Monday, October 15, 2012

Six Dividend Winners Boosting Investor's Distributions

In this article, I have highlighted several companies whose Boards of Directors approved increases in distributions over the past week. In order to reduce the list to a more manageable level, I only highlighted companies which have managed to boost dividends for at least five years in a row. I use five years as an initial screen, because it is roughly equal to the average economic cycle. By only including companies which have raised dividends for at least five years in row, I am only including companies which have demonstrated the ability to hike distributions for longer than one economic cycle.

The consistent dividend raisers of the past week include:

Northwest Natural Gas Company (NWN) stores and distributes natural gas primarily in Oregon, Washington, and California. The company raised quarterly distributions by 2.20% to 45.50 cents/share. This dividend king has boosted distributions for 57 years in a row. Yield: 3.60%

This utility has managed to boost earnings from $1.63/share in 2002 to $2.39 in 2011. The ten year dividend growth is 3.50%/year, which is not bad for a utility. In addition, its current payout ratio of 76.50% is not too bad for a utility either. After I sold the majority of my Con Edison (ED) position, I have been on the lookout for utility companies to add to my portfolio. I would consider analyzing the stock in more detail in the coming weeks.

Fastenal Company (FAST), together with its subsidiaries, operates as a wholesaler and retailer of industrial and construction supplies in the United States and internationally. This dividend achiever raised quarterly distributions by 10.50% to 21 cents/share. Fastenal has boosted distributions for 14 years in a row. Yield: 1.80%

I like the fundamentals behind Fastenal, as well as the strong earnings growth over the past decade. In addition, I also like the strong potential for future earnings growth. One drawback behind Fastenal is the high valuation. The stock trades at over 33 times earnings and yields only 1.80%. I would consider initiating a position in the stock on dips to my buy zone between $27 - $30/share.

Targa Resources Partners LP (NGLS) provides midstream natural gas and natural gas liquid (NGL) services in the United States. This master limited partnership raised quarterly distributions to 66.25 cents/unit. Targa Resources Partners has boosted distributions for 6 years in a row. Yield: 6%

The partnership has been able to cover distributions from distributable cash flow at 1.15 times in Q2 2012, 1.5 times in Q1 2012, 1.6 times in Q4 2011 and 1.10 times DCF in Q3 2011. In addition, the partnership has also been able to boost distributable cash flow in order to be able to pay rising distributions over the past six years. I would like to see at least ten years of dividend hikes before I invest in a stock however. As a result I would add the stock on my watch list in order to see how the business evolves over the next few years

Western Gas Partners, LP (WES) owns, operates, acquires, and develops midstream energy assets in east, west, and south Texas; the Rocky Mountains; and the Mid-Continent. The MLP raised quarterly distributions to 50 cents/unit. Western Gas Partners has boosted distributions for 5 years in a row. Yield: 3.80%

Western Gas Partners has one of the lowest yields for Master Limited Partnerships. However, its ratio of distributions paid to the distributable cash flow has been 1.59 in 2011 and 1.64 in 2010, which is very high for the sector. In addition, it is targeting double digit distribution growth over the next year, due to expansion. I would add this MLP to my list for further research.

Healthcare Services Group, Inc. (HCSG), together with its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and dietary services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. This dividend achiever raised quarterly distributions to 16.50 cents/share. Healthcare Services Group has boosted distributions for 10 years in a row. Yield: 2.90%

I like the fact that the company has managed to boost distributions every single quarter since initiating a dividend in 2003. However, I think that the company went too far in raising distributions to an unsustainably high amount. I currently find the dividend payout to be extremely high. As a result, I do not find the current payment to be sustainable. As a result, I would not be able to commit funds to initiate a position in the stock.

Senior Housing Properties Trust (SNH), a real estate investment trust (REIT), primarily invests in senior housing properties in the United States. The company raised quarterly distributions by 2.60% to 39 cents/share. Senior Housing Properties Trust has boosted distributions for 8 years in a row. Yield: 7.10%

A common metric for evaluating REITs is Funds From Operations, which includes earnings and other non-cash offsets such as depreciation. For the past four quarters FFO/share is $1.75, while the forward dividend payment at the new rate is $1.56year. This makes for a FFO payout ratio of 89%, which is slightly high for my liking. I typically prefer an FFO payout in the mid 80’s %. This metric has stood around 84% – 86% between 2009 and 2011, which is why I think that the company might not have a lot of room to grow distributions going forward. FFO/share increased from $1.70/share in 2009 to $1.75/share for the past four quarters through Q2 2012.

Full Disclosure: None

Relevant Articles:

Eleven Dividend Kings, Raising dividends for 50+ years
Dividend Achievers Offer Income Growth and Capital Appreciation
Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors
Three High Dividend Stocks Raising Distributions

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