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

Friday, March 8, 2013

National Retail Properties (NNN) Dividend Stock Analysis

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. National Retail Properties is structured as a REIT, which means that all profits, gains and losses, flow-through and are taxed at the individual investor’s level.

This dividend achiever has managed to boost dividends for 23 years in a row. It prides itself for being one of 104 companies in the US, out of 10,000, which have managed to achieve that. Over the past decade, this REIT has managed to boost distributions by only 2.10%/year. Even the latest distribution hike in 2012 was for a meager 2.60%, to 39.50 cents/share. This is below the rate of inflation, and thus could expose investors eroding purchasing power of income over time. On the positive side however, National Retail Properties was one of the few REITs that did not cut distributions during the financial crisis of 2007 – 2009.


Investors can sign up for National Retail Properties’ DRIP plan, by investing as little as $100. The beauty of this plan is that dividends are reinvested at a 1% discount, which allows for a much faster compounding of distributions. The REIT has managed to sell $93.50 million worth of shares using this plan in 2011. This is good from a liquidity perspective, since it allows cash to remain available for what the REIT seems fit. In comparison, in 2010 and 2009 National Retail Properties attracted $17.60 million and $67.30 million respectively from DRIP investors. DRIPs are more difficult to manage at an individual level, particularly investors own more than 20 -30 individual stocks, and could be a pain if good records are not kept. Check this listing of companies offering drip discounts.

The company focuses on single-tenant properties, under a triple-net lease. These properties are leased by large recognized retailers. Under a triple-net lease, the tenant is responsible for paying property taxes and ongoing operating expenses associated with the property. The lessor receives a base rent amount, with clauses for rent increases over the course of a contract based on inflation and store sales above certain thresholds. This provides for a very stable source of revenue. A few of the company’s competitors include Realty Income (O) and W.P. Carey (WPC).

The company acquires single tenant properties, with 15 – 20 year leases. Its average remaining lease is currently 12 years. Properties are selected based on location, and the REIT has found that main street locations have better rent increase potential and also make it easier to find replacement tenants. National Retail Properties owns 1530 properties in 47 states in the US. Management expertise in selecting properties and tenants has resulted in pretty consistent occupancy ratios between 97% - 98%. The only exception occurred in 2009, when occupancy declined to 96.40%, mostly due to the financial crisis. This is helped by the fact that the REIT likes to build long-term relationships with managements of growing retail operations, and also is more focused on established locations and analyzing credit and business operational risks in properties.

Future growth could come from strategic acquisitions of properties, increases in rent and keeping occupancy levels high. The company made acquisitions worth $238 million in 2010 and $767 million in 2011 at average cap rates of 9.5% and 8.40%. As of Q3 2012, National Retail Properties had made acquisitions worth $431 million at an average cap rate of 8.40%.

Some of the risks behind National Retail Properties are related to rising interest rates, decline in portfolio occupancy. The company sold ten year unsecured notes at 3.98% in Q3 2012, which was a very good rate. In comparison, in July 2011, the company issued $300 million worth of ten year notes at a 5.50% yield. However, if interest rates were to go up due to general increase in benchmarks or due to debt downgrades, the company would earn much less on the spread between cap rates and interest cost of capital. Since REITs typically sell bonds and stocks in order to grow their asset base, increase in the cost of capital could make growth tough to come by and might also threaten existing business, if debt has to be refinanced at much higher rates. On the positive side, the debt maturities are well-laddered, with $150 - $200 million maturing every year between 2013 and 2017. After that, in 2021 and 2022 $300 million in debt matures each year.

A decline in portfolio occupancy is another risk that the company is facing. The risk is mitigated by the company’s careful evaluation of each property and the analysis of tenants that would lease it for 15 – 20 year periods. However, if the economy experiences another recession, a portion of their tenants might have to break the leases. While tenants that look good today might be in dire conditions a decade from now, the fact that properties are located at attractive main street locations, would mitigate risks of excessive decrease in portfolio occupancy, as it would be easier to lease an attractive location. In addition, the company also tried to dispose of locations that it no longer deems fit for its strategic portfolio.

The company has less than 5% of leases expire each year through 2021. Looking at the past five years’ worth of lease expiration activity, 87% of leases had been renewed. 59% of these had been renewed at higher rents, 26% at lower rents while the remaining 15% had been renewed at same rents.

The following fifteen tenants represent over 50% of National Retail Properties’ rental income:



Because it is structured as a REIT, any income, gains and losses are not taxed at the entity level, but flow through to the proportionally to the individual shareholder’s tax returns. For 2012, most of the distributions (85.55%) was taxed as ordinary income, while 17.77% was classified as a return of capital, which is nontaxable. The remaining 4.50% and 3.13% were taxed as capital gain distribution and unrecaptured section 1250 gain.

In general, I find REITs to be an alternative for individual investors compared to renting out individual properties. It is much easier to own a REIT, which owns and operates a diversified portfolio of properties, than tie-up large amounts of cash in a few individually owned locations. In addition, you would never receive the proverbial 2 AM call by tenants if you owned a REIT; if you owned a single property, then the chances of such a call increase dramatically.

Overall, I like what I found about National Retail Properties in general. One thing that I like to calculate is distribution coverage, in order to determine whether the dividend is sustainable. For REITs, the typical indicator used is Funds From Operations (FFO).

