Thursday, January 31, 2019

PepsiCo (PEP) Dividend Stock Analysis

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). The company is a dividend champion, which has increased distributions for 46 years in a row.

Between 2007 and 2017, PepsiCo managed to grow its earnings from $3.41/share to $5.11/share. The 2017 figures include a $2.5 billion provisional net tax expense ($1.73 per share) as a result of the U.S. Tax Cuts and Jobs Act (TCJ Act) passed on December 22, 2017. PepsiCo is expected to earn $5.66 per share in 2018 and $5.96 per share in 2019.

Share buybacks have resulted in the decrease in outstanding shares from 1.645 billion in 2007 to 1.44 billion in 2017. A history of consistent share repurchases is helpful, because it shows that the company is willing to help out long-term holders of stock with increased proportional share of earnings and the business over time.

PepsiCo has a wide moat, due to strong recognizable brands it owns, scale of operations, relationships with retailers and having a distribution network of bottlers that will take billions of dollars to create and replicate. Because of the consumer affinity for branded snacks and beverages that PepsiCo makes, they are less likely to switch to a cheaper product. Hence, PepsiCo is part of a sort of unregulated monopoly, which also has some pricing power.

The company has a solid distribution network, a portfolio of strong brand names, and solid relationships with retailers. This portfolio also includes 22 brands with sales of at least $1 billion for each brand. The market dominance in the snack business of Frito-Lay has resulted in higher margins, relative to competitors.

Frito-Lay generates a quarter of revenues, but close to 45% of profits. PepsiCo beverages accounts for a third of revenues and a quarter of profits while PepsiCo International account for 38% of revenues and also a quarter of profits. The rest is generated by Quaker Foods.

Future growth in earnings will come from international expansion, particularly in emerging markets. The number of servings that consumers abroad consume is much lower than that in North America, which is why I believe there will be years of growth ahead. In addition, I like the fact that the company sells not only beverages, but snacks as well. As an investor, I like to be diversified; hence, I like it when the companies I own are diversified in products and geography. It is estimated that the company achieves significant synergies by operating both a beverage and a snack business.
Earnings can also increase through organic growth for those snacks and beverages, and price increases to offset cost pressures. Strategic cost initiatives to streamline operations, increase productivity and reduce redundancies are another tool to increase shareholder earnings. The distribution networks of the bottlers acquired could be used to push some of PepsiCo's non-beverage products such as snacks and other foods.

Sales of carbonated drinks have been softening, due to increased health awareness by consumers in developed markets. However, PepsiCo has also focused on fast growing non-carbonated soft drinks. The company's innovation in the area has been successful with the introduction of Aquafina, Gatorade and Propel, Lipton teas and Tropicana.

Earnings growth could also come from other strategic acquisitions, as well as product innovations in health and wellness food and beverage section. For example PepsiCo recently completed the acquisition of SodaStream International, bringing in-home carbonated beverages to consumers. This move lets PepsiCo expand its diverse options on to another platform.

The annual dividend payment has increased at a rate of 8.90% per year over the past decade, which is higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling every eight years on average. If we check the dividend history, going as far back as 1973, we could see that PepsiCo has actually managed to double dividends every six years on average. I would expect future dividend growth to be closer to 5% - 6%/year over the next decade.

In the past decade, the dividend payout ratio increased from 42% in 2007 to a little over 62% in 2017. I generally do not want to see high dividend growth because of expansion in the payout ratio. If we look at forward earnings of $5.66/share, the payout is at 65%, which is still high. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, the company is fairly valued at 19.60 times forward earnings and yields 3.40%. It is slightly cheaper than Coca-Cola, which sells for 22.90 times forward earnings and has a current yield of 3.30%.

Relevant Articles:

How to value dividend stocks
Successful Dividend Investing Requires Patience
Dividend Companies Showering Shareholders With More Cash
Rising Earnings – The Source of Future Dividend Growth

Tuesday, January 29, 2019

Seven Companies Working Hard For Their Stockholders

As part of my monitoring process, I review the list of dividend increases every week. This is helpful as a method to observe recent developments in companies I own. This process is helpful in identifying companies for further research, which may be exhibiting certain characteristics that look promising.

I usually focus on companies with at least a ten year streak of annual dividend increases, in order to focus my attention to companies that can establish and maintain a streak throughout a full economic cycle.

