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

Friday, January 23, 2015

General Mills (GIS) Dividend Stock Analysis

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to increase distributions to its shareholders for 11 years in a row.

The most recent dividend increase was in March 2014, when the Board of Directors approved an 8% increase in the quarterly dividend to 41 cents/share.

The company’s largest competitors include Nestle (NSRGY), Kellogg (K) and Danone (DANOY).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.40% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.


The company has managed to deliver a 7.50% average increase in annual EPS over the past decade. General Mills is expected to earn $3.01 per share in 2015 and $3.22 per share in 2016. In comparison, the company earned $2.83/share in 2014.

The company has utilized share buybacks in order to reduce the number of shares outstanding from 818 million in 2005 to 632 million in 2014.

General Mills has a portfolio of strong brands, as well as the scale of operations to make products and sell them efficiently. In addition, the company is trying to maintain an innovative approach and either develop in house or acquire products in growth niches. Consumer tastes tend to slowly evolve over time, which is why companies like General Mills that try to stay innovative and capture major trends in tastes and deliver profits. Continued product innovation is the key to capturing future growth. That being said, the bread and butter of consumer products companies are its established brands, where a large portion of consumers engage in repetitive purchases, that create repetitive cashflows, which make investing in consumer staples such a steady and profitable endeavor. While things do change over time, the change is much slower than that in the technology field, which makes it easier for companies to react, adapt and profit to the changing environment. Having a steady marketing budget also helps to maintain the broad appeal of the company’s products.

Earnings per share could increase from new product offerings, strategic acquisitions, international expansion and streamlining of operations. A constant focus on operations, eliminating unnecessary costs, improving margins and reducing negative effects of input costs are something that should help the company accomplish its targets. The company is able to expand its distribution network on a global basis, invest in innovation and in its strong brands. Having a portfolio of stable food brands generates recurring excess cash flows. Those excess cash flows are not necessary for expansion of the business. Therefore they result in the ability for the company to shower shareholders with more cash every year through regular dividend payments and increases.


The annual dividend payment has increased by 10.90% 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, likely around 7% - 8% annually, and will be limited by the growth in earnings per share.

A 7.50% growth in distributions translates into the dividend payment doubling every nine and a half years on average. If we check the dividend history, going as far back as 1987, we could see that General Mills has managed to double dividends almost every nine years on average.

In the past decade, the dividend payout ratio has increased from 40.30% in 2005 to 54.80% 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.

General Mills has also managed to generate a high return on equity, which also increased from 22.50% in 2005 to 27.60% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, General Mills is attractively valued at 17.80 times forward earnings and yields 3.10%. I am slowly building my position in the stock, and have been doing so this year. I have also sold some long-dated puts on the company, which have 50/50 odds of being exercised.

Full Disclosure: Long GIS, NSRGY and K

Friday, January 16, 2015

Target (TGT): The Underdog Dividend Champion To Consider On Further Weakness

Target Corporation (TGT) operates general merchandise stores in the United States and Canada. Target is a dividend champion, which has paid dividends since and raised them every year for 47 years in a row.

The most recent dividend increase was in June 2014, when the Board of Directors approved a 20.90% increase in the quarterly dividend to 52 cents/share.

The company’s largest competitors include Wal-Mart (WMT), Costco (COST) and Amazon (AMZN).

Over the past decade this dividend growth stock has delivered an annualized total return of 4.80% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 4.40% average increase in annual EPS over the past decade. Target is expected to earn $3.25 per share in 2015 (minus losses on exiting Canada) and $3.88 per share in 2016. In comparison, the company earned $3.07/share in 2013. Earnings per share have been depressed by steep losses in the company’s Canadian division, where expansion has been difficult.

Between 2005 and 2014, the number of shares outstanding has decreased from 912 million to 638 million. The decrease in shares outstanding through consistent share buybacks adds an extra growth kick to earnings per share over time. The annual dividend payment has increased by 19.80% per year over the past decade, which is much higher than the growth in EPS.

Currently, Target is selling for 23.60 times expected current year earnings and 19.80 times next year's earnings and yields 2.70%. So far in 2014, I was slowly building my position in the stock by dollar cost averaging my way. At this stage I am not planning on adding more to Target.