FFO is calculated as follows: net earnings (computed in accordance with GAAP) plus depreciation and amortization of assets unique to the real estate industry, excluding gains (or including losses) on the disposition of certain assets and National Retail Properties s share of these items from National Retail Properties s unconsolidated partnerships and joint ventures.

However, when I tried to find comparable FFO values over the past five years, I noticed that the company never provided this information on a per share basis in a consistent format. For example, FFO listed in the 2011 annual report is $1.57/share. The FFO listed in the 2010 report is at $1.45/share. However, the 2009 report discussed AFFO of $1.65/share, therefore eliminating any comparability to the 2008 report, which listed FFO of $1.99/share. I realize that the 2007 – 2009 recession made it very difficult on REITs to cover their dividends well. I also praise the firm for maintaining distributions at a very difficult time. However, the fact that FFO is not comparable and does not agree to prior year reports, mostly due to changes in the formula for calculating FFO looks like cheap trickery to me. This is not accounting wrongdoing, as FFO is not a GAAP term, and financial statements have been certified by E&Y, but it is very confusing for the person who reads financial statements. You can view the annual reports from this link.

The FFO payout has ranged dramatically over the past five years. Based on estimated FFO/share of $1.71 - $1.73 and annualized dividend of $1.58/share, the forward FFO payout comes out to roughly 91.30% - 92.40%, which is still rather high.

Year
2011
2010
2009
2008
2007
2006
Dividends Paid to Shareholders
133,720
125,391
120,256
110,107
92,989
76,035
Diluted Funds from Operations
139,665
108,328
89,506
132,996
110,589
86,749
FFO Payout Ratio
95.74%
115.75%
134.36%
82.79%
84.09%
87.65%

This is the data from the 2009 annual report:


Year
2009
2008
2007
2006
2005

Dividends Paid to Shareholders
120.256
110,107
92,989
76,035
69,018

Diluted Funds from Operations 
90,087
142,355121,60296,41681,803

FFO Payout Ratio
133.49%
77.35%76.47%78.86%84.37%





At this point I view National Retail Properties as a hold that could be attractive on dips. The slow distribution growth is something that does not look very appealing at this point, particularly given the high payout ratio. The yield chasing crowd has taken the stock price to multi-year highs, and could probably go as high up as $39 - $40/share, for a yield of 4%. That being said, I might be interested in purchasing some shares of National Retail Properties on dips below $29 /share. I would be particularly interested in National Retail Properties on dips below $26/share.


Full Disclosure: Long O, NNN

Relevant Articles:

Using DRIPs for faster compounding of dividends
Four High Yield REITs for current income
Eight Income Stocks Boosting Investor Returns
Realty Income (O) Raises Dividends by a Record 19.20%

Friday, March 1, 2013

Nu Skin Enterprises (NUS) Dividend Stock Analysis

Nu Skin Enterprises, Inc. (NUS) develops and distributes anti-aging personal care products and nutritional supplements worldwide. This dividend achiever has paid dividends since 2001, and has increased dividends for 13 years in a row.

The company’s last dividend increase was in February 2013 when the Board of Directors approved a 50% increase in the quarterly distribution to 30 cents /share. The company’s peer group includes Avon Products (AVP), Estee Lauder (EL) and Revlon (REV).

Over the past decade this dividend growth stock has delivered an annualized total return of 14.40% to its shareholders.


The company has managed to deliver an impressive 17.10% average increase in annual EPS since 2003. Analysts expect Nu Skin Enterprises to earn $3.99 per share in 2013 and $4.50 per share in 2014. In comparison, the company earned $3.52/share in 2012. Over the next five years, analysts expect EPS to rise by 11.40%/annum.

The company’s growth could come from introducing new products, which its army of independent distributors would sell to clients. Another source of growth could include emerging markets, such as Greater China, where revenues have doubled since 2009. The company is a multi-level marketing organization, and its products are sold through independent distributors. One such company, Herbalife (HLF) has been in the spotlight a lot recently, as one activist investor claimed it is a pyramid scheme. This has made other similar companies guilty by association. In general, there is nothing wrong with a company selling products to customers through independent, commission based dealers as long as revenues are indeed derived from product sales.

The one factor that is making me a little uneasy about the company is the fact that it spent less than 1% of its sales on research & development. I am also not certain if its products really work or not. If they do not work, then repeat sales from customers would be difficult to achieve, and the only way to grow would be through constantly having to find new clients and selling to them. If the products do not really achieve their desired purpose, then the only competitive advantage that the company has is its network of independent distributors

Another factor that is making me a little uneasy is this quote from the 2011 annual report “We
include preferred customers who have purchased products during the previous three months in our “active distributor” numbers.” There should be a very big distinction between customers and distributors. This sentence makes me wonder how many of the new distributors, who are referred to by existing independent sales people, end up just closing shop. My skepticism could also be fueled by an experience when someone close I knew purchased cosmetics products from a direct re-seller from another company, and they were not something that would have been purchased again. In fact, according to MLM Myths website, multi-level marketing companies have a very high turnover rate in their independent sales forces.  This could be due to the fact that new sales are mostly coming from newly recruited distributors, rather than from repeat customer purchases.

