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

Friday, September 13, 2013

Coca-Cola (KO): A Core Holding for Dividend Growth Investors

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverages worldwide. This dividend king has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every for 51 consecutive years. Warren Buffett’s Berkshire Hathaway (BRK.B) is the largest shareholder of the world’s largest beverage company.

The company’s last dividend increase was in February 2013 when the Board of Directors approved an 9.80% increase to 28 cents/share. Coca-Cola’s largest competitors include PepsiCo (PEP), Dr. Pepper Snapple (DPS) and Monster Beverage (MNST).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.60% to its shareholders.


The company has managed to deliver a 9.20% annual increase in EPS since 2003. Analysts expect Coca-Cola to earn $2.11 per share in 2013 and $2.28 per share in 2014. In comparison Coca-Cola earned $1.97 /share in 2012.

The company has managed to reduce the number of outstanding shares from 4.916 billion in 2003 to 4.527 billion in 2013. The spike in 2010 EPS was caused by a onetime accounting event related to recognize a gain on the 33% stake in Coca-Cola Enterprises that Coke already owned before acquiring the bottling giant.

Coca-Cola's 2020 Vision Strategy strives for a high single digit annual EPS growth throughout this decade, driven through 5%-6% annual increases in revenues as the company expects 3%-4% yearly increase in sales volumes.

Some of the company’s acquisitions over the past years have provided increased exposure to higher growth still beverages, which is where Coke lags behind PepsiCo (PEP). The acquisition of CCE’s North American bottling business should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers. Coca-Cola usually purchases bottling operations in underperforming areas, when it believes it can improve operations. Given struggles in the European markets, I would not be surprised if the company attempts to buy those rights in a few years.

Emerging markets in Asia and Latin America are key to the company’s growth strategy, as more consumers there join the middle class. For example, the average consumer in China enjoys 38 servings of Coca-Cola per year, versus approximately 400 servings for the average US consumer. The average consumer in India only enjoys 18 servings of Coca-Cola, whereas the average Russian had 69 servings of the product. In Coke’s developed markets, the company continues to invest in brands and infrastructure programs, but at a slower rate than revenue growth.

Some of the competitive advantages for Coca-Cola include leading brands with high levels of consumer acceptance, a worldwide network of bottlers and distributors of Company products and sophisticated marketing capabilities. The company continues to build a supply chain network that leverages the size and scale of the Coca-Cola system to gain a competitive advantage. They work with their bottling partners to identify system requirements that enable quick achievement of scale and efficiencies. Coca-Cola tries to share best practices throughout the bottling system & address the ever changing consumer tastes. The company focuses on continuous improvement – innovations in packaging, new solutions to meet changing preferences in consumers.

The company’s return on equity has been on the decline over the past decade, falling from a high of 33.60 % in 2003 to a low of 27.40% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 9.80% per year over the past decade, which is slightly higher than to the growth in EPS.

A 10% growth in distributions translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1973 we see that Coca-Cola has managed to double its dividend almost every six and a half years on average.

The dividend payout ratio has remained at or above 50% over the past decade, ignoring last year’s spike caused by the onetime accounting gain referenced above. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Coca-Cola is close to fully valued at 19 times forward 2013 earnings, has a sustainable dividend payout and yields 2.80%. In comparison, PepsiCo (PEP) is trading at a P/E of 19.90 and yields 2.70%. For enterprising income investors, selling a January 2015 put on Coca-Cola with a strike of $40, could result in an entry P/E of about 16, if exercised. If Coca-Cola stock trades above $40 at expiration date, the investor would get to keep the whole premium of approximately $4/contract. Otherwise, just wait and look for a correction below $40.

Full Disclosure: Long KO, PEP and DPS

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Friday, September 6, 2013

McDonald’s Corporation (MCD) Dividend Stock Analysis for 2013

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. This dividend champion has paid dividends since 1976 and increased distributions on its common stock for 36 years in a row.

The company’s last dividend increase was in September 2012 when the Board of Directors approved a 10% increase to 77 cents/share. The company’s largest competitors include Yum Brands (YUM), Starbucks (SBUX) and Burger King (BKW).

Over the past decade this dividend growth stock has delivered an annualized total return of 19.50% to its shareholders.


The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 18.30% per year. Analysts expect McDonald’s to earn $5.60 per share in 2013 and $6.11 per share in 2013. In comparison McDonald’s earned $5.36/share in 2012.

