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

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, 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

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
39 Dividend Champions for Further Research
Pure Dividend Growth Stocks I wish I owned
Dividend Investors – Do not forget about total returns
Warren Buffett’s Dividend Stock Strategy

Friday, March 20, 2015

Eaton Vance (EV) Dividend Stock Analysis

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. It also provides investment management and counseling services to institutions and individuals. Eaton Vance is a dividend champion which has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in October 2014, when the Board of Directors approved a 13.60% increase in the quarterly dividend to 25 cents/share. Eaton Vance’s largest competitors include Franklin Resources (NYSE:BEN), T. Rowe Price Group (NASDAQ:TROW) and Blackrock (NYSE:BLK). In a previous article I mentioned that I am bullish on asset managers for the long run.

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 a 9.30% annual increase in EPS since 2004. Analysts expect Eaton Vance to earn $2.49 per share in 2015 and $2.83 per share in 2016. In comparison Eaton Vance earned $2.44 /share in 2014. The company has managed to consistently repurchase common stock outstanding over the past decade. As a result of these share buybacks, shares outstanding decreased from 142 million in 2005 to less than 119 million by 2014.

Overall I am bullish on asset managers in the long run, and Eaton Vance fits by default. The more assets under management they gather, the better the scale against competitors. Since investments grow in value over time, this makes it easier to simply generate higher fees without much additional insight. Switching costs to investors are high, since they would have to incur steep taxes and penalties as well as the uncertainty of finding an untested solution for their money. Therefore, a large portion of investors stick to the products they own.

Eaton Vance is a player that targets tax-sensitive investors in fixed income and securities. They are also a leader in closed-end funds. These assets are more sticky, and account for roughly half of assets under management. A company like Eaton Vance is worth a second look, since it has managed to attract and retain assets under management throughout different market cycles.

As we have millions of baby boomers retiring and needing financial advice, I expect them to use financial advice from certified planners, which would pre-sell open and closed-end funds and other financial products. Once a product has been sold to investors, it creates a recurring income stream to the provider of funds. The revenues that investment managers generate are realizable in cash almost instantaneously, which is a big plus. New product offerings could also contribute to growth, although at $298 billion in asset under management, it won’t be the main source of revenues for Eaton Vance. Eaton Vance has recently been cleared by the SEC to sell actively managed Exchange Traded Funds where holdings do not have to be disclosed daily.

Acquisitions to obtain advisers that target high-net worth individuals could be a big driver for future growth, as would be expansion internationally. Another positive is that as US stock prices keep increasing, this would eventually attract more investors to add in more money, which would create even higher profits for companies like Eaton Vance. Over time I expect Eaton Vance to get an even larger pile of assets under management due to all of the above mentioned reasons, which would lead to earnings and dividend growth.

One of the largest risks for Eaton Vance includes competition, which could result in net outflows for assets under management as well as decrease in fees charged to clients. Another risk includes prolonged declines in equity and fixed income markets, which could turn investors off stock market investing. A third risk includes underperformance relative to benchmarks, which could lead to outflows.

The company generates a very high return on equity, which has followed the ups and downs of the stock market 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 12.70% per year over the past decade, which is higher than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years. If we look at historical data, going as far back as 1990, we see that Eaton Vance has actually managed to double its dividend almost every four years on average.

The dividend payout ratio has increased from 26.70% in 2005 to 58% in 2009, before falling down to 37% in 2014. The reason behind this increase was the fact that dividend growth exceeded earnings 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 Eaton Vance is attractively valued at 17 times forward earnings, yields 2.30% and has a sustainable dividend payout. If the stock yields more than 2.50%, it would be attractively valued per my entry criteria. A 2.50% yield would be equivalent to a stock price dip below $40.

Disclosure: Long EV, TROW

Relevant Articles:

Dividend Macro trends: The Baby Boomer Retirement Investment
T. Rowe Price Group (TROW) Dividend Stock Analysis
Franklin Resources (BEN) Dividend Stock Analysis
Best Dividend Stocks for 2015
How to reach your dividend income goals?

Wednesday, March 18, 2015

39 Dividend Champions for Further Research

The list of dividend champions is the most complete list of US dividend stocks that have managed to boost dividends for 25 years in a row. David Fish painstakingly maintains this list, and spends many hours each month on this very useful tool for dividend growth investors. As a side bonus, his list also includes dividend contenders (those which have increased dividends for 10 to 24 years) and dividend challengers ( those which have increased dividends for 5 to 9 years in a row).

I did a quick screen on the list of dividend champions, where I isolated companies which have managed to grow dividends by 5%/year over the past 1, 3, 5 and 10 years. I believe that companies which have managed to grow dividends every year for over a quarter of century, deserve a second look for further analysis. I also believe that those companies that manage to grow those dividends at close to twice the rate of annual inflation deserve a second look. The reason is of course to find those companies which have the potential to keep delivering more dividend increases.

As I mentioned previously, the hidden power behind future dividend growth is earning growth. Without earnings growth, a company would be unable to grow dividends into the future. I am not interested in a company that merely grows dividends by expanding the dividend payout ratio. I am interested in a company that can grow earnings, and increase dividends as well. This combination also results in appreciation in the company’s value over time. You can see that dividend investors can have their cake (dividends) and eat it too ( capital gains as a bonus).