The next steps involve evaluating the rate of increase relative to the historical average, in an effort to determine consistency. Usually, I end up observing a dividend growth rate that is accelerating or decelerating.

I also try to review trends in earnings, and looks at valuation, in order to determine if a company is worth pursuing further.

There were several companies raising dividends last week. The companies include:

1st Source Corporation (SRCE) operates as the bank holding company for 1st Source Bank that provides commercial and consumer banking services, trust and investment management services, and insurance to individual and business clients

The company raised its dividend by 8% to 27 cents/share. This marked the 32nd consecutive annual dividend increase for this dividend champion. In the past decade, it has managed to boost dividends at an annual rate of 4.10%.

The company grew earnings from $1.25/share in 2008 to $3.16/share in 2018.

The stock is fairly valued at 14.40 times earnings and yields 2.40%. The company may be worth adding to my list for further research.

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, equipment, and services worldwide.

The company raised its quarterly dividend by 5.50% to $1.16/share. This marked the 37th consecutive annual dividend increase for this dividend champion. In the past decade, the company has managed to boost distributions at an annual rate of 9.60%.

Between 2009 and 2018, APD managed to boost its earnings from $2.96/share to $6.78/share. The company is expected to generate $8.17/share in 2019.

The stock is close to overvalued, selling at 19.60 times forward earnings. Air Products & Chemicals yields 2.90%. I own shares in the stock and would love to be able to add on dips below $136/share ( prior year earnings times a P/E ratio of 20)

Comcast Corporation (CMCSA) operates as a media and technology company worldwide. It operates through Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment, and Theme Parks segments.

Comcast raised its quarterly dividend by 10.50% to 21 cents/share. This marked the 12th year of annual dividend increases for this dividend achiever. The five year dividend growth rate is 14.90%/year

Comcast managed to grow earnings per share from $0.43 in 2008 to $2.55 in 2018.

Comcast seems to have done very well over the past decade. The stock is attractively valued at 13.90 times earnings and spots a dividend yield of 2.40%. I would add the stock to my list for further research.

J.B. Hunt Transport Services, Inc. (JBHT), together with its subsidiaries, provides surface transportation and delivery services in the continental United States, Canada, and Mexico. It operates through four segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT).

The company raised its quarterly dividend by 8.30% to 26 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, J.B. Hunt has been able to grow distributions at an annual rate of 9.80%/year.

Earnings per share great between 2008 and 2017 from $1.56 to $6.18. The company is expected to generate $6.26/share in 2019.

The stock is attractively valued at 16.70 times forward earnings, and yields 1%. I will place it on my list for further research.

Kimberly-Clark Corporation (KMB), together with its subsidiaries, manufactures and markets personal care, consumer tissue, and professional products worldwide. It operates through three segments: Personal Care, Consumer Tissue, and K-C Professional.

The company raised its quarterly dividend by 3% to $1.03/share. This marked the 47th consecutive annual dividend increase for this dividend champion. The latest dividend hike is smaller than the ten year average of 6.70%/year.

Kimberly-Clark managed to grow earnings from $4.04/share in 2008 to $6.40/share in 2017. The company is expected to generate $6.65/share in 2018.

The stock is attractively valued at 16.20 times forward earnings and yields 3.80%. Unfortunately, the company is growing dividends at 3% for a second year in a row. The slowdown in dividend growth shows that management expects headwinds in the near term for the business. I will have to reassess whether it makes sense to continue adding to the position.

Rollins, Inc. (ROL), through its subsidiaries, provides pest and termite control services to residential and commercial customers. It offers protection against termite damage, rodents, and insects. The company raised its quarterly dividend by 12.50% to 10.50 cents/share. This marked the 17th consecutive year of annual dividend increases for this dividend achiever. In the past decade, Rollins has been able to grow the dividend at an annual rate of 17.90%.

Rollins managed to grow earnings from 20 cents/share in 2008 to 55 cents/share in 2017. The company is expected to generate 72 cents/share in 2018.

Unfortunately, the stock is overvalued today at 51.80 times forward earnings. The yield is 1.10%. Rollins may be worth a closer look on dips to $14/share, which would be a huge decline from todays levels.

