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

Monday, September 22, 2014

How to analyze dividend stocks

Most dividend investors tend to have a screening criteria which helps them narrow down the investable universe of income stocks to a more manageable list. This screen could include criteria such as profitability, valuation, as well as other characteristics that are tailored to the individual’s strategy. Once a list of potential candidates is presented however, investors need to create an additional set of parameters that would help them to identify the best investments for their money.

In my investment process, I apply my entry criteria to the list of dividend champions and dividend achievers. I tend to perform this exercise once a month, but might perform it more often if stock prices decline. After I have a manageable list of investments to dig into, I often dig into them one by one. The items I look for might seem highly subjective, and based on my personal experiences. Therefore, they should not be a be it all inclusive list to copy and mindlessly replicate.

In general, I typically look for increases in income over the past decade. It does not have to be a stair step increase, although a period of flat or declining earnings of five or more years is typically a red flag for me. After past earnings are analyzed, I tend to research how exactly the company is making money. This is typically found in the first few pages of an annual 10-K filing, and it typically makes for a fascinating read. The next step after that is determining if the company has any formal plan or goals for growth over a given time period.

For example, IBM has a plan to earn $20/share by 2015. If a company does not have a formal plan written down, I tend to analyze factors that could allow it to grow profitably for the next decade and hopefully beyond that. In general companies can grow earnings by expanding in new markets, acquiring competitors, increasing sales volumes, introducing new products, raising prices or cuttings costs to name a few. For example, companies like Coca-Cola (KO), which are expanding rapidly overseas, could generate increases in earnings over the next several decades. This would be fueled by the increase in the middle-class worldwide, introductions of new healthier beverages as well from strong pricing power coming from strong brand name that the company owns.

For a company like Wal-Mart (WMT), it could expand its presence overseas in key markets such as China, while also maintaining its position as the lowest cost retailer, due to its scale. If Wal-Mart can successfully renovate a large portion of stores and manages to make and keep them cleaner and more appealing to the types of shoppers that tend to frequent Target (TGT), it could increase sales for years to come. Of course, by simply maintaining its grip on retail sales by negotiating favorable terms with suppliers, squeezing out inefficiencies from its value chain and passing off savings to consumers, it should continue to dominate in the US retail market. The problem that Wal-Mart is facing is that its size is a major impediment to fast growth in the future; moderate growth in earnings per share however could still be expected over time.

I typically also look at the return on equity, in order to determine whether the dollars which had been reinvested back into the business have generated any value to the company. In general, if there has not been a major acquisition, ROE would be a helpful factor to analyze. Companies need to invest in the business in order to keep their edge and also to increase profitability over time. Not all new projects are going to add to the bottom line immediately, but on aggregate, I would expect that a reasonably capable management team would deliver the kind of organic earnings growth that would pay dividends for years to come. Chasing hot or exciting projects that make news headlines might not be helpful for operating performance, since it would likely result in overpaying for assets. For example, back in the early 2000s, European Telecom’s spent billions for 3G wireless spectrum, which was more than they could swallow. This resulted in increased debt levels, and the big winners ended up being the governments which sold licenses at high prices.

Another thing I tend to look for includes trends in dividends and dividend payout ratios. If companies are able to generate rising profits over time, I generally tend to like those that raise distributions in tandem with increases in profits. A company with the culture to reward shareholders with more cash as the business grows and profits are rising are definitely a plus in my book. However, I tend to closely monitor the dividend payout ratio, in order to determine whether dividends are being increased on borrowed time. In other words, if dividends are rising faster than earnings, chances are that sooner or later both of these indicators have to converge their growth rate. Otherwise, the company would end up with an unsustainably high dividend payout ratio. Without a margin of safety in dividends, any short-term dip in profitability could result in steep dividend cuts, which could end long records of consistent dividend increases.

Companies like Chubb (CB) have been able to raise dividends at a rate that has been very close to the increase in earnings over the past decade.

In addition, I also look for companies which can deliver meaningful dividend increases for years to come. In general, utilities have been plagued by dividend cycles of increases followed by dividend cuts. Other utility companies such as Consolidated Edison (ED) have managed to eke-out minimal dividend raises of 1%/annually for the past 16 years. Given that inflation is typically 3%/year, this minimal dividend increase is not sufficient to maintain purchasing power of our dividend dollars. In general, I recognize that there is a trade-off between current yielder with low growth and a low yielder with high growth. However, investors should select the option that shows them the best potential from growth in earnings and dividends, rather than impose their own personal situation on the world.

