Monday, June 17, 2019

Five Dividend Machines Working Hard for Their Owners

There were several dividend increases last week for companies who are either dividend achievers or dividend champions. A long record of annual dividend increases is a sign of quality, because only stable companies with dependable earnings are able to achieve this track record. I review the notable dividend increases weekly, as part of my monitoring process.

I reviewed the dividend increases, along with the underlying financial performance, in order to determine the likelihood of future dividend growth. After all, successful dividend growth investing is based on acquiring ownership stakes in companies which grow earnings, raise dividends and expand their intrinsic value over time. Rising earnings per share provide the fuel behind future dividend growth. Without earnings growth, dividends have a nature limit to growth. Dividend income that grow at or above the rate of inflation tend to help maintain the standard of living for the retirees living off investments;

It is equally important to determine if the valuation makes sense however, because when you overpay for a future stream of income, your future returns will be lower, as you lock in a lower dividend yield. When you overpay, you end up paying up for the near term expected growth of the business. Since things never work out as expected, this is an example of a risky behavior.

The companies that raised dividends last week include:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,800 real estate properties owned under long-term lease agreements with regional and national commercial tenants.

The REIT increased its monthly cash dividend to $0.2265 per share from $0.226 per share. The dividend is payable on July 15, 2019 to shareholders of record as of July 1, 2019. Realty Income is about to become a dividend champion later this year, after increasing dividends several times per year since 1994. The ten year dividend growth rate is 4.50%/annum.

"We remain committed to our company's mission of paying dependable monthly dividends to our shareholders that increase over time," said Sumit Roy, President and Chief Executive Officer of Realty Income. "Our Board of Directors has once again determined that we are able to increase the amount of the monthly dividend to our shareholders, marking the 102nd increase since our company's public listing in 1994. With the payment of the July dividend, we will have made 588 consecutive monthly dividend payments throughout our 50-year operating history."

Between 2008 and 2018, Realty Income has managed to grow FFO from $1.84/share to $3.12/share. Realty Income expects FFO/share in the range of $3.26 - $3.31 for 2020.

The stock is overvalued at 22.50 times forward FFO. Realty Income yields 3.70% today. Investors have bid up the Monthly Dividend Company, because it has dependable rent streams, which increase over time. In addition, Realty Income is also growing its FFO/share over time. I would like to see this quality REIT sell at a more reasonable valuation, before adding to my position there. Check my analysis of Realty Income for more information about the company.

Target Corporation (TGT) operates as a general merchandise retailer in the United States. The board of directors of Target Corporation declared a quarterly dividend of 66 cents per common share, a 3.1% increase from the prior quarterly dividend of 64 cents. This event marked the 48th consecutive year in which Target has increased its annual dividend. A lot of resources claim that Target is a dividend king. My research has uncovered that it is not. This is why it makes sense to always double check everything you read on the internet.

During the past decade, Target has been able to grow dividends at an annual rate of 15.40%/year. This is the third year in a row where dividend growth has been slowing down to around 3%/year. I would expect that Target keeps dividend growth slow for the foreseeable future, as it invests in the competitiveness of its operations, and fend off rivals such as and Wal-Mart.

Between 2009 and 2019, Target has managed to grow earnings from $2.85/share to $5.51/share. Target is expected to generate $5.93/share in 2020.

The stock looks cheap around 14.80 times forward earnings and offers a forward dividend yield of 3%. It is possible that the next market decline or retail apocalypse doomsday fear will lower the share price to somewhere in the low 60s. That is usually a good time to consider Target.

W. P. Carey (WPC) ranks among the largest net lease REITs with an enterprise value of approximately $19 billion and a diversified portfolio of operationally-critical commercial real estate that includes 1,168 net lease properties covering approximately 134 million square feet. W.P. Carey (WPC) increased its quarterly dividend to $1.034/share. This was a 1.40% increase in the quarterly dividend over the distributions paid during the same time last year. Dividend growth has slowed down considerably from the 7.70%/year annual dividend increases during the past decade. W.P. Carey has managed to boost AFFO from $3.09/share in 2008 to $5.39/share in 2018.