Franklin Electric Co., Inc. (FELE), together with its subsidiaries, designs, manufactures, and distributes water and fuel pumping systems worldwide. It operates in three segments: Water Systems, Fueling Systems, and Distribution. The company raised its quarterly dividend by 20.80% to 14.50 cents/share. This marked the 27th year of annual dividend increases for Franklin Electric. This increase was more than double the size of its ten year average dividend growth of 6%/year.
Between 2008 and 2017, earnings per share increased from $0.95 to $1.65. The company is expected to generate $2.23/share in 2018.

The stock is overvalued at 20.50 times forward earnings. Franklin Electric yields 1.30%.

Relevant Articles:

How to value dividend stocks
How to read my weekly dividend increase reports
Price is what you pay, value is what you get
Three Characteristics of Successful Dividend Investors

Monday, January 28, 2019

I just bought these ten dividend growth stocks

Good Morning,

Subscribers to the Dividend Growth Investor newsletter received ten ideas for research on Sunday. The newsletter included information behind each company, and relevant research behind each company listed. I discussed how much I am allocating to each investment when I initiate my buy orders at the open on Monday.

In addition to that, subscribers will obtain an updated list of dividend portfolio holdings.

Premium readers get a first glimpse of the process I use to allocate fresh capital into ten ideas each month. I will continue adding $1,000/month to this portfolio, and provide educational input on the complete process of dividend portfolio management. The process includes researching investments, adding companies to the portfolio, and then monitoring the portfolio regularly while tracking the progress towards its long-term goals. By using broker Robinhood, I am spending zero on commissions.

The price for the monthly subscription is just $6/month to new subscribers who sign up for the service. The price for the annual subscription is only $76/year for new subscribers. If you subscribe at the low introductory rate today, the price will never increase for you.

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Once you sign up, I will add you to my premium mailing list, and you will receive all exclusive content related to the portfolio.

The ultimate goal of this portfolio is to generate $1,000 in monthly dividend income. I will track my progress towards our goal every month. I plan to track this portfolio in real time over the next few years, and track our progress towards our goal. I view this exercise mostly as an educational tool, that will hopefully show how I build and manage a dividend portfolio.

Thank you for reading Dividend Growth Investor.

Thursday, January 24, 2019

Frequently Asked Questions about the Dividend Growth Investor Newsletter

Back in July 2018, I launched the Dividend Growth Investor Newsletter. I am truly honored that I am able to provide value to readers through my writing. In my newsletter, I discuss ten dividend growth ideas that I invest in every single month, and show readers how I build a portfolio from scratch.

After launching the service last year, I received a lot of great questions from readers. I decided to go ahead and compile a short list for now. It is not exhaustive by any chance.

When will the next newsletter come out?

I post a new edition of the newsletter on the last Sunday of the month. The stock selections included in the newsletter will be used to make investments on the last Monday of each month. I plan to have the next newsletter out by end of day on January 27, 2019. My goal is to invest another $1,000 on Monday, January 28 in the companies that I will feature in the newsletter.

Once we start generating enough dividend income, we will start making off-cycle purchases that will be communicated in advance to subscribers. Subscribers will also be notified after the investment has been done.

What is your process for adding positions to an existing portfolio

When I built my portfolio, and I came up with ten ideas to invest in every month I usually focused on the companies where I had no exposure first. However, if I had exposure to all companies, I would try to add to the position where I have the lowest exposure first.

I view this question as a tradeoff between value and diversification. If the largest holding I own is greatly undervalued relative to a new potential acquisition which is available at higher valuation, I would most probably add to the new position. I would do this because I believe in diversification. If I add to the largest position, I may do very well if I am right. However, if it turns out I was wrong, and the position turns out to be a value trap, I would have at least protected by nest egg by investing my money elsewhere, and not just putting it in a sinking ship.

But really, it depends on the individual’s situation, circumstances, goals etc. It is not a one size fits all approach

How do you rank the ten companies?

This is a tough question to answer, because I am selecting these companies with the intent to build a portfolio to stand on its own. I am not sure which ones should be overweight/underweight for your portfolio.

I am striving for equal weights, but due to low dollars, those will vary. For all purposes however, I like all of those companies equally.

Each company has a purpose – for example a company like Verizon will not deliver the best results in the long term, but the high dividend will be heaven when next recession hits.

A company like Visa does not yield much today, but it could provide great growth and strong total returns. However, there may be trying periods where share prices decline by a lot during the next bear market.

But that overall purpose is realized by all of those companies working together in synchrony to lift the portfolio and its income. The portfolio is like a symphony - all musicians play a role in the overall performance.

