Monday, October 23, 2017

Four Dividend Growth Stocks to Consider on Dips

As part of my monitoring process, I review the list of dividend increases every week. This is in addition to the regular screening I do against the list of dividend champions and contenders.
I use this exercise as a way to monitor how companies I own are doing, and potentially uncover any attractively priced opportunities that my screens may have overlooked. Many times, I end up uncovering quality companies for further research that fit everything I am looking for, except for valuation. As a result, I tuck those companies on a waiting list. If they ever get close to my desired entry price, I get an alert and review the situations further.

In general I look for:

1) A history of dividend increases through a full economic cycle. A long streak of annual dividend increases is an indication that we have quality company with a strong track record for further research

2) A history of earnings growth. I believe that a company that grows earnings over time can withstand a large number of headwinds working against it.

3) A dividend that is well covered out of earnings. I require a margin of safety in dividends, for companies I am monitoring. I also require growth in earnings per share, in order to make sure that dividend growth does not occur solely by expansion of the dividend payout ratio

4) An attractive valuation. To me, this generally means a P/E below 20, coupled with a track record of earnings and dividend growth. A low valuation is not bullish in itself, if a company is not growing the bottom line.

After going through the list of companies that raised dividends over the past week, I identified four companies for further research.

The companies include:

Visa Inc. (V) operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. The company raised its quarterly dividend by 18.20% to 19.50 cents/share. This marked the 9th consecutive annual dividend increase for Visa. The company has been growing distributions at a rapid rate over the past 5 years. It has also managed to almost double earnings per share over the past five years as well.

Currently, the stock is overvalued at 43 times earnings and a dividend yield f 0.70%. Even using forward earnings of $3.43/share, the stock is overvalued at over 31 times forward earnings. I had been able to purchase Visa in the past around 20 times forward earnings. I would only consider adding to it around 20 times earnings.

Magellan Midstream Partners, L.P. (MMP) engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The company operates through Refined Products, Crude Oil, and Marine Storage segments. The partnership raised its quarterly distributions to 90.50 cents/unit. Magellan Midstream Partners is a dividend achiever that has rewarded limited partners with a raise for 17 years in a row. Over the past decade, it has managed to raise distributions at an annual rate of 11%/year. Currently, this MLP yields 5.30%. I believe that Magellan is one of the best run MLPs out there ( the other being Enterprise Product Partners (EPD)). Magellan is also one of the investments listed today that is attractively valued today in my opinion.

Cintas Corporation (CTAS) provides corporate identity uniforms and related business services primarily in North America, Latin America, Europe, and Asia. It operates through Uniform Rental and Facility Services; First Aid and Safety Services; and All Other segments. The company raised its quarterly dividend by 21.80% to $1.62/share. This marked the 35th consecutive annual dividend increase for this dividend champion. Over the past decade, Cintas has managed to grow dividends at an annual rate of 14.30%/year. This was supported by growth in earnings from $2.15/share in 2008 to $4.38/share in 2017. Cintas is expected to earn $5.36/share in 2018. Currently, the stock is overvalued at 28.40 times forward earnings. Cintas currently yields 1.10%. I would take another look at Cintas if it ever dips below $107/share.

Lincoln Electric Holdings, Inc. (LECO), through its subsidiaries, designs, manufactures, and sells welding, cutting, and brazing products worldwide. It operates through three segments: Americas Welding, International Welding, and The Harris Products Group. The company raised its quarterly dividend by 11.40% to 39 cents/share. This marked the 23rd consecutive annual dividend increase for this dividend achiever. Over the past decade, Lincoln Electric Holdings has managed to grow dividends at an annual rate of 12.90%/year. Earnings per share grew from $2.33/share in 2007 to $2.91/share in 2016. The company is estimated to earn $3.76/share in 2017. Currently, the stock is overvalued at 25.50 times forward earnings and yields 1.60%. Lincoln Electric Holdings may be worth a second look on dips below $75/share.

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