Thursday, October 29, 2020

How to find companies for my dividend portfolio

I am a buy and hold dividend growth investor. This means that I build my portfolio patiently. It also means that I rarely sell. I buy stocks to hold for decades, and would do so for as long as the dividend is not cut or for as long as a company is not acquired. This inactivity keeps investment fees and costs low.

It also reduces the impact of behavioral errors. I believe that time in the market beats timing the market. I try to buy companies that I would be comfortable owning even if the stock market closed for a decade. 

To paraphrase Warren Buffett “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

I have discussed how I evaluate each company in detail. But I have not discussed how I find companies to research and potentially invest in a more comprehensive way.

Today I will share with you the general process I use to find companies for investment. 

One of the goals of my newsletter is to try and share how I operate as an investor. My goal is to help you become a more rounded investor, so as you can create your own investing process that would help you to achieve your investment goals and objectives. While I would hope that you would stay and follow my journey over the years, I would be happier if you end up as an investor who can follow their own system, and be an independent thinker that would take their financial future in their own hands.

I wanted to share with you the process I follow to identify companies for further research, and potential acquisition. 

My process has evolved over time of course, but there are a few places where I look for investment ideas.

The first place is the good old list of dividend aristocrats. It is a well-known and widely distributed list of S&P 500 companies which have managed to increase dividends for at least 25 years in a row.

Membership is restrictive, but I like the quality and the fact that this list includes great businesses and it is not too exhaustive either. The list has ranged from 40 to 65 members over the past 10 – 15 years. If you managed to learn about each company, you will likely have a list of companies that make sense to you from a business perspective. The next step is either to consider acquiring the ones that are attractively valued, or to wait for the right price for the companies that seem expensive.

I generally screen the list by focusing on growth in earnings per share, dividends per share growth versus valuation, payout ratios etc. 

The second place is the list of dividend champions, contenders and challengers. It is updated monthly, and includes over 800 companies. The number of companies raising dividends for over 25 years is double the Dividend Aristocrats list, because it includes companies that are not part of the S&P 500. It doesn’t have liquidity or market capitalization requirement either.

This list also includes a list of companies that have increased dividends for over 10 years or over 5 years. It has a lot of useful data as well.

The third place I look is the monitoring process, where I review dividend increases every week. I like reviewing the press release for nuance, and try to gauge the management optimism. Sometimes, they read that we are in a situation where it is business as usual. Other times they seem too optimistic. After reading it for a few years, you may get a hang of it too.

A fourth place is through checkups of activity, including press releases, large sudden drops or increases in share price etc. While I review the list of dividend champions, dividend aristocrats and my portfolio holdings, I still learn about major moves in other businesses that I may want to study.

A fifth place is by scuttlebutt. Basically, in my daily life, I look at products, services, ideas, trends etc. You can identify investable opportunities this way. This is also an interesting way to admit that a lot of the missed opportunities I have had have been underneath my nose all those years.

If you like a certain product or service, you should always check and see if there is a company behind it. If that company is publicly traded, you may want to put it on your list for research. This idea is inspired by Peter Lynch.

Sometimes we overcomplicate life. Some of the best investment opportunities are right under our noses. I am reminded about Wal-Mart, Target, Lowe’s, Home Depot, Microsoft, Apple, Starbucks, Hormel, Altria, etc.

I recently saw a video, about a very simple investing process. The eat them, drink them, smoke them and go to the doctor portfolio. You may check it out from here - https://www.youtube.com/watch?v=U23fhx06SUQ&feature=youtu.be

Sometimes, I like a company, and decide to review some of its peers. I may end up owning stakes in all of them.

The sixth place is primary the most dangerous one. I follow a lot of dividend investors and other investors. Sometimes I see a lot of them buying a stock, perhaps because they are blindly following each other. Or perhaps because they are all seeing a good value, possibly because the stock had a catalyst that makes it a value. It is dangerous to be a lemming and blindly follow others, because you may be following them into their bad ideas, lose conviction, and ignore their best ideas. Also, you are not learning much by following others. Groupthink may influence you, which could be bad for your investment returns. 