If I owned a position in some of the companies however already, I may consider those where I had no exposure first. In addition, if I had exposure to all companies, I would consider adding to the position or positions where I had the lowest exposure first.

How readers use the Dividend Growth Investor Newsletter

After launching the newsletter, I received a lot of feedback and great questions from readers. Based on my understanding of their questions, different readers are using the ideas in their own ways.

One group of readers is considering all of these companies for their research. They look at each ten with the same level of detail as the newsletter, but also adding their own unique way of evaluating businesses.

Another group of readers is only considering some of the companies in their research. This could be because they already may have a position in the rest of the list, or they may not find all stocks suitable for their investment portfolios.
A third group of investors focus on the companies where they have the least amount of exposure in.

When to sell a dividend growth stock

I am mostly a buyer of dividend paying stocks. I buy those companies with the intention of never selling. I want stable and growing dividend income to live off in retirement. I do not trade in and out of stocks actively – instead my goal is to buy a group of stocks to hold on for decades. I have found that my money is made by holding on to my dividend stocks through thick or thin, and let the power of compounding do the heavy lifting for me.

However, there are some situations where I will most likely consider selling.

The first scenario that would cause me to sell involves dividend cuts. I purchase dividend paying stocks with the intention of receiving a growing stream of dividend income annually. If this is no longer the case, I will consider selling, and reinvesting the proceeds elsewhere. If a company cuts dividends, there is a high chance that I will be selling. If a company simply stops raising its dividend, but at least maintains it, there is a high chance that I will continue holding on to the position, but I will not add to it and will not be reinvesting my dividends there either.

The second scenario that would force me to sell involves acquisitions. If a company I own is acquired for cash, I will have to sell my stock. However, if we get a combination of cash and stock in the acquirer or we have a stock for stock exchange, I will most likely keep the stock of the acquirer after some consideration. If the acquirer does not fit with my overall portfolio strategy however, I will sell.

I still reserve the right to sell a company if I believe that selling is warranted. In my experience over the past decade however, selling is usually a mistake. This is because a company’s prospects usually look bleakest at the exact time things are about to turn around, and the stock price is undervalued.

How much does it cost?

I believe that the newsletter is a bargain at only $65/year. I show you how I build a portfolio from scratch, and provide insight into diversification, security selection and decision making behind each investment. I have kept the price at its introductory rate for several months now. You can lock in the special price of $76/year. The price will never increase for existing subscribers.

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Tuesday, January 22, 2019

Seven Dividend Growth Stocks Rewarding Shareholders With a Raise

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me to check up on existing holdings and to identify companies for my watch list.

Last week, there were seven dividend growth stocks that raised dividends to shareholders. Each one of those companies has at least a ten year track record of annual dividend increases. Since dividends are paid out of earnings, these dividend achievers couldn’t have compiled such a record without having enjoyed consistent success in their core business, whatever it is. So you’re looking at a group of profitable enterprises with staying power.

I review the increase relative to the dividend record, along with valuation and track record. The companies included:

Realty Income (O), The Monthly Dividend Company is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,600 real estate properties owned under long-term lease agreements with regional and national commercial tenants.

The REIT raised its monthly dividend to 22.55 cents/share, which represents a 3% increase over the distributions paid during the same time last year. This is the 100th dividend increase since Realty Income's listing on the NYSE in 1994. 

During the past decade, Realty Income has managed to boost dividends at an annual rate of 4.40%/year.

Between 2008 and 2017, FFO/share grew from $1.83 to $2.82. Realty Income is expecting to generate FFO/share in the $3.11 - $3.14 range in 2018.

I like Realty Income, but so do a lot of other REIT investors. As a result, it is offering a 4.20% yield and is selling at 20.80 times forward FFO. The REIT is managed well, but I would require at least a 5% entry yield to purchase it. At current rates, this translates into a buy price below $54/share. Check my analysis of Realty Income for more information about the REIT.

BlackRock, Inc. (BLK) engages in the provision of investment management, risk management, and advisory services for institutional and retail clients worldwide. Its products include single and multi-asset class portfolios investing in equities, fixed income, alternatives, and money market instruments.

The company raised its quarterly dividend by 5.40% to $3.30/share. This marked the 10th year of annual dividend increases for this future dividend achiever. Blackrock has managed to boost dividends at an annual rate of 14.10%/year over the past decade.

