Monday, July 6, 2020

Bank OZK and John Wiley & Sons Reward Shareholders With Raises

I review the list of dividend increases every week, in an effort to monitor existing holdings, and uncover hidden dividend gems for further research.

I usually narrow my research to companies with a ten year history of annual dividend increases.
Last week, there were two companies that raised dividends. The companies include:

Bank OZK (OZK) provides retail and commercial banking services to businesses, individuals, and non-profit and governmental entities. The bank is expected to earn $1.51/share in 2020 and $2.26/share in 2021.

The bank raised its quarterly dividend by 0.90% to 27.25 cents/share. This increase represents a 13.50% hike over the dividend paid during the same time last year.

This was the 24th consecutive year of annual dividend increases for this dividend achiever. During the past decade, Bank OZK has managed to increase dividends at an annualized rate of 21.90%.
The company raised its earnings from 94 cents/share in 2010 to $3.30 in 2019.

Bank OZK is expected to earn $1.51/share in 2020 and $2.26/share in 2021.

The stock sells for 15.20 times forward earnings and yields 4.70%.

John Wiley & Sons, Inc. (JW-A) operates as a research and learning company worldwide. The company operates through three segments: Research Publishing & Platforms, Academic & Professional Learning, and Education Services.

The company raised its quarterly dividend by 0.70% to 34.25 cents/share. This was the 27th 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 9.50%. The rate of annualized dividend growth has been stalling over the past one, three and five years however.

John Wiley & Sons is expected to generate $2.02/share in 2020 and $2.43/share in 2021. For reference, the company earned $2.80/share in 2011 but lost $1.32/share in 2019.

The stock is fairly valued at 18.63 times forward earnings. The stock yields 3.64%.

I personally view both stocks as risky. Bank OZK has grown rapidly over the past decade, but that was in a very favorable economic environment. They’ve had some issues, so I am going to wait this one out.

John Wiley and Sons is a company that has not managed to grow earnings per share over the past decade. Perhaps because traditional publishing business model is under siege.

Relevant Articles:

Three Dividend Stocks in the News
Expect Dividend Cuts and Dividend Freezes in the Banking Sector
My Favorite Exercise As A Dividend Growth Investor
Seven Dividend Growth Stocks Rewarding Shareholders With Raises

Sunday, July 5, 2020

Dominion Energy (D) Cuts Dividends

I just learned that Dominion Energy (D) is going to cut annual dividends to $2.50/share, from $3.76/share. This ends an 18 year track record of annual dividend increases.

The company is selling assets to Berkshire Hathaway.

Proceeds will be about $3B as the deal includes the assumption of $5.7B in debt and taxes.

The proceeds of the asset sale will be used to buy back stock.

Dominion Energy is disposing of its Gas Transmission & Storage segment assets.

That includes more than 7,700 miles of natural gas storage and transmission pipelines and about 900 billion cubic feet of gas storage that Dominion currently operates.

This is from the press release that was just issued:

Dominion Energy is revising its 2020 operating earnings guidance. The company now expects 2020 operating earnings of $3.37 to $3.63 per share. The company's previous guidance was $4.25 to $4.60 per-share. 

Dominion Energy expects 2021 operating earnings per share to grow around 10 to 11 percent over 2020, reflecting the full-year impact of planned share repurchases, and by about 6.5 percent annually starting in 2022, off a 2021 base. This represents a 1.5 percentage point, or approximately 30 percent, increase from previous long-term earnings per share growth guidance. 

The company now expects to target an approximately 65 percent payout ratio to be effective upon completion of the transaction. This new payout ratio implies a 2021 dividend payment of around $2.50 per share. The projected reduction in the annual dividend reflects the absence of income from the divested assets and a revision to the company's target payout ratio to align with best-in-class industry peers.

Beginning in 2022, the company expects annual dividend-per-share increases of approximately 6 percent per year.  This represents a significant increase from previous long-term dividend per-share growth guidance of 2.5 percent. 

For 2020, the company has made two quarterly payments of 94 cents per share in March and June. The company expects to make an additional payment of 94 cents per share in September and currently expects a fourth payment in December 2020 of approximately 63 cents reflecting the expected timing of transaction closing.