I posted the full analysis on Seeking Alpha in September. The thing that changed is that Target is now exiting Canada. By stopping the bleeding, the company can start generating more income right away. 


Full Disclosure: Long TGT, WMT

Relevant Articles:

How to buy when there is blood on the streets
Why Did I Purchase This Dividend Paying Company For a 3rd Month in a Row?
How to think like a long term dividend investor
Top Dividend Growth Stocks of the past decade

Tuesday, January 13, 2015

Two Dividend Stocks I Purchased in 2015

I kicked off the year with investments in two companies. Those are existing positions, which I am adding to. The companies include:

ConocoPhillips (COP), which explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to increase dividends for 14 years in a row. It sells for 11.60 times earnings. Earnings per share for 2014 are expected at $5.62. For 2015, earnings per share are expected to go down to $3.72. This is down from an expected $6.34/share that Wall Street analysts were predicting just 90 days ago. At that 2015 rate dividend growth will likely stall. You might want to check my analysis of ConocoPhillips (COP).

I think the effects of sharp drop in oil have not been felt yet across the investment community. Many investors seem to believe that this is a short term event. In reality, I see a lot of players under pressure - from Oil producer states to unconventional exploration and production companies. The interesting thing about cyclical companies is that they appear cheapest near the top, but most expensive when things are closer to the cyclical bottom.

I see companies slashing capital spending, and a few flow-through entities cutting dividends, but I have not seen anyone go bankrupt yet. The magnitude of the oil collapse reminds me a little bit of the housing crisis, which spread through the economy and affected different sectors. This was preceded by a long boom and stories of boom towns, people who made a lot of money quickly, etc. I think the real risk is that oil fell by 50% from highs, yet stock prices on Exxon Mobil (XOM), Conoco Phillips (COP) and Chevron (CVX) are not down by as much. I think many are expecting a quick snapback up in oil prices. Therefore, many could probably be surprised negatively in the short-term (12 months from now). I am prepared for slow and gradual decreases in share prices, which would be great for an investor like me who has a set amount of fund to deploy to work every month, rather than invest a lump sum.

As I mentioned in the articles before, I am planning to slowly buying up shares in Exxon Mobil (XOM), Conoco Phillips (COP) and even Chevron (CVX). Companies like Chevron and Exxon Mobil are the ones that will survive drops to $40/barrel, and will benefit since they will be able to acquire reserves at a discount.

Conoco Phillips could benefit as well, although further sustained declines in commodity pricing below $50 could put the dividend in risk territory. I believe Conoco Phillips management is good at capital allocation, and runs the company for shareholders (as evidenced by sale of Lukoil (LUKOY) stake in 2011, and other projects while returning billions to stakeholders through share buybacks and dividends and spin-offs). I doubt they will cut the dividend, but it is likely dividend growth will be zero or very low for a few years if prices stay low for extended periods of time. I am planning to slowly buy things this year, and dollar cost average my way. ExxonMobil is probably going to be the next purchase in February and then possibly Chevron in March or April. Again, this is not a timing call. I simply have some amount to invest every month, and I like diversification, hence I buy stock over time. I don’t have $1 million sitting on my checking account, waiting to be deployed at once. But as I mentioned before, while prices are down, that doesn't mean they can’t go lower from here. Hence I am also buying companies with more durable earning streams throughout different phases of the economic cycle.

One example is Diageo plc (DEO), which manufactures and distributes premium drinks. This international dividend achiever has managed to boost distributions for 15 years in a row. It has a ten year dividend growth of 5.80%/year in its base currency the British Pound. Diageo owns a portfolio of strong brands, with wide consumer appeal, which are usually number one or two in their respective categories. A few include Smirnoff, Johnnie Walker, Guinness, Baileys, and Captain Morgan. The company also has a wide distribution network on a global scale, which might be difficult for a competitor to replicate. Diageo is the largest spirits company in the world, which provides it with the advantage of scale, relative to its competitors. The stock is attractively valued at 17.40 times forward earnings and has a current dividend yield of 2.80%. I would be even more excited if the stock drops further, since I have room in my portfolio for more of this quality company. Check my analysis of Diageo.


