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

Friday, February 27, 2015

Unilever (UL) Dividend Stock Analysis 2015





Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, Europe, and the Americas. This international dividend achiever has paid dividends since 1937, and has increased dividends for 19 years in a row.

The company's last dividend increase was in June 2014 when the Board of Directors approved a 5.90% increase in the quarterly distribution to 28.50 eurocents /share. The company's peer group includes Nestle (NSRGY) and Procter & Gamble (PG).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.30% to its US shareholders.


The company has managed to deliver a 9.20% average increase in annual EPS since 2004. Analysts expect Unilever to earn $2.15 per share in 2015. In comparison, the company is expected to earn $2.01/share in 2014. Over the next five years, analysts expect EPS to rise by 4.10%/annum. All this information is in US dollars however, while the company reports earnings in Euros. While earnings appear to be flat in dollars over the past 5 years, they actually increased in Euros.

The company is dually listed in the U.K. and the Netherlands. There are two classes of ADRs available for US investors, one for the U.K. listing - Unilever PLC (UL) and the other being Unilever N.V. (UN) in the Netherlands. For U.S. investors, the U.K. traded shares are much more desirable, because the U.K. does not withhold taxes on dividends. This makes the Unilever PLC (UL) shares best for retirement accounts. In a taxable accounts for investors already paying 15% on dividends, it might make slightly better sense to buy the Unilever N.V (UN) shares, since they are always selling at a slight discount.

A large share of Unilever's sales are derived from emerging markets, where revenue growth is expected to continue at a high single digit to a low double digit rate of increase. The company has also been able to pass on increases in prices of raw materials onto consumers, who purchase its branded products globally. The risk behind this strategy is if Unilever increases prices too rapidly, sales volumes might suffer as a result. Typically however, while the market for food and personal consumer products is highly competitive, demand is stable and relatively immune from economic stress. The company's strategic plans have revealed that it expects long-term sales growth of 3%- 5% per year.

The company generates a very high return on equity, which has declined however over the past decade. 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 7.50% per year since 2004, which is slower than the growth in EPS. With international dividend achievers, it is important to look at the trend in distributions in their base currencies. Despite the fact that the annual dividend payment appears volatile in US dollars, the growth in distributions in Euros has shown a consistent upward trend in distributions.


Year
Dividend Per Share/ Euro
1991
               0.2100
1992
               0.2200
1993
               0.2233
1994
               0.2333
1995
               0.2333
1996
               0.2633
1997
               0.3367
1998
               0.3800
1999
               0.4233
2000
               0.4767
2001
               0.5200
2002
               0.5667
2003
               0.5800
2004
               0.6300
2005
               0.6600
2006
               0.7000
2007
               0.7200
2008
               0.7600
2009
               0.7800
2010
               0.8190
2011
               0.8830
2012
               0.9540
2013
               1.0500
2014
               1.1240

A 7.50% growth in distributions translates into the dividend payment doubling almost every nine and a half years on average. If we look at historical data, going as far back as 1996, one would notice that the company has actually managed to double distributions every nine years on average.

The dividend payout ratio has remained at or above 60% over the course of the past decade, with the exception of a brief decrease below in 2007 and 2008. Currently, this ratio is above 70%, which is not something I would like to see in a company I am considering purchasing. 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 Unilever is slightly overvalued at 20.90 times earnings, yields 3.10% and has a sustainable distribution. Since the stock is trading above a P/E of 20, I would only consider adding to my position there on weakness in the share price. The thing that I do not like however is the high payout ratio, and the slowing down of earnings growth. That being said, I believe Unilever is a good hold for long-term investors.

Full Disclosure: Long UL

Relevant Articles:

Should taxes guide your investment decisions?
International Dividend Stocks – Pros and Cons
How to buy dividend stocks with as little as $10
Look abroad for higher dividend yields
How to get dividend investment ideas

Friday, February 20, 2015

Buying Quality Companies at a Reasonable Price is Very Important

I like to buy quality companies at attractive valuations. I look for quality in the companies I put my money to work. This means that I look for wide moats, strong brands, unregulated monopolies, strong competitive advantages and I don’t like to see change in the business models. If you are the player number 1 or 2 in a given niche, and you don’t have much change in your industry, you can make a lot of profits over time, and earn high returns on invested capital. In addition, chances are that you will generate a lot of cash each year, and will be able to distribute those excess profits to shareholders. This “monopoly” position could translate into stable earnings and profits throughout various phases of the economic cycle, high margins, and much lower likelihoods of cutting dividends during the next recession. Since I plan on living off dividends in the future, it is important to have a reliable stream of cold hard cash deposited to my account even during the darkest of times.