I believe it is best to have your own process to follow, because you are not at the mercy of others for ideas. Plus, no single investors out there, even Warren Buffett is right 100% of the time. If you follow someone, make sure to follow all of their investment ideas. However, also make sure you have your own process to decide for yourself if a stock is a buy or an avoid.

For example, Buffett received a lot of negative publicity recently, after he sold his airline stocks. In my opinion, that was a bad decision in the first place. After he sold at a loss, everyone out there started saying that he has lost his touch. After Apple went up to $135/share however, everyone started signing poraises for him again. Right now, he is sitting on an unrealized gain of $76 billion, and few are saying that he has lost his touch. And overall, his gains on Apple are higher than his losses on airlines and IBM.


Monday, October 26, 2020

Eleven Companies Rewarding Shareholders With Regular Dividend Increases

As part of my monitoring process, I review the list of dividend increases every week. This exercise helps me monitor the progress of existing holdings. It also helps me identify companies for further research. I use this process in conjunction with my screening process.

As part of this process, I look at the companies that raised dividends over the past week. I narrow my focus on companies with an established track record of annual dividend increases. I look for companies that have managed to increase for at least a decade.

I then review the company’s most recent dividend increase, and compare it to the ten year average for perspective.

I also look at the growth in earnings, along with estimated earnings for this year. It is helpful to gain an understanding if the company has been able to grow dividends due to growth in the business. If growth is achieved through expanding the payout ratio, I am generally not interested in such a company.

Last but not least, I review valuation. This includes P/E ratios, dividend yields, but also compare that with historical dividend growth and trends in earnings per share. As you can see, I have come to the conclusion that valuation is more art than science.

During the past week, there were several companeis that raised dividends. Each company has at least a ten year track record of annual dividend increases: The companies include:

Home Bancshares, Inc. (HOMB) operates as the bank holding company for Centennial Bank that provides commercial and retail banking, and related financial services to businesses, real estate developers and investors, individuals, and municipalities. 

The company increased its quarterly dividend by 7.70% to 14 cents/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend achiever. During the past decade, it has managed to grow distributions at an annualized rate of 25%.

The company raised earnings from $/share in 2009 to $/share in 2019. Home Bancshares is expected to earn $1.18/share in 2020.

The company sells for 15 times forward earnings and yields 3.16%.

Middlesex Water Company (MSEX) owns and operates regulated water utility and wastewater systems. It operates in two segments, Regulated and Non-Regulated.

The company increased its quarterly dividend by 6.30% to 27.30 cents/share. This marked the 47th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow distributions at an annualized rate of 3.20%.

Between 2009 and 2019, the company was able to grow earnings from 72 cents/share to $2.01/share.Middlesex Water is expected to earn $2.12/share in 2020.

The company sells for 32.90 times forward earnings and yieods 1.56%.

Standex International Corporation (SXI), together with subsidiaries, manufactures and sells various products and services for commercial and industrial markets in the United States and internationally. The company operates through five segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions. The company hiked its quarterly dividend by 9.10% to 24 cents/share, marking its tenth consecutive annual dividend increase. During the past decade, it has managed to grow distributions at an annualized rate of 8.60%.

Standex is expected to earn $3.65/share in 2020.

The company sells for 17.80 times forward earnings and yields 1.50%

American Electric Power Company, Inc. (AEP) is an electric public utility holding company that engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. It operates through Vertically Integrated Utilities, Transmission and Distribution Utilities, AEP Transmission Holdco, and Generation & Marketing segments.

American Electric Power raised its quarterly dividend by 5.70% to 74 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow its dividends at  an annualized rate of 5.15%.

Between 2009 to 2019, the company’s earnings went from $2.96/share to $3.88/share.

