, expanding e-commerce, and continuing to provide a great assortment of great values on fashion, brands and quality. Loyalty programs and increase in marketing can result in retention of customers and attracting new ones to the stores. Maintaining a low inventory turnover rate of less than 2 months can also help in reducing markdowns and ensuring that a fresh new inventory assortment is available for repeat customers.

The company has 3389 stores as of fiscal year 2015. This includes 2094 TJ Maxx or Marshal’s stores, 487 Homegoods, 368 TJX Canada and 440 TJX Europe. TJX Companies expects that the number of stores under its umbrella could eventually reach 5475. The projections include 3000 TJ Maxx or Marshal’s stores, 1000 Homegoods, 500 TJX Canada and 975 TJX Europe. The company is opening its first stores in Austria and The Netherlans in 2015. While store saturation in the US is a potential risk, international expansion could bring a source of growth for years ahead. As international operations expand their scale, this could aid operating margins and profits. The downside to international operations is that a larger portion of TJX profits will be impacted to short-term fluctuations in the US dollar.

TJX Companies is also focusing on expanding its e-commerce platforms such as tjmaxx.com and sierratradingpost.com in the US and tkmaxx.com in the UK. Further sales growth could be obtained by leveraging the brick and mortar and online platforms. An example includes allowing customers to shop online and pick up items in stores.

I really like the fact that TJX Companies is dedicated to sharing excess cashflows with shareholders in the form of share buybacks and dividends. I would actually prefer more dividends to buybacks, but would take what I can get.

The annual dividend payment has increased by 25.30% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.


A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1997, we could see that TJX Companies has managed to double dividends almost every three and a half years on average.

In the past decade, the dividend payout ratio has increased from 12.70% in 2006 to 21.30% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


TJX Companies has also managed to grow return on equity from 37.90% in 2006 to 52.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, TJX Companies is overvalued at 20.60 times forward earnings and yields 1.20%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I may consider initiating a small position in the stock on dips below $66/share.

Full Disclosure: None

Relevant Articles:

Ross Stores (ROST) Dividend Stock Analysis
The Value of Dividend Growth
The work required to have an opinion
The Value of Dividend Growth
The Pareto Principle in dividend investing

Friday, May 8, 2015

3M Company (MMM) Dividend Stock Analysis 2015

3M Company operates as a diversified technology company worldwide. 3M Company is a dividend king, which has raised dividends for 56 years in a row.

The most recent dividend increase was in December 2014, when the Board of Directors approved a 19.90% increase in the quarterly dividend to $1.025/share.

The company’s largest competitors include General Electric (GE), Siemens (SIEGY) and ABB (ABB).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.50% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 7.10% average increase in annual EPS over the past decade. 3M is expected to earn $7.94 per share in 2015 and $8.78 per share in 2016. In comparison, the company earned $7.49/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 777 million in 2005 to 649 million by 2015. 3M expects to spend somewhere in the range of $17 billion to $22 billion on share repurchases through 2017.

The strength of 3M’s business model is largely driven by three key strategic levers: active portfolio management, investing in innovation, and business transformation. Management believes that these levers, combined with more aggressive capital deployment, will drive enhanced value creation.

The company’s financial objectives through 2017 include 9 – 11% growth in earnings per share, fueled by 4 – 6% annual revenue growth. In addition, 3M expects to make 5 – 10 billion in acquisitions over the next 3 - 4 years.

The company generates 35% of revenues from emerging markets, which could increase to 40 – 45% by 2017, driven by strong growth in developing economies of the world. In fact, emerging market revenues are expected to increase by 8 – 12% over the next four years, versus a more modest 2 – 4% growth for developed markets.

The company spends over 5% of revenues on R&D, and has been able to discover innovative products to bolster its bottom line. 3M expects to increase R&D expense to 6% of revenues by 2017. 3M keeps careful track of new product development, using a measure called the New Product Vitality Index (NPVI), which quantifies the percentage of 3M’s sales from products that were introduced during the past five years. In 2013, the NPVI was 33%. The company is trying to increase this index to 37% by 2017. 3M allows it engineers to spend 15% of their time on their own projects, which has resulted in a lot of innovation.