The company generates a very high return on equity, which has been on the rise since 2006. 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 12.80% per year over the past decade, which is lower than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling almost every five and a half years on average. If we look at historical data, going as far back as 2001, one would notice that the company has indeed managed to double distributions every five and a half years on average.

The dividend payout ratio has remained below 60% over the course of the past decade, with the exception of a brief spike in 2006 – 2007 period. 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 Nu Skin Enterprises is attractively valued at 10.90 times earnings, yields 3.10% and has a sustainable distribution. While the stock is cheap, and seems to have great growth prospects ahead, the lack of competitive advantages makes me pass it at this time.

Full Disclosure: None

Relevant Articles:

Dividend Achievers Additions for 2012
Dividend Investing in times of a Social Media Bubble
Twelve Dividend Machines Boosting Dividends
Ten Dividend Stocks Beating Inflation

Friday, February 22, 2013

BHP Billiton (BBL) Dividend Stock Analysis

BHP Billiton Plc (BBL), together with its subsidiaries, operates as a diversified natural resources company worldwide. This international dividend achiever has increased dividends for 13 years in a row.

The company’s last dividend increase was in August 2012 when the Board of Directors approved a 3.60% increase in the semi-annual distribution to $1.14 /share. The company’s peer group includes Rio Tinto (RIO), Vale (VALE) and Anglo-American (AAUKF).

Over the past decade this dividend growth stock has delivered an annualized total return of 19.60% to its shareholders.


The company has managed to increase EPS from $0.62/share in 2003 to $5.77 by 2012. Analysts expect BHP Billiton to earn $5.54 per share in 2013 and $5.70 per share in 2014.

The Australian BHP Billiton Limited (BHP) and the British BHP Billiton Plc (BBL) are separately listed with separate shareholder bodies, but they operate as one business with identical boards of directors and a single management structure. The headquarters of BHP Billiton Limited, and the global headquarters of the combined BHP Billiton Group, are located in Melbourne, Australia. The dual-listed company structure grants shareholders of the two companies the same proportional economic interests and ownership rights in the consolidated BHP Billiton Group, in such a way as to be equivalent to all shareholders of the two companies actually being shareholders in a single, unified entity. This structure was implemented in order to avoid adverse tax consequences and regulatory burdens. In order to eliminate currency exchange issues, the company's accounts are kept, and dividends paid, in United States dollars. For US investors, shares of BHP Billiton PLC (BBL) are recommended versus the Australian ones (BHP), as United Kingdom does not withhold any taxes on dividends paid to American Citizens. Each ADS represents two ordinary shares traded in London.

The company managed to boost earnings significantly between 2003 and 2008, as a result of several factors.. These include strong emerging markets demand for metals such as iron ore and copper particularly from China. Other factors included the rebound in global economy, and the increase in commodities prices. The 2008 – 2009 recession lead to decrease in profitability. Several competitors such as Rio Tinto (RIO) cut distributions to conserve cash, while BHP Billiton kept them as it had a strong balance sheet position at the time. The rebound in the global economy starting in 2009 has brought demand and commodities prices up, which increased profits.

Long-term growth could be aided by strategic acquisitions and investment in the business to uncover new fields for mining. Another bright spot includes the company's effort to diversify operations, as evidenced by its investment in natural gas assets. Unfortunately, only large acquisitions will likely make an impact on the company’s bottom line. However, these large scale acquisitions are more difficult to complete due to regulations and the fact that governments do not want to see large players consolidating. The company's attempt to acquire Potash and Rio-Tinto have been unsuccessful. In addition, earlier in 2012, the company scrapped its $80 billion in capital expenditures project pipeline. This occurred in the first year of the five year capital spending program. The company is scaling back on 50 billion worth of projects through 2016, but is still working on approximately $20 billion for which it had already committed the capital.

The company is a player in a commodities industry, and is a price taker. I do not see it as having much in competitive advantage, other than its scale of operations. Its performance is closely tied to global economic trends, and prices for metals. While it would be good to have exposure to “hard assets”, I do not believe that the company has the business characteristics that would enable it to continue raising distributions over the next decade. I believe the streak of consecutive dividend increases was mostly due to the company being at the right place at the right time a decade ago, right before the commodities boom started. Long-term successful dividend growth investing is focused on selling branded, proprietary products or having some other form of competitive advantage to allow firms to weather any short-term weakness in the economy.

The return on equity has oscillated wildly between 15% and 50%. Between 2003 and 2007, it rose from 15% to 49%, followed by a drop to 15% in 2009. By 2011 it bounced back up above 45%, before tumbling to 25% in 2012. I generally want to see at least a stable return on equity over time.

Over the past decade, BHP Billiton has managed to substantially boost distributions. In 2003 the company paid 29 cents/share, which has increased to $2.20/share by 2012. At the new rate of $1.14/share, the annual dividend is $2.28/share.

The dividend payout ratio has mostly remained below 50%, with the exception of a brief spike in 2009. 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 BHP Billiton PLC is attractively valued at 12 times earnings, yields 3.30% and has a sustainable distribution. I do not believe in diversifying for diversification sake. However, given the fact that the company is simply a price taker participant in a commodities industry, the most I can rate the stock is a hold.

Full Disclosure: None

Relevant Articles:

International Dividend Achievers for diversification
Best International Dividend Stocks
International Over Diversification
Diversified Dividend Portfolios – Don’t forget about quality

Friday, February 15, 2013

ONEOK Partners (OKS) Dividend Stock Analysis

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. The partnership has paid distributions since 1994, and increased them every year since 2006.