I have a few quality companies I like such as Church & Dwight (CHD), Moody’s (MCO) and Hershey’s (HSY). They are all selling for very high valuations today – above 20 times forward earnings each. Another high quality company I like is Brown-Forman (BF.B). It sells for close to 30 times forward earnings. Luckily I do own some shares in Brown-Forman, although not enough.

Despite the fact that I am very confident in the abilities of each one of those companies to keep printing money for shareholders in the next 10 – 20 years, I do not want to pay too much for those dollars. As a passive long-term buy and hold investor, my returns are largely dependent on the performance of the business I invest in. If that business increases earnings per share over time, and growth the dividends, I will do well. This would occur of course, as long as I do not overpay for that business. After all, my capital also has opportunity costs – meaning that I am better off in a dividend compounding machine at a lower valuation, if everything else is equal.

I want to generate good returns on my money. When I find a good compounding machine, it might make sense to allocate the money to it right away. The problem of course is that there are a few competing arguments to think about before doing that:

For example, Hershey is selling for 24.30 times forward earnings for 2015 of $4.36. The company has not cut dividends since 1974. It has raised dividends in every single year since 1974, except for 2009. It pays $2.14 in annual dividends, for a current yield of 2%. Earnings per share increased from $2.30 in 2004 to $3.77 in 2014. The company paid out $0.84/share in 2004 in dividends to shareholders. The stock price at the time of this writing is $106.02.

At that price, I do not think there is much margin of safety in the company. It seems as if most of future profit growth is already priced in the company’s stock. As such, the returns over the first decade of ownership are not going to be very high. The returns beyond the first decade will be harder to forecast. This is because the longer the period you are studying, the higher the possibilities for something changing for the worse. Before I buy a company, I ask myself the following questions:

- What happens if there is a change in the product or the competitive landscape?

- What happens if there is a valuation compression? For example, is it worth it to pay a premium at 25 – 30 times earnings for a company which could sell for 15 times earnings in 10 or 20 years.

- What happens if growth slows down? Are current growth expectations overly rosy or overly pessimistic? After all, once a certain size is reached, growth could be very difficult to achieve.

- Are there other compounders available at better valuations? Just because Hershey is a wide-moat compounder that will likely do well in the next 20 years, that doesn’t mean that other quality compounders might not be available at better starting valuations. For example, a few weeks ago, PepsiCo and McCormick were available at cheaper valuations than today ( less than 20 times earnings).

In the case of Hershey, I expect it to earn $4.36 in 2015, and pay $2.14 this year. I would then expect it to grow earnings per share by 7%/year over the next 2 decades, and to pay approximately 50% of earnings each year in the form of dividends.

This means that the company will be earning $8/share in 2024, and would have paid $30 in dividend income between 2015 and 2024. At a P/E of 15, this could translate into a price of $120/share in 2024. This means that an investment in Hershey today could translate into a 42% return in about a decade. At the time of writing this, the shares are selling for $106. A 42% return in 10 years is not an adequate return on investment for my money. I would much rather have my principal and income double every 10 years at the very worst. If we use historical equity returns of 10%/year as a benchmark, I would expect that buying a stock and reinvesting dividends there will result in doubling of my capital and income roughly every 7 years or so.

The P/E of 15 of course assumes an increase in interest rates, which translates into lower P/E ratios for large-cap common stocks. A 7% annual increase in earnings per share is slightly lower than forecasts, but it is more conservative, given the competitive nature of the confectionery industry, exposure to commodities on the cost side etc. I essentially came up with the estimates by averaging out the various possibilities times the expected probability of event occurring.

Therefore, we saw that in the first decade, even the best dividend compounder might not be worth purchasing at overvalued prices.

However, if the company keeps growing earnings per share at the same rate of 7%/year for the next 10 years, the picture is somewhat mitigated. By 2034, the company could earn $15.77/share, and be paying $7.88/share in annual dividend income. Using a P/E of 15, the stock price translates to $236/share. In addition, between 2015 and 2034 the company would have generated $89.33/share in dividend income to the shareholder. This translates in over $325 worth of money at the end of the 20 year period. If the dividend is reinvested at 20 times earnings, the investor in 2034 is left with 1.50 shares for every share invested in February 2015. The total worth is approximate $355. You could see that even if a high initial price, the consistent growth, and even with reinvesting dividend at an inflated price, the investor came out ahead and still realized a good return.