American Electric Power is expected to earn $4.32/share in 2020.

The company sells for 21.30 times forward earnings and yields 3.20%

Hubbell Incorporated (HUBB) designs, manufactures, and sells electrical and electronic products in the United States and internationally. The company operates through two segments, Electrical and Power.

The company increased its quarterly dividend by 7.70% to 98 cents/share. This marked the 13th consecutive annual dividend icnrease for this dividend achiever. Over the past decade Hubbell has managed to grow dividends at an annualized rate of 9.40%/year.

Between 2009 and 2019 the company managed to grow earnings from $3.15/share to $7.31/share. Hubbell is expected to earn $7.22/share in 2020.

The company sells for 21.25 times forward earnings and yields 2.56%

The Gorman-Rupp Company (GRC) designs, manufactures, and sells pumps and pump systems worldwide. 

The company increased its quarterly dividend by 10.70% to 15.50 cents/share. This marked the 48th consecutive annual dividend icnrease for this dividend champion. Over the past decade Gorman-Rupp has managed to grow dividends at an annualized rate of 7.80%/year.

The company grew earnings from 70 cents/share in 2009 to $1.37/share in 2019. Gorman-Rupp is expected to earn $1.10/share in 2020.

The company sells for 31 times forward earnings and yields 1.80%

Avery Dennison Corporation (AVY) produces and sells pressure-sensitive materials worldwide. The company raised its quarterly dividend by 6.90% to 62 cents/share. This marked the 10th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has been able to raise dividends by 6.35%/year.

In 2008, the company earned $2.70/share. It managed to grow earnings to $3.57/share by 2019. Avery Dennison is expected to earn $6.06/share in 2020.

The company sells for 23.40 times forward earnings and yields 1.75%

Stepan Company (SCL) produces and sells specialty and intermediate chemicals to other manufacturers for use in various end products in North America, Europe, Latin America, and Asia. The company operates through three segments: Surfactants, Polymers, and Specialty Products. 

Stepan raised its quarterly dividend by 10.90% to 30.50 cents/share. This marked the 53rd consecutive year of annual dividend increases for this dividend king. During the past decade, the company has managed to boost dividends at an annualized dividend growth of 8.60%.

Between 2009 and 2019, Stepan managed to grow earnings from $2.92/share to $4.42/share. Stepan is expected to earn $5.21/share in 2020.

The company sells for 22.70 times forward earnings and yields 1.03%

Lincoln Electric Holdings, Inc. (LECO), designs, develops, manufactures, and sells welding, cutting, and brazing products worldwide. It operates through three segments: Americas Welding, International Welding, and The Harris Products Group.

The company increased its quarterly dividend by 4.10% to 51 cents/share. This marked the 26th consecutive annual dividend icnrease for this dividend champion. Over the past decade Lincoln Electric has managed to grow dividends at an annualized rate of 13.30%/year.

The company earned $2.46/share in 2008, right before the Global Financial Crisis. While it has had some dips in earnings per share in 2009 and in 2014 – 2016, its earnings per share grew to $4.68/share in 2019. Lincoln Electric is expected to earn $3.58/share in 2020.

The company sells for 29.50 times forward earnings and yields 1.93%

Whirlpool Corporation (WHR) manufactures and markets home appliances and related products. It operates through four segments: North America; Europe, Middle East and Africa; Latin America; and Asia.

The company raised its quarterly dividend by 4.20% to  $1.25/share. This marked the 10th consecutive annual dividend increase for this newly minted dividend achiever. Over the past decade, the company has been able to raise dividends by 10.70%/year.

Between 2009 and 2019, the company managed to increase earnings from $4.34/share to $18.45/share.

Whirlpool is expected to earn $13.02/share in 2020. The company sells for 15.20 times forward earnings and yields 2.50%

Tompkins Financial Corporation (TMP), a community-based financial services company, provides commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. The company operates in three segments: Banking, Insurance, and Wealth Management.