W.P. Carey expects AFFO/share to be in the range of $4.95 - $5.15/share in 2019.

I find the REIT to be fairly valued today at 17.30 times forward AFFO. The REIT offers a slow distribution growth, but yields a respectable and relatively safe 4.80%. It is cheaper than the likes of Realty Income and National Retail Properties but offers slower dividend growth too. If Interest rates were to rise however, all REITs will see lower prices, higher yields and higher costs of capital. Check my analysis of W.P. Carey for more information about the REIT.

Casey's General Stores, Inc. (CASY), operates convenience stores under the Casey's and Casey's General Store names. The company increased its dividend by 10.30% to 32 cents/share. This marked the 19th year of consecutive annual dividend increases for this dividend achiever.

Over the past decade, it has managed to grow dividends at an annual rate of 14.70%/year.

Between 2009 and 2019, Casey’s has been able to grow its earnings from $1.68/share to $5.51/share. The company is expected to earn $5.50/share in 2020.

Right now, the stock is overvalued at 27.60 times forward earnings. Casey’s yields 0.80%.

National Fuel Gas Company (NFG) operates as a diversified energy company. It operates through five segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. National Fuel Gas Company (NFG) announced a 2.4 percent increase in the quarterly dividend, raising the quarterly rate to 43.5 cents per share. National Fuel has paid dividends for 117 consecutive years and has increased its annual dividend for 49 straight years.

The latest dividend increase is in line with the ten-year average of 2.80%/year.

Earnings went from $3.18/share in 2008 to $3.34/share in 2018. The company is expected to generate $3.52/share in 2019. The slow growth in earnings per share explains the slow growth in dividends per share.

The stock looks fairly valued today at 15.40 times forward earnings and offers a dividend yield of 3.20%. Given the lack of earnings growth and the slow rate of distributions growth, I view this stock as a hold.

Relevant Articles:

Dividend Achievers Offer Income Growth and Capital Appreciation Potential
2019 Dividend Champions List
How to monitor your dividend investments
How to read my weekly dividend increase reports
Five Metrics of Successful Dividend Companies

Thursday, June 13, 2019

Home Depot (HD) Dividend Stock Analysis

The Home Depot, Inc. (HD) operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and d├ęcor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. It's largest competitor is Lowe's (LOW), which we analyzed last week.

Home Depot increased its quarterly dividend by 32% to $1.36/share in February, marking the tenth consecutive year of dividend increases for this newly minted dividend achiever. During the past decade, the company has managed to boost distributions at an annualized rate of 16.40%/year. Home Depot started paying dividends in 1987 and kept raising the bar until it kept them unchanged in 2008. After that, Home Depot started growing shareholder distributions again in 2010. I expect dividend growth to slow down during the next recession, and we may even have a couple of years of dividend freezes ( keeping dividends unchanged). But over the long run, the company should be able to grow dividends decade over decade.

During the past decade, the company was able to grow earnings per share at an annualized rate of 22%/year. Earnings grew from $1.33/share in 2009 to $9.73/share in 2019. Analysts expect Home Depot to earn $10.09/share in 2020. This is impressive growth in earnings per share, which was definitely aided by the recovery in the housing market post the financial crisis of 2007 – 2009. It is also helped by the fact that 2009 and 2010 marked the lows for earnings per share post the crisis. It bears mentioning that earnings for companies like Home Depot and Lowe’s are exposed to the cyclical nature of the economy. This means that earnings per share will increase during economic expansions and will decrease during recessions. For example, between 2007 and 2009 earnings per share declined from $2.80 to $1.33.

The long-term success of Home Depot is tied to the housing market in North America. Rising home values over time, coupled with aging of homes, new construction, higher incomes are key factors that could trigger more renovations, home remodels and upgrades. Home Depot targets do-it-yourself customers, professional segment (e.g. – homebuilders) as well as contractors or handymen who help those individuals who are not the DYI type.

The company does not have a lot of room for many more store openings in the US. This means that future growth will be generated from improvements in stores, productivity of operations, and expanding product offerings by tapping more on the online channel. Selling online for direct home delivery or pick up in store, while having the store network and distribution centers behind it, is a competitive advantage that online retailers largely do not have at present. A focus on improved customer care should also increase company’s moat further, because customers will be more likely to return to a store where associates are knowledgeable enough to provide value for their needs. Another opportunity for growth include the rise of smart home systems, which may benefit long-term growth.