This is why Warren Buffett says that "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." A great compounder will produce best results if left uninterrupted for a couple of decades. Even if the original price is a little too high, it will deliver good returns on investment. Of course, given the fact that we have limited investment timeframes, it is not efficient to waste the first decade of the compounding process, and only hoping that the subsequent decade afterwards bails you out. I assume your investment timeframe is 30 years. In reality, my investment timeframe is hopefully 40 – 50 years.

Very often, the price returns generated from companies comes unexpectedly. This is why I believe it is important to just sit tight, and do nothing for as long as possible, even if companies you own experience temporary setbacks. It would have been very difficult for an investor to hold for a long ten years, while generating a meager 42% in total returns. This is because patience usually would run out, and they would start questioning themselves and their strategy. If they sold after year 10, they would have missed out on most of the gains. This is why it is important to purchase shares only at valuations that make sense, and to avoid overpaying for companies. It is also important to not just look at the stock price, and not avoid the folly that you will be selling off assets to live in retirement. By selling off assets in retirement, you are exposing yourself to sequence of return risk. Sequence of return risk is the risk that volatility in year to year stock returns could result in you running out of money in retirement. I do not know about you, but I would like to reduce the risk of outliving my money in retirement.

This is why I focus so much on the growing dividend income stream. If I can live off the dividend income stream, I am much less likely to panic if the other stock market participants disagree that the company’s shares should be worth more. I view relying on stock prices alone, and selling off chunks of your portfolio, to be very risky. This is because stock prices are unpredictable – it could easily be feast or famine for the investor who sells off shares to pay for their retirement expenses. Dividends on the other hand provide always a positive return on investment, which is realized in cash, is more stable, and cannot be taken away from you. Even the study behind the current 4% rule, covered a time period when stock dividend yields were closer to 4% (1926 - 1993). Hence, I have a much higher confidence in the ability of a dividend portfolio to generate the necessary dividend income over time, than the ability to correctly guess stock prices and sell off shares to live during my golden years. Having a diversified portfolio of quality dividend growth stocks, purchased at attractive valuations, will mitigate the risk of outliving my money in retirement.

Full Disclosure: Long PEP and MKC

Relevant Articles:

How to never run out of money in retirement
Six Quality Dividend Companies For Long Term Investors
Dividend income is more stable than capital gains
Dividend investing timeframes- what's your holding period?
Why I am a dividend growth investor?

Monday, February 16, 2015

How Ordinary Investors Can Generate Float Like Buffett

Warren Buffett is one of the best investors in the world. The most interesting fact about him is that he started making a lot of money after retiring twice – first time in 1956 and the second time in 1970. The first retirement idea he had was to run a hedge-fund like partnership, which he closed in 1970. The second retirement idea he had started in the 1960s, when he bought a struggling textile factory called Berkshire Hathaway at a heavy discount to book. While he calls this acquisition one of his biggest investment mistakes of his career, he has nevertheless managed to transform Berkshire Hathaway from a struggling company to a thriving conglomerate with a $300 billion market capitalization. This was mostly due to the fact that he is a learning machine that has accumulated business knowledge at a rate of 70 hours per week for 70 years. Accumulated knowledge is like compound interest, which pays tremendous dividends over time. For example, he purchased a massive block of Coca-Cola stock between 1988 and 1994, after using the product for over 50 years. Another example includes his ivnestment in IBM in 2011, after reading the annual report for the preceding 50 years, and investing in a company that competed with Big Blue in the 1950s.

While his investing prowess is unmatched, he has had a few levers within his control that helped him in his ascend to one of the world’s wealthiest people. The major lever that helped him earn his first $20 million were the performance fees he earned on Buffett Partnership partners. In fact, if returns exceeded 6% for a given year, he earned 25% of the profits above that threshold. As the level of assets increased, and as he was able to compound partners’ money at market-beating returns, his share turned him into a millionaire by his early 30s. By the time BPL was closed in early 1970, Buffett was worth over $20 million.