The company increased its quarterly dividend by 3.85% to 54 cents/share. This marked the 34th consecutive annual dividend icnrease for this dividend champion. Over the past decade Tompkins Financial has managed to grow dividends at an annualized rate of 5%/year.

Between 2009 and 2019, Tompkins Financial grew earnings from $2.96/share to $5.37/share. Tompkins Financial is expected to earn $4.49/share in 2020.

The company sells for 13 times forward earnings and yields 3.70%

Relevant Articles:

How to value dividend stocks

Four Dividend Increases From Last Week

Price, Value and Sources of Returns

Dividend Growth Investing Principles

Friday, October 23, 2020

Price, Value and Sources of Returns

 As an investor, I follow a very simple model.

I look for companies that have a track record of annual dividend increases, supported by earnings growth. I try to buy enough of these companies in order to build a diversified portfolio.

Naturally, everyone discusses the fact that they do not want to overpay for companies. Obviously you want to buy at a discount.

The problem with this statement is that it assumes a static environment. 

We live in a dynamic environment. 

If I see a company that sells at a P/E of 20, it may look optically more expensive than a company that sells at a P/E of 10.

However, we cannot just look at P/E in isolation. Not all P/E ratios are created equal.

We need to look at the stability of the earnings and cash flows for each company. A cyclical company should in general have a lower P/E ratio, because its earnings streams are not defensible and they follow the rise and fall in the economy. A more defensive company such as a tobacco or spirits manufacturer whose earnings are more immune to the short-term ups and downs of the economic cycle would be more resiliant, and therefore pricier. The market participants are willing to pay a premium (usually) for things that are easier to forecast due to the repetitive nature and stability and intanglibles such as brands. 

We also need to look into the growth prospects for the company. A company with a P/E of 10, that doesn’t grow earnings is more expensive for a long-term investor than a company with a P/E of 25 that manages to double earnings every decade.

To paraphrase Warren Buffett: Price is what you pay, value is what you get


I also follow a simple model for when it comes to estimating future returns.

Future returns are a function of:

1) Initial dividend yield

2) Growth in earnings per share

3) Dividend Reinvestment

4) Changes in valuation

The first three items are part of the fundamentals return. The fundamental return – earnings, dividends, reinvested earnings and dividends, basically remind me that by buying a stock I am not just buying a lottery ticket, but a piece of an actual business.

That business sells products and services to customers, and hopefully it grows. Management hopefully works carefully at capital allocation too, in order to benefit shareholders. As I discussed earlier, management should invest earnings back into the business, but only if they expect those to generate a certain return on investment. If they cannot put that money back into the business and generate a high rate of return on it, they need to send it back to shareholders in the form of dividends. There is a natural limit to how much money a business can reinvest at a high rate of return and how quickly it can deploy that money as well in an intelligent manner. Just stocking up the balance sheet with cash may not be the most optimal decision. Excess cash can goad chief executives into making impulsive acquisitions at high prices, splurging on palatial headquarters or overfunding underwhelming projects. In fact, academic research shows that companies with the highest levels of cash go on to become less profitable in the long term; one recent study found that high-cash firms earn future profit margins 1.5 percentage points lower than those that carry the least cash. Source

Charlie Munger has stated that “Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount.  Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.”

Terry Smith from Fundsmith states that Munger’s idea is a mathematical certainty. 

It is difficult to forecast returns or management ability to reinvest capital at high rates of return. Hence, it is important to look at predictable businesses that can deploy earnings back at a high rate of return. Not every company can do that, as there are limits to everything due to competition, nature of the industry, time etc. 

But perhaps this is what Buffett was refering to with this quote “ It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.’ 

It is good to buy a company that can grow earnings over time, since that grows dividends and intrinsic value. This is a good type of company to be in if you are a long-term investor. Otherwise, you would be stuck buying cheap stocks at a low P/E, that you have to sell when they get to a fair price. Only to repeat this process again and again.