This would mean avoiding a high yielder like Con Edison (ED), despite its mouth-watering yield and sticking to a company like Kimberly-Clark (KMB). Chances are that a high yielder could generate a high level of dividend income for years, which would decrease its purchasing power over time because of low growth rates. In addition, a high yielder would likely deliver lower total returns, since it would not be able to grow earnings as quickly as a low yielder.

Many of the companies I hold are defensive in nature, and sell products or services sold to millions of consumers and businesses worldwide. Many of those sales represents recurring transactions, which repeat every so often. Finding a business model that I can understand is definitely a plus. I believe that most ordinary investors can understand how Colgate-Palmolive (CL) or Procter & Gamble (PG) or PepsiCo (PEP) earn their money. This is the type of "qualitative" analysis which could be subjective, but important. In the case of those companies listed in this paragraph, I doubt that their profits will decline by much during the next recession.

In conclusion, investors should take into consideration the performance of the companies in which they plan to invest their money in, and estimate whether they stand a decent chance of continuing that performance in the future. If the answer is yes, and the dividend paying stock is attractively priced, then chances are that it would be a decent addition that would bear fruit for years to come.

Full Disclosure: Long KMB, KO, PEP, APD, WMT, CLX

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Friday, June 28, 2013

Teva Pharmaceutical (TEVA) Dividend Stock Analysis

Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes pharmaceutical products worldwide. This dividend achiever has paid dividends since 1984, and has increased them for 13 years in a row.

The company’s last dividend increase was in February 2013 when the Board of Directors approved a 25% increase in the quarterly distribution to 1 NIS /share. The company’s peer group includes Actavis (ACT), Taro Pharmaceutical (TARO) and Revlon (REV).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.10% to its shareholders.


The company has managed to deliver a 7.30% average increase in annual EPS since 2003. Analysts expect Teva Pharmaceutical to earn $5.07 per share in 2013 and $5.54 per share in 2014. In comparison, the company earned $2.25/share in 2012. Over the next five years, analysts expect EPS to rise by 6.81%/annum.

Earnings per share have been following a general uptrend, which has been quite volatile however. The company’s US operations have benefited from the recent launches of new generic products such as Lexapro and Actos. The patent cliff experienced by big pharma is beneficial for generics manufacturers such as Teva. Generics account for over half of the company’s sales. The company is under intense competition in the generic pharmaceuticals market, where being first to file might offer a slight competitive advantage to the filer.

However, Teva is not immune to the patent cliff itself. Its multiple-sclerosis drug Copaxone, accounting for 17% of sales in 2012, will face competition from Mylan Laboratories as early as 2015.

Future growth could also be realized from strategic acquisitions. The firm is expecting to benefit from the 2011 acquisition of Cephalon in terms of synergies, as well as adding its portfolio of products through its distributions pipeline.

The return on equity for Teva has been on the decline from a high of 27% in 2003. Currently, it is below 10%, but if earnings projections materialize, it could go up to 15%. 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 in US dollars has increased by 27.60% per year over the past decade, which is higher than the growth in EPS.

A 27% growth in distributions translates into the dividend payment doubling almost every two and a half years on average. If we look at historical data, going as far back as 1990, one would notice that the company has managed to double distributions every three years on average.

The dividend payout ratio has increased from 12% in 2003 to 46% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Teva is attractively valued at 17.20 times earnings, yields 2.80% and has a sustainable distribution. Unfortunately, I am not certain if it has the durable competitive advantages that would help it differentiate itself from competitors. It looks like in the generic drugs industry, companies do not have any competitive advantages related to branding, that would allow them to charge premium prices. In the long-run, commodity producers cannot realize excessive profits, that would translate into fat future dividends. As a result, I do not plan on initiating a position in the stock.

Full Disclosure: None

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Friday, June 21, 2013

Archer-Daniels-Midland (ADM) Dividend Stock Analysis 2013

Archer-Daniels-Midland Company (ADM) manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. This dividend champion has paid dividends since 1927, and has increased them for 37 years in a row.

The company’s last dividend increase was in February 2013 when the Board of Directors approved an 8.60% increase in the quarterly distribution to 19 cents /share. The company’s peer group includes Bunge (BG), Ingredion (INGR) and Cargill.

Over the past decade this dividend growth stock has delivered an annualized total return of 10.20% to its shareholders.