The company’s international operations have fueled the strong growth in McDonald’s earnings over the past twenty years. Despite the fact that a little over half of the company’s profits are derived internationally, this segment could continue to deliver solid performance in the future. Another factor fueling the company’s growth and maintenance of its edge against competitors and other threats has been its ability to innovate in its menu and reinvent itself in order to win. Some examples of that include the addition of salads to its menu a few years ago, as well as the introductions of premium drinks for customers. Other examples include extending store hours as well as focusing on the core brands through disposition of Chipotle Mexican Grill (CMG). The company has also been able to focus on streamlining operations and focusing on same-store sales, rather than mindlessly expanding at all costs. However, it still plans on expanding store count, while also reimaging existing locations, in order to improve the customer experience.

McDonald's growth targets include:

- Average annual sales growth of 3% to 5%
- Average annual operating income growth of 6% to 7%, and
- Return on incremental invested capital in the high teens

The company also has a strong brand name, which has also allowed it to pass on price hikes onto customers, who nevertheless are still perceiving it’s menu in the “value” category. As a result, inflationary pressures should not affect profitability by a wide margin.

The return on equity has expanded from 13.20% in 2003 to 36.80% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 28.40% per year over the past decade, which is much higher than to the growth in EPS.

A 28% growth in distributions translates into the dividend payment doubling every two and a half years. If we look at historical data, going as far back as 1976 we see that McDonald’s has actually managed to double its dividend every three and a half years on average. I expect dividend growth to average 10%/year over the next decade.

The dividend payout ratio has increased from 34% in 2002 to 53.50% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, McDonald’s is attractively valued at 16.80 times earnings, yields 3.10% and has an adequately covered dividend.

Full Disclosure: Long MCD and YUM

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Friday, August 30, 2013

Air Products and Chemicals (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend champion has paid distributions since 1954 and increased dividends on its common stock for 31 years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved a 10.90% increase to 71 cents/share. The company’s largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.80% to its shareholders.


The company has managed to deliver 11.20% in annual EPS growth since 2003. Analysts expect Air Products and Chemicals to earn $5.50 per share in 2013 and $6.08 per share in 2014. In comparison Air Products and Chemicals earned $4.66/share in 2012.

Air Products and Chemicals is expected to post growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia.

While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically.

The priorities that have been outlined in the latest annual report included increasing volumes in the merchant segment, plus executing new projects on time and budged in the tonnage segment, while focusing on plan efficiency improvements. In addition, the company is focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that would hopefully increase margins and returns. Other important priorities include focusing on the pricing and the right mix of productivity and cost reductions, in order to hit profitability and margin goals set for itself.

In recent weeks, activist investor Bill Ackman has built a 10% stake in the firm, with his goal likely to push management to improve performance. This could be achieved either by passing on cost increases to customers, cutting costs or a combination of both.

The return on equity has increased from 11% in 2003 to 22% in 2011, before slipping to 16% in 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 11.80% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven years on average.

The dividend payout ratio remained at or below 50% over the past decade, with the exception of two brief spikes in 2009 and 2012. 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, Air Products and Chemicals is slightly overvalued at 22.90 times earnings, yields 2.70% and has an adequately covered dividend. I would consider adding to my position in the stock on dips below $94.

Full Disclosure: Long APD

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Friday, August 23, 2013

Wal-Mart Stores (WMT): A high dividend growth giant

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, and neighborhood markets, as well as walmart.com; and samsclub.com. The company is a member of the dividend aristocrats index, has paid dividends since 1973 and increased them for 39 years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved an 18.20% increase to 47 cents/share. The company’s largest competitors include Target (TGT) and Costco (COST)

Over the past decade this dividend growth stock has delivered an annualized total return of 5.30% to its shareholders.



The company has managed to an impressive increase in annual EPS growth since 2004. Earnings per share have risen by 10.60% per year. Analysts expect Wal-Mart Stores to earn $5.30 per share in 2014 and $5.82 per share in 2015. In comparison Wal-Mart Stores earned $5.02/share in 2012. On average, Wal-Mart has also managed to repurchase approximately 4.08% of its shares outstanding each year over the past five years as well.