Sadly, in this day and age, a lot of investors tend to view shares in terms of speculative returns.  

Let’s illustrate everything with an example. I will use the company Church & Dwight (CHD)

Back in 2009, the company sold at $15.11/share. It earned 85 cents/share, and had a forward annual dividend of 14 cents/share. Church & Dwight yielded 0.93% and sold for a P/E of 17.78.

Fast forward a decade, and the stock sold at $70.35/share, and earned $2.44/share. The annualized dividend rose to $0.91/share, and the dividend yield was 1.29%. The P/E ratio had expanded to 28.83.

If you had bought 1 share of Church & Dwight at the end of 2009, you would have paid $15.11 for it. If you had reinvested those dividends along the way, you ended up with 1.165038 shares by the end of 2019. At a share price of $70.35/share, the total investment value went to $81.96. Not a bad return for a decade.

You can see the breakdown of sourced of return.

Intrinsic value resulted in a $28.26 increase in value, while changes in valuation resulted in a $26.98 increase in value. The rest is attributed to dividend reinvestment. I believe that changes in valuation are part of the speculative return, so I would not expect that to be a key source of investor returns going forward. As an investor I would focus more on the fundamental returns, mostly growth in earnings per share and dividends. Over time, I would expect that valuations revert to the mean.

Between 2010 and 2019, the company earned $17.04/share in earnings in total. It distributed $6.03/share in dividends. This means that the company retained $11.01/share to reinvest in the business.

According to Morningstar, the company has been able to achieve a return on invested capital of roughly 13% - 14%, which is pretty impressive. I do not want to venture any further into calculating more numbers however. At first look, it may seem that retaining $11.01/share resulted in increase in earnings from 85 cents to $2.44 and intrinsic value by $28.26. However, it may be hard to break down what percentage of growth was derived from past capital investments versus the investments from 2009 - 2019. Some long-term investments may not bear fruit for many years; others may have been misallocated.

Right now, Church & Dwight is expected to earn $2.82/share in 2020. The stock sells at $90.99/share for a forward P/E of 32.21. At the annual dividend rate of 96 cents/share, the dividend yield is at 1.05%. If earnings and dividends grow by 7%/year over the next decade, then they will double by 2030. The basic return would be at least 8%/year ( 1% from dividend yields and 7% from earnings and dividend growth). There are various scenarios going on of course, one where P/E ratios remain elevated and another where they shrink. The speculative return is hard to estimate, which is why I doubt it matters too much, unless you plan to invest for less than 5 years. If Church & Dwight doubles earnings in a decade, but the P/E ratio shrinks, the share price may not deliver much in terms of returns. This has happened before and won't surprise me from happening again in the future. 

Under this scenario, the stock would still sell around $90/share, but would be earning $5.60/share and have a P/E of 16. The stock would be paying a dividend of $1.92/share and yield 2.10%. If you hold for several decades, and the business is durable enough to continue compounding wealth and income, that valuation shrinkage won't matter. This is why Buffett states that you want to invest in quality businesses, and let the power of compounding do the heavy lifting for you.

I do want to emphasize focus on quality companies that have a strong brand, strong moat, repetitive purchases, strong competitive positions, which can also grow profits over time. We want a durable and predictable business model, with a slower pace of industry change.


Today, we learned a few important lessons.

We learned that when valuing companies, we need not look at P/E ratio in isolation. We need to take into consideration growth and stability of the earnings

We learned the factors that drive future investment returns, notably initial dividend yield, earnings growth and changes in valuations. We need to focus on fundamental return, because the speculative return based on changes in valuations cannot be relied upon, as it reverts to the mean.

If management is able to reinvest earnings at a high rate of return in the business, they should do so. But for excess cashflows, they should distribute it to shareholders. For most of the dividend growth stocks we have covered extensively over the past decade and a half, managements have managed to balance the long-term needs of the business and its earnings growth with the ability to distribute a growing stream of dividends. But those rising earnings and rising dividends, reinvested over time, really turbocharge returns for investors.

