Wednesday, May 12, 2021

A Look Under the Hood For Inflation

I recently saw a chart from AEI, which broke down inflation into a few components between 1997 and 2017. 

You can see that prices increased on average by 55.60% between 1997 and 2017.


Source: AEI

This picture provides an interesting perspective, because not every item you would buy actually increased at the pace of inflation that is widely quoted. 

Certain items that are more labor intensive, which cannot be easily automated ended up increasing much faster than the pace of inflation. Those include healthcare, education and childcare – all very labor intensive occupations, which require some skill and are difficult to automate well. There are other issues around healthcare and education, notably the persistent demand for these services, as well as the opaque nature of the industry ( eyeing healthcare, and the way it is “broken” in the US essentially).

On the other hand, items like TV have declined in price. That’s because it is easier to automate TV production.

This is a fascinating chart to look at, because it explains to a certain degree why some folks “feel’ that inflation is higher than reported. It is very likely that the composition of your annual expenses will determine whether you experience high inflation or a low inflation. If all you spend money on is TV’s, your cost of living has declined substantially over the past 20 years. However, if you are like one of the millions who need quality healthcare, you have likely seen a large spike in your costs over the past 20 years.

It’s fascinating to think that your personal basket of goods and services will definitely impact your lifestyle cost over time. For example, for most Americans the cost of daycare and college is high, but covers only a few years ( around 4 in each, give or take). There is a clear end in sight to when your child would graduate college for example ( in most cases). It also makes planning for retirement that much more challenging, because it entails forecasting expenses that are not a major component of your inflation basket today. 

Owning productive assets such as equities provided a very good inflation hedge over the past 20 years. I used S&P 500 as a proxy for a diversified dividend growth portfolio, since data on S&P 500 is readily available. 

Year

Earnings Per Share

Dividends Per Share

Price

1995

33.96

13.79

615.93

1996

38.73

14.90

740.74

1997

39.72

15.49

970.43

1998

37.71

16.20

1229.23

1999

48.17

16.69

1469.25

2000

50.00

16.27

1320.28

2001

24.69

15.74

1148.08

2002

27.59

16.08

879.82

2003

48.86

17.39

1111.92

2004

58.50

19.44

1211.92

2005

69.93

22.22

1248.29

2006

81.51

24.88

1418.30

2007

66.18

27.73

1468.36

2008

14.88

28.39

903.25

2009

50.97

22.41

1115.10

2010

77.35

22.73

1257.64

2011

86.95

26.43

1257.60

2012

86.51

31.25

1426.19

2013

100.20

34.99

1848.36

2014

102.40

39.44

2058.90

2015

86.53

43.39

2043.94

2016

94.55

45.70

2238.83

2017

109.88

48.93

2673.61

2018

132.39

53.75

2506.85

2019

139.47

58.24

3230.78

2020

94.13

58.28

3756.07

Dividends did a pretty decent job in providing a good inflation hedge. 

The S&P 500 paid $14.90 in dividends in 1996 and $15.49 in 1997. The annual dividends kept growing to $48.93 in 2017, for an over 228% increase. 

The index earned $38.73 in 1996 and $39.72 in 1997. S&P 500 grew earnings to $109.88 in 2017 for a 183% increase. 

The S&P 500 index closed at 740.74 at the very end of 1996, and went all the way up to 2673 by the end of 2017, for a 260% increase.

I could have used a combination from any of the large cap dividend growth stocks like PepsiCo, Johnson & Johnson, Procter & Gamble etc, and reached similar conclusions that dividends generated from diversified portfolios tend to grow above the rate of inflation over time.

It also looks like dividends have managed to exceed inflation in each decade since 1960. The exception is in the 1970s, when dividends trailed slightly behind inflation. However, stock prices lost a lot more ground to inflation.

Period

S&P 500 Price Growth

Earnings Growth

Dividend Growth

CPI Growth

1960s

58.58%

77.74%

61.11%

31.08%

1970s

47.33%

172.05%

101.88%

112.37%

1980s

143.24%

51.10%

87.73%

58.62%

1990s

299.82%

147.81%

32.92%

31.75%

2000s

-4.74%

49.24%

40.95%

26.66%

2010s

198.66%

64.88%

150.33%

18.66%

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Sunday, May 9, 2021

Eleven Dividend Growth Stocks Rewarding Shareholders With A Raise

I review the list of dividend increases as part of my monitoring process. This is helpful in evaluating how my investments are doing. I review the dividend increase announcements, along with their corresponding press releases. The list of dividend increases is also helpful in identifying quality companies for further research. It is also helpful in observing companies act during a crisis. The companies with robust business models are able to weather the crisis relatively well, and are able to maintain and even increase dividends

There were several companies that bucked the trend of dividend cuts, and actually raised dividends to shareholders. Just as usual, I focus my review only on those companies that raised dividends last week, which also have at least a ten-year history of annual dividend increases.