Between 2008 and 2018, Blackrock managed to grow earnings from $5.78/share to $26.58/share.
Currently, the stock is fairly valued at 15.80 times earnings and yields 3.10%. Check my analysis of Blackrock for more information about the company.

Consolidated Edison, Inc. (ED), through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States.

The company raised its quarterly dividend by 3.50% to 74 cents/share. This marked the 45th consecutive annual dividend increase for this dividend champion.

“The increase in the dividend, the 45th consecutive annual increase for stockholders, reflects our continued emphasis on providing a return to our investors while meeting the needs of our customers,” said Robert Hoglund, Con Edison’s senior vice president and chief financial officer.

Con Edison has managed to grow the dividend at a rate of 1.80%/year over the past decade. Given the decrease in the dividend payout ratio, I would expect dividend growth to pick up a little steam over the next decade to 3% - 4%/year. The company is targeting a payout ratio in the 60% - 70% range.

During the same time, earnings per share grew from $3.37 in 2007 to $4.12/share in 2017 ( adjusted for the effects of the next tax law signed at the end of 2017). Con Ed is expected to earn $4.30/share in 2018.

Currently the stock is fairly valued at 17.80 times forward earnings and yields 3.90%. I am reviewing ConEd for a potential purchase, especially if investor sentiment towards utilities turns sour.

Alliant Energy Corporation (LNT) operates as a utility holding company that provides regulated electricity and natural gas services in the Midwest region of the United States. It operates through three segments: Electric, Gas, and Other.

The company raised its quarterly dividend by 6% to 35.50 cents/share. This marked the 16th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, it has managed to grow its dividends at an annual rate of 7.10%/year.

Between 2008 and 2017 earnings per share rose from $1.30 to $1.99. The company is expected to earn $2.16/share in 2018.

The stock is overvalued at 19.90 times forward earnings. Alliant Energy yields 3.30% and has a forward payout ratio of 65.70%.

CMS Energy Corporation (CMS) operates as an energy company primarily in Michigan. It operates through three segments: Electric Utility, Gas Utility, and Enterprises.

The company raised its quarterly dividend by 7% to 38.25 cents/share. This raise is in line with the average raise of 6.70% over the past five years. This increase marked the 13th year of annual dividend increase for this dividend achiever.

During the same time, earnings per share grew from $1.20 to $1.65/share. The company is expected to earn $2.34/share in 2018.

Currently, the stock is overvalued at 21.70 times forward earnings. The stock yields 3% and has a forward payout ratio of 65%. I usually like utilities at a P/E that is lower than 20, mostly around 15 - 16 times earnings.

Fastenal Company, (FAST) engages in the wholesale distribution of industrial and construction supplies in the United States, Canada, and internationally. It offers fasteners, and other industrial and construction supplies under the Fastenal name.

The company raised its quarterly dividend by 7.50% to 43 cents/share. This move marked the 20th consecutive annual dividend increase for this dividend achiever.

Fastenal has managed to increase dividends at an annual rate of 19.30%/year over the past decade.
The company managed to boost earnings from $0.94/share in 2008 to $2.62/share in 2018.

The stock is overvalued at 22.60 times earnings. It does yield 2.90% today. Fastenal may be worth a second look on dips below $52/share.

ONEOK, Inc. (OKE) engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company operates through Natural Gas Gathering and Processing, Natural Gas Liquids, and Natural Gas Pipelines segments.

ONEOK raised its quarterly dividend to 86 cents/share. This is an 11.70% increase over the dividend paid during Q1 2018. ONEOK has managed to grow dividends at an annual rate of 16.10%/year over the past decade. The stock yields 5.60%

Relevant Articles:

Dividend Champions, Contenders & Challengers: The most complete list of US dividend growth stocks available
The Future for Dividend Investors
How to value dividend stocks
How to read my stock analysis reportss

Thursday, January 17, 2019

Stagnant earnings create a risky environment for dividend investors

As a dividend growth investor, my goal to purchase shares in a company at an attractive valuation, and then receive a rising stream of dividend payments for decades.

The companies that tend to shower shareholders with more dividends every year tend to be the ones who manage to grow earnings per share over time and have manageable payout ratios. These companies manage to distribute excess cash to shareholders in the form of dividends. As earnings are rising, this translates into higher annual dividends for these shareholders. Any remaining earnings are retained to maintain and grow the business, which results in more growth down the road.