Home Depot does have a massive scale, being one of the largest home improvements retailers in the US. This means lower per unit costs, and higher margins. Its retail locations are in good spots, which bodes well for traffic. While the number of store locations in the US is not expected to grow materially in the future, international expansion presents an opportunity.

Earnings per share have been aided by share buybacks. Between 2009 and 2019, the number of shares has been reduced from 1.686 billion to 1.143 billion.

The dividend payout ratio has been in a decline between 2009 and 2019. During the financial crisis in 2009, the payout ratio exceeded 68% due to declining earnings, which is probably one of the reasons why the dividend was kept unchanged. Right now the payout ratio is at 42%, which makes the dividend adequately covered.

Currently, the stock is close to fully valued at 19.50 times forward earnings. Home Depot does offer an attractive dividend yield at 2.75%. Home Depot has a higher forward P/E versus competitor Lowe’s, but it has a higher dividend yield. Lowe’s is selling at 17.40 times forward earnings, but yields 2.30%.

Relevant Articles:

Lowe's (LOW) Dividend Stock Analysis
Busy Week For Dividend Increases
How to select winning retail stocks
Dividend Kings List For 2019

Tuesday, June 11, 2019

Dividend Stock Analysis of UnitedHealth Group (UNH)

UnitedHealth Group Incorporated (UNH) operates as a diversified health care company in the United States. It operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight, and OptumRx.

UnitedHealth Group has managed to increase dividends for 10 years in a row. The company increased its quarterly dividend by 20% last week, to $1.08/share. I expect it to become a dividend achiever soon.

UnitedHealth really started growing distributions in 2009, which led to a rapid growth in annual distributions from 3 cents/share to $3.60/share. Long-term growth in dividends per share will likely match growth in earnings per share in the future. However, there is still some room for a little faster growth in dividends over the next 5 – 10 years, given the lower dividend payout ratio today.

UnitedHealth has managed to grow earnings per share by a factor of 6 over the past decade. Earnings grew from $2.40/share in 2008 to $12.19/share in 2018. Earnings per share were impacted briefly during the financial crisis in 2008, as they fell from 2007’s level of $3.42/share. However, they quickly recovered. The company is expected to earn $14.67/share in 2019.

The company’s share price has been declining, due to external risks. The possibility for a disruption of the existing healthcare model in the US could negatively impact profits. An increase in scrutiny on pharmacy benefits managers, which generate revenues based off pharmaceutical rebates can also be a drag on performance. There will be increased volatility as we head into the 2020 election, which may result in lower entry prices for investors. I do believe that the possibility of disruption is there, however the likelihood of it occurring are very low in my opinion. Changing the nation’s laws will be a challenge, as there is an army of lobbyists as well as a divided congress which cannot reach a compromise on anything. Ironically, UnitedHealth Group could benefit from increased government regulation in the healthcare market, as this will increase the number of participants, the volume of prescriptions and procedures being performed. In addition, it could still offer competitive managed care plans on top of government health insurance such as Medicare. Or alternatively, it could manage the Medicare for a portion of the population if it could do it in a smarter and more efficient way than what a government agency could accomplish.

The company offers health insurance, manages health insurance plans, offers pharmacy benefit management, as well as solutions to improve performance and deliver efficiencies. The integrated nature of its business model has given it excellent scale, which competitors such as CVS Health are trying to emulate. This integrated nature of providing health insurance and providing prescription benefits management leads to lower costs, and increases competitiveness and profits. For example, due to lower costs, UNH can offer lower premiums than its competitors for health insurance or for managing health plans.

Scale is important for Pharmacy Benefits Managers, since it allows them to extract lower prices from drug manufacturers due to huge volumes of prescriptions being filled. There are only three major PBM’s in the US that fill the majority of prescriptions in the country. Also having the know-how of filling a lot of prescriptions also improves scale and generates sufficient efficiencies to further result in lower costs. The more of a certain task you do, the better you get, and your efficiency and expertise improves dramatically.