The company has managed to deliver an 11.30% average increase in annual EPS since 2003. Analysts expect Archer-Daniels-Midland to earn $2.55 per share in 2013 and $2.95 per share in 2014. In comparison, the company earned $1.84/share in 2012. Over the next five years, analysts expect EPS to rise by 10%/annum.

One of the driving forces behind future growth could be the company’s potential for expansion in its Agricultural Services and Oilseeds businesses. The firm plans on allocating 80% of its capital spending budget to these two segments. In addition, it plans on spending half of its growth capex on international operations. ADM is in the process of bidding for Australia’s GrainCorp, which could potentially provide it with higher presence in Asia.

In the long-run, strong demand for crops and agricultural products globally should be beneficial for Archer Daniels Midland. This is a function of potential for the gradual increase in the global population. The world population is expected to increase by 1.4 billion people through 2030, which represents an increase of over 20%. The highest population growth would be experienced in Asia and Africa. While the company has a strong dominant position in the industry, it is exposed to volatile commodities prices.

The company has three major business segments:

The Oilseeds Processing segment includes activities related to the origination, merchandising, crushing and further processing of oilseeds such as soybeans, cottonseed, sunflower seeds, canola, peanuts, flaxseed and palm into vegetable oils and protein meals for food, feed, energy and other industrial products industries. Oilseeds and oilseed products may be processed by ADM or resold into the marketplace as raw materials for other processing. This segment accounted for 45% of ADM’s 2012 operating profits.

The Corn Processing segment includes corn wet milling and dry milling activities, primarily in the United States, to produce ingredients used in the food and beverage industry including syrup, starch, glucose, dextrose and sweeteners. Dextrose is also used by the company as a feedstock for its bioproducts operations, including the production of ethanol, amino acids and industrial products. Corn gluten feed and meal, as well as distillers grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed as an oilseed into vegetable oil and protein meal. This segment accounted for 21% of ADM’s 2012 operating profits.

The Agricultural Services segment utilizes the company's extensive grain elevator and transportation network to buy, store, clean and transport agricultural commodities, including oilseeds, corn, wheat, milo, oats, rice and barley; and resells these commodities primarily as food and feed ingredients, and as raw materials, for the agricultural processing industry. Agricultural Services' grain sourcing and transportation network provides reliable and efficient services to the company's agricultural processing operations. The Agricultural Services segment includes 160 domestic and 25 international elevators, an animal feed facility in Illinois, 27 domestic and seven international formula feed and animal health nutrition plants, an edible bean plant in North Dakota, 23 domestic edible bean procurement facilities and a rice mill in California. This segment accounted for 33% of ADM’s 2012 operating profits.

The return on equity for Archer-Daniels-Midland has been following the rise and fall in commodities prices over the past decade. I expect this indicator to increase over the next five years, as earnings per share rebound. Currently, the cost of capital is 5.30%, which bodes well for the earnings growth potential behind new projects and capex spending. 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 12.30% per year over the past decade, which is slightly higher than the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling almost every six years on average. If we look at historical data, going as far back as 1990, one would notice that the company has managed to double distributions every six years on average.

The dividend payout ratio has charted a complete u-turn over the past decade. However, it has never gone significantly beyond 35%. 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 Archer-Daniels-Midland is attractively valued at 17.30 times earnings, yields 2.30% and has a sustainable distribution. I would consider adding to my position in the stock on dips below $30.

Full Disclosure: Long ADM

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Friday, June 14, 2013

General Mills (GIS) Dividend Stock Analysis

General Mills, Inc. (GIS) manufactures and markets branded consumer foods worldwide. This dividend achiever has paid dividends since 1898, and has increased them for ten years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved a 15% increase in the quarterly distribution to 38 cents /share. The company’s peer group includes Heinz (HNZ), Hershey (HSY) and Kellogg (K).

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


The company has managed to deliver a 7.60% average increase in annual EPS since 2003. Analysts expect General Mills to earn $2.68 per share in 2013 and $2.91 per share in 2014. In comparison, the company earned $2.35/share in 2012. Over the next five years, analysts expect EPS to rise by 7.93%/annum. The company has also managed to consistently repurchase 1.87% of outstanding shares each year over the past decade.

The company may be able to achieve earnings growth through expanding internationally, particularly in emerging markets, introducing new products, making strategic acquisitions as well as managing its bottom line. The industry is characterized by intense competition, but stable overall revenues, which are somewhat immune from the economic cycle. The acquisition of Heinz has definitely increased interest and valuations for food companies like General Mills so far in 2013.