At some point, corporations start facing challenges due to changes in the competitive environment. As a result, companies are unable to grow revenues and earnings per share. This in itself is not a problem, because shareholders could still in theory generate high returns, even if revenues and earnings are flat. For example, if a company stops growing and as a result sells at 10 times earnings, it can generate great returns to shareholders if it distributed most of its earnings in the form of dividends or share buybacks. If the company manages to cut costs a little bit, it can generate good long-term returns to shareholders. This is management’s job – to work for the shareholders.

Unfortunately, at some point, management teams become unhappy with the status quo. It is not exciting to be sitting still, generating a lot of excess cashflows, but not growing the business. All of this creates the urge for management teams to do something. Rather than focus on shareholder returns, they focus on growing the enterprise at all costs, in order to perpetuate the entity and get higher status in the corporate world ( and bigger paychecks too). This is an example of the tug of war between top management and shareholders. In theory, top management works for shareholders who have capital at risk. In reality, top management is only looking after themselves. Most CEO’s are not very good at what they do. It is usually the business model or the business environment that creates shareholder wealth – management usually just take the credit for being in the right place at the right time.

In some cases, they end up buying growth at inflated valuations, so that revenues grow and net income grows. That doesn’t fool investors however. In the process, these management teams discard the prudent strategy of dividend growth and share buybacks used to share profits with investors. By taking on more debt, or using stock at cheap prices to fund acquisitions at inflated values, these companies waste shareholder resources and endanger the financial viability of the enterprise.

A few companies I had in mind when writing this article include General Mills and IBM. I am tempted to include Altria as well, despite the fact that the company has managed to grow earnings and revenues.

General Mills (GIS)

For several years in row, General Mills had been unable to grow earnings per share. The company earned $2.70/share in 2011, and it was unable to grow beyond that amount. That is unfortunate given the fact that over 12% of shares outstanding were repurchased during that time period. The 2018 earnings per share have been adjusted for the one-time 89 cent/share impact of the new tax law signed at the end of 2017.

A few months ago, General Mills acquired Blue Buffalo, which produces pet food. Usually, acquisitions are a great source of future earnings growth, as you get synergies on top of existing lines of business. In the case of General Mills however, the company ended up overpaying massively, using cheap stock it sold at $44/share or almost 14 times forward earnings. This is unfortunate, because General Mills had acquired shares over the past five years at prices that were higher than $44/share.

Blue Buffallo was purchased for roughly $8 billion, and had earnings of $193 million in 2017. The stock was acquired for $40/share, while it earned 99 cents/share in 2017. The company had sales of $1.27 billion in 2017.

While General Mills did not obtain a lot of earnings power and revenues from Blue Buffalo, it mostly paid up for the future expected growth.

Perhaps they saw that some of their competitors own pet foods ( Nestle, Colgate-Palmolive, J.M. Smucker), so they decided to own a piece of the pie.

Nevertheless, I find it foolish that they spent billions of dollars buying back stock when it was high, only to sell billions in stock at the low price of $44/share. As a result, they are no longer buying back stock when the price is even lower today. And best of all, General Mills froze the dividend. When they sold those extra shares, now they have to pay even more in total dividend income, leaving less for growing the dividend income for the existing shareholders like you and me. Given the high yield today, some investors seem to believe that there is a higher chance of a dividend cut than an year ago.
I believe that management is trying hard to make themselves look better, after several years of stagnant revenues and earnings. This really created the pressure to do something. In reality, shareholders would have been better if the funds used to acquire Blue Buffalo were distributed as special dividends or even through share buybacks.

I believe that the underlying business that General Mills is strong enough to withstand some mismanagement. So while I will hold on to my shares for as long as the dividend is maintained, I doubt I will add to my position.

The stock looks cheap at 13.70 times forward earnings and yields 4.70% today. The stagnant earnings and stagnant dividend is what is keeping me away from adding to my position there. I will likely allocate dividends elsewhere as well.

International Business Machines (IBM)

A few months ago IBM announced that it would acquire cloud company Red Hat for over $34 billion. Red Hat earned $259 million in 2018 on annual revenues of $2.92 billion. I believe that IBM is overpaying for this acquisition. I believe that IBM is desperate to get out of the trend of declining revenues at any price, after experiencing several years’ worth of decreasing sales.

IBM’s 2017 revenues of $79 billion were smaller than their 2008 revenues of $103 billion. Earnings per share grew from $8.89 in 2008 to $11.98 in 2017 ( adjusted for the one-time impact of the new tax law enacted at the end of 2017).