The company has managed to reduce the number of shares outstanding over the past decade by a fifth. The number of shares outstanding decreased from 1.214 billion shares in 2008 to 983 million in 2018.

The dividend payout ratio increased from 1.25% in 2008 to 28.30% in 2018. A lower payout ratio is always a plus, because it provides an adequate margin of safety in case of short-term turbulence in earnings per share. In this case, it is possible that dividends can grow faster than earnings, through expanding the payout ratio to 40% - 50%.

Right now, I find UnitedHealth Group to be attractively valued at 16.80 times forward earnings and yields 1.75%.

Relevant Articles:

My Bet With Warren Buffett
Three stages of dividend growth
Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Rising Earnings – The Source of Future Dividend Growth

Thursday, June 6, 2019

Lowe's (LOW) Dividend Stock Analysis

Lowe's Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer in the United States, Canada, and Mexico. The company offers a line of products for construction, maintenance, repair, remodeling, and decorating. Lowe's is one of the Original Dividend Aristocrats from 1989.

Lowe’s is one of 26 dividend kings in the US. The company hiked its quarterly dividend by 15% to 55 cents/share just last week. This marked the 57th consecutive annual dividend increase for the dividend king. Over the past decade, the company has managed to increase distributions at an annualized rate of 18.40%.

The strong growth in dividends per share was aided by growth in earnings per share and the increase in the dividend payout ratio over the past decade.

Between 2009 and 2019, earnings per share rose at an annualized rate of 12%/year. Lowe’s grew earnings per share from $1.48 in 2009 to $4.62 in 2019. The company is expecting diluted earnings per share of $5.54 to $5.74 for the fiscal year ending Jan. 31, 2020.

Earnings per share for 2019 have been adjusted upwards for a few one-time events such as goodwill impairment on Canadian Stores, impairment on company’s Mexico Operations, charges related to Orchard Supply Hardware, as well as charges related to US store closings for a total of $1.78/share.
Lowe’s is in the process of exiting its Mexico operations, closing Orchard Supply Hardware and closing underperforming stores in Canada and the US. Getting out of the ancillary businesses, closing underperforming businesses and concentrating on key operations in home improvement and enhancing the website functionality should help in focusing its efforts on key competencies. The company is working on a transformational initiative to improve stores, do a better job in inventory control, reign in SG&A spending, and improving supply chains. An increase in margins can improve profitability for each dollar of sales. It looks like the company will be relying less on growth through new stores, and more on doing better with the store base it already has.

The company’s fortunes are tied to the housing market in North America. A strong housing market will provide better sales over time. Growth in housing prices over time will provide a wealth effect, which can be transformed into higher spending on homes. As houses age over time, homeowners will spend more funds maintaining their places of living. Living in a house will tell you that the number of house projects never ends, as things break or get into the need for improvements, remodeling and renovations. An uptick in construction can benefit Lowe’s.

While the earnings growth during the past decade has been impressive, we should not forget that Lowe’s is exposed to the cyclical nature of the economy. During the past recession for example, earnings dropped from $1.99/share in 2007 to $1.20/share in 2010.

Lowe’s is second to Home Depot, which has slightly better store locations, higher margins, and a higher share of the professionals market. Better execution at Lowe’s can help in attracting more DIY customers and those from the Pro-segment. Investing in better customer service can pay dividends down the road, as better trained associates can broaden the moat behind the retailer operations. The ability to order online and pick-up in store is helpful in having successful online operations, while fending off threats from Amazon.

The company has been active on the share repurchase front during the past decade. The number of shares outstanding has gone from 1.465 billion in 2009 to 812 million by 2019. Most of the repurchases occurred between 2013 – 2019, when the share price was going up.
If the economy goes into a recession, I expect that Lowe’s will halt share buybacks, until the coast is clearer.

Either way, the buybacks have made each remaining share more valuable, thus boosting earnings per share.

The dividend payout ratio has increased from 23% in 2009 to 40% in 2019. The increase in the payout ratio has definitely helped Lowe’s grow distributions faster than earnings. It looks like between 2012 and 2019 however the payout ratio has not increase by much, which means that dividend growth was closely following earnings growth for a better part of the past decade.