Wal-Mart has a wide moat, since it is the lowest cost retailer. Its sheer scale gives it a pricing advantage in negotiating with suppliers and its investment in technology allows it to gain further efficiencies across its value chain, thus offering lowest prices in a market. The company has recently refocused in strategy on maximizing return on investment from existing US stores, rather than focusing exclusively on square footage growth. By remodeling stores, and improving their ambiance, it could not only retain its shoppers but even attract different target groups. Its everyday low prices strategy in the US, allows the company to match prices by competitors on items that happen to have lower prices that Wal-Mart. It would take a competitor a considerable investment in a number of stores, distribution centers, technology and logistics in order to emulate Wal-Mart’s business model.

Its international segment however is expected to have low double digit growth in square footage, International currently represents an important opportunity for growth, as it only generates one third of the company’s revenues. Future growth in its international segment could come from acquisitions, as well as organic growth. Wal-Mart is just getting started in certain key markets such as China and India for example. The combination of rising populations, increasing per capita incomes and providing an efficient retailing experience, are some of the characteristics that could fuel growth in international.

The return on equity has remained consistently above 20%, and has increased to 23% by 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 18.10% per year over the past decade, which is higher than to the growth in EPS.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1976 we see that Wal-Mart Stores has actually managed to double its dividend every three years on average.

The dividend payout ratio has increased from 17.70% in 2004 to 32% in 2012. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Wal-Mart Stores is attractively valued at 14.30 times earnings and has an adequately covered dividend but only yields 2.50%. In comparison, Target (TGT) trades at 15.40 times earnings and yields 2.50%.

Full Disclosure: Long WMT and TGT

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Friday, August 16, 2013

Exxon Mobil (XOM) - An Undervalued Dividend Machine

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend champion has paid dividends since 1911 and increased distributions on its common stock for 31 years in a row.

The company’s last dividend increase was in April 2013 when the Board of Directors approved a 10.50% increase to 63 cents/share. The company’s largest competitors include Chevron (CVX), British Petroleum (BP) and Royal Dutch (RDS.B). In late 2012, I replaced Exxon Mobil with a position in ConocoPhillips.

Over the past decade this dividend growth stock has delivered an annualized total return of 12.20% to its shareholders.


The company has managed to an impressive increase in annual EPS growth since 2003. Earnings per share have risen by 13.30% per year. Analysts expect Exxon Mobil to earn $8.02 per share in 2013 and $8.21 per share in 2014. In comparison Exxon Mobil earned $9.70/share in 2012.

Exxon plans to spend $38 billion/year in capital spending over the next five years. The company is targeting over 31 projects, which will deliver 1 million BOE/day by 2017. The major projects that are expected to be brought online include Kashagan Phase 1 project in Kazakhstan, Kearl Oil Sands Project in Canada as well as a few in Africa. Its recent deal with Rosneft to explore in the Arctic and Black seas could generate long-term dividends for the corporation, which has tried to do business in Russia for years.

The company has also tried to increase its exposure to Natural Gas, through its E&P activities as well as the acquisition of XTO Energy three years ago. Unfortunately, natural gas prices have remained in the doldrums, which would affect profitability negatively. In addition, there are few factors that could lead to increase in natural gas prices in the America’s. One bright spot however includes the fact that foreign natural gas prices are more robust than the US ones however.

One important indicator for oil and gas companies is the reserve replacement ratio, which measures the amount of proved reserves added to a company's reserve base during the year relative to the amount of oil and gas produced. Exxon has been successful in maintaining a reserve replacement ratio exceeding 100% in recent years.

Over the past fifteen years, the company has consistently expanded its refining capacity. Refining however is a cyclical business, that is mostly been seen as a cash cow for major integrated producers over the past few years.

Exxon is one of the most consistent repurchasers of stock I have seen, dedicating $5 billion/quarter for this activity. As a result, the number of shares outstanding has decreased from 6.954 billion in 1999 to 4.485 billion in 2013. However, this has resulted in a stingy dividend payout policy, and below average yields compared to its peers. The company has been able to purchase a large quantity of shares without looking at price, and I have argued that in essence shareholders would have been better off just receiving special distributions. However, in 2012 the company started raising dividends much faster than its peers. Hence, it seems to be changing course, which should bode well for investors.

The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2003 and 2008, and then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 9% per year over the past decade, which is lower than to the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1974 we see that Exxon Mobil has actually managed to double its dividend every ten years on average.