Full Disclosure: Long COP, CVX, XOM and DEO

Relevant Articles:

Not all P/E ratios are created equal
Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)
Are Energy Stock Values Today a Once in a Lifetime Opportunity?
Strong Brands Grow Dividends
How to Generate Energy Dividends Despite the Peak Oil Non-Sense

Tuesday, January 6, 2015

Dividend Kings List for 2015

The dividend kings index includes companies which have managed to increase dividends for over fifty consecutive years. A company that regularly raises dividends to the tune of fifty years in a row is the type of company that every serious dividend growth investor should study. None of those companies are automatic purchases however. The important thing is to learn the type of business those companies are in, and what factors might have helped them achieve the dividend success. By gathering little bits and pieces of wisdom along the way, the dividend investor greatly increases their knowledge of business. Knowledge is like compound interest – it builds and accumulates over time.

The companies in the 2015 dividend kings list include:

Name
Symbol
Yrs Div Gro
10-yr Div Gro
Fwd P/E
Yield
10 year EPS
Analysis
American States Water
AWR
60
5.62%
25.8
2.20%
15.23%

Dover Corp.
DOV
59
9.79%
15.6
2.20%
15.23%

Northwest Natural Gas
NWN
59
3.69%
22.2
3.70%
3.42%

Genuine Parts Co.
GPC
58
6.23%
23.1
2.20%
8.04%
Parker-Hannifin Corp.
PH
58
13.39%
16.2
2%
19.89%

Procter & Gamble Co.
PG
58
10.59%
20.8
2.80%
8.04%
Emerson Electric
EMR
57
7.71%
15.6
3%
9.61%
3M Company
MMM
56
6.76%
21.9
2.10%
8.33%
Cincinnati Financial
CINF
54
6.41%
19.8
3.40%
4.04%

Vectren Corp.
VVC
54
2.53%
20.1
3.30%
0.56%

Coca-Cola Company
KO
52
9.79%
20.7
2.90%
9.89%
Johnson & Johnson
JNJ
52
10.84%
17.5
2.70%
7.20%
Lowe's Companies
LOW
52
29.19%
25.4
1.40%
6.32%
Colgate-Palmolive Co.
CL
51
11.45%
23.6
2.10%
6.82%
Lancaster Colony Corp.
LANC
51
6.92%
24.4
2%
2.04%

Nordson Corp.
NDSN
51
8.11%
18.5
1.10%
20.00%


It is very interesting that the dividend kings returned 14.10% in 2014 and 30.70%. In comparison, the S&P 500 returned 13.50% in 2014 and 32.305 in 2013.

There was one company that was taken from the list in 2014. Diebold (DBD) had managed to grow dividends for 60 years in a row. Unfortunately, the company failed to increase distributions in 2014, which violated the long history of consistent dividend growth. If Diebold starts growing dividends again 2015, it would take it until 2075, before it achieves the same level of accomplishment. Given the fact that earnings per share didn’t grow at all in the past decade, but followed an erratic pattern, I am not surprised that the dividend was left unchanged. Rising earnings per share are the essential fuel behind future dividend growth.

There were no additions in 2014 to the list. Based on my analysis of dividend streaks, it looks like there won’t be an addition until sometime in 2016, when Hormel Foods (HRL) and Tootsie Roll Industries (TR) reach dividend king status. Currently, each of those two companies has managed to grow dividends for 48 years in a row.

I believe the valuations are a little overstretched right now for many of the companies on the list. The only companies which meet my entry screen of valuation, growth and dividend sustainability include Johnson & Johnson and Emerson Electric. If I were willing to reduce the entry yield to 2%, I could add Dover and Parker Hannifin on the list for further research.