This is where the next chapter of Buffett’s investing prowess started. He was able to transform Berkshire into a powerhouse, by investing heavily into insurance companies like National Indemnity, GEICO, General RE to name a few. Insurance companies generate so called float, which is the amount of premiums received by policyholders. Overall, the amount of insurance premiums received tends to increase over time, which provides cash in the coffers of insurance companies. This cash is ordinarily invested in fixed income instruments like corporate bonds by most insurance companies. In general, his companies have managed to turn a profit in the difference between paying out claims and receiving premiums from policyholders. In the hands of Warren Buffett, that float was golden, as it represented free money he is given to invest, and was being paid to hold it. He was able to use the float generated by insurance companies as a defacto free leverage that allowed him to purchase even more businesses and more stocks, that further magnified his returns. In essence, he is a superinvestor, and his results have benefitted immensely from this free form of leverage.

However, I believe that even an ordinary investor with an ordinary investment records can benefit from the type of leverage, that float provides. The big issue is that as an ordinary investor who does not have tens of millions of dollars to buy an insurance company outright, it is almost impossible to use the same lever as Buffett. However, as I have been thinking about it, I could think of a few scenarios within the reach of ordinary dividend investors, where they have access to float.

1) When you purchase quality dividend paying stocks, the investor receives dividends today. However, as the company earns more, and pays more in dividend income over time, the shares become more valuable over time. If the investor decides to sell, they would have to pay hefty capital gains taxes on their money. In essence, the amount of the unrealized capital gain times the taxable rate of the shareholder is a defacto interest free loan from the US government, that subsidizes the long-term buy and hold investor. As long as the investor never sells, they never have to repay that float.

2) When you put investments in a tax-deferred account such as an IRA or 401 (k), you are receiving a tax deduction today, but promise to pay taxes on distributions at some future point in time. As a result you can end up purchasing dividend paying stocks at an immediate 25% discount. As you earn more dividends on investments, and as they appreciate in value over the course of several decades, the potential liability to the IRS increases. However, until you have to make distributions at the tender age of 70 and ½ years of age, you don’t have to pay taxes. Those tax liabilities are there, and in the eyes of Uncle Sam are not yours, but they nevertheless provide an interest free loan, and a sort of float for you to use in the meantime to propel your family to riches.

3) When you sell puts on a company stock, you are contractually obligating yourself to purchase the stock at a predetermined price and date, if it trades below the strike price. You are paid an option premium for this trade, whose value depends on factors such as interest rates, volatility of the stock, dividend yields and how far the option strike price is from the current stock price. If the stock is above the strike price at options expiration, you can keep the premium. If the stock price is below the strike price at expiration, you have to purchase the stock, even if it is much lower than the market price at the time. The premium you earn can be used to buy more stock. Either way, it is a win-win for the option seller, since they either end up with option premium cash in their account or with shares in a good quality company at a lower price than the competition.

4) The other type of float that ordinary investors can generate includes taking on margin loans and buying stocks on margin. You are therefore using borrowed money from your broker when you buy stock on margin. If you use brokers like Interactive Brokers, you are paying something like 1.60%, which is low. If you purchase a stock like Coca-Cola (KO) or General Mills (GIS), which pay around 3% today, and are expected to grow dividends over time, you could end up having dividends pay off the interest and principal. As long as the dividend is higher than the amount of interest paid on the margin loan, it is possible that eventually the dividend will pay for the stock. The downside to this strategy is if stock prices tank, and you need to put more money into the account. This is the dreaded margin call. If you do not have any more money to put, you can effectively lose everything. This is why purchasing shares on margin is so risky. Even if a stock price declines temporarily, and you know underlying fundamentals are great, the market participants might disagree with you and keep prices low for longer than you can remain liquid.

Full Disclosure: Long GIS, KO, BRK.B

Relevant Articles:

Warren Buffett Investing Resource Page
Selling Puts: Pros and Cons for Dividend Investors
Warren Buffett is now working for me
The Most Successful Dividend Investors of all time
How to never run out of money in retirement

Monday, February 9, 2015

Two Dividend Paying Companies I purchased last week

I like purchasing companies, which have dependable revenues and earnings. Companies that manage to generate dependable earnings throughout different phases of the economic cycle, and also grow them over time, have an especially important place in the portfolios of the dividend investors. This is because stable earnings reduce the likelihood of a dividend cut when things get tough. Since my goal is to one day live off dividends, the primary goal is to find those companies whose dividend streams are reliable, and can withstand short-term fluctuations in earnings. Another important factor is the ability of those companies to grow those earnings over time. Rising earnings per share are the secret ingredient behind future dividend growth. Companies that usually manage to keep growing earnings for many years tend to have some type of competitive advantage, and usually are in an industry where they provide a product or service that is well differentiated, and not commoditized.