The dividend payout ratio has remained below 50% for the majority of the past decade. Up until 2011, Exxon Mobil had a stingy dividend payout, where it focused its excess cash flows towards stock buybacks. Starting in 2012 however, the company seems to be changing course, and is increasing distributions much faster than peers. 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, Exxon Mobil is attractively valued at 9.30 times earnings, yields 2.80% and has an adequately covered dividend. In comparison, peer Chevron (CVX) trades at 9.10 times earnings and yields 3.40%. If the amount of attractively valued dividend stocks keeps dwindling, I might initiate a position in Exxon again.

Full Disclosure: Long CVX, COP, RDS/B

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Friday, August 9, 2013

Target Corporation (TGT) - A high growth, attractively valued dividend champion

Target Corporation (TGT) operates general merchandise stores in the United States. The company is a dividend champion, which has paid dividends since 1965 and increased them for 46 years in a row.

The company’s last dividend increase was in June 2013 when the Board of Directors approved a 19% increase to 43 cents/share. The company’s largest competitors include Wal-Mart Stores (WMT), Dollar Tree (DLTR) and Costco (COST).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.60% to its shareholders.


The company has managed to an impressive increase in annual EPS growth since 2004. Earnings per share have risen by 9.40% per year. Analysts expect Target to earn $4.36 per share in 2014 and $5.46 per share in 2014. In comparison Target earned $4.52/share in 2012.


Future growth would likely be focused on expanding same-store sales and renovating existing stores, rather than simply by opening a large number of locations. Future growth could be realized by the increased penetration of the RED Card, which the company’s cashiers keep promoting to customers. This decreases expenses related for transactions processing of other credit cards. Another venue for growth that could increase the number of customer visits is the remodeling of its stores, which would add fresh foods to the stores. The company is targeting middle-class and upper income consumers, which are more interested in quality and diversity of product offerings, rather than simply looking at the lowest prices. It has in essence managed to differentiate itself from Wal-Mart (WMT), while also retaining its status as a discounter.

The company also is on track to bring the number of stores in Canada to 125 by 2013, which could increase long-term profits. Currently, the costs associated with jumpstarting its Canada operations have been dilutive for earnings, and would be for the next few years.

Target Stores has a goal of earning $8/share by 2017, which would be driven by 5% sales growth in US, share repurchases, store openings in Canada, as well as square footage growth. Risks to growth include worsening of the economy, failure to execute its strategy of effectively differentiating itself from arch rival Wal-Mart as well as credit card risks.

The return on equity has remained consistently in a tight range between 15% and 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 18.60% per year over the past decade, which is higher than to the growth in EPS.

An 18.60% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1974 we see that Target has actually managed to double its dividend every five and a half years on average.

The dividend payout ratio has increased from 13 % in 2004 to 29.20% in 2013. The expansion in the payout ratio has enabled dividend growth to be faster than EPS growth over the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Target Stores is attractively valued at 16.90 times earnings and has an adequately covered dividend but only yields 2.40%. In comparison, rival Wal-Mart (WMT) trades at 15.10 times earnings and yields 2.50%. Target could be a decent addition to a portfolio on dips below $69; however Wal-Mart (WMT) continues to be my preferred way to play big box retailers.

Full Disclosure: Long WMT

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Friday, August 2, 2013

Dr. Pepper Snapple Group (DPS): A Cheap Stock with Dividend Growth Potential

Dr Pepper Snapple Group (DPS) was spun off from Cadbury Schweppes in 2008. It initiated a dividend in 2009, and has managed to consistently raise it, while repurchasing stock.


Analyst expectations are for the company to earn $3.08/share in 2013 and $3.29/share by 2014. I initiated a position in the stock in the prior week,

The company operates under three segments:

Packaged Beverages

This segment is responsible for primarily manufacturing and distribution of packaged beverages and other products, including DPS brands, third party owned brands and certain private label beverages, in the U.S. and Canada. This segment accounts for approximately 73% of sales, but 40% of operating profits.

Latin America Beverages

The Latin America Beverages segment reflects sales in the Mexico and Caribbean markets from the manufacture and distribution of concentrates, syrup and finished beverage. This segment accounts for approximately 7% of sales, but 4% of operating profits.

Beverage Concentrated

This segment is responsible for manufacturing and selling beverage concentrates to customers in US and Canada. Most of conentrates are produced in St Louis, Missouri, which is a risk in and of itself, in case of a natural disaster. This segment accounts for approximately 20% of sales, but 57% of operating profits.

