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

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

Relevant Articles:

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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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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:

NameSymbolIndustryYrs1-yr3-yr5-yr10-yr
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 CompanyGRCMachinery4212.19.37.47.4
Hormel Foods Corp.HRLFood Processing4917.616.216.113.5
Illinois Tool WorksITWMachinery4011.98.17.113.3
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.MHFIPublishing427.16.35.97.2
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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