I believe that IBM should have simply stuck to its role of growing the dividend and making share buybacks. At least the purchase is made with cash and debt. As a result of the acquisition, the share buybacks have been halted, which is ironic given the fact that the share price is at its lowest this decade and is selling at a very low valuation today. IBM shares are selling at roughly 13.90 times earnings and yield 5.20%.

If I were in charge of IBM, this would be the time to step on the gas to do buybacks when valuations are low. Or just distribute special dividends to shareholders.

It is likely that IBM can turn its operations around, and the stock today is a great bargain. However, it is also possible that it continues to go through a painful transition. IBM has been through a transition before, in the early 1990s. The company did manage to pull through, but had to cut its generous dividend ( ironically the stock was yielding around 5% at that time as well). In my case, I will continue holding on to any shares I own, but allocate dividends elsewhere. Due to the stagnant earnings per share, I do not see the stock as a long-term buy at the moment.

Altria Group (MO) 

Last month, Altria purchased a large stake in an upcoming competitor JUUL. I dislike the fact that Altria is overpaying so much, and it is also providing a lot of concessions which are going to disrupt its existing cigarette business. I wrote a more detailed article on the topic here. The difference of course is the fact that Altria has been able to grow earnings and even revenues over the past decade.


I believe that stagnant earnings and revenues create pressure for company executives to do something. This pressure leads to expensive acquisitions to grow the company's revenues and earnings at any cost. When companies are desperate to grow the bottom line at any cost through acquisitions, they risk overpaying for the shiny company with growth expectations behind it. When you overpay dearly for a growth company, you can undo the effects of a subsequent decade of favorable business developments. Ultimately, the price is being paid by shareholders, as the focus shifts from sending excess cashflows in the form of dividends, to purchasing growth at high valuations.

In the case of General Mills (GIS), IBM (IBM) and Altria (MO), these stocks are cheap today. If they can turn the operations around and grow those earnings, it is possible that an investment today will be a smart one. However, if there is integration risk, and rosy growth expectations do not turn out as expected, managements would have ended up wasting shareholder resources. Any extra debt can shift the focus from being a dividend growth company to becoming a growth company. This change in mindset can increase the risk of a dividend cut down the road, particularly if reality does not work out as the projections.

In my case, I will keep holding on to my positions in all three companies. However, I will allocate dividends elsewhere. If the dividends are cut, I will likely sell my positions there.

Relevant Articles:

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Monday, January 7, 2019

British American Tobacco (BTI) Dividend Stock Analysis

British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide. It manufactures vapour and tobacco heating products; oral tobacco and nicotine products, such as snus and moist snuff; cigars; and e-cigarettes.

The company is an international dividend achiever, which has managed to reward shareholders with a dividend increase every year since 1997.

Some of BTI's competitors include Altria Group (MO), Phillip Morris International (PM) and Japan Tobacco.

Earnings per share increased from 1.23/share in 2009 to 2.85/share in 2017. The 2017 figures have been adjusted for some one-time items related to the acquisition of Reynolds and the changes in US corporate tax code. The company is expected to earn 2.97 GBP per share in 2018.

The figures are in British Pound Sterling (GBP), since this is a British Company based in the UK. There will be currency fluctuations for US investors in British shares, driven by the changes in currency rates between the US dollar and the British pound. Even if the dividend increases in British Pounds, it is possible that your dividend income in US dollars decreases, if the British pound depreciates in value.

The stock price has plunged in recent months following fears that there will be ban on the sale of menthol tobacco products in the US by the FDA. Even if that happens however, it would take a long time to be implemented. Menthol cigarettes account to almost a quarter of profits. There is also increased pressure on e-cigarettes as well, which have been a growth opportunity for tobacco companies like BTI.

The number of smokers in the developed world is expected to keep declining. This effect is usually offset by price increases which are larger than declines in the number of smokers. BTI is investing in its next generation products, which could spur growth in the future, while also striving to maintain its position in the traditional tobacco products markets. I really like the fact that BTI is well diversified internationally, with exposure to North America, Eastern Europe Middle East and Africa, Europe, and Asia. This diversification spreads the regulatory risk down a notch.

BTI acquired Reynolds in 2017, and is working to integrate the operations, while also realizing the synergies expected from the deal. Future growth can also be achieved by acquisitions, which the company has had a strong history of successfully integrating under its umbrella.

