Monday, August 20, 2018

How to read my stock analysis reports

I usually try to analyze one dividend paying company every week. In a typical stock analysis report, I would outline the years of consecutive dividend increases along with the amount and timing of the latest dividend increase. This should be a helpful review for readers of the premium dividend growth investor newsletter and all readers in general.

I would then look at trends in stock prices, earnings per share, dividends, and dividend payout ratios over the preceding decade.

Right under earnings per share, I typically try to discuss qualitative factors that might drive future profitability. I believe that rising earnings per share is the fuel behind future dividend increases. The rising stream of earnings per share also allows for growth in intrinsic values over time. I am not a big fan of stagnant earnings per share, because this shows me that there is natural ceiling for future dividends to grow. Therefore, I am losing purchasing power for my dividend income and intrinsic value over time. While some higher yielding companies tend to have low growth in earnings per share, but compensate with the high dividend, I still want some growth in the future.

We also want to review the quality of earnings over time. The trends in earnings per share should show you how cyclical those profits are over time. For cyclical companies, earnings per share are their highest at the top of the economic cycle. Therefore, P/E ratios are relatively low and these companies appear cheaper than they really are. We want stable and dependable earnings as much as possible. A historical review, coupled with a qualitative understanding of the dependability of the business model throughout the economic cycle.

I tend to review trends in dividend payout ratios, in order to determine dividend safety. As an investor whose goal is to live off dividends in retirement, dividend safety is of paramount importance. Once you hit the dividend crossover point, which is the point where dividend income exceeds your expenses, you are good to go as long as the dividend is stable and growing over time. The goal of the dividend investor is to stay retired no matter what happens in this unpredictable world. This is why I not only want a dividend payout ratio that is generally below 60%, but also want a growing dividend that is supported by growth in underlying fundamentals ( earnings per share). In other words, I would like to see a dividend payout ratio that stays within a range, rather than a situation where companies grow dividends by paying out a larger and larger portion of the earnings pool. For most companies, there is a need to reinvest a portion of earnings in the business to grow. Anything in excess of that should be distributed back to shareholders, or else risk being wasted by executives on ill-timed acquisitions, corporate jets or projects with poor visibility and sub-par expected risk adjusted returns.

Of course, I also review the trend in dividends per share. Dividends are more stable and dependable than stock prices, which is what makes them an ideal source of income for retirees. I want to focus on companies which can pay and grow dividends no matter where they are in the economic cycle. I review the recent increases in dividends versus the trends over the past decade. A rising dividend indicates a management team that is shareholder focused, which also wants to establish a track record of sharing excess shareholder wealth with the rightful owners of the business. The rising dividend that is based on growing earnings, and coupled with a sustainable payout ratio, while available at an attractive valuation is something I look for in an investment.

Basically in the article I discuss how I like a record of dividend growth, earnings growth and a sustainable dividend payout ratio. If the stock has these traits, I then focus on valuation.

In my conclusion section, I usually link to my article on entry criteria when I call a stock attractively, fully or overvalued. In my article on entry criteria I discuss that I am not willing to pay more than 20 times earnings for a stock. If the company trades at less than 20 times earnings, I would call it attractively valued and call it a day. However, if the stock trades above 20 times earnings I would try to calculate a reasonable price which would make it a good buy on dips. This entry criteria applies to most corporations that pay dividends and are traded on exchanges.

For example, Automated Data Processing (ADP) trades at 27.50 times forward earnings, which is above the price I am willing to pay for it. If it earns $5.18/share, at 20 times earnings, the most I would pay is $104/share. Hence, if I posted an analysis on ADP I would say it is overvalued at 27.50 times earnings, and would buy on dips below $104/share.

If Automated Data Processing (ADP) traded at $90/share, and earned $5/share, I would say it is attractively valued at the moment. For example, in my analysis of Johnson & Johnson (JNJ), I discussed that I thought the stock was attractively valued at the moment.

I link to my entry criteria article, because I want readers to understand how I value company stock.

For a recent dividend stock analysis of Starbucks (SBUX), I assigned an entry price of $48/share at $2.40/share in earnings per share. If you read the article in 12 months and the stock trades at $70 but earns $4/share, you would think it is above fair value and ignore it completely for that reason. However, at $70, the stock would have been attractively valued since the P/E is a reasonable 17.50.

Readers would notice that I do not assign “fair values” to stocks I analyze. I am not going to complicate my screens by using discount rates, forecasting future dividend payments and discounting them back etc.

Instead I use the P/E and yield as mentioned above. However, I do select companies that have raised dividends for at least a decade, and which usually have done so above the rate of inflation. In the end, yield and dividend growth is a balancing act. This should go without saying, but in the valuation criteria I look at P/E ratios in conjunction with looking at earnings growth rates and dividend growth rates. If we select a company with a higher P/E ratio, we would expect a higher growth in earnings and dividend growth. For an equity with lower P/E ratios, we would generally see slower growth but probably a slightly higher yield.

I select companies that have not only raised dividends for long periods of time, but I believe also have a decent shot of continuing that in the foreseeable future. I expect dividends to grow over time, I just don’t want to overcomplicate things by assigning forecasted values and proving my point mathematically. I would avoid doing math since I can mention my expectations with one single sentence or less, and have them already built into the assumption.