The company is going to be earning about a full $1/share less than originally expected ( The actual loss in earnings power per year 97 cents/share - $1.23/share). The company had 838 million shares as of 3/31/2020. This means that Dominion energy is losing roughly $800 million in earnings power, while receiving less than $10 billion in "value" from Berkshire Hathaway. Value is derived by assumption of debt in the amount of $5.7B and pre-tax cash proceeds in the amount of $4B.

This is a P/E of 12.5 - 13 for the assets that Buffett is acquiring. It looks to me that this deal is not a good one for Dominion shareholders. I do not understand why a company would voluntarily impair its earnings power, in order to sell those assets at a low price, and then have to reduce dividends to shareholders.

It is odd that the sale of these assets will result in reduction of earnings per share by $1 per year. It is also interesting that Dominion is losing almost $1 billion to taxes. This comes out to $1.25/share. The debt reduction is $5.70 billion, and pre-tax proceeds are at $4 billion ( $3 billion after-tax).

Dominion Energy has been unable to grow earnings per share for quite some time however. This is the reason why I haven't added to my position for over 6 years. Wihout growing earnings per share, you cannot grow dividends per share or grow intrinsic value.

Dominion last raised dividends in December by 2.50% to 94 cents/share. This was a very slow dividend increase, which was in stark contrast to the high raises in the years before. This is what I mentioned in my review last year:

"The earnings history over the past decade has been spotty, due to one-time adjustments for which the numbers have to be corrected for ( and which won’t be done for the purposes of this weekly review).
Dominion Energy is expected to generate $4.20/share in 2019.

The stock seems richly valued at 19.25 times forward earnings but yields 4.60%. The forward payout ratio is at 89.50%, which is a little high for my liking. Dividend growth may disappoint given the high payout ratio, unless the company manages to grow its earnings per share."

The other announcement is that Dominion and Duke Energy announced the cancelation of the Atlantic Coast Pipeline ("ACP") due to ongoing delays and increasing cost uncertainty which threaten the economic viability of the project. Recent public guidance of project cost has increased to $8 billion from the original estimate of $4.5 to $5.0 billion. In addition, the most recent public estimate of commercial in-service in early 2022 represents a nearly three-and- a-half-year delay with uncertainty remaining. That project was announced in 2014, so it's cancellation surely is going to cut into future profitability. (Source)

Contrary to popular sentiment, utility stocks tend to cut dividends quite often. I realized that when I researched the histories of companies in the Dow Jones Utility Average a few years ago. Check my article:

I own some shares in my personal account, which I may end up selling on Monday. I would like to initiate a position in Nextera (NEE), but the valuation is a little high for my taste. Otherwise, Con Edison (ED) is not a bad choice today for decent current income, though the future dividend growth would be less than 3%/year. A lot of folks like Southern Company (SO), but this one has been unable to grow earnings per share over the past decade either. Plus, it has some cost overruns in a project that may not be completed.

Relevant Articles:

Tuesday, June 30, 2020

Simon Property Group (SPG) and Wells Fargo (WFC) to cut dividends

Right after the market closed on Monday, June 29, I learned that Simon Property Group (SPG) is cutting dividends per share. Simon is a real estate investment trust engaged in the ownership of premier shopping, dining, entertainment and mixed-use destinations. Check my analysis of Simon for more details about the REIT.

The company declared a dividend of $1.30/share, which is 38.10% decrease over the dividend paid during the first quarter of 2020. The Company expects to pay at least $6.00 per share in common stock dividends for 2020, in cash, subject to Board of Directors approval. Since Simon already paid $2.10 in February, this means that it plans to distribute two more payments of $1.30/share through the end of 2020. That's fine, since the REIT essentially skipped its dividend for the second quarter of 2020.

Back in May 2020, the company ended up being ambiguous on its dividend, as it failed to declare a payment for the second quarter. There were several things happening, namely the acquisition of Taubman (TCO), the Covid-19 shutdown of its properties, and the difficulty in collecting rent from tenants. Since then we have had no visibility on the amount of rent that is collected, but judging by other peers it is likely low. Hence why Simon is in the news for trying to sue tenants such as The GAP for not paying rent.

Simon is also trying to cancel the merger with Taubman, citing the Covid-19 situation and using the deterioration in business as a cause to walk away from this transaction. While it may have to pay a steep fine to walk away, Simon may actually be bluffing its way to bring Taubman to the negotiating table, and lower the entry price for the deal. We could only speculate of course.