General Mills has a very high return on equity, which has also increased 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 8.70% per year over the past decade, which is slightly higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we look at historical data, going as far back as 1986, one would notice that the company has managed to double distributions every eight and a half years on average.

The dividend payout ratio has increased from 45% in 2003 to 545 in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently General Mills is attractively valued at 17.60 times earnings, yields 3.20% and has a sustainable distribution. I would consider initiating a position in the company subject to availability of funds.

Full Disclosure: Long K

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Friday, June 7, 2013

PepsiCo (PEP) - A great dividend stock for long-term investors

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend aristocrat which has increased distributions for 41 years in a row. The most recent dividend increase was in February 2013, when the Board of Directors approved a 5.60% increase in the quarterly dividend to 56.75 cents/share.

PepsiCo’s largest competitors include Coca Cola (KO) and Dr Pepper Snapple Group (DPS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.


The company has managed to deliver an average increase in EPS of 7.40% per year since 2003. Earnings growth has been almost non-existent since 2009 however. Analysts expect PepsiCo to earn $4.39 per share in 2013 and $4.77 per share in 2014. This would be a nice increase from the $3.92/share the company earned in 2012. Over the past decade, PepsiCo has consistently managed to repurchase 1.10% of its outstanding shares every year, on average.

PepsiCo has recognized that carbonated drink sales are not going to grow significantly in the future, which is why it has focused on fast growing non-carbonated soft drinks. The company’s innovation in the area has been successful with the introduction of Aquafina , Gatorade and Propel, Lipton teas and Tropicana. Pepsi has also started to emphasize on health and wellness, and has worked to minimize the amount of trans fats in its snack foods. Future earnings growth could also come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods. Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. In 2011, PepsiCo acquired the leading Russian food and beverage company Wimm-Bill-Dann (WBD), in an effort to position itself in the growing emerging market in Russia and to build its nutrition business.

PepsiCo is also undergoing a strategic initiative in order to cut costs by $3 billion through 2014. In addition, the company is heavily investing in its brands in North America, by increasing advertising budgets. The company is also increasing prices in its products in order to offset inflation costs. These price hikes could make consumers more resistant to PepsiCo’s products.

The company has a high return on equity, which has remained above 30%, with the exception of a brief decrease in 2005 and 2012. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.60% per year since 2002. A 14% growth in distributions translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1965, we see that PepsiCo has actually managed to double its dividend every five years on average. Dividend growth has slowed down over the past few years, mostly due to flat earnings since the end of the financial crisis.

Over the past decade the dividend payout ratio has increased from 30% in 2003 to 54% in 2012.. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, PepsiCo is fully valued at 20.70 times earnings, yields 2.70% and has a sustainable dividend payout. In comparison Coca Cola (KO) yields 2.70% and trades at a P/E of 20.90.

Full Disclosure: Long PEP and KO

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Friday, May 31, 2013

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

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

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

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


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

Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company largely immune from economic cycles. In addition, the company has strong competitive advantages due to its scale, breadth of product offerings in its global distributions channels, continued investment in R&D as well as its stable financial position. In addition to that Johnson & Johnson is expanding into new long term opportunities through strategic acquisitions. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run. Sales in drugs like Simponi, Stelara, Zytiga, Edurant, Incivek, Xaralto and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. The acquisition of Synthes, which was completed in 2012, is expected to generate significant synergies for Johnson & Johnson.

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

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

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

The dividend payout ratio has increased from 38% in 2003 to 62% in 2012. This was caused by one-time charges against net income. The payout ratio based on forward EPS is standing at 45%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Johnson & Johnson is attractively valued at 14.60 times forward 2013 earnings, has a sustainable dividend payout and yields 3%. I recently added to my position in Johnson & Johnson.

Full Disclosure: Long JNJ

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Friday, May 10, 2013

Procter & Gamble (PG) - A dividend stock to hold forever

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1891 and increased payments to common shareholders every for 57 consecutive years. There are only fifteen companies in the world which have managed to boost distributions over half a century. One of the largest shareholders is no other but Warren Buffett’s Berkshire Hathaway (BRK.B).

The company’s last dividend increase was in April 2013 when the Board of Directors approved a 7% increase to 60.15 cents/share. Procter & Gamble’s largest competitors include Kimberly-Clark (KMB), Colgate-Palmolive (CL) and Clorox (CLX).