Readers of my dividend growth newsletter are receiving ten dividend ideas per month in their emails. I have these ten companies analyzed in detail, by following the logic outlined in this article. I will post an updated list of the ten dividend growth stocks I will be buying at the end of the month on August 26. The structure of each analysis is similar to the following dividend stock analyses below:

Thank you for reading!

Relevant Articles:

The ten year dividend growth requirement
My Entry Criteria for Dividend Stocks
How to retire in 10 years with dividend stocks
How to become a successful dividend investor

Thursday, August 16, 2018

Starbucks Dividend Stock Analysis

Starbucks Corporation (SBUX), together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development.

Starbucks is a dividend challenger, which has increased dividends every single year since it initiated its first dividend in 2010. The last increase occurred in June 2018, when Starbucks hiked its quarterly dividend by 20% to 36 cents/share.

The stock has compounded by 21.90%/year over the past decade. This came off the lows in 2008, when the stock was depressed due to mismanagement and the global financial crisis. Future returns would be much more reasonable in my opinion.

Over the past decade, the company managed to boost earnings from $0.44/share in 2007 to $1.97/share in 2017. Earnings per share growth seems to have slowed down since 2015. That being said, Starbucks is expected to earn $2.41/share in 2018.

Monday, August 13, 2018

Broadridge Financial Delivers Strong Dividend Growth

Broadridge Financial Solutions, Inc. (BR) provides investor communications and technology-driven solutions for the financial services industry worldwide.

The company raised its quarterly dividend last week by a massive 32.90% to 48.50 cents/share. With this increase, the company's annual divided has increased for the eleventh consecutive year since becoming a public company in 2007.

The new quarterly payment is almost seven times larger than the dividend payment from a decade ago. This was possible due to the rapid expansion in the dividend payout ratio, as earnings managed to double.

For history buffs, Broadridge Financial was spun-off from Automatic Data Processing in 2007. ADP itself has a long history of growth and dividend increases, which it has passed onto its spin off-spring.

This dividend achiever is careful in its capital allocation strategy, as it focuses on projects with high return on investment, which could improve its competitive position and ability to serve its customers efficiently and cost effectively. This mindset has allowed the company to grow earnings and excess free cash flows, the majority of which are distributed in the form of dividends and share buybacks.

Thursday, August 9, 2018

Best Dividend Investing Articles For July 2018

For your reading enjoyment, I have highlighted several articles that the readers found of particular interest this month. I have included the article title, as well as a short description.

1) Introducing Dividend Growth Investor Newsletter
Last month, I created my own dividend investing newsletter. It features ten quality companies for the long-term each month. This newsletter features companies that I am investing in every single month. This dividend portfolio would be a great teaching exercise on building a portfolio from scratch. We would also discuss diversification, how to allocate new cash towards new or existing position and how to monitor and manage the portfolio. Subscribers of the newsletter received a report listing the ten dividend paying companies I bought last week.

2) Screening The Dividend Champions List For Bargains
I ran my screen against the list of dividend champions from June 2018, in order to identify bargains. The list of dividend champions includes companies that have managed to increase dividends to shareholders for at least 25 years in a row. The dividend champions list is more comprehensive than the list of dividend aristocrats, which is why I prefer to use it for my investing process. In this article, I discussed my approach to screening large groups of dividend growth stocks. Not surprisingly, I focus on qualitative and quantitative criteria to come up with a list of companies for further research.

3) Dividend Champions List For June 2018
I updated the list of dividend champions on June 30, 2018. I discussed the process I took to do the updates, which is mostly manual in nature. I discussed this in an effort to educate investors how to maintain their own lists if noone updates it for the community on a go forward basis. After going through the process of just updating the list of dividend champions, I have a lot of respect for the amount of work that David Fish did on a monthly basis for a decade, in updating the champions, contenders and challengers lists. He will be missed.

4) Three Dividend Growth Stocks Rewarding Shareholders With A Raise
In this article, I highlighted three dividend growth stocks with a ten year record of annual dividend increases. Those companies had raised dividends in the preceding week. I review the dividend increases that interest me, as part of my monitoring process. I own two of the three companies mentioned in the article, and recently added to my position in one of them.

5) How to retire in 10 years with dividend stocks
In this article, I shared a simple model for forecasting dividend income using a few simple inputs such as dividend yield, dividend growth and the impact of regular contributions to a dividend portfolio. While the future is seldom linear, this model gives at least a ballpark estimate of what can be expected if certain assumptions are made. When playing with models, I have found it very helpful to change assumptions, and see what the overall impact to the end result turns out to be. It is always helpful to stress test assumptions.

Relevant Articles:

Best Dividend Investing Articles For June
Dividend Investing Resources I Use
Best Dividend Investing Articles For May
Help! I have a serious spending addiction

Monday, August 6, 2018

Three Notable Dividend Increases To Consider

As part of my monitoring process, I review recent dividend increases. The process of identifying dividend increases is manual, because it relies on information coming from a list of multiple sources. I usually focus my attention on companies which have managed to increase dividends to shareholders for at least ten consecutive years. This is then followed by a brief review of trends in fundamentals and valuation. I like to compare the recent increase against the ten year average, and then try to discern whether that growth is supported by the business.

Over the past week, I noticed three companies with a ten year record of annual dividend increases. The companies include:

Illinois Tool Works Inc. (ITW) manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.

The Board of Directors of Illinois Tool Works Inc. (ITW) increased the company’s quarterly dividend by 28.20 percent to $1.00 per share. This marked the 44th consecutive annual dividend increase for this dividend champion.

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