Monday, April 20, 2015

Five Dividend Paying Companies Rewarding Shareholders With Higher Dividends

One of the ways to monitor my portfolio and the list of dividend growth companies is by checking for dividend increases each week. I achieve that in my process of reviewing press releases. In addition, my broker is really good at notifying me about upcoming earnings releases or recent dividend announcements for the companies I own.

There were a few companies I find interesting, which I have highlighted below:

Kinder Morgan, Inc. (KMI) operates as an energy infrastructure and energy company in North America. The company operates through Natural Gas Pipelines, CO2, Terminals, Products Pipelines, Kinder Morgan Canada, and Other segments. The company raised its quarterly dividend to 48 cents/share, which represented a 14.30% increase over the distribution paid at the same time last year. The yield based on the new distribution is a very respectable 4.40%. Kinder Morgan has raised dividends since going public in 2011. However, the Kinder Morgan Pipeline that it absorbed in 2014 and to which KMI was a general partner to, had managed to increase distributions for 18 years in a row.

Kinder Morgan is my largest position at close to 6%. When the merger of the partnerships into the General Partner was announced, there were some very optimistic projections shared with shareholders. For example, dividends per share were expected to reach $2 in 2015, followed by annual growth of 10%/year. I believe that with the slowdown in oil prices, there could be a corresponding decline in production of oil and possibly natural gas. This could impact volumes on pipelines, and could reduce demand for building new pipeline projects out there. This slowdown will likely be a good opportunity for someone like Kinder Morgan to further strengthen its grip on fee generating assets in the US, as it could use its stock as currency to acquire companies or assets directly at bargain prices. In addition, Kinder Morgan does not have to spend all of its cashflows on dividends, and could accumulate cash on balance sheet. This could be a very good competitive advantage relative to any other major US pipeline, which constantly sell shares to fund major new projects.

That being said, even if dividend growth and cash flows only grow by 5%/year for the next decade, current shareholders will do pretty well. That’s because a stock that has a 4.40% - 4.50% yield today, which also grows at 5%/year will likely be worth at least 50% - 60% more within a decade. Add in reinvested distributions, and it is quite possible that money and income will more than double after a decade under this pessimistic forecast.

CSX Corporation (CSX), together with its subsidiaries, provides rail-based transportation services in the United States and Canada. It offers traditional rail services, and transports intermodal containers and trailers. The company raised its quarterly distributions by 12.50% to 18 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate as 25.20%/year, while the 5 year dividend growth rate is 16.50%/year. The stock sells for 16 times forward earnings and yields 2.20%. I would add the stock to my list for further research. I have meant to put more railroads on my list, but valuations have not been very attractive. Hopefully sentiment turns gloomy in the short-run, so that more attractive opportunities are present for those like me in the accumulation phase.

The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. The company raised dividends by 3% to 66.29 cents/share. This marked the 59th consecutive annual dividend increase for this dividend king. This is also the slowest rate of dividend increases by P&G since the 3.70% increase in dividends in 1988. Back in 1986, the company also raised quarterly dividends by a paltry 3.80%. What makes those two dates stick out is the fact that the company had maintained dividends steady for 7 quarters in a row prior to the increases. Therefore the annual increases were likely smaller than 3%. However, the company was committed to rewarding its investors with an annual dividend raise and maintain its status of a dividend growth stock. Its business turned around and it managed to continue its streak of consistent dividend growth. If someone got scared from the slowdown in dividend growth and sold in the 1980s, they would have missed out since dividends rose over 16 times over the next 30 years. The shares are overvalued at 20.70 times forward earnings and yield 3.20%. While I would not add to P&G at present levels, I think the company is still a good hold for long-term investors. Check my last analysis of P&G. I will be posting an updated analysis shortly.

Discover Financial Services (DFS) operates as a direct banking and payment services company in the United States. It operates in two segments, Direct Banking and Payment Services. The company raised its quarterly dividends by 16.70% to 28 cents/share. This marked the 5th consecutive dividend increase for the company. The shares are attractively valued at times earnings and yield 1.90%. I like the valuation on this company relative to its rivals, and would add it to my list for further research.

PPG Industries, Inc. (PPG) manufactures and distributes coatings, specialty materials, and glass products. The company raised its quarterly dividends by 7.50% to 72 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. The ten year dividend growth is 3.90%/year. The shares are selling for 19.80 times forward earnings and yield 1.30%. I have taken a pass on PPG Industries before, mostly because I did not feel comfortable with the wild fluctuations in earnings for this cyclical company. I would still put it on my list for further analysis, in order to understand how it managed to grow earnings so quickly in the past three years. Sometimes, it is helpful to look back  at ideas I have passed on and determine whether something could be learned from this mistake of omission.

Full Disclosure: Long KMI, PG

Relevant Articles:

How to create a bulletproof dividend portfolio
Five Metrics of Successful Dividend Companies
How long does it take to manage a dividend portfolio?
Return on Investment with Dividend Stocks
The work required to have an opinion

12 comments:

  1. Long PG @ 2.4% of the portfolio, and KMI @ 1.6%. Thanks for the update.

    ReplyDelete
    Replies
    1. Thanks for stopping by Keith! Hope you are enjoying your retirement!

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  2. Replies
    1. It is important to stay diversified and not fall in love with a company, despite how great it is. In the case of KMI, it could do wonders for dividend investors.

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  3. Also, UL raised 6% in Euro.

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  4. Thanks for the analysis. How do you think of UPS? I just purchased some shares of it.

    ReplyDelete
    Replies
    1. I have not looked at UPS or FDX for quite some time. I should probably correct that in the next couple of months. At this stage I have no opinion, since I haven't done the work to have an opinion ;-)

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  5. DGI - Good historical anlysis on PG. Josh Arnold wrote a similar piece on WMT on SA recently. I am frustrated but leaning toward taking the long view on both. (Hard to do when alternatives like KMI just keep truckin.)

    Here is my question and I would love to hear your thoughts: should companies increase executive compensation when the dividend growth slows? Or should there be shared suffering that truly aligns interests?

    Keep up the great work - long time fan. Cory

    ReplyDelete
    Replies
    1. Cory,

      I would be happier if companies paid out special dividends to buybacks. I would also be happier if shares are given only if above average performance is achieved. Buybacks usually try to conceal the dillutive effect of shares given away to employees. So yes, poor EPS growth and poor DPS growth should translate into no shares for employees.

      I will try to post an updated analysis of PG once its annual results are up. But based on the data I am seeing, I would not add a single dollar to PG today.

      Best Regards,

      DGI

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  6. With KMI, it's extremely important to remember that they own a large number of natural gas pipeline facilities, as well. Although KMI has shown weakness lately as a result of oil prices, their long term prospects are incredibly solid as US electric power generation increasingly switches to natural gas as a fuel source. KMI is well positioned not only to move gas on its existing pipelines, but also to be the builder of the massive amount of new pipelines that need to be built.

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  7. Last Anon,

    I think long-term KMI will do well. But I don't think it will do as well as it projects out to do. But I will be happy if KMI proves me wrong and sustainably grows my dividends by 10%/year for the next decade.

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