One of the warning signs that I identified from reading the annual report was that 67% of Dr Pepper volumes are distributed through the Coca-Cola affiliated and PepsiCo affiliated bottler systems. I also found out that PepsiCo (PEP) and Coca-Cola (KO) are the two largest customers of the Beverage Concentrates segment, and constituted approximately 30% and 18%, respectively, of the segment's net sales during 2012. The Beverage Concentrates segment's operations generate a significant portion of the company’s overall segment operating profit. On the other hand, using the distribution networks of Coca-Cola & PepsiCo bottling groups could be an advantage, because it could require less investment from Dr. Pepper Snapple Group's part to build out those relationships. This could mean more money for shareholders either through higher dividends or share repurchases.

It is interesting that no one talks about this arrangement, as I could see a lot of issues arising from it. First of all, it looks like an arrangement where the wolf is put in charge of the herd. In other words, a potentially cancelation of one or both contracts could result in a 25% - 30% drop in profits for Dr. Pepper. In addition, failure to properly distribute Dr Pepper products in order to sell their own products, could be another scenario where Coca-Cola and Pepsi can steal market share away from the company.

In 2010, the company made 20 year licensing deals with PepsiCo and Coca-Cola that paid the company $900 and $715 million dollars respectively. As a result, it is recognizing $64.60 million in annual revenue over 25 years. The company used this cash for buybacks and debt reductions.

On the other hand, the 20 year contract with both companies might be too expensive to break by Coke or Pepsi, which could result in a relatively peaceful 18 years for DPS. In addition, I wouldn’t be surprised if either giant decides to try and acquire Dr Pepper Snapple, in order to tap into this cash machine. The only factor preventing this might be the US government’s distaste for monopolies. A cash rich private equity group however, might be able to do just that however. In addition, both agreements could very easily be extended for another 20 years around 2030, and they require that both PepsiCo and Coke meet certain performance conditions.

I view Dr Pepper Snapple Group’s management as very shareholder friendly ones. They are utilizing their steady cash flows to repurchase stock and regularly hike dividends. This is because it has strong brands such as Dr Pepper & Snapple, which have a fiercely loyal customer base. At some point however, I would like to see them expand by adding new products in segments it is not represented, and in other countries.

I also view the company as a very stable consumer staple, which has strong brand names that consumers like. I would say it has competitive advantages, and should continue to churn out plenty of free cash flows for the next 20 years.

The largest portion of revenues are derived from carbonated soft drinks. This segment is not particularly popular with investors, given the declines in consumption over the past decade, in addition to stagnant sales volumes expected due to health concerns by customers. The company is trying to be responsive by introducing low calorie beverages like Dr Pepper 10, 7 UP 10 etc. Given the stable nature of the business brands, I believe that the firm can achieve solid total returns for shareholders, even with anemic growth in the future. They are also increasing the amounts they are spending on advertising, in order to create buzz about the product and maintain the brand, which should bode well for revenues.

Dr Pepper Snapple Group does not have any energy drinks, nor does it have any bottled water to offer. This could be an opportunity for diversifying away from carbonated drinks, and could also provide the company with the ability to expand internationally. This could likely cost a lot of money however, which is why being smart with the shareholder money and not expanding at all costs would be preferred.

The company currently operates in mostly three countries – US, Canada and Mexico ( also Caribbean). This is because the company was acquired by Cadbury Schweppes in 1995. Back in 1999, the parent sold a large part of international distribution rights to Coca-Cola for 155 countries. As a result, the company would be unable to expand internationally, unless it buys back those licensing rights.

While the US represents half of the global soft drinks market, Europe is second at slightly over one-third. Asia Pacific represents about 12%, although it could result in higher growth over time.

Several months ago, DPS purchased the rights for distribution of Snapple in key markets such as China, Japan, Australia, South Korea, Malaysia, Hong Kong and Singapore. This is the right strategy to pursue, in order to capitalize on long-term growth in the emerging markets. The rights to Dr Pepper drink internationally are owned by Coca-Cola or Mondelez International (MDLZ).

The allure behind the growth story of Coca-Cola (KO) and PepsiCo (PEP) is in the expected growth in emerging markets such as China, India, Russia, Brazil, Turkey and many others. As millions of consumers become middle class in those emerging markets, they would be able to spend their increasing discretionary incomes on items such as sodas, snacks and other purchased beverages.