Right now, the stock sells for 17.50 times forward earnings and yields 2.30%. I find Lowe’s to be attractively valued today.

Relevant Articles:

- 2019 Dividend King's List
How to select winning retail stocks
Dividend Growth Stocks by Sector - Retail
- Where are the original Dividend Aristocrats now?

Tuesday, June 4, 2019

Early Retirement For Dividend Investors

There are a lot of stories about people who become financially independent these days in their 30s or 40s. While these are isolated instances in the grand scheme of things, they are part of a broader movement online, where people want to take ownership of their time and retire to something more meaningful in their lives. Some call it retirement, others call it financial independence, and a lot of them are calling it FIRE – Financial Independence Retire Early. I use the terms financial independence interchangeably with the term retirement in this article. I view both as simply points in time for a person’s life, which allow them more options of how to live their life. This is a point where you have enough money to never have to work again in your life. When you become financially independent, you typically receive dividends, capital gains, rent payments, royalty payments from investments, and you have the added benefit of not having not work even a day in your life from there. Depending on how things work out for you, this can be achieved as early as your 30s or as late as your 50s or 60s.

Retirement is typically viewed as the activity where someone stops working for an employer, after they receive a pension or a Social Security check. As long as those checks pay for the persons expenses, they have the option to not have to work another day in their lives. The main difference is that we associate traditional retirement with folks in their 50s or 60s, whereas financial independence is not something defined or limited by age. I view both as interchangeable, because in essence, in both cases folks are having the financial flexibility to live life to their own terms, not being chained to a desk or a job they may dislike. In both situations, you have the option to leave one endeavor and focus on another one.

I embrace the pursuit of financial independence. It shouldn’t be a big surprise that after discussing investments for over a decade, I am a big fan of pursuing financial independence at my own terms. To me, financial independence is the point at which your passive income meets or exceeds your expenses. This is the so called dividend crossover point. The point of learning about dividend investing and applying it with real money on the line has always been to help me reach my dividend crossover point.

The main ingredients that allow you to reach financial independence are focused around earning money, saving money and investing that money.

Earning money is the first step in pursuing financial independence. If you are able to earn a good income, it is much easier to manage expenses and save money. Getting to that income point may result in choosing a profession that pays well, while avoiding crippling student loans that may set you back. A good paying job in IT, professional services such as consulting or accounting, medicine ( doctor, nurse), law or engineering can provide the fuel to save enough money, while also maintaining a good standard of living. Other fields may offer good earnings such as being a plumber, electrician, HVAC technician, handy-person, without the need to go to an expensive college. In other words, if you spend $30,000/year, it is easier to save money if you earn $100,000/year than if you earn $40,000/year. Theoretically, the amount you can earn is unlimited. However, it is good to know that for a typical work week in your chosen profession you can expect a certain income range depending on your qualifications. Therefore, it makes sense to increase your worth to an employer and get recognition for it, in order to unlock your value and earn more. In many cases these days, this means moving from one employer to the next every 2 – 3 years or so, in order to obtain the market value for your skills. It also may mean getting more qualifications and taking on challenging projects that no one else wants to take. Income is relative however, and meaningless, without thinking about the expense side of the equation.

Saving money is the next step in pursuing financial independence. You may be earning all the money in the world, but if you spend everything, you will never be able to save any money to reach financial independence. You need to have a balance between spending and savings. It is easier to save more money if you earn a lot. However, the important link is the percentage of salary that you can save, rather than the maximum total dollar amount. For example, if you earn $100,000/year and save $10,000/year, you are not better off than someone who earns $30,000/year but saves $10,000/year. That's because the first person is spending $90,000/year and not saving enough to cover their expenses. The second person is spending $20,000/year, but saves enough to pay for half an year's worth of expenses.