ONEOK Partners is a master limited partnership (MLP), which is a pass through corporate structure. As such, profits are not taxed at the entity level, but at the individual partner level. Investors in MLPs are called limited partners, shares are called units and dividends are called distributions. As a result of the fact that the net results are taxed at the individual partner level, the taxation of these distributions could be slightly more challenging when compared to taxation of dividends from typical dividend stocks such as Chevron (CVX) for example. ONEOK (OKE) is the general partner and owner of 43.40% in ONEOK Partners (OKS).

I replaced my investment in ONEOK Inc (OKE) for ONEOK Partners (OKS) units in 2011. In 2012 I sold the majority of my shares in Con Edison (ED) and bought more units of ONEOK Partners with the proceeds. You can read my arguments behind the trade in this article.

The partnership operates in three major segments:

Natural Gas Gathering and Processing Segment- Provides nondiscretionary services to producers
that include gathering and processing of natural gas produced from crude oil and natural gas wells. Revenues from this segment are derived primarily from POP and fee contracts. Under a POP contract, ONEOK retains a percentage of the NGLs and/or a percentage of the residue gas as payment for gathering, treating, compressing and processing the producer’s natural gas. While the partnership is exposed to commodity price risk in this segment, it is mitigated by the fact that the majority of exposure is hedged. This segment is expected to deliver approximately 25% of operating income in 2013.

Natural Gas Pipelines Segment – Operation of regulated natural gas transmission pipelines, natural gas storage facilities and natural gas gathering systems for nonprocessed gas. Natural Gas Pipelines segment’s revenues are derived typically from fee-based services provided to customers. This segment is expected to deliver approximately 14% - 15% of operating income in 2013.

Natural Gas Liquids Segment - Provide nondiscretionary services to producers that consist of facilities that gather, fractionate and treat NGLs and store NGL products primarily in Oklahoma, Kansas and Texas. Revenues for our Natural Gas Liquids segment are derived primarily from fee-based services provided to customers and physical optimization of assets. Physical optimization is a fancy term to describe purchase and transportation of NGL products in order to realize market or seasonal differentials in pricing. This segment is expected to account for over 60% of operating income in 2013.

Projected distribution and earnings growth are expected to be driven primarily by natural gas and natural gas liquids volume growth. The partnership also expects higher anticipated natural gas gathering and processing volumes and increased natural gas liquids gathering volumes as several projects from its $5.7 billion to $6.6 billion, four-year growth program are placed into service.

Approximately $1.5 billion to $1.8 billion will be spent to to construct a 1,300-mile crude-oil pipeline to transport light-sweet crude oil from the Bakken Shale in the Williston Basin in North Dakota to the Cushing, Okla., crude-oil market hub. Construction is expected to begin in late 2013 or early 2014 and be completed by early 2015. In addition, approximately $2.4 billion to $2.9 billion for natural gas liquids projects expected to inservice between 2013- 2015. The remaining $1.8 billion to $1.9 billion for natural gas gathering and processing projects mostly in the Bakken Shale.

Since 2005, ONEOK Partners has managed to boost distributions by 7.10% per year. The partnership expects 10% – 15% annual distribution growth through 2015 and plans to maintain at least a 1.05 times distributable cash flow coverage. Per its partnership agreement, the majority of available cash from operations should be distributed to general and limited partners.


Master limited partnerships such as ONEOK Partners have a geographic competitive advantage. The entry costs to build a pipeline and connect oil and gas wells with processing facilities is in the hundreds of millions if not several billions. The steep fee is a deterrent to competition, since running two pipelines adjacent to each other would not be profitable for either party. The business is heavily regulated by FERC, which sets rates to allow recovery of investment plus a proscribed rate of return.

There are several risks to investing in MLPs such as ONEOK Partners. Because the business is capital intensive in nature, and requires a lot of capital for future investment, increase in interest rates would reduce distributable cash flows per unit. The partnership distributes almost all of its cash flows to unitholders, which is why it finances growth through sale of debt or sale of additional units. Another risk involves government regulation, such as abolishment of MLP structure for example. This could lead to taxation of profits at the MLP level and the shareholder level, which would lead to distribution cuts. Distribution cuts would probably lead to decrease in unit prices, similar to what happened with Canadian Royalty Trusts in 2006.

A large portion of the distribution paid to limited partners is usually classified as a return of capital. This lowers the partner’s basis, until it reaches zero. As a result, a large part of the distribution received by the partners is tax deferred for a period of time. This is caused by the depreciation on long-term assets such as pipelines. Partners receive a K-1 form each year, which is slightly more complicated than a 1099 –Div form. When I filed my tax returns for 2011 however, the partnership sent me a pretty useful tax package, which visualized how I need to report the amounts from the K-1 package.

Currently, ONEOK Partners yields 4.80%, which is somewhat lower in comparison with other MLPs. However, the strong distribution growth more than compensates for low current yield. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long OKS and CVX

Relevant Articles:

Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
General vs Limited Partners in MLP's
Why I am replacing ConEdison (ED) with ONEOK Partners
Master Limited Partnerships: The Perfect Dividend Stocks
ONEOK Inc (OKE) Dividend Stock Analysis

Friday, February 8, 2013

YUM! Brands (YUM) Dividend Stock Analysis

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. Dividend stock has paid dividends since 2004, and has increased dividends for 8 years in a row.

