In order to identify promising dividend candidates for further research, I follow a multi-dimensional approach. At least once per month, I run my dividend entry criteria screen on the dividend champions list in order to uncover attractively valued securities. I also review my portfolio, in order to determine whether I should initiate a position in a new stock or I should add to an existing position. Another method I use is to look at the weekly list of dividend increases, in order to identify up and coming dividend achiever, and also to monitor the dividend increases for my existing positions.
I identified the following dividend increases over the past week, which I found interesting.
Lowe’s Companies, Inc. (LOW) operates as a home improvement retailer. It offers products for maintenance, repair, remodeling, and home decorating. The company managed to increase dividends by 12.50% to 18 cents/share. This dividend king has managed to boost distributions for 51 consecutive years. While earnings per share have not grown above the high set in 2007, I believe that the company’s best days are ahead in the future. Lowe’s will benefit from the long-term recovery in the US housing sector, as well as expanding its presence domestically and internationally. The stock is not cheap right now at 23 time earnings and an yield of 1.70%, but it is a very good long-term hold. Check my analysis of Lowe’s.
Helmerich & Payne, Inc. (HP) engages in the contract drilling of oil and gas wells. The company raised its quarterly distributions by 233% to 50 cents/share. This dividend champion has rewarded its shareholders with growing distributions for 41 consecutive years. The company also hiked dividends back in late 2012 from 7 to 15 cents/share.
Company Chairman and CEO, Hans Helmerich commented, "We are pleased to be in position to deliver a meaningful level of yield to our shareholders while retaining a strong ability to continue to pursue growth opportunities."
High double or triple digit dividend growth rates are more of one-time events, rather than the norm in future dividend increases for companies. I have found that companies that increase dividends at a double or triple digit rates indicate a policy shift that is friendly for investors. In addition, their willingness to distribute more to investors shows confidence in the underlying business prospects over the next three to five years. When I look at situations where companies decided to boost their payout ratio, and increased dividends significantly, shareholders were much better off going forward. This includes increases in earnings, dividends and also total returns.
For example, since V.F. Corp (VFC) increased quarterly dividends from 29 to 55 cents/share in 2006, dividends are up 58% to 87 cents/share. Earnings per share are up from $4.72 in 2006 to 49.70 in 2012, while the stock price is up by 205% to $187/share.
In the case of Helmerich & Payne, the company always had a very low dividend payout ratio, because the number of drilling units in the industry in the US and around the world fluctuates a lot. However, they still managed to build the long history of dividend hikes. This dividend champion has raised distributions for 42 years in a row. If earnings continue growing, and the company starts to meaningfully increase distributions over time in the high single digits, shareholders will be well compensated for the risks they are taking. The stock looks cheap at 11.20 times earnings and yields 3.10%. I would need to look into it, analyze further over the coming few weeks.
Cracker Barrel Old Country Store, Inc. (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company raised its quarterly distributions by 50% to 75 cents/share. This dividend achiever has raised distributions for 11 years ina row.
Ever since last year, when on April 26, 2012 Cracker Barrel increased quarterly dividends from 25 to 40 cents/share; the stock has been on a tear. The company has essentially tripled the dividend, and the stock has gone by 70%. Earnings per share have increased from $3.61 in 2011 to an expected range of $4.75 – $4.85 in 2013. Currently, the stock is fully valued at 20.80 times earnings and an yield of 3.10%.
At the end of the day, dividend growth investors need not only look at dividend yields but also the underlying earnings growth that fuels those distributions. If a company that has maintained a low payout ratio all of a sudden determines to share a greater portion of its already growing earnings stream, this unlocks a lot of value for shareholders and makes the asset even more appealing.
Full Disclosure: Long LOW
Relevant Articles:
- Lowe’s (LOW) Dividend Stock Analysis
- Dividend Achievers Offer Income Growth and Capital Appreciation Potential
- Dividend Champions - The Best List for Dividend Investors
- The Dividend Kings List Keeps Expanding
- Check Out the complete Archive of Articles
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Have you looked at Realty Income Corp (O) lately? They had a fairly large correction within the past couple of weeks.
ReplyDeleteI almost yields 5% now. I sold a put at expires in a few months, so let's hope I get assigned to it. If not, I would earn some premiums in the process.
ReplyDeleteI do expect some large expenses going forward over the next 2- 3 months, which is why I might refrain from much in stock purchases through there.