Over the past week, I made two additional purchases, other than the Exxon Mobil one I previously discussed.

Diageo plc (DEO) manufactures and distributes premium drinks such as Johnnie Walker, Crown Royal, Buchanan’s, J&B, Baileys, Smirnoff, Captain Morgan, Guinness, Shui Jing Fang, and Yenì Raki.. The company has raised dividends for 15 years in a row. In the past decade, the company has managed to boost dividends by 5.80%/year. Currently, the stock is selling for 18.70 times forward earnings and yields 2.70%. Check my analysis of Diageo.

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company has raised dividends for 22 years in a row. In the past decade, the company has managed to boost dividends by 12.90%/year. Currently, this dividend achiever is selling for 17.10 times forward earnings and yields 2.10%. Check my analysis of United Technologies.

The nice thing was that the day of my scheduled purchase of United Technologies, the company also announced that it was raising its quarterly dividend by 8.50% to 64 cents/share. For Diageo, the interim dividend was raised in late January by 9% in British Pounds. While the interim dividend is usually 40% of the total annual dividend that will be paid, the growth in interim and final dividends for Diageo usually follow very similar rates of change.

A few other companies I own, which raised dividends last week include Archer Daniels Midland (ADM) and Dr. Pepper Snapple (DPS).

Archer Daniels Midland (ADM) raised its quarterly dividend by 16.70% to 28 cents/share. This marked the 40th consecutive annual dividend increase for this dividend champion.The stock yields 2.30%, and sells at 14 times forward earnings. I would probably consider adding to this stock on dips below $44.80/share. Check my analysis of ADM.

Dr. Pepper Snapple (DPS) raised its quarterly dividend by 17.10% to 48 cents/share. This marked the sixth consecutive annual dividend increase for the company. The stock yields 2.50%, but is overvalued at 21.40 times forward earnings. I would only consider the stock on dips below $73. Check my analysis of Dr. Pepper.

Since the purpose of my investment strategy is to generate enough dividends to cover my expenses, I receive a validation of my research any time a company I have purchased raises its dividend. Of course, it doesn't hurt that dividends represent cold hard cash deposited in my brokerage accounts, for which I didn't have to work 60 hours/week putting cover sheets on TPS reports. Dividends are the return on investment, which is always positive, almost always go up, and once paid to you can never be taken away from you. Any time a dividend payment is paid to me, it also serves as a kind of positive reinforcement that helps me reiterate to myself that I am a partial business owner of tens of companies in a variety of industries that have global operations and employ millions of workers.

Full Disclosure: Long DEO, UTX, XOM, DPS, ADM

Relevant Articles:

The Energy Company I want to buy
Six Quality Dividend Companies For Long Term Investors
Two Dividend Stocks I Purchased in 2015
Six Dividend Investments I Made Last Week
Three Dividend Machines I Accumulated Recently

Friday, February 6, 2015

W.P Carey (WPC): A Dividend REIT For Current Income

W. P. Carey Inc. (WPC) is an independent equity real estate investment trust. The firm also provides long-term sale-leaseback and build-to-suit financing for companies. It invests in the real estate markets across the globe. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties.

W.P. Carey is a dividend achiever, which has managed to boost dividends for 17 years in a row. In September 2012, this dividend achiever converted from a partnership form into a real estate investment trust. After this transformation, as well as merger with one of its privately managed REIT, dividend growth has been spectacular, although I expect it to slow down in the foreseeable decade.

The company not only invests in triple-net lease properties throughout the world, but it also managed privately held REITs. As a result, its sources of revenues are derived from the stable and recurring rents from those properties, which are usually leased to tenants under long-term leases. Those triple-net leases also allow for rent escalation over time. Under a triple-net lease, the tenant is required to pay all expenditures associated with maintaining and operating the property under lease.


Since 2003, FFO/share has grown by 5.30%/year. Growth in FFO will be delivered through accretive acquisitions for its own portfolio of properties, increasing rents over time, growing assets under management which generate fees.