The annual dividend payment has increased by 9% per year over the past decade, which is higher than the growth in EPS. Future rates of growth in dividends will be limited to the rate of growth in earnings per share.

A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we check the dividend history, going as far back as 1973, we could see that 3M Company has managed to double dividends almost every eight and a half years on average.

In the past decade, the dividend payout ratio has increased from 40.40% in 2005 to 45.70% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

3M has also managed to maintain a high return on equity over the past decade. During out study period, this indicator ranged between a high of from 37.70% in 2007 to a low of 26.60% in 2013, while ending little changed for the decade. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, 3M is close to fully valued at 19.70 times forward earnings and a current yield of 2.60%. Last week, I added a little to my position in 3M. I would be excited to increase my exposure to this quality company on further dips in the stock price.

Full Disclosure: Long MMM and GE

Relevant Articles:

How to find long term dividend stock ideas
Dividend Investing for Financial Independence
Dividend Kings List for 2015
39 Dividend Champions for Further Research
Will the dividend grow?

Friday, May 1, 2015

Johnson & Johnson (JNJ): A Quality Dividend King At An Attractive Valuation

Johnson & Johnson (NYSE: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 53 years in a row.

The company's latest dividend increase was announced in April 2015 when the Board of Directors approved a 7.10% increase in the quarterly dividend to 75 cents /share. The company's peer group includes Novartis (NYSE:NVS), Pfizer (NYSE:PFE) and Roche Holdings (RHHBY).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.20% to its shareholders.

The company has managed to deliver 7.20% average increase in annual EPS over the past decade. Johnson & Johnson is expected to earn $6.14 per share in 2015 and $6.42 per share in 2016. In comparison, the company earned $5.70/share in 2014.

Johnson & Johnson also has managed to reduce number of shares outstanding. Between 2004 and 2015, the number of shares declined from 2,996 million to 2,826 million.

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company largely immune from economic cycles. In addition, the company has strong competitive advantages due to its scale, leadership role in various diverse healthcare segments, breadth of product offerings in its global distributions channels, continued investment in R&D, switching costs to users of its medical devices, as well as its stable financial position. The company generates 70% of revenues from products where it is number one or number two in the respective field. The ability to generate strong cash flows, have enabled Johnson & Johnson to reward shareholders with a higher dividends for 53 consecutive years.

Future profits growth could come from new product offerings, which are the result of continued investment in research and development, and through strategic acquisitions. The company spends approximately 11% on R&D, and generates a quarter of its revenue from products launched in the past five years. In the Pharmaceuticals segment, the company expects 10 major filings and 25 line extensions expected between 2013 and 2017. Approximately thirty major filings are expected between 2014-2016 in the Devices segment.

Johnson & Johnson is also expanding its business through strategic acquisitions. For example, the acquisition of Synthes, is expected to generate significant synergies for Johnson & Johnson and make it a leader in fast growing trauma market. This also allowed the company to use its overseas cash without having to pay the steep repatriation taxes. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run.

Sales in drugs like Simponi, Stelara, Zytiga, Xaralto and Olysio should more than offset the generic erosion from older drugs which are losing their patent protection. The fact that the company has exposure to other healthcare segments besides pharmaceuticals makes it a much safer play on the healthcare sector than pure pharma companies. I like the fact that there is diversity in the revenue generating behind each of the large segments. The three segments include Pharmaceutical with 43% of sales, Medical Devices & diagnostics with 37% of sales and the Consumer segment with approximately 20% of sales.

The annual dividend payment has increased by 9.60% per year over the past decade, which is higher than the growth in EPS.

A 10% 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 1977, we could see that Johnson & Johnson has actually managed to double dividends every five and a half years on average.