I had a very small position in Simon, which I just sold today. That dividend cut ended a 10 year streak of annual dividend increases. Ironically, buying Simon when it last cut dividends in April-May 2009 would have turned out to be a smart decision through 2018. If we look at prices today however, the returns are not as high since early 2009.

I also wanted to add to my article from Friday, about expectations for dividend increases and dividend cuts in the banking sector.

It turns out that the results for the initial stress tests are out. It turns out that the following banks are going to keep dividends unchanged in the third quarter:

- Goldman Sachs (GS)
- Bank of America (BAC)
- Citigroup (C)
- Ally (ALLY)
- State Street (STT)
- U.S. Bank (USB)
- BNY Mellon (BK)
- Discover Financial Services (DFS)
- Fifth Third Bancorp (FITB)
- PNC Financial (PNC)
- American Express (AXP)
- J.P. Morgan (JPM)

Jamie Dimon, Chairman and CEO of JPMorgan Chase said: “At this time, using both JPMorgan Chase’s and the Federal Reserve’s base case economic outlook, the Firm can continue to pay its dividend in future quarters while maintaining healthy capital and liquidity positons. If there is a significant deterioration in the future outlook, the Firm will, of course, consider reducing dividends.

The only major bank that won't be keeping dividends unchanged is Wells Fargo (WFC). (Source)

"The company expects its common stock dividend in third quarter 2020 will be reduced from the current level of $0.51 per share. The company expects that the level of the third quarter dividend will be announced when it releases second quarter financial results on July 14, 2020."

This would be the first dividend cut for Wells Fargo since the Global Financial Crisis. Back in March 2009, the bank cut dividends as part of the TARP program. Incidentally, that was a great time to buy Wells Fargo below $10/share. The stock rebounded and went as high as $65 by early 2018, but has slowly gone downhill from there. Buffett is one of the largest holders of Wells Fargo, and is likely not very happy with the outcome. The bank was one of the strongest a decade ago, but its been mired in scandals related to fictitious account openings, and its size of operations has been capped.

I had a very small position in Wells Fargo. I built it in 2013, but stopped adding after raising some concerns that noone else paid attention to at the time. After all, if Buffett was buying, it was good enough. The nice part of my risk management procedures is that I usually build positions slowly, always doubt myseld and if the story changes, I stop buying more. When I am wrong, I like to keep losses low. I believe in keeping losses low, while trying to maximize future dividends and capital gains.

Relevant Articles:

Wells Fargo Joins the Crowd of Dividend Cutters
Should you invest in Wells Fargo (WFC)?
Why Warren Buffett Likes Investing in Bank Stocks
Simon Property Group (SPG): A High Yield and High Risk REIT
Expect Dividend Cuts and Dividend Freezes in the Banking Sector

Monday, June 29, 2020

Three Dividend Stocks in the News

I review the list of dividend increases as part of my monitoring process. This helps me to see whether the companies I own continue to progress financially, as evidenced by a well supported dividend increase. A well-supported dividend increase is one that is derived from growing earnings per share over time, and a business that continues humming along nicely. A well-supported dividend increase is one where the payout ratio is not too high, but just right.

Reviewing the list of dividend increases also helps me to identify companies for further research. While I do my fair share of screening on the list of dividend champions, dividend aristocrats, achievers and contenders, I also prefer to look at individual stories. I invest using a bottom up approach, but also try to look at the big picture as well.

Over the past week, there were three companies that raised dividends:

The Kroger Co. (KR) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores.

The Kroger Co.'s Board of Directors approved a dividend increase from 16 to 18 cents per quarter. Kroger's quarterly dividend has grown at a double-digit compound annual growth rate since it was reinstated in 2006. This marks the 14th consecutive year of annual dividend increases for this dividend achiever.

"Kroger's 12.50 percent dividend increase reflects our ability to deliver strong free cash flow during uncertain times and throughout the economic cycle," said Rodney McMullen, Kroger's chairman and CEO. "It also reflects the Board of Directors' confidence in both our business model and our commitment to return value to shareholders and achieve consistently attractive total shareholder returns."

Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 12.60%.

Kroger managed to grow earnings from 94 cents/share in 2009 to $2.04/share 2020. The company is expected to earn $2.71/share in 2021 and $2.56/share in 2022.

Kroger sells for 12.10 times forward earnings and yields 2.20%. Check my analysis of Kroger for more information about the company.