The company’s last dividend increase was in September 2012 when the Board of Directors approved a 17.50% increase in the quarterly distribution to 33.50 cents /share. The company’s peer group includes McDonald’s (MCD), Burger King (BKW) and Domino’s Pizza (DPZ).

Over the past decade this dividend growth stock has delivered an annualized total return of 21.10% to its shareholders.


The company has managed to deliver a 12.60% average increase in annual EPS since 2002. Analysts expect YUM! Brands to earn $3.27 per share in 2012 and $3.67 per share in 2013. In comparison, the company earned $2.74/share in 2011. Over the next five years, analysts expect EPS to rise by 14.27%/annum.

The company’s long-term earnings will be driven by its international segment, where it expects to open new restaurants. The company owned over 14,500 restaurants internationally and 4,500 in China. In total, Yum! Brands had approximately 37,000 restaurants. Chinese units are expected to generate 5% in annual same-store sales growth. Yum! expects to keep increasing the number of restaurants in the double digits in order to capitalize on the growth in emerging middle class there. Rising incomes are making Yum!’s brands even more affordable for an increasing number of people. In fact, the consuming class is expected to double over the next 10 years, going from 300 million to at least 600 million people, as significant urbanization continues.
With this tailwind, Yum! Brand’s new-unit development pace should continue at a high rate, and same store sales should continue to grow. India could be another major source of growth as well. The company believes that its new unit progress with KFC in India is very similar to what they saw in China during its first 10 years. Currently, Yum! owns approximately 450 units in India, and plans to add 150 units in 2013. Overall, the company expects to increase international units by 3%-4%/year, with same store sales exceeding 2%.

Although the US units have not been as hot as the international segment, they have a lot of room for growth also. The company is just getting started with introducing breakfast menu items, and also increasing hours of operations. The number of units has declined from 18,500 in 2007 to 18,000 by 2011.

While the recent reports have not been overly optimistic, I believe that the best acquisitions are made when there is blood on the streets. The third quarter report showed sharply lower sales in the company's China stores for last 2 weeks of 2012 due to the poultry supply situation. This is not an issue that affects just Yum! however, although the media has found it easier to focus on a single target. The company now expects slight decrease in EPS in 2013, although long-term prospects are still bullish. The company is in the process of performing a comprehensive view of Chinese operations, in order to strengthen supply chain, ensure better quality assurance and implement the Shanghai FDA report recommendations. Restoring consumer confidence would probably take time, and there might be a few more earnings dissapointments over the next few quarters, before the tide turns back up

The company generates a very high return on equity, which never fell below 50%. I generally want to see at least a stable return on equity over time.

Ever since Yum! Brands started paying dividends in 2004, it has managed to increase them at a fast clip. The quarterly dividend has increased from 5 cents/share in 2004 to 33.50 cents/share by 2012. Over the past five years, dividends have growth by 17.80%/annum, which is faster than earnings growth.

The dividend payout ratio increased from 0% in 2002 to 40% in 2012. This is a direct result of Yum!’s initiation of a dividend policy, and raising distributions at a faster rate than earnings. Future dividend growth would likely be closer to the growth rate in earnings per share. 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 YUM! Brands is trading at 18.30 times earnings, yields 2.20% and has a sustainable distribution. The stock is a little richly valued for my taste, and I would probably try to buy some on dips below $54/share. Of course, if the stock price is flat in 2013, but dividends increase to 40 cents/share, my entry price would increase to $64 /share. It is important to remain disciplined, and only invest in the best companies at the best prices. The issues with Chinese poultry supply would most probably present investors with an attractive opportunity to acquire a great long-term holding at depressed valuations.

Full Disclosure: Long YUM and MCD

Relevant Articles:

Dividend Investing Goals for 2013
Nine Income Stocks Delivering Dividend Increases to shareholders
Why I am not worried about the Fiscal Cliff and Dividend Tax Increases
How to choose between dividend stocks?
Dividend Growth Strategy for Retirement Income

Friday, February 1, 2013

Should dividend investors hold on to Abbott (ABT) and Abbvie (ABBV) following the split?

I have been a shareholder of Abbott Laboratories for several years. I liked the fact that the company was constantly undervalued, and also managed to offer a very attractive yield plus an above average dividend growth. My last addition to my position occurred in the final weeks of 2012. In my last analysis of the stock, I was bullish on its business going forward.

On January 1, 2013, Abbott Laboratories split into two companies, one which retained its name Abbott Laboratories (ABT), and another named Abbvie (ABBV). For every share of legacy Abbott Laboratories, shareholders received one share of Abbvie (ABBV) and one share of the new Abbott (ABT). Following the split, Abbott has declared a dividend of 14 cents/share, while Abbvie declared a dividend of 40 cents/share. The total annual dividend combined for both companies of $2.16 is above the $2.04/share annual dividend declared by legacy Abbott in 2012. This former dividend champion had boosted distributions for 40 consecutive years. For legacy Abbott shareholders, this new dividend from the sum of the parts translates into the 41st consecutive year of higher dividend income.