In the past decade, the dividend payout ratio increased from 38.70% in 2004 to a high of 64.50% in 2011, before decreasing to 48.40%. 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 decreased from 29% in 2004 to 22.70% in 2014. This is still a very high return on equity however. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. Given the fact that the amounts in this indicator are still high these days, I do not view this decline as a major warning sign.

Currently, the stock is attractively valued at 17.80 times forward earnings and a current yield of 2.70%. The only reason I am hesitating to add more shares is because the company is one my five largest holdings.

Full Disclosure: Long JNJ

Relevant Articles:

Four Quality Dividend Machines Hiking Distributions
Dividend Growth Stocks Increase Intrinsic Value Over Time
The Value of Dividend Growth
39 Dividend Champions for Further Research
Dividend Kings List for 2015

Friday, April 24, 2015

Ross Stores (ROST) Dividend Stock Analysis

Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. Ross Stores is a dividend achiever, which has raised dividends for 21 years in a row.

The most recent dividend increase was in February 2015, when the Board of Directors approved a 17.50% increase in the quarterly dividend to 23.50 cents/share.

The company’s largest competitors include TJ Companies (TJX), Kohl’s (KSS) and Macy’s (M).

Over the past decade this dividend growth stock has delivered an annualized total return of 21.90% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. Ross Stores is expected to earn $4.84 per share in 2015 and $5.41 per share in 2016. In comparison, the company earned $4.42/share in 2014.


Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 293 million in 2005 to 209 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to share repurchases, I will take what I can.

As consumers become more price sensitive, companies like Ross Stores that provide quality merchandise at a discount tend to profit. Based on historical performance, it looks like this is a recession resistant business, which could deliver results in good and bad years.

Future growth will be aided by opening new stores in the US, as well as starting international expansion like competitor T.J. Companies.

The important factor for Ross is that it needs its buyers to select and purchase quality inventory that will sell quickly. In fact, it has managed to achieve that, as evidenced by its low inventory turnover of 2 months or so, versus three months for the average department store. When you manage to sell inventory quickly, you reduce the need for further discounting of inventory, and you reduce the costs associated with storing inventory for too long. In addition, bargain shoppers are more likely to increase the frequencies of their visits if the stores are constantly re-stocked with fresh new inventory on the shelves.

The company’s stores offer everyday low pricing on department store brands, which are sold at significant discounts off competitors. There is a broad assortment of goods, which creates a “treasure hunt” type environment for shoppers. The self-help type of the store reduces need for labor relative to competitors. In addition, I think there is a lower risk of disruption by the internet for the type of store like Ross or TJ Max, due to nature of its merchandise and treasure hunt mentality of shoppers there.

For Ross, it is important for buyers to have solid relationships in order to snap quality merchandise quickly and at discounted prices. Competition for that merchandise is intense, which is why speed and relationships and scale matter. Ross Stores does have quite have the scale in terms of 600 buyers negotiating with 8000 vendors in order to fill, the stores and 4 distribution centers in order to obtain the right inventory for the right stores at the appropriate time. However, its larger competitor has almost three times the number of stores as Ross, and twice as much buyers. However, Ross Stores has managed to grow operations rapidly, and still has room to expand its geographic reach beyond the 33 states it is in and the 1362 stores it currently owns and operates. Of those stores, 1210 are under the Ross Stores brand and 152 are dd’s Discounts brand.

The company expects that it would ultimately be able almost double stores in the US ( 1500 Ross Stores and 500 DD discount Stores). At a rate of 5% – 6% growth in number of stores, this could be achieved within 12 – 14 years. If Ross Stores also manages to grow same-store sales alongside with new store openings, and if it also manages to expand internationally, it could achieve high earnings growth over the next decade.

The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.

A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1995, we could see that Ross Stores has indeed managed to double dividends almost every three years on average.

In the past decade, the dividend payout ratio has remained steady, and it has only increased slightly to 18% in 2015. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Ross Stores has also managed to grow its high return on equity from 24.90% in 2006 to 43.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.