FactSet Research Systems Inc. (FDS) provides integrated financial information and analytical applications to the investment and corporate communities in the Americas, EMEA, and the Asia Pacific.

The company raised its quarterly dividend by 6.50% to 82 cents/share. This increase marks the twenty-second consecutive year the Company has increased dividends, demonstrating its ongoing commitment to bring value to shareholders. During the past decade, the company has managed to increase dividends at an annualized rate of 13%.

The company is expected to earn $11.15/share in 2021.

The stock is selling for 30.24 times forward earnings and yields 0.97%.

Leggett & Platt Incorporated (LEG) designs, manufactures, and markets engineered components and products worldwide.

The company raised its quarterly dividend by 5% to 42 cents/share. This marked the 50th consecutive annual dividend increase for this newly minted dividend king. During the past decade, the company has managed to increase dividends at an annualized rate of 4.30%.

"We are also very pleased to be increasing our dividend for the 50th consecutive year, honoring our ongoing commitment to return value to our shareholders. As a result of this commitment over many decades, next year we will become a member of a select group of companies referred to as Dividend Kings.

The company is expected to earn $2.72/share in 2021.

The stock is selling for 21.13 forward earnings and yields 2.92%.

MSA Safety Incorporated (MSA) develops, manufactures, and supplies safety products that protect people and facility infrastructures in the oil, gas, petrochemical, fire service, construction, industrial manufacturing applications, utilities, military, and mining industries in North America, Latin America, and internationally.

The company raised its quarterly dividend by 2.30% to 44 cents/share. MSA is a newly minted dividend king which has increased its dividend annually for more than 50 consecutive years.  During the past decade, the company has managed to increase dividends at an annualized rate of 5.60%.  

The company is expected to earn $4.69/share in 2021.

The stock is selling for 35.26 times forward earnings and yields 1.06%.

Pool Corporation (POOL) distributes swimming pool supplies, equipment, and related leisure products in the United States and internationally. 

The company raised its quarterly dividend by 37.90% to 80 cents/share. This was the eleventh year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 16%.

The company is expected to earn $12.36/share in 2021.

The stock is selling for 35.91 times forward earnings and yields 0.72%.

UGI Corporation (UGI) distributes, stores, transports, and markets energy products and related services in the United States and internationally.

The company raised its quarterly dividend by 4.50% to 34.50 cents/share.

This was the 34th Consecutive Year of Annual Dividend Increases for this dividend champion. During the past decade, the company has managed to increase dividends at an annualized rate of 8.10%.

The company is expected to earn $2.98/share.

The stock sells for 15.33 times forward earnings and yields 3.02%.

Algonquin Power & Utilities Corp. (AQN) owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in Canada, the United States, Chile, and Bermuda.

The company raised its quarterly dividend by 10% to 17.06 cents/share. This marked the 13th year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 11.80%.

The stock sells for 11.60 times earnings and yields 4.29%.

RLI Corp. (RLI) is an insurance holding company, underwrites property and casualty insurance in the United States and internationally.

RLI raised its quarterly dividend by 4.20% to 25 cents/share. RLI is a dividend champion which has increased dividends in each of the last 46 years. Over the past decade, the company has managed to grow dividends at an annualized rate of 5.20%.

The stock sells for 37.26 times forward earnings and yields 0.88%.

ManpowerGroup Inc. (MAN) provides workforce solutions and services in the Americas, Southern Europe, Northern Europe, and the Asia Pacific Middle East region.

Manpower raised its semi-annual dividend by 7.70% to $1.26/share. This was the eleventh year of annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 11.80%.

The company is expected to earn $6.20/share in 2021. 

The stock sells for 19.80 times forward earnings and yields 2.05%.


Expeditors International of Washington, Inc. (EXPD) provides logistics services in the Americas, North Asia, South Asia, Europe, the Middle East, Africa, and India.

The company raised its semi-annual dividend by 11.50% to 58 cents/share. This was the 27th year of annual dividend increases for this dividend aristocrat. Over the past decade, the company has managed to grow dividends at an annualized rate of 10%.

The stock sells for 19.99 times forward earnings and yields 0.98%.

Cardinal Health, Inc. (CAH) operates as an integrated healthcare services and products company in the United States and internationally.

Cardinal Health raised its quarterly dividends by 1% to 49.08 cents/share. This was the 25th year of consecutive annual dividend increases for this dividend aristocrat. While it has a ten year annualized dividend growth rate of 10.10%, the dividend growth has slowed down in recent years to about 1%/year.

The company is expected to earn $5.99/share in 2021.

The stock is selling for 9.70 times forward earnings and yields 3.38%.

Microchip Technology Incorporated (MCHP) develops, manufactures, and sells semiconductor products for various embedded control applications in the Americas, Europe, and Asia.