Abbott (ABT) is focused on nutritionals, diagnostics, generic drugs and medical devices. The company yields 1.70%, but has the potential to grow earnings significantly over the next few years. Abbott Laboratories is expected to earn $1.95/share in 2013, which translates into a forward P/E of 16.80. Approximately 40% of sales will be derived from emerging markets, while 27% are derived from the US. The company has opportunities in medical products that have consistent earnings per share growth and strong sales, coupled with large mix of products addressing different areas of health care. Abbott is the leader in each of its four segments, which contribute almost equally diversified revenues for it. For example, in its medical devices segment, Abbott is number one for Lasik surgeries and a number two for Cataract surgery. Other positive trends behind each of the four businesses include favorable long-term healthcare and emerging markets growth. There is an increased demand for healthcare products due to aging of population in much of the developed world as well as the increase in chronic disease.

In the generic drugs segment, BRIC’s account for over 30% of sales, which are expanding at the high teens. Emerging markets as a whole accounted for 60% of sales in this segment in 2012, which could increase to 70 -75% by 2015. Driving trends behind this include population growth coupled with rising incomes. Other growth factors include improving access to healthcare for people who have not had access to modern facilities before.

In the medical devices segment, growth could be driven by continued innovation, margin expansion, as well as capitalizing on emerging market growth. The firm is a leader in LASIK and holds a number two spot in cataract segment of the market. Cataract is a market segment identified as very profitable and growing rapidly by Abbott. The company is developing new technologies to drive market share growth. In addition, Abbott is advancing new product pipeline to address unmet testing needs of insulin-users. New products such as its drug-eluting stents, coupled with cost reductions, could lead to margin improvements in this segment.

In the Nutrition segment, growth could be driven by several factors such as high number of emerging markets birth rates, tripling of aging population in the next 35 years,a 70% increase in the emerging market middle class households by 2016, as well as the growing awareness of nutrition by consumers. The company expects to add over a billion in incremental sales from innovations by 2016, and also plans on expanding aggressively in seven key emerging markets. In addition, the firm also plans on increasing margins from 13% of sales in 2011 ro over 20% in sales through a few initiatives on product packaging, supply chain & distribution, and improving efficiencies for manufacturing processes at different plant locations.

Growth in the diagnostics segment could come from higher sales in emerging markets, margin expansion and new products that are result of continuous reinvestment in R&D. This segment has managed to increase margins from 8% in 2007 to 18 in 2012. The company expects margins to be higher than 20% by 2016. Abbott expects a 4% – 5% growth in this segment through 2016, most of which would come from emerging markets such as China, Brazil and Russia. Diagnostics products represent less than 5% of hospitals costs, but drive majority of decisions. With the increased awareness of health and disease prevention and increased amount of healthcare spending, this segment offers the opportunity for more growth, provided that adequate products to meet demand are offered to clients.

Abbvie (ABBV) is focused on numerous drugs including Humira, Kaletra, Lupron, Synagis etc.. Almost 55% of revenues are generates in the US, and 14% in emerging markets. The drug generates 9 billion in sales worldwide, which has grown by approximately $1 billion/year since 2008. Humira generates approximately 50% of revenues for Abbvie, but % of income. Abbvie’s patent for Humira in the US expires at the end of 2016, while the European equivalent is expected to expire by April 2018. However, since HUMIRA is a biologic and biologics cannot be readily substituted, it is uncertain what impact the loss of patent protection would have on the sales of HUMIRA. This provides a higher barrier for entry. As a result, sales are not going to fall right off the cliff, since it would be more difficult for competitors to reverse engineer it and create a generic substitute. In the meantime, the drug is expected to provide low double digit sales growth at least until 2016-2017.

The strong cash flow generated, should be sufficient to advance Abbvie’s pipeline of drugs. The company has more than twenty compounds in Phase II or Phase III development. Over the next three year, Abbvie expects to launch a few new products treating Hepatitis C Virus, Parkinson’s disease, multiple myeloma, multiple sclerosis and an inhibitor for chronic lymphocytic leukemia. In addition, the company could grow by expanding presence in Emerging markets such as Brazil, China, Russia, Mexico, India and Turkey. Strategic acquisitions could also pave the way for future growth in revenues.

One of the drugs that could offset some of Humira’s decreasing sales after 2017 is its Hepatitis C Virus product, for which market entry is targeted for early 2015. This is a $3 billion dollar market, which could grow 5- 6 times by 2020. The US, Japan, Brazil, China and Russia represent over 90% of worldwide sales.

Abbvie is expected to earn $3.06/share in 2013, which translates into forward P/E of 12.20. The company also yields 4.40%, and has an adequately covered distribution.

Usually spin-offs perform very well after the event, with the stocks delivering outstanding returns on aggregate in the first year or two after the event. I would wait for a few years to see how both companies develop as separate entities. I did like the legacy company with its long history of earnings and dividend growth, and believe that both Abbott and Abbvie will grow shareholder wealth over the next decade. So far, Abbvie looks like a company that is more mature and therefore pays out a higher proportion of earnings than Abbott. Hence, Abbvie’s yield at 4.40% is higher than the yield on Abbott. I would monitor the growth in distributions, and would automatically sell if dividends are cut or eliminated in either firm. However, since both companies have not had a chance to operate for long periods of time, I would simply hold on to my position.