Over the past decade this dividend growth stock has delivered an annualized total return of 8.40% to its shareholders.

The company has managed to deliver a 7.90% annual increase in EPS since 2003. Analysts expect Procter & Gamble to earn $4.05 per share in 2013 and $4.36 per share in 2014. In comparison Procter & Gamble earned $3.12 /share in 2012. The 2012 results included impairment of goodwill for 51 cents/share as well as a 20 cents/share incremental restructuring charge.

Since the company acquired Gillette in 2006, the number of shares has decreased from 3.286 billion to 2.941 billion in 2012.

Procter & Gamble is a globally diversified consumer products company. Procter & Gamble’s long-term strategic goals include growing organic sales at 1% to 2% faster than market growth in the markets in which the company competes. Another important goal includes EPS growth in the high single digits to low double digits.

The company offers a broad scope of products for every consumer at different price points, and has a sizeable distribution network, which enables it to have a global geographic reach. The company invests in innovation, has a broad portfolio of products and strengths in emerging markets. Procter & Gamble also owns strong brand names, which allow it to maintain pricing power, in order to be able to pass price increases to consumers. The sheer scale of its massive operations and broad geographic reach ensure that the company is able to generate consistent revenue streams.

The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits.

In 2012, P&G announced plans to achieve $10 billion in cost savings over the next five years. The savings would be realized through elimination of overhead positions, reducing packaging costs, increasing focus on digital advertising at the expense of print as well as squeezing out inefficiencies.

The company’s return on equity decreased in half when it acquired Gillette in 2006. This indicator has stabilized around 19% for four years after that, before decreasing to 14% in 2012. I fully expect this to rebound to 19% in 2013, as 2012 performance was low because of one-time accounting charges. 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 10.80% per year since 2002, which is higher than the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1976 we see that Procter & Gamble has actually managed to double its dividend every seven years on average.

The dividend payout ratio has mostly remained between 40% and 50%. Currently, it is at 68%, mostly due to lower earnings from one-time accounting charges. Given forward earnings of $4.05/share in 2013, the payout is a sustainable 55.50%. 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 Procter & Gamble is attractively valued at 17.40 times earnings, has a sustainable dividend payout and yields 3.10%. I consider Procter & Gamble to have the qualities of a perfect dividend stock, which should be a core holding for any serious dividend investor. I would consider adding to my position in the stock on dips.

Full Disclosures: Long KMB, PG, CL, CLX

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Thursday, May 2, 2013

Vodafone Group (VOD) Dividend Stock Analysis

Vodafone Group Plc (VOD) provides mobile telecommunication services worldwide. It offers mobile voice services to approximately 447 million customers; messaging services; mobile data services; fixed broadband services; and whole sale carrier services. This international dividend achiever has consistently raised dividends every year since dividends were paid in 1989.

The company’s last dividend increase was in November 2012 when the Board of Directors approved a 7.20% increase in the first interim dividend to 3.27 pence /share. This is equivalent to 52 cents/share. The company’s peer group includes China Mobile (CHL), America Movil (AMX) and Verizon (VZ).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its US shareholders.


Earnings per share increased from a deficit of $2.61/share in 2003 to $2.18/share by 2012. Analysts expect Vodafone to earn $2.53 per share in 2013 and $2.57 per share in 2014. Over the next five years, analysts expect EPS to rise by 6.20%/annum. Each ADS is equivalent to ten ordinary shares traded on London Stock Exchange.

The company generates more than two-thirds of revenues from Western Europe. The company is typically number one or in the wireless markets it operates in. The slowdown in Europe has meant increased cost cutting, and slugging revenue growth. In addition, the European market is characterized by high regulatory pressure, high saturation and high competition. Vodafone has been disposing of assets which have not been characterized as core in Europe, while adding assets in developing markets. The company’s bright spot is its emerging market operations, which could be the next driver of strong growth. For example, it has over 150 million subscribers in India, and 65 million in South Africa and four other African countries.

In addition, Vodafone owns 45% of Verizon Wireless, which accounted for 42% of Vodafone’s adjusted operating income in 2012. The company received a GBP 2.90 billion dividend from Verizon Wireless for the first time since 2005, and as a result paid a special distribution to its shareholders. Verizon wireless will distribute another dividend in the current year, the proceeds of which will support Vodafone’s share buyback program. If Verizon (VZ) buys the stake from Vodafone, this could provide the British based telecom with a nice amount of pocket change to be used to dividends, share buybacks or other strategic acquisitions.

