Monday, September 18, 2017

Three High Yielding Dividend Machines Rewarding Shareholders With a Raise

Over the past several weeks, there were three high yielding dividend growth stocks that raised distributions for shareholders. I am going to do a quick review on all three, using my criteria for evaluating dividend growth stocks.

I review the list of dividend increases every week. I then narrow the list down based on a variety of criteria such as minimum streak of annual dividend increases. The end result from the list today includes three high yielding companies that raised dividends over the past two weeks. The companies include Philip Morris International Inc., Realty Income Corporation and Verizon Communications.

Plenty of retirees I have gotten in touch with over the years seem to own those dividend machines. The question is, are those still good ideas today for accumulation?

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 2.90% to $1.07/share. This marked the 9th consecutive annual dividend increase for PMI. The new annualized dividend payment is $4.28/year. This is a decent rate of growth from the annualized dividend payment of $1.84/share in 2008.

The rate of dividend growth has been slowing down in recent years, due to lack of earnings growth. The company reached a peak level of earnings in the $5.17 - $5.26 level in 2012- 2013. It earned $4.48/share in 2016, and is expected to earn $4.83/share in 2017.

As a result of this lack of earnings growth, we have the dividend payout ratio increasing to 88.60%, which is very high. If earnings do not start growing soon, we may witness a halt to annual dividend increases. I believe that the dividend is relatively safe, because a high payout ratio is normal for tobacco companies. Furthermore, earnings have been somewhat depressed in the near term due to the strength of the US dollar. Now that the US dollar is starting to weaken, the results of companies like PMI that sell abroad should benefit. At this point I view the stock as overpriced above $96/share. This article provides a rough guideline of how I determined this amount.

While I would not buy the stock today due to valuation and lack of earnings growth since 2012, I would view it as a hold. It is nice to be paid a generous 3.70% yield, until the company’s earnings start rebounding. The most interesting fact is that I viewed Philip Morris International as the security I like best in early 2014. Despite the fact that earnings have not grown, the high dividend income has provided a stable source of returns to shareholders who reinvested distributions. While I do not think it worthwhile to compare myself to a benchmark, it is ironic that PMI has done better than S&P 500 since I wrote that article. Of course, the latter has also been unable to grow earnings since 2013. The dividend has also steadily increased from 94 cents/share in late 2013 to $1.07 by 2017. This just goes to say that if you have adequate margin of safety, a high starting yield that is sustainable and a defensive earnings stream coupled with a good valuation, you can be ok with your investments, even if your original thesis takes longer to materialize.(or even if you are wrong and it doesn't materialize)

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. The firm makes investments in commercial real estate. The REIT raised its monthly dividends to 21.20 cents/share. This dividend achiever has rewarded shareholders with a dividend increase for 23 years in a row. Dividends per share have risen from $1.56 in 2007 to an estimated $2.54 in 2017. This was supported by FFO growth from $1.89 in 2007 to $2.88/share in 2016. The REIT yields a sustainable 4.30%. I would be interested in adding to this REIT at yields around 5%, which is equivalent to an entry price below $51/share. I reviewed the company as well as two other REITs in an article a few months ago. It discusses the performance of the business in a little bit more  detail. Please check this article on the Five Things to Look For in a Real Estate Investment Trust, if you would like to see the factors I look for in evaluating REITs.

Verizon Communications Inc. (VZ), through its subsidiaries, provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company raised its quarterly dividends by 2.20% to 59 cents/share. This marketd  the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, Verizon has managed to boost its annual dividend at a rate of 3.40%/year. The company managed to grow earnings per share from $1.90/share in 2007 to $3.21/share in 2016. Verizon is expected to earn $3.76/share in 2017.

I view the stock as fairly valued today at 12.70 times forward earnings, yields 5.10% and has a dividend payout ratio of 62.80%. The dividend is well covered. Verizon is a decent pick for those retirees who are looking for high current income. However, the high dividend is not going to grow above the rate of inflation over time. Therefore, it may not be as suitable for younger investors today. In this article, I discussed AT&T and Verizon in more detail.

What is your opinion on those companies? I would love to hear from you at dividendgrowthinvestor at gmail dot com.

Relevant Articles:

Three REITs Approaching Value Territory
Should I invest in AT&T and Verizon for high dividend income?
What to do about slowing earnings growth?
Five Things to Look For in a Real Estate Investment Trust (REIT)
19 Dividend Champions For Further Research

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