Microchip Technology raised its quarterly dividend by 5.90% to 41.30 cents/share. This is the 21st consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has only increase dividends at an annualized rate of 0.70%.

The company is expected to earn $7.85/share in 2021.

The stock sells for 19.09 times forward earnings and yields 1.10%.

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Thursday, May 6, 2021

Abbvie (ABBV) Dividend Stock Analysis for 2021

AbbVie Inc. (ABBV) discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company was created in 2013, when Abbott Laboratories split into two companies – Abbvie and Abbott. Abbvie continued raising dividends to shareholders for the five years since becoming a separate publicly traded company. The company is a dividend aristocrat., with a 48 year track record of annual dividend increases.

GAAP Earnings per share have been largely flat since 2013. The company does provide reconciliation between GAAP and non-GAAP earnings however. The non-GAAP earnings have been increasing.

 


However, Abbvie is expecting GAAP adjusted earnings per share of $10.47 - $10.49/share in 2020. Based on those forward earnings, the stock seems attractively valued today.

The downside with Abbvie is that the company generates 40% of its sales and a larger share of profits from a rheumatoid arthritis drug called Humira. The drug’s patent expired in 2016 in the US and in 2018 in the European Union. However, due to the drug being a bio-similar, there are over 70 patents that provide some intellectual property protection until sometime in 2022 according to Abbvie.

Humira sales have been growing rapidly, and will likely continue going strongly, until competitors catch up to it. It is possible that sales can continue growing at a healthy clip until 2022, after which they will start decreasing as competitors nibble at Humira’s market share. If the market it serves expands, or there are new uses for the drug, it is possible that sales can actually be maintained, even if we have increased competition.

 


I do not like the huge reliance on a single product, because it decreases the margin of safety factor. I also do not like the fact that this product will certainly face higher competition in the years to come. The third fact I do not like is that I do not see another blockbuster drug that will replace Humira’s sales after 2022. While there are many compounds in different stages of clinical trials, it would take several new drugs to compensate for the eventual loss of Humira’s sales.

As a dividend investor, I need growing earnings in order to have growing dividend income. If the current business model cannot be forecasted into the future, it may mean that the company may not be the type of buy and hold investment that can be safely be tucked into your portfolio. It may need more monitoring.

On the other hand, others may argue that these headwinds are already priced into the shares. As a result, despite the problems that are expected to occur in the 2020s, investors will do ok and enjoy a high dividend income in the meantime. 

Abbvie acquired biotech firm Allergan un 2020 in a transaction valued at $60 billion, paid in cash and stock. This deal will allow Abbvie to diversify its revenue stream away from blockbuster drug Humira, which accounts for a very large portion of revenues and earnings. Humira is losing its exclusivity in the US after 2023. This deal will also bring in synergies, and bring in new drugs in various stages of development. The synergies will be mainly from a reducing duplication in SG&A, R&D, and consolidating manufacturing operations. The acquisition price is roughly half what Allergan was going for, when Pfizer walked out of its deal to acquire it a few short years ago. It will reduce the revenues derived from Humira from 60% to 40%. This analysis of cash-flows is not taking into consideration any cost savings that will be generated by eliminating duplicate functions in corporate departments, R&D and manufacturing. However, it also doesn't take into consideration increased interest expenses, due to higher debt.

The company did a lot of share buybacks after the split from Abbott in 2013. However, the number of shares reached 1.673 billion in 2020, after the completion of the Allergan acquisition.


The annual dividend per share has increased from $1.60/share in 2013 to $4.72/share in 2020. Back in October 2020, the company raised quarterly dividends by 10.20% to $1.30/share. This brings the annual dividend to $5.20/share.



The dividend seems adequately covered based on forward earnings for 2020. The forward dividend payout ratio comes out to 57%. However, if earnings per share over the next decade end up falling off a cliff if Humira sales start decreasing, the dividend may be in a dangerous territory sometime in the latter part of the next decade.

 


I find Abbvie to be attractively valued today at 9.08 times forward earnings and yields 4.57%. While the future is unclear as to where future growth in sales will be generated after Humira, the stock can still deliver solid returns in the near term. The integration with Allergan could generate synergies, diversification and a much-needed boost to future pipeline. That’s at the expense of integration risk and higher debt. Some may argue that the future uncertainty is somewhat priced in the stock already. That being said, the stock could still provide good entry points for investors on bad news. Given the recent seal of approval by no other but the Oracle of Omaha, I decided to initiate a position in the stock for the newsletter.

Abbvie is a company that needs closer monitoring, because it is not the type of business where future growth can be taken for granted. On the other hand, the dividend seems sustainable at the moment, and will likely grow for the next four - five years at a high single digit rate. Investors today need to decide for themselves whether the current valuation is attractive enough to outweigh future risks. Either way, investors are getting paid generously to hold onto their Abbvie shares.

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