You all know my goal is to one day live off my dividends, when then exceed my annual expenses. I see the dividend income I will receive from companies I own as a salary substitute. I view capital gains as a bonus, which is dependent on a lot of extra factors I have little effect on. This is similar to my day job, where I know I can get a decent salary every 2 weeks. However, if my company does really well and I do my job really well, my total compensation could be much higher than the salary alone. This is how I view capital gains - as a nice bonus.

Using the output from the first screen, I went through the rate of earnings growth over the past decade for each company in the output. I tried to look for companies where earnings per share increased in the past decade. I was looking for a roughly doubling of earnings per share, and I ignored companies whose results seemed too volatile. The companies that I ended up with include:

3M CompanyMMMConglomerate5734.615.810.99Stock analysis
Air Products & Chem.APDChemical-Specialty32910.61111.2Stock analysis
Altria Group Inc.MOTobacco458.98.18.611.6Stock analysis
American States WaterAWRUtility-Water609.214.710.46.5
Automatic Data Proc.ADPBusiness Services4010.910.27.913.2
Becton Dickinson & Co.BDXMedical Instruments4310.110.911.114.1Stock analysis
Brown-Forman Class BBF-BBeverages-Alcoholic3111.810.6910Stock analysis
Chevron Corp.CVXOil & Gas277.910.99.610.7Stock analysis
Chubb Corp.CBInsurance3312.1879.8Stock analysis
Cintas Corp.CTASBusiness Services3210.416.312.611.4
Clarcor Inc.CLCAuto Parts3123.517.714.110.9
Colgate-Palmolive Co.CLPersonal Products526.87.810.511.5Stock analysis
Donaldson CompanyDCIIndustrial Equipment282729.922.518.9
Dover Corp.DOVMachinery592816.312.711.8
Eaton Vance Corp.EVFinancial Services34117.67.812.7Stock analysis
Franklin ResourcesBENFinancial Services3523.112.911.415.5Stock analysis
Genuine Parts Co.GPCAuto Parts5978.57.76.8Stock analysis
Gorman-Rupp CompanyGRCMachinery4212.
Hormel Foods Corp.HRLFood Processing4917.616.216.113.5
Illinois Tool WorksITWMachinery4011.
Johnson & JohnsonJNJDrugs/Consumer Prod.526.677.49.7Stock analysis
Lowe's CompaniesLOWRetail-Home Improv.5220.617.918.627.9
McCormick & Co.MKCFood Processing298.89.7910.2Stock analysis
McDonald's Corp.MCDRestaurants395.199.919.6Stock analysis
McGraw Hill Financial Inc.MHFIPublishing427.
Medtronic plcMDTMedical Devices378.37.88.314.1Stock analysis
Nordson Corp.NDSNMachinery5121.220.316.89.9
Parker-Hannifin Corp.PHIndustrial Equipment5816.313.115.715.1
PepsiCo Inc.PEPBeverages/Snack Food4313.18.47.712.5Stock analysis
Raven IndustriesRAVNBusiness Equipment285.411.912.716.7
Sherwin-Williams Co.SHWPaints371014.69.212.5
Sigma-Aldrich Corp.SIALChemical-Specialty3878.59.710.5
Stepan CompanySCLCleaning Products476.29.28.96
T. Rowe Price GroupTROWFinancial Services2915.812.41216.6Stock analysis
UGI Corp.UGIUtility-Electric/Gas279.55.997.3
Valspar Corp.VALPaints3717.414.512.511.6
VF Corp.VFCApparel422119.313.315.5
W.W. Grainger Inc.GWWElectronics-Wholesale4316.218.318.618.2
Wal-Mart Stores Inc.WMTRetail-Discount425.71112.614.8Stock analysis

Long-time readers know that I look at valuation before putting my hard earned money to work in a dividend growth stock. For example, I generally avoid buying companies for more than 20 times earnings. If a company sells for more than that, I wait patiently and monitor the situation. I believe that overpaying for a stock can reduce future returns, and provide no margin of safety for my capital. I also try to generally look for a minimum dividend yield of 2.50%, but I am more willing to break that guideline if I really like everything else about the company.

More sophisticated readers might also employ strategies such as put selling, in order to effectively purchase a stock at 20 times earnings.

After going through the exercise described above, I added a few shares in McCormick (MKC), PepsiCo (PEP) and initiated small positions in W.W. Grainger (GWW) and Genuine Parts Company (GPC).

Full Disclosure: I own shares in MMM, APD, MO, ADP, BDX, BF-B, CVX, CB, CL, EV, GPC, JNJ, LOW, MKC, MCD, MDT, PEP, TROW, GWW, WMT,

Relevant Articles:

Dividend Champions - The Best List for Dividend Investors
S&P Dividend Aristocrats Index – An Incomplete List for Dividend Investors
Dividend Angels – a possible searching ground for investment opportunities
The Pareto Principle in dividend investing
How to read my stock analysis reports

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