On the surface, it might not look like FFO/share has increased that much over the past decade. However, once you look at the composition, the data paints another picture. Up until 2007 – 2008, approximately 40% – 60% of FFO/share were derived from fees to manage non-traded REITs. The rest came from managing real estate holdings. As various of its CPA non-traded REIT programs came to their end, they ended up being acquired by W.P. Carey in a liquidity event, which boosted the share of rental real estate FFO/share. The portfolio management fees provide a source of income for the REIT, which is relatively stable, and allows it to spread costs over a larger asset base.

The nice thing is that approximately 94% of leases include either fixed or CPI-based rent increases or percentage rent. The REIT has virtually no exposure to operating expenses due to nature of net leases, and they come with built-in rent increases as mentioned in the previous sentence. The weighted average lease term is 8.50 years. Approximately half of leases expire after 2022.

Since 2003, dividends per share have increased by 7.10%/year. I wanted to point out that W.P. Carey converted into a Real Estate Investment trust in 2012 from a Master Limited Partnership. As a result, dividends per share increased rapidly after 2012. Prior to 2012, dividends per share ( or unit), grew very slowly over time.


The FFO payout has been increasing from 65% in 2003 to over 80% expected in 2014. This is still sustainable, but means that future growth in distributions will definitely have to come from growth in FFO, since this ratio cannot exceed 100%. I do view the dividend to be sustainable at the moment however.

The portfolio occupancy has increased from 89% in 2004 to 97% in 2007, before stumbling again during the 2008 – 2009 recession and bottoming at 89% in 2010. It has been on the rebound and is approximately at 98% as we speak of. I am a little concerned about the fluctuations in occupancy/vacancy over the past decade, since it seems prone to high vacancy rates when times are tough and we are coming out of a recession. I have not seen declines of a similar nature with Realty Income (O), or National Retail Properties (NNN) for example.

The other metric I like to look at is tenant diversification. The nice thing about W.P. Carey is that it owns and manages triple-net properties in 17 countries. International accounts for approximately one third of revenues. The top 10 tenants account for 31% of revenues.

The current yield on W.P. Carey is 5.30%. I recently initiated a small position in W.P. Carey.  I would be more interested in this REIT on dips to 5.50% - 6% or higher yields. I am hopeful that 2015 will be a complete mirror to 2014, and be similar to the latter part of 2013, when everyone was scared from the potential for rising interest rates. Either way, I will probably increase my holdings in this REIT slowly over the next five years to take maximum advantage of dollar cost averaging.

Full Disclosure: Long WPC, O

Relevant Articles:

Realty Income - A dependable dividend achiever for current income
National Retail Properties (NNN) Dividend Stock Analysis
Five Things to Look For in a Real Estate Investment Trust
High Yield REIT Analysis: Omega Healthcare Investors
HCP Inc (HCP) A High Yield REIT Play on Healthcare

Wednesday, February 4, 2015

The Energy Company I want to buy

The other day, I posted an article which discussed a few investments I have recently made. I had previously bought some ConocoPhillips in early 2015, at which point forward earnings expectations hadn’t really gone as low as they are now. In previous research I had mentioned that I was looking to adding more to my positions in Exxon Mobil, ConocoPhillips and potentially even Chevron.

You might be surprised to see that I have not added to any of my energy holdings. The reality is that stock prices have not fallen as much as the price of oil, which reduced future earnings power.

Ticker
Price
Dividend
2015 EPS
Payout
P/E
Analysis
COP
62.98
$       2.92
$       1.59
184%
39.61
CVX
102.53
$       4.28
$       4.73
90%
21.68
XOM
87.42
$       2.76
$       4.29
64%
20.38
Note: Data is as of Friday, Jan 30, 2015

The reduced prices on oil have resulted in lowering of the expected earnings for 2015 for ConocoPhillips (COP), ExxonMobil (XOM) and Chevron (CVX) of and $1.59, $4.29, $4.73. Since prices have fallen much less than earnings, those oil companies are now selling above 20 times expected earnings. In all three, the forward dividend payout ratios are very high.

I am well aware that cyclical companies appear cheapest at the top of the cycle when earnings are highest, and that they appear most expensive at the bottom of the cycle when earnings are lowest. However, I also want to knowingly avoid purchasing companies that cannot support their dividend out of expected earnings.

This essentially rules out further investment in ConocoPhillips for me, and potentially even Chevron which should sell below $95/share to enter value territory. For ExxonMobil, my ideal value price would be below $86/share. Given its low payout ratio, ExxonMobil looks like the ideal candidate to build out an energy position.