Hingham Institution for Savings (HIFS) is a Massachusetts-chartered savings bank located in Hingham, Massachusetts.

The bank announced that its Board of Directors has declared a regular quarterly cash dividend of $0.43 per share. This represents an increase of 2% over the previous regular quarterly dividend of $0.42 per share as well as a 10.20% increase over the dividend paid during the same time last year.
The company has consistently increased regular quarterly cash dividends over the last twenty-five years. The Bank has also declared special cash dividends in each of the last twenty-five years, typically in the fourth quarter.

Over the past decade, this dividend champion has managed to grow distributions at an annualized rate of 6.10%.

The bank has managed to grow earnings from $3.79/share in 2009 to $17.83/share in 2019. There are no earnings estimated for 2020 due to its small size, but trailing 12 month earnings are at 14.33/share.
The stock is selling for 11.10 times earnings and has a dividend yield of 1.10%.

Worthington Industries (WOR) is a leading industrial manufacturing company delivering innovative solutions to customers that span many industries including transportation, construction, industrial, agriculture, retail and energy.

The board of directors of Worthington Industries, declared a quarterly dividend of $0.25 per share, an increase of 4%. Worthington has increased its dividend for 10 consecutive years and has paid a quarterly dividend since it became a public company in 1968.

Over the past decade, this newly minted dividend achiever has managed to grow distributions at an annualized rate of 6.70%.

The company managed to grow earnings from 57 cents/share in 2010 to $1.41/share in 2020. The company is expected to earn $2.06/share in 2020 and 2021.

The stock sells at 16.60 times forward earnings and offers a dividend yield of 2.90%.

Relevant Articles:

My screening criteria for dividend growth stocks
How to read my stock analysis reports
Dividend Investing Resources I Use
How to determine if your dividends are safe

Friday, June 26, 2020

Expect Dividend Cuts and Dividend Freezes in the Banking Sector

Update 06/29/2020: Wells Fargo (WFC) announced that it may have to cut dividends after releasing results on July 14, 2020. Source: WFC Announcement

The Federal Reserve released its information on bank stress tests yesterday - June 25, 2020. You can read the announcement at this link. I found the following information very interesting, as it pertains to investors:

"For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.

All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.

During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks. The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income."

I bolded the words to show you the support behind my analysis.

It basically boils down to the fact that banks will experience credit losses due to high unemployment, and the recession related to Covid-19. The bank system is sound, and can survive a recession, as well as a potential W or V shaped recovery. There may be fewer casualties, in comparison to the Great Recession from 2007 - 2009. Therefore, the Federal reserve expects fewer bank failures from the larger companies.

However, in order to maintain liquidity and capital reserves, banks cannot do share buybacks for the third quarter. It is likely that banks won't be able to do share buybacks until the recession is over. That may mean that they won't be able to take advantage of "low prices", due to government regulation.

Banks can still continue paying dividends, but they will be unable to raise dividends for the duration of this recession. It would be nice if we just get away with dividend freezes - meaning dividends are unchanged. Financial dividends will return after the recession is over, and the stress tests allow them to do so.

The trouble is if banks report losses due to loans deteriorating due to the recession. If they are temporarily unable to earn enough to pay the dividend, they have to cut dividends. In other words, if Wells Fargo loses money in Q3 2020, it would have to cut dividends or suspend them, even if the bank recovers in Q4 2020. I doubt that a recovery would be so quick, as it looks today that we are headed for a second wave of Covid-19 cases, and potentially a second shutdown.

It also looks like the Federal Reserve is viewing share buybacks differently from dividends. It makes sense, because companies usually allocate any residual excess cash flows to buybacks that are not committed to dividends or growing the business. Buybacks can be best viewed as special dividends, so they are not recurring, and dependable like dividends.

I have a small allocation to banks. I will be selling if we have dividend cuts however. If a company maintains dividends, I will hold on to it. Perhaps I would finally learn the lesson that banks are cyclical companies, which cannot pay dependable dividends through the ups and downs of the economic cycle.

Selling financial companies after a dividend cut worked well early in the last recession, mostly in 2007 and 2008. Selling after a dividend cut was a mistake in 2009. Either way, it is important to stick to a plan, through thick or thin!

Relevant Articles:

TARP is bad for dividend investors
Which Bank will be next? Follow the dividend cuts
Dividend Investing During the Financial Crisis
Six things I learned from the financial crisis

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