If you are able to save half of your salary, you are theoretically able to work for one year and take an year off. If you work for 20 years, you will be able to save enough money to sustain you for 20 years without working ( assuming you keep the money in a savings account). Of course, if you invest the money, the power of compound interest would provide more than enough to sustain you for even longer than 20 years. If you are able to save a quarter of your salary, you can theoretically take one year off for every four years of work. After working for 40 years, you should be able to take a decade off. OF course, due to compound interest, the amount of time you can take off is going to be a little bit higher. If you cannot work for 40 years however, the amount of funds you can save will be lower as well.

In order to be able to save money, it means being mindful about your spending and cutting unnecessary costs. Not keeping up with the joneses is one strategy that can result in a higher savings rate. Learning some DIY skills can also result in better savings rates. Managing the largest expenses around housing, transportation, taxes and food can be the deal changer between saving enough and not saving enough.

The last piece is investing the money intelligently, to provide for your retirement needs when you no longer pursue active employment. Earning a decent income and saving enough is not sufficient to get to financial independence if all you do is keep the money in the bank. In order to reach financial independence, you need to have your money work hard for you, so that you don’t have to.
There are various schools of thought on the best investment techniques to preserve and grow wealth. I have followed a few, and stopped on dividend growth investing. It makes perfect sense that a business that generates excess cashflows while still growing is one I want to focus and analyze. If this business ends up sharing that growing cashflows with shareholders, they are essentially getting paid to hold on to their ownership stakes. This is the type of business that attracts long-term shareholders, and not the active trader types who are focused on share prices too much for their own good. If I can assemble a diversified selection of such businesses at attractive valuations, I know that I should do ok over time. Financial independence is also much easier to model with dividend income.

Other investors are putting their money to work in diversified index funds, rental real estate or some type of momentum or value companies. Each strategy has its pros and cons, and no strategy is perfect. However, if you find the right strategy for your temperament and your situation, you should embrace it and stick to it ( assuming it has a positive expectancy of a gain). By harnessing the power of compound interest through smart and regular investing, you will be able to grow your savings to a point where they can meet your expenses. In my case, this is the dividend crossover point, which is where dividend income covers personal expenses.

There are many reasons to pursue financial independence.

- Spend more time with family members
- Spend more time on hobbies which fulfill you
- Flexibility if you lose your job due to downsizing or illness
- Volunteer for causes that are dear to your heart
- Shape government policies
- Start a business
- Move to another industry or job type

I am sure that there are a lot of reasons to pursue financial independence, which I have left out. Please feel free to email me with your ideas, and I will add them to the article.

In my case, I have pursued investing as a way to provide financial stability for me, which is independent from having to report for 40 – 60 hours/week to an employer.

The typical corporate environment today is characterized by constant restructuring and reorganizations has left with many companies expecting to pay the least to their rank and file workers, while expecting them to do the jobs of two or three people. Doing a good job is not enough, because you also need to take on new responsibilities and find ways to work beyond what your job description requires from you. That doesn’t mean anything however, because your department or position may not be viewed as essential in the next round of layoffs and eliminated. While you build some skills at this job, you have no say in the management, because you are just a tool in the corporate machine that is expected to operate at peak capacity at all times. That tool is instantly replaceable however. Perhaps that's why it is better to own the tools of production, by buying and holding stock in the corporations, than work for them.

Companies also expect employees to dedicate their lives to them, and potentially sacrifice evenings and weekends for them, in order to finish projects with impossible timelines due to poor design. This doesn’t bode well for having an adequate work-life balance.

While some readers may be in careers they enjoy today, they should still be in the market for pursuing financial independence. You never know when things would change, and the great job may turn into a toxic work environment. A corporate restructuring, a new boss, office politics, companies pushing workers against each other, or increased scrutiny and unrealistic expectations could easily derail the enjoyment at the workplace. If you have reached out your dividend crossover point, you may be in a position to walk out of a bad situation, without worrying about how this decision could impact your finances.

I view the pursuit of financial independence as an endeavor that would allow readers to reclaim their own time, while also providing the flexibility to pursue what is truly important for them.

What about you? How far along your journey to financial independence are you? You can email me at

Relevant Articles:

Financial Independence Is Easier to Model with Dividends
Dividend Investing for Financial Independence
Margin of Safety in Financial Independence
Achieve Financial Independence with Dividend Paying Stocks
The Simple Math Behind Early Retirement

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