Full Disclosure: Long ABT and ABBV

Relevant Articles:

Abbott Laboratories: Quality Dividend Aristocrat for Long Term Dividends
Dividend Champions - The Best List for Dividend Investors
Stock Spin-Offs – What Should Dividend Investors do?
Dividend Stocks I Purchased Over the Past Two Months

Friday, January 25, 2013

ConocoPhillips (COP) Dividend Stock Analysis

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen on a worldwide basis. This dividend achiever has paid dividends since 1934, and has increased them for 12 years in a row.

Back on May 1, 2012 ConocoPhillips split in two separately traded companies – ConocoPhillips (COP) and Phillips 66 (PSX). The data presented below shows the ten year financial trends for legacy ConocoPhillips, as accounting records had not been updated going back 10 years for just ConocoPhillips. ConocoPhillips is the upstream operations, which are involved in exploration and production of oil and natural gas. Phillips 66 (PSX) represented downstream operations such as operating refineries in US and abroad, as well as transportation assets such as pipelines.

The company’s peer group includes Exxon Mobil (XOM), Chevron (CVX)) and British Petroleum (BP).

Over the past decade this dividend growth stock has delivered an annualized total return of 15.50% to its shareholders.


The company has managed to increase EPS from $0.74/share in 2002 to $8.97 by 2011. Analysts expect ConocoPhillips to earn $6.06 per share in 2012 and $6.26 per share in 2013.

ConocoPhillips plans to spend $15 billion per year through 2016. Some of its investments will be in oil rich fields in North America including Bakken Shale, Eagle Ford and Permian Basin. The goal is to reach a reserve replacement ratio of 100%. The nature of the oil business is such, that for every barrel of oil pumped out of the ground, your reserves decrease by one barrel. With advancements in technology however, it is possible to obtain more oil from existing and new wells than before. In addition, oil and gas companies spend large amounts of money on seismic activity studies, in order to increase their chances of striking oil. With the amount of funds spent to achieve a reserve replacement ratio above 100%, the company is also targeting production growth of 3% - 5%/year as well.

Over the past three years, the company has sold off a lot of assets, raising billions of dollars in the process. Examples include selling off its stake in Lukoil, the proceeds from which were used to repurchase stock. Currently, it is in the process of selling off its stake in the Kashagan project in Kazakhstan. ConocoPhillips expects to raise somewhere between $8 - $10 billion through 2013 by the sale of these non-core assets.

The average return on equity has remained around 20% for most of the time, with the exception of the 200 7 -2008 run up in oil prices, followed by the 2008 – 2009 decline. Since then, it has increased back up to 20% in 2011. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 14.20% per year over the past decade, which is lower than the growth in EPS.

A 14% growth in distributions translates into the dividend payment doubling every five years on average. If we look at historical data, going as far back as 1982, one would notice that the company has actually managed to double distributions every ten years on average. Management has expressed willingness to distribute 20% - 25% of cashflows for dividends each year, which should be appealing to income investors.

The dividend payout ratio has mostly remained below 50%, with the exception of 2002 and 2008- 2009 periods. 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 ConocoPhillips is attractively valued at 8.10 times earnings, yields 4.40%, and has a sustainable distribution. In comparison Exxon Mobil trades at 9.70 times earnings and yields 2.50%, while Chevron trades at 9.50 times earnings and yields 3.10%. I have recently replaced Exxon Mobil with ConocoPhillips.

Full Disclosure: Long COP and CVX

Relevant Articles:

Chevron Corporation (CVX) Dividend Stock Analysis.
Exxon Mobil (XOM) Dividend Stock Analysis 2012
Royal Dutch Shell – An Undiscovered Dividend Gem
Exxon Mobil’s Stingy Dividend Payout

This article was featured in Carnival of Wealth, And Stay Out Edition

Friday, January 18, 2013

V.F. Corporation (VFC) Dividend Stock Analysis

V.F. Corporation (VFC) designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. This dividend champion has paid dividends since 1941, and has been able to boost them for 40 years in a row.

The company’s last dividend increase was in October 2012 when the Board of Directors approved a 20.80% increase to 87 cents/share. The company’s peer group includes Coach (COH), Ralph Lauren (RL) and PVH Corp (PVH).

Over the past decade this dividend growth stock has delivered an annualized total return of 18.70% to its shareholders.


The company has managed to deliver an 10.50% average increase in annual EPS since 2002. Analysts expect VF Corp to earn $9.54 per share in 2012 and $10.99 per share in 2013. In comparison, the company earned $7.98/share in 2011.
The company has transformed itself into a designer and marketer of casual lifestyle brands for the US population. The company focuses on its Outdoor & Action sports, Sportswear and Contemporary brands lifestyle businesses, as rhey are projected to reach 60% of sales by 2015. Increasingly, I see many people wearing jackets with the “North Face” logo, either at work or in the streets. In 2011, the company outlined in its strategy the goal to generate $5 billion in additional sales and $5 in additional earnings per share by 2015, from 2010 levels. Over the near term, profits are going to come from increase I profit margins as denim costs decrease. Another growth factor could be expansion into international markets, as well as strategic shifting of focus to more profitable brands. The company expects to grow international sales by 15%/year, until they reach 40% of total sales. The company has a history of making acquisitions work, as evidenced by Vans and North Face deals in the early 2000s. The deal for Timberland brand is expected to be accretive to earnings as well. The company delivers a quality product at an attractive price point for consumers.