Currently, Ross Stores is overvalued at 21.40 times forward earnings and yields 0.90%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I would consider initiating a small position in the stock on dips below $96/share.

Full Disclosure: None

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Friday, April 17, 2015

Philip Morris International (PM) Dividend Stock Analysis


Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. Its portfolio of brands comprise Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company was created in 2008 when Altria (MO) spun-off its international tobacco operations into Philip Morris International. Between 2008 and 2013, I believed Philip Morris International to be the security I like best. As a result it is one of my largest positions.

Philip Morris International has managed to boost dividends in every single year since 2008. The last dividend increase was in September 2014, when the quarterly dividend was raised by 6% to $1/share. The quarterly dividend has increased from 46 cents/share in 2008. The chart below shows dividends from 2008 to 2015. There were only 3 dividend payments made in 2008, and for 2015 it assumes that the dividend stays unchanged at $1/quarter. It is likely that it will be increased in October 2015, but it is unclear at this time what the increase will be.


In the future, the company can grow earnings per share through acquisitions, entry into new markets, through price increases that exceed decreases in demand, increase in market shares, through new product offerings (such as e-cigarettes) and through share buybacks. I would be curious to see whether PMI tries to diversify beyond tobacco in the future, into other areas such as packaged food for example or alcoholic beverages. The company is committed to returning 100% of cashflow to shareholders, which it has achieved through dividends and share buybacks.

Everyone is aware of the legislation risks behind tobacco companies, and dangers of tobacco investing. As a result, I am not going to discuss those. For those who do not like companies like PMI due to ethical considerations, I respect that. However, please do not try to impose your own ethical considerations on others.

The main positive for PMI is that the company is not dependent on the mercy of a single government and a single market, in terms of unfavorable legislation or bans on tobacco products. For example, the fact that Australia initiated plain packaging laws on cigarettes was not a blow to globally diversified companies like PMI. In addition, even if this plain packaging law spreads to the UK or a few other countries, the diversified nature of PMI’s operations could soften the blow. On the other hand however, it is more cumbersome to deal with 180 governments, which all have different laws and regulations regarding the manufacturing, processing and sale of tobacco products. The fact that a single government entity cannot throw a deadly blow to PMI is a plus. The other positive is that tobacco usage in certain places like emerging markets is actually growing. The downside is that profits per unit are higher in the developed world, and lower in emerging markets.

PMI has managed to increase earnings per share from $2.75 in 2007 to $5.26 in 2013. Since then, earnings per share have decreased and are expected to fall to $4.35 for 2015.


As a company that operates in countries outside of US, PMI is exposed to currency fluctuations. The company reports results in US dollars, but sells its products for Euros, Rubles, Yen, Rupees etc. This means that annual results in US dollars will fluctuate from year to year. This explains partially the reason why earnings per share have not been growing since 2013, when they were $5.26/share. Rather, earnings per share fell to $4.76 in 2014 and are expected to fall further down to $4.35 in 2015. One of the reasons for declines is the increase in the US dollar against other currencies. The unfavorable foreign exchange impact is equivalent to $1.15/share in 2015, which could bring back those earnings to $5.50. Even if you add in the currency impact, of $0.34 in 2013 and $0.80 in 2014 and expected $1.15 in 2015, earnings per share would have been flat for 3 years in a row however. The general belief is that these currency fluctuations make the company performance look worse than it is. I usually view currency fluctuations as a wash – you get some years where currencies go your way, and then years where they go against you. The negative part about PMI’s exposure to foreign exchange rates however is that emerging market currencies usually tend to depreciate against the dollar over time. Therefore, I am a little cautious about taking out foreign exchange impact since it is a normal cost of doing business. Emerging markets reflect 45% of company’s revenues in 2014.

The drop in earnings per share has pushed the dividend payout ratio up, and resulted in slowing down of dividend growth. In itself, a high payout ratio for a tobacco company is not as big of a problem.