The company has managed to boost dividends every year since 1989. In addition, it also distributed an extra dividend payment of 62 cents/share in connection with its receipt of dividend from Verizon Wireless. Vodafone pays dividends twice per year. The first payment which occurs in February is the interim dividend, which has accounted for approximately 40% of total annual dividends for the year. Final dividends are typically paid in August. Since the dividend is paid in US dollars to ADS holders, it is not stable like the dividend paid in British Pounds due to fluctuating currency exchange rates.

Since 2002, the annual dividend in British Pounds has increased from 1.47 pence/share to 9.52 pence/share in 2012. The dividend in US dollars increased from 21.6 cents/share in 2002 to $1.48/share in 2012 (excluding the special distributions paid). Unlike other countries, the UK does not withhold any taxes out of US stockholders distributions.



Currently Vodafone is attractively valued at 10.20 times forward 2013 earnings and yields 5.70%. The forward dividend payout ratio is around 60%, which is sustainable. The company looks like a much better telecom play in comparison to AT&T (T) and Verizon (VZ). Given that I have zero exposure to the telecom sector, I recently initiated a position in the stock.

Full Disclosure: Long VOD

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Friday, April 12, 2013

High Yield REIT Analysis: Omega Healthcare Investors (OHI)

Omega Healthcare Investors (OHI) invests in healthcare facilities, principally long-term healthcare facilities in the United States. It provides lease or mortgage financing to qualified operators of skilled nursing facilities , as well as to assisted living facilities , independent living facilities, and rehabilitation and acute care facilities. This real estate investment trust has raised dividends for ten years in a row. Back in March, I initiated a position in Omega Healthcare Investors and Digital Realty Trust (DLR), after I sold my position in Universal Healthcare Realty Investors (UHT).

One of the reasons why I have been hesitant to look at Omega Healthcare before, was the fact that the REIT cut distributions in 2000, and eliminated them for 2001 and 2002.  The risk with a company that eliminates dividends once, is that the conditions might appear again, thus causing the firm to become a repeat dividend cut offender. In this article, I will review the operating performance over the past decade, and conclude on whether the company is a good addition to an investor’s portfolio.I will evaluate this REIT using the five criteria I use as outlined in an earlier article this week.

Since 2005, FFO has grown by 150%, while the dividend has doubled in the same period.


Over the past decade, dividends have grown from $0.72/share in 2004 to $1.69/share by 2012


I usually prefer a margin of safety in dividend payments. At 82%, the FFO Payout ratio is sustainable. A lower payout is always a plus, because it allows the company to absorb any short-term fluctuation in FFO, which lowers risk to dividend payments.

Future distribution growth would be driver by growth in investments that the company has been making over the past decade. Acquisitions of property have accelerated starting in 2009, with over $1.30 billion invested over the period. The REIT’s strategy is focused on pursuing selective investments in senior care facilities.
Skilled Nursing Facilities will be a growth industry for the next three – four decades, as the population ages. For example, the proportion population aged over 85 years is estimated to increase from six million in 2010 to 10 million by 2030 and 15 million by 2040.

Another positive factor is the stable occupancy of the company’s properties. Occupancy has increased from 80% in 2001 to 84% in 2011. A stable and growing occupancy percentage is a plus, and shows that management has maintained quality of new assets being acquired. The REIT will face a potential obstacle in 2018, when 19% of its leases expire.

The ten largest tenants account for 68% of revenues. Generally, I prefer that there isn’t a very high concentration of tenants, and 68.50% is in the top range of what I am willing to tolerate. All of the REIT’s properties are leased under 5 – 15 year lease terms, and are triple-net leases. The lease terms always have renewal options. Under a triple-net lease, the tenant pays net real estate taxes, building insurance and net common area maintenance, in addition for paying rent.
Omega Healthcare disclosed that a significant portion of its operators’ revenue is derived from governmentally-funded reimbursement programs, primarily Medicare and Medicaid. According to The Alliance for Quality Nursing Home Care, as of January 2013, approximately 70% of SNF residents depend upon Medicare and/or Medicaid funding for care. With the focus on cutting federal deficits, this could slow down growth in reimbursements.