It also looks like many participants have not priced in low prices, and are acting as if low prices are a temporary event. In the case the drop is temporary, buying today makes a lot of sense. In case prices stay low for longer than expected however, share prices might reflect that new reality. Most importantly, shares in many companies seem slightly overvalued, despite going down in price. Of course, I am also well aware that I should not blindly look into next years earnings as well. As someone who plans on holding for 20 - 30 years, I expect that oil prices will recover at some point, which would result in higher earnings over time ( especially if production volumes increase). However, I also want to avoid situations where a short-term pain ( 1-2 years) causes a company to cut dividends - this would disqualify it right away for my strategy. As most of you are aware, my goal is to generate a defensible stream of dividend income, which grows above the rate of inflation. I am trying to avoid companies which might be prone to dividend cuts as much as possible.

ExxonMobil is the one oil company, where I want to build out a full position over time. I already own a lot of Chevron, which is one of the reasons why any additions there will be limited. Given the high payout ratio on ConocoPhillips, I might not be able to buy more however. When I am presented with new evidence, I believe that the smart thing to do is change my view and manage risk accordingly.

I did add to my ExxonMobil position early this week. I might take the plunge into more ExxonMobil sometime in March, especially if stock prices go lower from here.

Full Disclosure: Long all companies listed above

Relevant Articles:

Margin of Safety in Dividends
Not all P/E ratios are created equal
Why do I use a P/E below 20 for valuation purposes?
Are Energy Stock Values Today a Once in a Lifetime Opportunity?
Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)

Monday, February 2, 2015

Six Quality Dividend Companies For Long Term Investors

My goal as an investor has always been to find those companies that are built to last. Those are the quality businesses, which possess some sort of a moat around them, that allow them to earn high returns, grow profits and dividends over time. Those are defensible businesses, which do well through most phases of the economic cycle. I believe that each of those businesses below will be around in 20 – 30 years, selling a similar type of goods and services to its clients. If they maintain their moats, chances are they will compound my capital and income for several decades. I could then live off that growing income, reinvest the excess back, and never have to sell shares to pay my expenses during the next bear market. My only goal is to avoid overpaying for these shares. Unfortunately, everyone knows that those businesses are good quality ones, with predictable earnings and revenues. Therefore, I had to pay close to full fair value on a few of them. However, I remind myself the words of Buffett that it is better to buy a good business at a poor price, rather than a poor business at a bargain price.

The companies I added to last week include:

McCormick & Company (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to retail outlets, food manufacturers, and foodservice businesses. It operates in two segments, Consumer and Industrial. This dividend champion has managed to increase distributions for 29 years in a row. The ten year dividend growth rate is 10.20%/year. Currently, the stock is selling for 20 times forward earnings and yields 2.20%. Since this is a retirement account purchase, I will likely reinvest dividends in this stock. Check my analysis of McCormick

PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. This dividend champion has managed to increase distributions for 42 years in a row. The ten year dividend growth rate is 12.50%/year. Currently, the stock is selling for 19.60 times forward earnings and yields 2.80%. Check my analysis of PepsiCo.

Kimberly-Clark Corporation (KMB), together with its subsidiaries, manufactures and markets personal care, consumer tissue, and health care products worldwide. It operates through four segments: Personal Care, Consumer Tissue, K-C Professional, and Health Care. This dividend champion has managed to increase distributions for 43 consecutive years. The ten year dividend growth rate is 8.20%/year. Currently, the stock is selling for 18.80 times forward earnings and yields 3.10%. Check my analysis of Kimberly-Clark.

Johnson & Johnson (JNJ), together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend king has managed to increase distributions for 52 years in a row. The ten year dividend growth rate is 9.70%/year. Currently, the stock is selling for 16.10 times forward earnings and yields 2.80%. Check my analysis of Johnson & Johnson.

Baxter International Inc. (BAX) develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions. This dividend stock has managed to increase distributions for 8 years in a row. The ten year dividend growth rate is 13.20%/year. Currently, the stock is selling for 15.20 times forward earnings and yields 3%. Check my analysis of Baxter.

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend champion has managed to increase distributions for 32 years in a row. The ten year dividend growth rate is 9.80%/year. Currently, the stock is selling for 12.50 times forward earnings and yields 2%. Check my analysis of Chubb Corporation.