Other companies like Cincinati Financial (CINF) have decelerated their rate of dividend growth, which is slower than the ten year average. Coca-Cola (KO) is a great company I am holding on to, but the problem I am seeing is that it has been unable to grow earnings per share for several years in a row. Without earnings growth, dividends will not grow over time and the intrinsic value of the business cannot grow either. For certain companies like Colgate-Palmolive (CL), valuations are a little high above 25 times earnings. I also find it hard to justify purchasing a utility which has increased dividends by 3%/year at an entry yield below 4%. Investors who overpay even for the most stable companies with the widest of moats might be in for some poor returns in the first decade of their investment. Hopefully we would see a sustained correction in 2015, which will correct the excess we are seeing. Let's wait and circle back in early 2016 on that.

Full Disclosure: Long KO, JNJ, PG, LOW, CL, MMM, EMR,

Relevant Articles:

The Dividend Kings List Keeps Expanding
Dividend Champions - The Best List for Dividend Investors
Dividend Champions Index – Five Year Total Return Performance
S&P 8000 – The power of reinvested dividends in action
How to be a successful dividend investor

Tuesday, December 30, 2014

Best Dividend Stocks for 2015

My goal is to find companies which pay a decent dividend today, sell at attractive valuations and can grow those dividends over time from increasing profits. If I manage to find companies that can regularly increase dividends, I would be able to live off dividends in retirement and not have to worry about inflation or having to withdraw money from my principle. In order to find good dividend stocks for further research, I start with the list of dividend champions. This list is maintained by Dave Fish, and shows companies which have managed to increase dividends for at least 25 years in a row. This is a big achievement, since it includes several recessions, wars, and world changes. If a company’s business model has managed to withstand the pressures of time, competition and changing world business environment, I want to study it for potential inclusion into my dividend portfolio. In addition, if I find that company selling at attractive valuations, I might be more inclined to act and buy, rather than sit and monitor on the sidelines.

Using the list of dividend champions, I ran the following entry criteria:

1) P/E ratio of 20 or below
2) Dividend yields above 2.50%
3) Dividend payout ratio (DPR) below 60%
4) 10 year dividend growth rate of at least 5%
5) One and three year dividend growth rates above 5%

Name
Symbol
Yrs Div Increase
P/E
Yield
DPR
PRICE
10 yr DG
Analysis
Eaton Vance Corp.
34
17.29
2.50%
40.98%
42.18
15.15%
Johnson & Johnson
52
17.4
2.60%
46.36%
105.06
10.84%
AFLAC Inc.
32
9.71
2.60%
24.45%
61.94
16.82%
Weyco Group Inc.
33
18.33
2.80%
46.91%
29.67
14.55%

ExxonMobil Corp.
32
11.73
2.90%
34.72%
93.21
9.64%
Kimberly-Clark Corp.
42
20.93
3.00%
59.47%
118.28
9.16%
Questar Corp.
35
19.39
3.10%
57.58%
25.59
6.17%

Tompkins Financial Corp.
28
15.61
3.40%
46.67%
56.18
6.25%

Chevron Corp.
27
10.43
4.10%
39.41%
113.25
10.55%
Helmerich & Payne Inc.
42
10.41
4.40%
42.57%
67.19
23.31%


Those ten companies are not automatic buys however. This is just the first part in quantitatively reducing the number of companies for research down to a more manageable level. Investors should review financials for each company and try to understand how they make money, and whether they can keep growing earnings and dividends over time.

I also view some companies like Helmerich & Payne (HP) as a potential contrarian plays, if energy prices recover in 2015 – 2016. However, H&P always paid a low portion of earnings to shareholders, which is why this otherwise cyclical company was able to increase dividends for 42 years in a row.

We also all know that a dividend portfolio should have adequate diversification in the number of companies. It also takes time to build a dividend machine that will shower the investor with cash in the future. I have been building my dividend machine for 7 years now, and I still have a lot of work to do, before it potentially covers my expenses some time around 2018. That's why the intelligent dividend investor should keep running their screen regularly, expand it to potentially cover other dividend growth stocks such as dividend contenders, and always be on the lookout for hidden dividend gems.

Full Disclosure: Long CVX, KMB, XOM, AFL, EV, JNJ

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
My Entry Criteria for Dividend Stocks
Why do I use a P/E below 20 for valuation purposes?
Dividend Investing for Financial Independence
My Dividend Goals for 2014 and after

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