However, when earnings per share are dropping, it is a slight cause for concern. The company has recently canceled its stock buyback program. Since May 2008, when PMI began its first share repurchase program, the company has spent an aggregate of $37.7 billion to repurchase 601.4 million shares. This represented 28.5% of the shares outstanding at the time of the spin-off in March 2008. The average price was $62.61 per share. However, the company is not repurchasing any shares for the time being, citing unfavorable currency fluctuations. In comparison, Philip Morris International has one of the most consistent share buyback programs between 2008 and 2014.


In 2014, PMI exceeded its one-year gross productivity and cost savings target of $300 million. In 2015, PMI's productivity and cost savings initiatives will include, continued enhancement of production processes, the harmonization of tobacco blends, the streamlining of product specifications and number of brand variants, supply chain improvements and overall spending efficiency across the company. This is something that could help in attaining future growth in earnings.

In general, I like PMI because the company has a wide moat. This means that its products have strong brand names, pricing power and loyal customer usage. In addition, PMI usually is number one or number two in most of its major markets in Europe, EMEA, ASIA etc. This strong advantage results in recurring sales and earnings for shareholders for years. This wide moat is the reason why I am willing to sit out any short-term turbulence in Philip Morris International. Since my holding period is the next 20 - 30 years, I am willing to sit out short-term weakness ( 3 - 5 years) if I believe that a company has solid long-term potential.

In contrast, Altria (MO) has done spectacularly well since 2008. The most interesting thing to learn is that in 2008, everyone (myself included) believed that PMI will do much better than Altria. Quite on the contrary however, Altria did better because it had a lower P/E ratio and a higher starting yield, which was coupled with consistently high growth in earnings per share. The moral of the story is that when it is conventional wisdom to accept something as a given, the real money making opportunity could be to pursue the alternative viewed as less desirable. By defying skeptics, Altria has rewarded its shareholders much better than PMI since 2008. However, Altria is riskier, since it derives most of its profits from US tobacco sales. The next major source of earnings is its stake in brewer SAB Miller.

Shares of Philip Morris International are not selling for 17.90 times forward earnings and yield 5.10%, with a payout ratio of 92%. If you adjust forward earnings for currency of $1.15/share, the forward P/E drops to 14.20 and payout ratio drops to 72.70%. After looking at the data, I would not consider adding to PMI today.  Of course, it is one of my largest positions, so common sense on diversification tells me that I should not buy more even if I wanted to. I believe that in the long-run, PMI’s profits will likely rebound. The nice thing is that I will be paid a high dividend in the process, which I can allocate into other interesting opportunities.

I do not like it when the dividend payout ratios is too high for companies I own and where earnings have been flat or going lower. While the risk that the company will cut dividends is low, since it has some room to maneuver after it has canceled stock buybacks, the risk for a dividend cut increases the longer the payout stays closer to 100%. I would like PMI to prove skeptics wrong, and return back to growing earnings. We all know that without rising earnings, dividend growth cannot be achieved in a sustainable fashion. That being said, I still think the long-term picture (10 - 20 years down the road) is solid however once short-term woes are behind us.

Full Disclosure: Long PM and MO

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Friday, April 10, 2015

Ameriprise Financial (AMP) Dividend Stock Analysis

Ameriprise Financial, Inc. (NYSE:AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. Ameriprise operates in five segments - Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other. The company was created as a result of a spin-off from American Express (NYSE:AXP) in 2005. Ameriprise Financial has paid dividends since 2005, and has increased them every year since then.

The company's last dividend increase was in April 2014 when the Board of Directors approved a 11.50% increase in the quarterly distribution to 58 cents /share. The company's peer group includes Principal Financial Group (NYSE:PFG), Northern Trust (NASDAQ:NTRS) and Waddell & Reed (NYSE:WDR).

Since going public in 2005, this dividend growth stock has more than doubled in price.


The company has managed to deliver a 12% average increase in annual EPS since 2004. Analysts expect Ameriprise Financial to earn $9.76 per share in 2015 and $11.14 per share in 2016. In comparison, the company earned $8.74/share in 2014. Over the next five years, analysts expect EPS to rise by 17%/year.