Generally, debt is one item that could derail a real estate investment trust’s ability to pay distributions. With Omega Healthcare Investors, there isn’t a significant amount of debt to be paid over the next five years. In addition, the lower interest rates can afford the company to renew debt at lower rates or to utilize low current rates if it chooses to draw from its line of credit.

Currently, I find Omega Healthcare Investors to be attractively valued at 15.50 times FFO and yielding 5.70%.

Full Disclosure: Long OHI and DLR

Relevant Articles:

Five Things to Look For in a Real Estate Investment Trust
High Dividend Growth REITs: Digital Realty Trust (DLR)
- Realty Income (O) – The Monthly Dividend Company
- Three High Yielding Dividend Machines Boosting Distributions

Thursday, April 4, 2013

High Dividend Growth REITs: Digital Realty Trust (DLR)

Digital Realty Trust, Inc. (DLR), a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. It focuses on strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise data center users, including the information technology departments of Fortune 1000 companies, and financial services companies. I recently initiated a position in Digital Realty Trust, after selling my position in United Healthcare Realty Trust (UHT).

Digital Realty Trust went public in 2004 and has been increasing dividends for eight consecutive years. In less than two years, the company will be able to join the list of dividend achievers.

The company’s top ten tenants account for 35% of revenues. The largest tenant is CenturyLink (CTL), at 9%. Tenant diversification is important; in order to reduce the impact on revenues if they broke the lease and the property had to be leased to a new prospective client. The REIT has an average original lease term of 13.60 years, and usually has an annual 2.50% - 3% cash rent increase on existing leases. Furthermore tenants are usually the ones responsible for power costs.

The industries that Digital Realty serves include IT and Telecom Providers, as well as Financial and Corporate Service. In addition, this real estate investment trust also derives a good amount of revenues from European and Asia-Pacific operations, which together account for 21% of rents.

Approximately 39% of gross rent is under Triple Net Leases, where the tenant spends a considerable amount of capital in data center infrastructure. This reduces the risk of breaking the lease by the customer. The beauty of triple net leases is that the tenant is the one who maintains the building.

Approximately half of the revenues are derived from modified gross leases, where the REIT makes the capital investment in infrastructure. These offer a fully commissioned, flexible data center solution with dedicated electrical and mechanical infrastructure. Given the fact that technology changes fast, the risk with this revenue stream is that the company might have to make substantial capital investment to meet the power and cooling requirements of today’s advanced data centers, or may no longer be suitable for this use.

One key metric for real estate investment trusts is their occupancy ratio. An asset that is not leased is not generating any money and is costing capital and maintenance. Generally, it is important that companies are as close to maximum occupancy as possible. Digital Realty has managed to maintain occupancy between 94 and 95% over the past five years, which is impressive because it made a large amount of property acquisitions over the period, without sacrificing quality. In addition, the company has been able to renew 82% to 90% of leases that expired in 2012.

Since 2009 however, cap rates have been declining and are reaching 7.60%, which is still not bad. If the company makes large acquisitions at decreasing cap rates however, future growth might not be as robust. However, with record low interest rates, the company has been able to tap debt markets at 3.625% to 4.25% for 10 and 12 year notes.

Digital Realty Trust has managed to increase FFO from $1.37/share in 2005 to $4.46/share by 2012.


At the same time, distributions have grown from $1/share in 2005 to $2.92 in 2012.

The company’s policy is to pay at least 100% of taxable income but no more than 90% of FFO. I find that there is adequate margin of safety in distributions, as seen through the trends in the FFO/payout ratio.

Future FFO growth would be fueled by acquisitions made at attractive cap rates, while maintaining portfolio occupancy levels. The trust tends to obtain capital mostly through common share offerings. The low interest rates could offer a cheaper way to obtain capital for further expansion, that could be more beneficial to current shareholders. Given the current conservative capital structure, I see room for increasing leverage at fixed rates.

Currently I find Digital Realty Trust to be attractively priced an 15 times FFO and yielding a very safe 4.70%.

Full Disclosure: Long DLR

Relevant Articles:

Spring Cleaning My Income Portfolio, Part II
Margin of Safety in Dividends
Four High Yield REITs for current income
National Retail Properties (NNN) Dividend Stock Analysis
Dividend Achievers Offer Income Growth and Capital Appreciation Potential



Thursday, March 21, 2013

Unilever (UL) Dividend Stock Analysis

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 14 years in a row.

The company’s last dividend increase was in June 2012 when the Board of Directors approved an 8% increase in the quarterly distribution to 24.30 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 10.20% to its shareholders.