Full Disclosure: Long all companies mentioned above

Relevant Articles:

Dividend Growth Stocks are Compounding Machines
Let dividends do the heavy lifting for your retirement
Dividend Kings List for 2015
How to never run out of money in retirement
How to be a successful dividend investor

Friday, January 30, 2015

HCP Inc (HCP) A High Yield REIT Play on Healthcare

HCP, Inc. (HCP) is an independent hybrid real estate investment trust. The fund invests in real estate markets of the United States. It primarily invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing.

HCP is a dividend champion which has increased dividends for 30 years in a row. The latest dividend increase was in January 2015 , when the board of directors increased the distribution by 3.87% to 56.50 cents/share.

Over the past decade, FFO/share has increased from $1.64 in 2003 to an expected $3.10 in 2014. This comes out to an annual FFO increase of 5.90%/year on average.


The company operates under 5 segments. Senior housing contributes 37% of revenues in 2013, while Post-Acute/Skilled properties contributes 31% of revenues. The Life Science and Medical Office Segments contributed 14% and 13% respectively, while the remaining 5% is generated from Hospital properties. I also like to look at the tenant diversification, in order to determine if revenues are overly dependent on a single customer. Based on the 2013 annual report, the four largest customers were HCR Manor Care with 29% of revenues, Emeritus Corporation with 13% of total revenues, Brookdale Senior Living with 8% and Sunrise Senior Living with 5%. The leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Most of our the leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of HCP’s senior housing, life
science, post-acute/skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs. The statistic to use is same-store growth, which has consistently been above 3% since 2009, and ranged between a low of 3.10% in 2013 to a high of 4.80% in 2010.

FFO/share growth has definitely been helped out by the low cost of debt, which has also been decreasing throughout its life as a public company since 1985. The nice thing about its debt profile is that almost all of liabilities are with fixed interest rates. Approximately half of the debt matures by 2018, which would mean that it would have to be refinanced at the rates available at the moment. The risk of course is if those rates start going up, it could leave less money for acquisitions and growing distributions.

Another factor that has helped FFO/share growth is the acquisition of properties, as well as strategic debt investments it has made. As the population ages in the US, the demand for health care services is only expected to increase. The percentage of senior citizen population is estimated to increase over the next 30 – 40 years, as is the growth in healthcare services. Therefore, a company like HCP should be able to enjoy stable occupancy in its medical properties, and recurring rents from that diversified portfolio that grow over time.

Over the past decade, dividends per share have increased from $1.66 in 2003 to $2.18 in 2014. This comes out to an annual dividend increase of 2.70%/year on average. The company offers a drip discount of 1% for those shareholders who elect to reinvest distributions back into more HCP shares. As a REIT, the company is required by law to distribute at least 90% of its taxable income. Since it is not taxed at the entity level, most distributions are not eligible for the preferential qualified dividend tax rates. Instead, a large portion of distributions are usually taxed under the ordinary income tax rates. The percentage allocations by tax source vary each year however. For example, in 2013, approximately 86% of the distribution was treated as ordinary income for tax purposes, while 7% was treated as capital gains income and the remainder was treated as a return of capital, which is nontaxable but reduces shareholders’ basis in the stock.

The reason behind the slower dividend growth relative to the higher FFO growth is due to the steady decrease in the FFO payout ratio over the past decade. Back in 2003, this indicator stood at 99%, which was certainly unsustainable. However as of 2014 it stands at 70%. The company also has another indicator called Funds Available for Distribution, which stood at $2.52/share in 2013. Therefore the dividend is well covered, and also has potential for growth at close to the rate of inflation for the foreseeable future.



HCP is an investment for those who need current income today, which will at least match the rate of inflation. I believe that the income stream is defensible, which means that dividends are secure, and are very likely to continue growing at least by the historical rate of annual inflation of around 3% over the next decade. As a result, the lower the entry price paid by the investor, the better the chances for higher returns, especially since the majority (approximately 60%) of long-term returns for REIT investors come from their distributions. The shares currently yield less than 5% and are selling for a forward price/FFO ratio of 15.40. I recently initiated a small position in HCP Inc. However, I would like to build a position in this REIT at an entry yield of 5 - 5.50% or higher.

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
Dividend Champions - The Best List for Dividend Investors
Dividends Provide a Tax-Efficient Form of Income
Using DRIPs for faster compounding of dividends
Six Dividend Investments I Made Last Week

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