Overall, I like that Dr. Pepper is shareholder friendly, and manages to distribute a lot of its excess cash flows to shareholders through dividend increases and share buybacks. However, I do not like the fact that the company is dependent on its main competitors Coca-Cola and PepsiCo for a large portion of its revenues and operating income. This is mitigated by its long-term licensing contracts with these two giants, and could be a positive because it provides a lot of cash flows with a limited need for a lot of capital to build a distribution system. In addition, I do not like the fact that Dr Pepper Snapple group is limited to only a select few countries for its operations, and has to purchase this right with shareholder cash. The company is trying to create new healthier beverages, and to expand internationally, which could be very beneficial in the long run.

The reason why had not purchased Dr Pepper till this moment is because I was already invested in the largest two “soda” companies in the world – Coca-Cola (KO) and PepsiCo (PEP) ( although I realize that PepsiCo has a substantial snack operation, I am looking at it from a soda company perspective here). In addition, its operations are mostly limited to North America for legacy brands as it cannot expand abroad. The company does not have a long history of dividend increases, which is mitigated by the fact that it was listed for only five years.

At this time, Coca-Cola (KO) and PepsiCo (PEP) are trading above 20 times earnings, which prevent me from adding money to those positions today. The stock of Dr. Pepper Snapple Group  is much cheaper at 16.30times earnings and yielding 3.20%. I also believe that the company would be able to grow cashflows and earnings well over the next 20 years, especially if it manages to expand in Europe, Asia – Pacific and South America.. Long-term growth of Dr Pepper Snapple over the next 20 -30 years would likely be slightly higher than that of its two largest rivals, due to its small relative size.

I recently purchased a very small starting position in the company, because I find it easiest to monitor an investment when you own it. It is difficult to find quality at a cheap price these days, which is why Dr Pepper Snapple Group sounded like an overlooked play. While I am not very happy with the reliance on Coke & PepsiCo mentioned above, or the lack of exposure outside of North America, and the heavy reliance on carbonated drinks, I think there is plenty of opportunity. There is a strong brand name, and opportunities for very good total returns over the next 20 years through stable revenues and earnings, share repurchases and dividend growth. If the company introduces new products to compete in new niches, manages to expand internationally by tapping the cash cow business behind Dr. Pepper and Snapple brands, it can probably achieve a dividend champion status one day. Even if it simply uses excess cashflows to repurchase stock and raise dividends, Dr Pepper Snapple Group should do well for shareholders.

Full Disclosure: Long KO, PEP, DPS, MDLZ

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Friday, July 19, 2013

Chevron Corporation (CVX): An Undervalued Dividend Growth Star

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has paid dividends since 1912 and increased distributions on its common stock for 26 years in a row.

The company’s last dividend increase was in April 2013 when the Board of Directors approved an 11.10% increase to $1/share. The strong dividend growth is an indication of management’s strong confidence of future cash flow generation. The company’s largest competitors include Exxon Mobil (XOM), British Petroleum (BP) and Royal Dutch (RDS.B).


Over the past decade this dividend growth stock has delivered an annualized total return of 16.30% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen from 3.57/share in 2003 to $13.32 in 2012. Analysts estimates are for Chevron Corporation to earn $12.38 per share in 2013 and $12.46 per share in 2014.

The goal of Chevron is to fund its massive capital program, grow the dividend, return excess cash flows to shareholders, while preserving its financial strength.

New field developments are expected to generate 1% annual production growth through 2014 and then 4%- 5% for the next four years. Most of the capital spending on exploration and production would go into the Australia LNG, Gulf of Mexico and deepwater projects. Higher oil prices would also result in high earnings per share. Natural gas prices overseas have been more competitive overseas, in comparison to the US, which is a positive. While oil is easier to transport, natural gas is not. The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron is better positioned than peers, since it has a larger exposure to more lucrative oil fields, versus natural gas fields. The company has also managed to consistently replenish its production with new finds, and is on a massive capital spending quest to increase production significantly by 2017. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The acquisition has provided Chevron with access to the Marcelus Shale. The company is also disposing of low margin assets like Refineries.

On the negative side, there is a court ruling in Ecuador against Chevron for a potential $19 billion. The likelihood of CVX having to pay this entire amount however is pretty slim to none however, as the company has no significant assets in Ecuador. Another potential dispute could occur in Brazil, related to a 2012 Frade Field leak there.

The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.