The company has managed to deliver a 7.60% average increase in annual EPS since 2003. Analysts expect Unilever to earn $2.33 per share in 2013 and $2.53 per share in 2014. In comparison, the company earned $1.98/share in 2012. Over the next five years, analysts expect EPS to rise by 5.40%/annum.

The company is dually listed in the UK and the Netherlands. There are two classes of stock listed for the UK – Unilever PLC (UL) and Unilever N.V. (UN) in the Netherlands. For US investors, the UK traded shares are much more desirable, because the UK does no withhold taxes on dividends.

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 in US dollars has increased by 8% per year over the past decade, which is higher than the growth in EPS. Because the dividend is based on a foreign currency, it could fluctuate up or down depending on the exchange rate, even if the board of directors keeps increasing it in local currency.

An 8% growth in distributions translates into the dividend payment doubling every nine years on average. If we look at historical data, going as far back as 1988, one would notice that the company has actually managed to double distributions every seven and a half years on average.

The dividend payout ratio has remained at 60% over the course of the past decade, with the exception of a few spikes in 2004 and 2006 and a brief decrease below in 2007 and 2008. 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 fully valued at 20.70 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.

Full Disclosure: Long UL, PG, NSRGY

Relevant Articles:

International Dividend Achievers for diversification
Procter & Gamble (PG)- A dividend stock to hold forever
Dividend Stocks I Purchased Over the Past Two Months
Dividend Stocks for Inflation Adjusted Income Stream
How to get dividend investment ideas

Friday, March 15, 2013

IBM (IBM) Dividend Stock Analysis

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. This dividend achiever has paid dividends since 1913, and has increased dividends for 17 years in a row.

The company’s last dividend increase was in April 2012 when the Board of Directors approved a 13.30% increase in the quarterly distribution to 85 cents /share. The company’s peer group includes Accenture (ACN), Infosys (INFY) and Hewlett Packard (HPQ).

Over the past decade this dividend growth stock has delivered an annualized total return of 11% to its shareholders.


The company has managed to deliver a 14.20% average increase in annual EPS since 2003. Analysts expect IBM to earn $16.63 per share in 2013 and $18.45 per share in 2014. In comparison, the company earned $14.37/share in 2012. Over the next five years, analysts expect EPS to rise by 9.86%/annum.

Back in 2010 the company unveiled an aggressive five-year plan, where it outlined its strategies that would allow it to hit $20/share by 2015. Halfway through the plan, the goal looks more than achievable. IBM is one of the most consistent share repurchasers in the world. Since 2002, it has reduced the number of shares outstanding from 1.703 billion to 1.155 billion in 2012.

IBM has transformed itself from a hardware company to services, solutions and software conglomerate. The company’ expansion overseas, focus on high margin software and providing solutions to customers, investing in innovation should help it in achieving its goals. The company strives to offer total solutions to customers, and its differentiating factor include its massive investments in R&D, and the many patents obtained as a result of it. This is a move away from commoditized serviced, and into value-added solutions, which has benefited the firm recently through margin expansions. IBM faces some pricing pressure from competitors, and risks related to failure to transition new products successfully. However, given the company’s economies of scale, contiguous focus on building and maintaining strong client relations and drive to innovate, it should weather any near term weaknesses successfully.

The company generates a very high return on equity, which has tripled over the past decade. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 18.80% per year over the past decade, which is higher than the growth in EPS.

A 19% growth in distributions translates into the dividend payment doubling almost every four years on average. If we look at historical data, going as far back as 1963, one would notice that the company has actually managed to double distributions every eight years on average.

The dividend payout ratio increased from 14.50% in 2003 to 23% in 2012. Because of the low dividend payout ratio, the company should be able to raise distributions above the rate of earnings growth for at least a decade, before a ceiling at 50% is reached. 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 IBM is trading at 15 times earnings, yields 1.60% and has a sustainable distribution. The stock is trading at a very attractive valuation, and has bright prospects ahead. Unfortunately, the shares are perennially yielding much less than my minimum requirements. Even if I lowered my entry requirement to 2%, I would require a drop below $170 to initiate a starter position.

Full Disclosure: None

Relevant Articles:

Dividend Achievers Offer Income Growth and Capital Appreciation
Four dividend paying companies with long term growth plans
25 Companies raising distribution in 2012’s busiest week for dividend increases
My Entry Criteria for Dividend Stocks
- Dividend Aristocrats List 

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