The really important lesson is to focus on quality, even if it looks optically more expensive. If you are a long-term investor, a quality company is more likely to deliver solid returns over time than a statistically cheap, but poor one.

Relevant Articles:

What drives future investment returns?

Not all P/E ratios are created equal

Evaluating Dividend Growth Stocks – The Missing Ingredient

Monday, October 19, 2020

Four Dividend Increases From Last Week

I review the list of dividend increases as part of my monitoring process. I find it helpful to observe the companies I own execute on their business plans, and watch them allocate money, and gauge their business sentiment through watching their dividend actions. 

The mental model I focus on looks for established companies that grow earnings, and generate more cashflows than they know what to do with. While some companies in the initial growth phases need all capital to grow the business, for most corporations in the US, there is excess cashflow left at the end of the year. There is also a limit as to how long you can profitably reinvest all cashflows too.

As a general rule, I prefer excess cashflows to be distributed to shareholders, in order to reduce the amount of wasteful acquisitions, spending on projects with low returns on investment, or just stocking up cash for no reason, which executives could waste on new headquarters, corporate jets etc.

I look for companies that grow earnings over time, which also manage to grow that excess cashflows and thus manage grow dividends for a certain number of years. Growing earnings, growing dividends and growing intrinsic values over time go hand in hand.

During the past week, there were four companies that raised dividends to shareholders. Every single one of those companies have managed to increase dividends for at least ten consecutive years. The companies include:

V.F. Corporation (VFC) engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products for men, women, and children in the Americas, Europe, and the Asia-Pacific. It operates through four segments: Outdoor, Active, and Work.

The company raised its quarterly dividend by 2.10% to 49 cents/share. This marked the 48th consecutive year of dividend increases for this dividend aristocrat.  V.F. Corp has managed to grow distributions at an annualized rate of 13% over the past decade.

Earnings per share went from $1.29/share in 2010 to $1.70/share in 2019. This is down from 2018’s earnings per share of $3.15.

The company is expected to generate $1.12/share in 2021 and $2.58/share in 2022.

Due to weakness in earnings this year, the company is selling at 67.70 times forward earnings. Even if earnigns were to normalize in 2022 however, V.F. Corp still seems expensive at close to 30 times forward earnings. The stock yields 2.60%, which does not seem well covered this year. It is a little better covered based on FY 2022 earnings. At this time I view the stock as a hold, but I would not be interested to add more.

Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, products worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.

The company raised its quarterly dividend by 3% to $1.35/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 21.50%.

Earnings per share increased from $5.28/share in 2010 to $14.48/share in 2019.

The company is expected to earn $9.72/share in 2020 and $11.99/share in 2021.

The stock is selling at 22.90 times forward earnings and yields 2.40%. I think it is a little pricey, and believe it may be a better value on dips.

A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products in North America, China, Europe, and India. It operates through two segments, North America and Rest of World.

The company raised its quarterly dividend by 8.30% to 26 cents/share.

This is the 27th consecutive annual dividend increase for this dividend aristocrat. During the past decade, A.O. Smith has managed to grow distributions at an annualized rate of 21.50%/year.

Earnings per share increased from 60 cents/share in 2010 to $2.22/share in 2019.

The company is expected to generate $1.87/share in 2020 and $2.29/share in 2021.

A.O. Smith is a little pricey at 29.60 times forward earnings. The stock yields 1.90%. It may be a better value on dips, provided that its short-term issues are finally resolved. The company is unlikely to exceed 2018’s earnings per share of $2.58 soon. That may be an opportunity if it does return to the path of profitable growth. It may be too expensive if earnings per share flatline.

Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.

The company raised its quarterly dividend by 10.40% to 53 cents/share. This marked the 15th year of consecutive annual dividend increases for this dividend achiever. During the past decade, this company has managed to grow distributions at an annualized rate of 14.60%.