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

A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1984 we see that Chevron Corporation has actually managed to double its dividend every ten years on average.

The dividend payout ratio has remained below 50% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Chevron Corporation is attractively valued at 9.40 times earnings, yields 3.20% and has an adequately covered dividend.

Full Disclosure: Long CVX and RDS.B

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Friday, July 12, 2013

Ameriprise Financial (AMP) Dividend Stock Analysis

Ameriprise Financial, Inc. (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 (AXP) in 2005. This dividend stock has paid dividends since 2005, and has increased them every year since then.

The company’s last dividend increase was in May 2013 when the Board of Directors approved a 15.60% increase in the quarterly distribution to 52 cents /share. The company’s peer group includes Principle Financial Group (PFI), Northern Trust (NTRS) and Waddell & Reed (WDR).


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

The company has managed to deliver a 5. % average increase in annual EPS since 2003. Analysts expect Ameriprise Financial to earn $6.60 per share in 2013 and $7.60 per share in 2014. In comparison, the company earned $4.63/share in 2012. Over the next five years, analysts expect EPS to rise by 14.70%/annum.

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 retirement 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 9,700 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.

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

The return on equity has been pretty consistent between 8 and 11% over the past decade, with the exception of the dip in 2008, during the depths of the Financial Crisis. 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 20.60% per year over the past five years, which is slightly 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 2003 to 30.90% in 2012. 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 16.20 times earnings, yields 2.50% and has a sustainable distribution. I recently initiated a position in the stock and plan on adding to it on dips.

Full Disclosure: Long AMP

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Friday, May 31, 2013

Johnson & Johnson (JNJ) - A must own dividend stock

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1944 and increased payments to common shareholders every for 51 consecutive years. There are only fifteen companies in the US which have managed to raise distributions for more than half a century each.

The company’s last dividend increase was in April 2013, when the Board of Directors approved an 8.20% increase to 66 cents/share. Johnson & Johnson's major competitors include Pfizer (PFE), Bristol Myers Squibb (BMY) and Novartis (NVS).

Over the past decade this dividend growth stock has delivered an annualized total return of 6% to its shareholders.


The company has managed to deliver a 5.40% annual increase in EPS since 2003. Analysts expect Johnson & Johnson to earn $5.41 per share in 2013 and $5.78 per share in 2013. In comparison Johnson & Johnson earned $3.86 /share in 2012. The amount was lower due to one-time accounting charges against net income. The company has managed to consistently repurchase 1.10% of its outstanding shares on average in each year over the past decade.

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, breadth of product offerings in its global distributions channels, continued investment in R&D as well as its stable financial position. In addition to that Johnson & Johnson is expanding into new long term opportunities through strategic acquisitions. 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, Edurant, Incivek, Xaralto and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. The acquisition of Synthes, which was completed in 2012, is expected to generate significant synergies for Johnson & Johnson.

The company’s return on equity has declined from 30% to 18% over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.70% per year over the past decade, which is higher than to the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1972 we see that Johnson & Johnson has actually managed to double its dividend every five years on average.

The dividend payout ratio has increased from 38% in 2003 to 62% in 2012. This was caused by one-time charges against net income. The payout ratio based on forward EPS is standing at 45%. 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 Johnson & Johnson is attractively valued at 14.60 times forward 2013 earnings, has a sustainable dividend payout and yields 3%. I recently added to my position in Johnson & Johnson.

Full Disclosure: Long JNJ

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Friday, May 17, 2013

Should you invest in Wells Fargo (WFC)?

In order to identify attractively valued dividend stocks, I follow a monthly screening process, where I go through the list of dividend champions and dividend achievers to look for bargains. In addition, I often stumble upon quality income stocks during my review of the dividend raises for the week or on an ad hoc basis through interactions with other dividend investors.

Some investors that I know have been purchasing Wells Fargo (WFC), which is one of the best run large banks in the country. The most prominent buyer of Wells Fargo is Warren Buffett, who has been accumulating the stock for the past four – five years in his personal portfolio and for Berkshire Hathaway (BRK.B). Buffett finds that the key competitive advantage for Wells Fargo is its low cost of funds. The bank took out 25 billion from TARP, and as a result had to slash its dividend and acquire Wachovia.

I had heard only great things about Wells Fargo, which increased my interest in the bank. As a result, I took a look at the financials over the past years.


