Friday, September 18, 2015

Two Recent Dividend Increases from my Dividend Machine

Two of the companies I own announced their intentions to hike their dividends. As a dividend growth investor, this is always good news. The companies included:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products.

The company raised its quarterly dividend by a paltry 2% to $1.02/share. This was the lowest rate of increase since the spinoff in 2008. It was much lower than the five year dividend growth rate of 12%/year. It was disappointing to many investors. This marked the 7th consecutive annual dividend increases nevertheless. The new yield is close to 5%.

As I mentioned in my analysis of the company however, this should not have been unexpected given the lack of earnings growth in the past few years and the rising dividend payout ratio. While I am bullish on the company for the long-term, I cannot ignore the data that has been showing me that things are not going according to plan. I will keep holding on to this position, because I believe that management will ultimately turn things around. Of course, in the meantime, I will redirect dividends elsewhere.

Dividend growth investing is very interesting endeavor. If things turn around, and earnings start increasing again, remaining patient would have been the smart choice.
However, if things stay stagnant for a while and dividend growth is halted, I am better off putting those dividends to work elsewhere. If Philip Morris International cuts dividends, I will be out the door the second after the announcement. While it is important to be patient, it is equally important to avoid falling in love with a company, and throw sound judgment out the window.

An interesting thing to consider is that there is a large dose of luck in investing. Even if you have a good sound logic that is backed up by data and solid expectations, the reality will likely be much more different than your expectations. Back in 2008, everyone believed that Philip Morris International will continue to do better than Altria. In reality, Philip Morris International has done well, but Altria (MO) has done even better for its investors. I was myself very bullish on Philip Morris International, even calling it my best idea for a few years. Philip Morris International had been one of my largest positions between 2011 and 2013. I stopped adding to the position in early 2013. I am happy that I diversified my risk and never really owned more than 3% - 4% in the stock. It is important to take care of the downside, in case one is wrong. The upside will always take care of itself.

Now those tides are turning around. When most start questioning PMI as an investment, this is the time that things will likely turn around. Unfortunately patience is the trait that few investors possess. It is understandable that after four years of flat earnings, and a couple of years more of expected flat earnings, some dividends will run out of patience. While I personally do not find the stock to be a buy today, I still believe it is a good hold. The nice thing about dividend investing is that I will be paid a generous 5% yield simply to hold on to that company's shares. The regular cash deposits to my brokerage account make it easier to hold on to my stock.

The second company that raised dividends in the past week is Williams Companies. The Williams Companies, Inc. (WMB) operates as an energy infrastructure company primarily in the United States. The company operates in three segments: Williams Partners, Access Midstream, and Williams NGL & Petchem Services.

This general partner of pipeline master limited partnership Williams Partners increased dividends to 64 cents/share. This is an increase of 14.30% over the payment paid in the same quarter of last year. Over the past decade, the company has managed to grow dividends at a rate of 37.70%/year. Of course, future dividend growth will likely be much lower. This dividend achiever has raised dividends for 11 years in a row. The new yield is now 5.60%.

I initiated a position in 2014, and then subsequently managed to add to it a few times. I liked the growth plans behind the company.

The most interesting thing is that it is very likely to be acquired by Energy Transfer Equity (ETE) or another player in the industry. My decision on what to do after a potential acquisition would be dependent on how the deal is structured. I hold more than half of my position in tax-deferred accounts at brokers that do not allow holding master limited partnerships. If I receive units from Energy Transfer Equity, that would mean that I will have to deploy the money elsewhere. If the company was not involved in an acquisition, I would have added to my position. I was actually considering purchasing more shares after the deal to acquire Williams Partners (WPZ) in May 2015. However, the speculation that Williams Companies (WMB) may be acquired instead, has put any further future investment there on hold.

It would be interesting to see given the energy rout that we are in, whether energy production in the US will decline, and whether there would be less demand for new energy infrastructure as a result of this. Either way, I believe that companies that transport oil and gas through pipelines are less sensitive to commodity prices, since volumes fluctuate less. This is why I will continue to hold on to my shares. If things turn out for the better, the general partners will do much better than limited partners.

Full Disclosure: Long PM and WMB

Relevant Articles:

Altria Delivers Another Strong Dividend Hike
Philip Morris International (PM) Dividend Stock Analysis
Do not get emotionally attached to a dividend position
Dividend Yield or Dividend Growth:My Experience With Both
How to read my weekly dividend increase reports

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