Earnings per share increased from $1.83/share in 2011 to $4.49/share in 2020.

The company is expected to generate $6.25/share in 2021 and  $6.04/share in 2022.

Williams-Sonoma is priced fairly at 16.80 times forward earnings and yields 2%.


Relevant Articles:

Dividend Growth Investing Principles

What is Dividend Growth Investing?

Rising Earnings – The Source of Future Dividend Growth

Friday, October 16, 2020

Cboe (CBOE) Dividend Stock Analysis

Cboe Global Markets, Inc. (CBOE) operates as an options exchange in the United States. It operates in five segments: Options, U.S. Equities, Futures, European Equities, and Global FX.

The company has managed to increase dividends for ten years in a row, which makes it a newly minted dividend contender.

The last dividend increase was in August 2020, when it hiked the quarterly dividend by 16.70% to 42 cents/share.

“This year marked the 10th anniversary of our IPO and each year since, we’ve raised our dividend, demonstrating Cboe Global Markets’ ongoing commitment to returning capital to our shareholders,” said Ed Tilly, Chairman, President and Chief Executive Officer, Cboe Global Markets. “The increase in our dividend reflects Cboe’s financial strength and cash flow generating capabilities, while we execute on our growth initiatives and deliver sustainable returns to our shareholders.”

Since initiating a quarterly dividend in 2010 at 10 cents/share, the company has managed to quadruple its quarterly distribution to 42 cents/share.


Between 2010 and 2019, CBOE grew earnings from $1.03/share to $3.34/share. The company is expected to generate $5.16/share in 2020.


CBOEs key growth initiatives are the following:
- Expand product lines across asset classes
- Broaden geographic reach
- Diversify business mix with non transactional revenues
- Leverage leading proprietary trading technology
- Build upon core proprietary products

The company operates the largest options exchange in the US, where we have equity and index options being traded. A large portion of revenues is derived by trading fees. With the proliferation of online trading, exchanges such as CBOE should benefit form all this speculation. The company has a dominant position in options. It is the second largest exchange for equities trading in the US after Nasdaq, but ahead of NYSE.

Some popular products include its options products on S&P 500 options, which are under license from S&P until 2030. Other products include VIX options and VIX Futures, which are widely followed as well. The implosion of several VIX funds in early 2018 was a negative for CBOE however. Both S&P 500 options and VIX futures can be a positive for CBOE when there is increased market volatility and when investors want to hedge their market exposure.

Focusing on costs, and driving efficiencies across its business can results in higher profits over time and a better customer experience.  Investing in the trading platforms through technological advances will definitely be a plus.

New products and bolt on acquisitions can further be accretive to its offerings to clients, and further strengthen the moat. Acquisitions could be accretive due to synergies realized. CBOE realized synergies from its acquisition of BATS from a couple of years ago for example, which boosted revenues and increased profits.

The acquisition of BATS also diversified the revenue mix from 81%/19% in options/futures to options (51%), futures (11%), US Equities (27%), European Equities (7%) and Global FX ( 5%). This merger also reduced the transactional fees as a percentage of revenues from 68% to 57%.

The dividend payout ratio increased from 19% in 2010 to 40% in 2019. A large part of the increase in the payout ratio was the initiation of the dividend later in the year in 2010. 


It is possible for this phenomenon to continue in the 2020s as well, but sooner or later dividend growth and earnings growth would converge. If management takes the payout ratio too far, it is very likely that the next step would be dividend growth going slower than earnings. But I am getting ahead of myself here.

The number of shares outstanding have increased over the past decade. Between 2010 and 2016, the number of shares went down from 96 million to 81 million. After the acquisition of BATS however, the number of shares outstanding increased to 111 – 112 million.



Currently, the stock is attractively valued at 16.30 times forward earnings. It offers a dividend yield of 2%.


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