The financial included Wachovia since 2009. The thing that I noticed was that there was no growth over past four years in revenues. The amounts from non-interest fees have held steady, while the net interest revenues have decreased slightly. Since 2009 however, expenses have decreased from $70.688 billion all the way to $57.615 billion in 2012. The main driver behind the decrease in expenses was due to decrease in the Provision for credit losses from $21.668 billion in 2009 all the way to $7.217 billion in 2012.

At the same time earnings per share increased from $1.75 in 2009 to $3.36 in 2012, while annual dividends increased from 49 cents/share to 88 cents/share. The forward annual dividend payment is $1.20/share. Wells Fargo also increased the number of shares each year since 2009 to 5.351 billion. Since the main reason behind growth has been the reduction in the Provision for credit losses, it seems that future growth would be limited, unless the company either earned more from loans or more from fees.

Actually, net interest income has been declining, while the amount of loans has been slightly up from $783 billion in 2009 to $800 billion in 2012. Securities available for sale have increased dramatically however to $235 billion, up from $173 billion in 2009. At the same time, deposits have increased from $781 billion to $946 billion. The main problem behind lending these days is that it is much tougher to loan money, and interest rates are dropping at the loan rate level. At the deposit rate level, interest rates are essentially zero. As a result, in order to compensate for the decrease in the net interest rate margins, Wells Fargo would have to ramp up its lending. With interest rates projected to be low for the next three years, increasing lending will be the only way out to profit growth in this segment, without sacrificing credit quality however.

The issue with ramping up credit right now however is that when interest rates go up in five - seven years, Wells Fargo might end up owning assets such as 30 year loans at 4% ( I made this number up), when its cost of capital is close to or above 4%.

The mitigating factor however is that the average maturity of loans is under 30 years, and also a portion of Wells Fargo’s loans are floating rate. The company will have almost $300 billion in loans mature within the next five years. Over half of these loans were floating rate ones. New loans will generate more income however.

I like the fact that the company also has a substantial amount of non interest based revenues, which account for half of Wells Fargo’s revenues. Total trust and investment fees and total mortgage activities accounted for over half of those non-interest revenues. The portion of fee income is approximately 59%, with the rest derived from mortgage origination, other, insurance and gains from trading. It is good to hear that the company is able to generate diverse income streams to fall back on. The company is able to cross-sell products to customers who enjoy their banking relationship with it.

One positive could be that the company has a record $945 billion in deposits, and has attracted over $200 billion since 2008. While not all of the funds are allocated to loans, this could be a good indicator going forward, because it means more banking relationships over time. A customer can open a checking account today, then decide to take a mortgage, open a brokerage account or do other business with Wells Fargo. The customer relationship piece is an intangible part of the business, but nevertheless could yield dividends down the road. In addition, with record low interest rates, these deposits are almost not costing anything to Wells Fargo.

Overall I like the fact that Wells Fargo is trading at 10.80 times earnings, yields over 3% and has a sustainable dividend payment. The company has a solid asset base, which will pay dividends for years. However, I am not certain where future growth will come from. The increase in the company’s profit since 2009 has been mostly due to the reduction in the provision for loan losses. At the same time revenues have been flat. Unfortunately, a company cannot grow shareholder value without growing revenues. You can only cut so much expenses. If Wells Fargo were to start loaning out more funds, it would possibly translate into more revenue, as long as borrower quality is maintained and the net interest margin does not drop from here. There is a margin of safety in today’s valuation, but until I can see revenues increasing, I am going to sit this one out on the sidelines.

At the same time, I am a big fan of the five largest Canadian banks. These companies have a dominant position in the Canadian market, and earn very good amount of fees from customers. At the same time they have been able to grow interest and non-interest income, increase number of branches and expand by buying US bank assets. Back in early 2013 I purchased shares in Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM).

Of course, if Canada’s housing market softens, these big five banks would likely perform worse than the likes of Wells Fargo. The table above shows the Net Interest and Non Interest Income trends for Toronto - Dominion Bank (TD). It also shows the trends in the provision for credit losses as well. Canada adopted IFRS accounting standards recently, which is why information for prior to 2011 is under Canadian GAAP. Either way however, the trend in the three pieces of information would be similar under both accounting methods. The trend over the past few years in both interest and non-interest income for the big five Canadian banks is positive. They have been expanding domestically and internationally, which makes seeing where growth will come much easier.

Full Disclosure: Long BMO, BNS, RY, TD, CM

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