Ameriprise Financial has actively used share buybacks to reduce the number of shares outstanding from 247 million in 2005 to 191 million by 2014.

The company operates in five segments. I expect that in the future, its growth will likely come from the Advice & Wealth Management and Asset Management segments, while Annuities and Protection segments will shrink as a percentage of the overall revenue pie.

• Advice & Wealth Management (32.20% of Operating Income); This segment provides financial planning and advice, as well as full-service brokerage services, primarily to retail clients through our advisors. A significant portion of revenues in this segment is fee-based, driven by the level of client assets, which is impacted by both market movements and net asset flows.

• Asset Management (32% of Operating Income); This segment provides investment advice and investment products to retail, high net worth and institutional clients on a global scale through Columbia Management in the US and Threadneedle, which operates internationally. Revenues in the Asset Management segment are primarily earned as fees based on managed asset balances, which are impacted by market movements, net asset flows, asset allocation and product mix.

• Annuities (25.70% of Operating Income); This segment provides RiverSource variable and fixed annuity products to individual clients. The RiverSource Life companies provide variable annuity products through our advisors, and our fixed annuity products are distributed through both affiliated and unaffiliated advisors and financial institutions. Revenues for the variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. Revenues for the fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.

• Protection (10% of Operating Income); This segment provides a variety of products to address the protection and risk management needs of our retail clients, including life, disability income and property casualty insurance. The primary sources of revenues for this segment are premiums, fees and charges we receive to assume insurance-related risk. The company earns net investment income on owned assets supporting insurance reserves and capital supporting the business. Ameriprise Financial also receives fees based on the level of assets supporting variable universal life separate account balances.

• Corporate & Other (#N/A). This segment consists of net investment income or loss on corporate level assets, including excess capital held in Amerprise subsidiaries and other unallocated equity and other revenues as well as unallocated corporate expenses

Overall, I am very bullish on companies that offer the tools to assist the 60 million Baby Boomers in their retirement. As there are 10,000 boomers retiring each day, there is the need for financial planning advice. Financial advisors help individual investors craft a plan, and execute it, while trying to create a long-term relationship with the client. The future growth of the company would come from building and retaining long-term relationships with customers. The company has an active sales force of 9,600 financial advisers, which help address customers' needs by selling them Ameriprise products. Almost 75% of its advisors are independent franchisees, who have the right to use the Ameriprise name. Approximately 25% of them are employees of the company.

I believe that investors who utilize the services of a financial advisor are more likely to stick to that advisor. As a result, I believe that investor assets with an adviser at a place such as Ameriprise are stickier than assets under a mutual fund company such as T.Rowe Price. The personal relationship with a client can provide benefits to both the inexperienced investor and the adviser. And a company like Ameriprise can offer an integrated approach to wealth management, and utilize its position in providing annuities and insurance products as well. It also helps that Ameriprise has positioned itself well as the place to obtain financial planning advise. The added risk for Ameriprise is that the advisers could take clients away if they switched to a competitor. However half of the company’s advisers have been with Ameriprise for over a decade, and have an average tenure of 18 years.

Future growth will also be dependent on attracting more client money both domestically and internationally. Future growth will also be aided by strategic acquisitions, which will expand the pool of assets under management. A rising market generally helps in increasing assets under management, which is accretive to revenues and profitability.

Rising stock prices will results in higher revenues and profits. On the contrary, if stock prices were to take a breather or even decrease, this will provide a headwind against further profit growth. In the long run, security prices generally tend to follow an upwards trend. Therefore, it might be a good idea to hope for a stock market correction, before initiating a position in a company like Ameriprise. A correction could provide for an even better entry price.

The return on equity has been pretty consistent between 8 and 11% between 2005 and 2012.The only dip was in 2008, during the depths of the financial crisis. Since then, this indicator has been going up and is reaching 20% in 2014. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 27.20% per year over the past five years, which is higher than the growth in EPS. This was possible because as a new dividend payer, Ameriprise started paying out a small amount, which was later increased significantly.