Another factor that could contribute to revenue growth is increase in the direct to consumer channels of sales. This will be achieved by increasing number of retail stores in US and Internationally as well as through online sales.

The return on equity has decreased from 22% in 2002 to 12.50% by 2009. Since then, it has increased back up to 21.20% in 2011. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 10.90% per year over the past decade, which is lower than the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling every six and a half 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 eight years on average.

The dividend payout ratio has increased from 30% in 2002 to 57% in 2009, before decreasing to 33% by 2011. 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 VF Corp is attractively valued at 16.50 times earnings and has a sustainable distribution. However, given the low yield of 2.30%, I would consider initiating a position in the stock on dips below $140.

Full Disclosure: None

Relevant Articles:

-  Why I am not worried about the Fiscal Cliff and Dividend Tax Increases
-  A Record Week for Dividend Increases
-  How long does it take to manage a dividend portfolio?
-  Dividend Aristocrats List for 2012

Friday, January 11, 2013

Stryker Corporation (SYK) Dividend Stock Analysis

Stryker Corporation (SYK), together with its subsidiaries, operates as a medical technology company. The company operates in three segments: Reconstructive, MedSurg, and Neurotechnology and Spine. The company is a member of the dividend achievers index, and has been able to boost distributions for 20 years in a row.

The company’s last dividend increase was in December 2012 when the Board of Directors approved a 24.70% increase to 26.50 cents/share. The company’s peer group includes Johnson & Johnson (JNJ), Zimmer Holdings (ZMH) and Smith & Nephew (SNN).

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 an 11% average increase in annual EPS since 2002. Analysts expect Stryker to earn $4.04 per share in 2012 and $4.30 per share in 2013. In comparison, the company earned $3.45/share in 2011.

The medical device sales tax that will be introduced in 2013 might reduce near term earnings. Softer hospital budgets might also be unfavorable to earnings growth. The market for US reconstructive sales is expected to recover, thus boosting Stryker’s revenues, and hopefully offsetting any softness from Europe. The company’s future growth could come from acquisitions as well as new product launches. It spends 17%/year in R&D expenses per year in an effort to maintain market share in an increasingly competitive marketplace.

The return on equity has decreased from 27% in 2002 to 18% by 2012. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 33.50% per year over the past decade, which is higher than the growth in EPS.

A 33% growth in distributions translates into the dividend payment doubling every two years on average. If we look at historical data, going as far back as 1993, one would notice that the company has actually managed to double distributions every three years on average.

The dividend payout ratio has increased from 6% in 2002 to 21% in 2011. 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 Stryker is attractively valued at 14.70 times earnings and has a sustainable distribution. However, given the low yield of 2%, I would consider initiating a position in the stock on dips below $43.

Full Disclosure: Long JNJ

Relevant Articles:

Seven Dividend Hikers in the News
My Entry Criteria for Dividend Stocks
How to invest like a Dividend Billionaire
Are dividend stocks in a bubble?

Friday, January 4, 2013

Becton Dickinson (BDX) Dividend Stock Analysis

Becton, Dickinson and Company (BDX), a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The company is a member of the dividend champions list, and has been able to boost distributions for 42 years in a row.

The company’s last dividend increase was in November 2012 when the Board of Directors approved a 10% increase to 49.50 cents/share. The company’s peer group includes Medtronic (MDT), Baxter International (BAX) and St. Jude Medical (STJ).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.70% to its shareholders.


The company has managed to deliver an 11% average increase in annual EPS since 2002. Analysts expect BDX to earn $5.63 per share in 2013 and $6.14 per share in 2014. In comparison, the company earned $5.30/share in 2012.


Despite soft economic outlook, Becton Dickinson should be able to generate higher sales in due to the sustainable demand for its diabetes products, disease testing products, and cell analysis products. The company generates almost 60% of its sales from international operations, which is expected to increase as it grows its presence in emerging markets. Becton Dickinson is also active on the acquisition front and is investing heavily in research and development, which should benefit the company through new product launches. Becton Dickinson has a solid long-term potential for its business, due to its strong position and due to the good prospects for its industry. The company enjoys strong demand for its products and a more favorable pricing than other competitors in its industry.

While the company could suffer from the implementation of a new medical device tax in 2013, it should be able to benefit from increased healthcare spending in the US and internationally.

The return on equity has increased from 20% in 2003 to 26% by 2012. I generally want to see at least a stable return on equity over time.


The annual dividend payment has increased by 15.70% per year over the past decade, which is higher than the growth in EPS.

A 16% growth in distributions translates into the dividend payment doubling every four and a half years on average. If we look at historical data, going as far back as 1975, one would notice that the company has actually managed to double distributions every six years on average.

The dividend payout ratio has increased from 19% in 2003 to 34% 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 Becton Dickinson is attractively valued at 13.70 times earnings, yields 2.60% and has a sustainable distribution. I plan on initiating a position in the stock subject to availability of funds.

Full Disclosure: Long MDT

Relevant Articles:

My Entry Criteria for Dividend Stocks
Dividend Champions - The Best List for Dividend Investors
Medtronic (MDT) Dividend Stock Analysis 2012
Ten Top High Dividend Growth Stocks for Long Term Returns

Popular Posts