The dividend payout ratio has increased from 5% in 2005 to 25.90% in 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


Currently Ameriprise Financial is attractively valued at 12.90 times forward earnings, yields 1.85% and has a sustainable distribution. I recently added to my position in the stock and plan on adding to it further if current yield is closer to 2.50%.

Full Disclosure: Long AMP, TROW

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Friday, April 3, 2015

Becton, Dickinson (BDX) Dividend Stock Analysis 2015


Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company is a member of the dividend champions list, and has been able to boost distributions for 43 years in a row.

The company’s last dividend increase was in November 2014 when the Board of Directors approved a 10.10% increase to 60 cents/share. The company’s peer group includes Medtronic (MDT), Baxter International (BAX) and St. Jude Medical (STJ).

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

The company has managed to deliver an 10.50% average increase in annual EPS since 2004. Analysts expect Becton Dickinson to earn $6.78 per share in 2015 and $7.42 per share in 2016. In comparison, the company earned $5.99/share in 2014.


Becton Dickinson has also managed to repurchase plenty of shares over the past decade, bringing the number of shares from 263 million in 2003 to 197 million in 2014. The company is not expecting much in terms of share buybacks following the acquisition of Carefusion, in an effort to deleverage quickly.

Becton Dickinson operates in three segments:

Medical (Over 50% of sales)

BD Medical produces a broad array of medical devices that are used in a wide range of healthcare settings. The primary customers served by BD Medical are hospitals and clinics; physicians’ office practices; consumers and retail pharmacies; governmental and nonprofit public health agencies; pharmaceutical companies; and healthcare workers.

Diagnostics (almost one third of sales)

BD Diagnostics provides products for the safe collection and transport of diagnostics specimens, as well as instruments and reagent systems to detect a broad range of infectious diseases, healthcare-associated infections (“HAIs”) and cancers. BD Diagnostics serves hospitals, laboratories and clinics; reference laboratories; blood banks; healthcare workers; public health agencies; physicians’ office practices; and industrial and food microbiology laboratories.

Biosciences (Approximately 14% of sales)

BD Biosciences produces research and clinical tools that facilitate the study of cells, and the components of cells, to gain a better understanding of normal and disease processes. That information is used to aid the discovery and development of new drugs and vaccines, and to improve the diagnosis and management of diseases. The primary customers served by BD Biosciences are research and clinical laboratories; academic and government institutions; pharmaceutical and biotechnology companies; hospitals; and blood banks.

I like the fact that almost half of revenues is derived from items that are essential and disposable, and which creates the need for customers to repeatedly keep buying more syringes and needles to name a few. I like that the Diagnostics segment is also characterized by recurring revenue streams, as the customers would face high switching costs if they move to another competition. Becton Dickinson’s scale allows it to compete effectively in the Medical segment.

Becton Dickinson should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates almost 60% of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. Becton Dickinson is also active on the acquisition front and is investing heavily in research and development, which should benefit the company through new product launches. Becton Dickinson has a solid long-term potential for its business, due to its strong position and due to the bullish prospects for its industry. The company enjoys strong demand for its products and a more favorable pricing than other competitors in its industry.

The company is in the process of acquiring Carefusion (CFN) for $12.20 billion, most of which is going to be paid in cash. The deal is expected to close in the first half of 2015. Given the cheap rates at which cash is available, this acquisition is likely to be accretive since it is paid for mostly in cash. The main risk is that Becton Dickinson has never made such a large acquisition before, which means that there is some integration risk.  The benefits include cost savings, increase in number of product offerings, improves scale and results in more access to different markets globally, including emerging markets. For example, the company expects to save $250 million by 2018 simply by reducing overhead and realizing efficiencies in manufacturing and operations.

The return on equity has increased from 22% in 2005 to 23.50% by 2014. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.70% per year over the past decade, which is higher than the growth in EPS. In my previous analysis I found that that BDX was one of the top dividend growth stocks for the past decade. The past four dividend announcements were for a hike of 10% in dividends each time. Going forward, I would expect dividend growth to closely approximate 10%.



A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we look at historical data, going as far back as 1975, one would notice that the company has actually managed to double distributions every six years on average.

The dividend payout ratio has increased from 27% in 2005 to 42% in 2013, before falling back to 36.40% by 2014.  A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Becton Dickinson is slightly overvalued at 20.20 times forward earnings, yields 1.70% and has a sustainable distribution. I initiated a small starter position in the stock in late 2013, after which the stock took off. This prevented me from adding more fresh capital to the company. As a long-term dividend investor in the accumulation phase, I get excited if the companies I am interested in are on sale, because I get to buy more shares with my limited amounts of capital. Although this price is a low probability event, I plan on adding to my position on dips below $96/share, equivalent to an entry yield of 2.50%. If I relaxed the requirement and required an entry yield of 2% however, I would need the stock price to fall below $120/share before adding more money to the company.

Full Disclosure: Long BAX, BDX and MDT

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Friday, March 27, 2015

W.W. Grainger (GWW) Dividend Stock Analysis

W.W. Grainger, Inc. (GWW) operates as a distributor of maintenance, repair, and operating (MRO) supplies; and other related products and services that are used by businesses and institutions primarily in the United States and Canada. W.W. Grainger, Inc.is a dividend champion, which has raised dividends for 43 years in a row.

The most recent dividend increase was in April 2014, when the Board of Directors approved a 16.10% increase in the quarterly dividend to $1.08/share.

The company’s largest competitors include Fastenal (FAST), Wesco International (WCC) and Applied Industrial Technologies (AIT).

Over the past decade this dividend growth stock has delivered an annualized total return of 16.30% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.

The company has managed to deliver a 13.80% average increase in annual EPS over the past decade. W.W. Grainger is expected to earn $13.01 per share in 2015 and $14.41 per share in 2016. In comparison, the company earned $11.45/share in 2014.

Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 92 million in 2005 to 69 million by 2015. For the past 30 years, the number of outstanding shares has been reduced by approximately one half.

W.W. Grainger is a leading distributor of maintenance, repair and operations products. The North American market is highly fragmented, and is characterized by annual revenues of approximately $150 billion. Grainger accounts for approximately 6% of it. The company can grow earnings through acquisitions, international expansion, gaining market share. The company has years of growth ahead of it. Some of that growth could be generated by going after small and medium sized customers. Currently, the company has a much better presence with larger customers. The company’s online platform could also generate higher sales growth, and lower costs for itself and customers. W.W. Grainger generates close to one third of its revenues from this online channel.

Approximately 88% of revenues are derived from North America (US and Canada). There is the opportunity to grow revenues by expanding internationally. Currently, W.W. Grainger has operations in Canada, Japan, Mexico, India, China, Panama and in Europe.

W.W. Grainger has scale and relationships with suppliers and customers (SME). Its size provides cost advantage relative to fragmented peers. The company also has strong relationships with manufacturers, which provides rebates and helps in maintaining a cost advantage.

In addition, W.W. Grainger is more efficient than its biggest competitor Fastenal. It manages to generate more revenue with less employees and less physical locations. However, those locations are generally larger, and have much more SKU’s and items per store.

The annual dividend payment has increased by 18.10% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, and will be limited by the growth in earnings per share.

An 18% 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 1977, we could see that W.W. Grainger has managed to double dividends almost every six years on average.

In the past decade, the dividend payout ratio has increased from 24.30% in 2005 to 36.40% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

W.W. Grainger has also managed to grow return on equity from a low of 15.90% in 2005 to 24.50% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, W.W. Grainger is selling for 18 times forward earnings and yields 1.80%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. As a result, I recently initiated a half position in W.W. Grainger. I would consider adding to my position if current yields exceed 2%. I would really consider load up on this company if yields exceed 2.50%.

Full Disclosure: Long GWW

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