BTI owns leading electronic cigarette brands such as Vype, Ten Motives, VUSE. In addition, it owns the brands iFuse and Glo, which are heated tobacco products. Major traditional tobacco brands include Kent, Dunhill, Lucky Strike, Rothmans and Pall Mall. Strong brands tend to have pricing power, which is good for profits in the long run. Given the global scale of operations, strong customer loyalty to brander products, high barriers to entry, and strong generation of excess cashflows and excess returns on investment, I believe that BTI has a wide moat ( though most other competitors such as Altria, PMI also spot a wide moat as well)

Companies like British American Tobacco can benefit from growth in emerging markets, where smoking is more widespread and declines in smokers are much slower. The company is well positioned in emerging economies.

The annual dividend increased from 70 pence/share in 2008 to 1.75 pounds/share in 2017. The forward annual dividend is 1.92 pounds/share.

The company switched from paying dividends twice per year to a quarterly dividend schedule by 2018. Prior to that it was paying dividends twice per year. The payments differed in size however, although in total they grew each year since at least 1997.

Since this is a UK based company, I analyzed the financial information in British Pounds. As a US based investor, I will be buying the ADR’s traded on NYSE, quotes in US dollars. The dividends in US dollars will fluctuate due to currency fluctuations between the dollar and the pound. In the long run however, these should not have that much effect, assuming that the underlying business model is not fundamentally impaired. 

The dividend payout ratio has increased from 57% in 2008 to 61% in 2017. The forward payout ratio is at 65%. While the payout ratio seems high, this is actually on the low side for a tobacco company.

The number of shares outstanding decreased between 2008 and 2016. The acquisition of Reynolds in 2017 for cash and stock increased the number of shares outstanding. I believe that while management will be prioritizing debt reduction over time, there should be some room for further share buybacks in the future.
The shares of British American Tobacco trade at a low valuation at just 8.70 times forward earnings and have a high dividend yield of 7.40%. Based on the forward payout ratio of 65%, the dividend looks safe. I view the stock as attractively valued today. There are plenty of other tobacco companies to choose from these days, including Altria and Phillip Morris International. While the future is cloudier, given the risk of obsolescence from other products, the valuations are compelling. If the dividend is at least maintained, investors should be able to generate some decent returns over the next decade.

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Tuesday, January 1, 2019

2019 Dividend Champions List

A dividend champion is a company which has a 25 year record of annual dividend increases. There are only 129 such companies in the US today. I believe that becoming a dividend champion is no accident, and it is a result of a strong business that has generated earnings growth for a long period of time. These are the types of businesses I like to study, and potentially consider at the right time for my dividend portfolio.

I have updated the list of dividend champions through December 31, 2018. I decided to update the list of dividend champions after the untimely passing of David Fish in May 2018

Since I use the list of dividend champions in my investing research, I realized that my process is at risk, since it is dependent on a single person. This led me to develop ways to update the list on a monthly basis. The list is a result of a few things I do:

1) Obtain forward dividend information from Yahoo Finance, and compare it to existing information from the prior month's list

2) Research differences, and verify if this is indeed a dividend increase. I like to verify new raises and dividend track records against press releases, which is a manual process. Very often, my research tells me that there is no increase, but my data feed or my calculations are incorrect.

3) Update the list using the inputs from 1) and 2) above, and add prices and trailing earnings per share.

4) The other step is more of a gut check. I like to keep plugged in the world of dividend growth investing. Between monitoring weekly dividend increases, monitoring my dividend portfolio holdings and following investors and companies, I develop a mental checklist of companies that have increased/decreased dividends. This is helpful when updating the list of dividend champions. I have also been around for a little bit, which is how I decided to promote certain companies like Abbott (ABT) to the rank of a dividend champion, but remove Realty Income (O) from the list.

5) I didn't find a reliable source to update the trailing dividend payments for 2018 in a systematic way. As I didn't feel like updating the annual dividend amounts for 2018 for over 100 companies, I skipped this step.

The 2019 dividend champions list can be downloaded from this location in an excel spreadsheet format. Subscribers to my free newsletter are receiving this as an attachment in their inboxes.

Additions to the list

I added two companies to the list of dividend champions, which raised their dividends for the 25th year in at row:

PSB Holdings Inc. (PSBQ)

Urstadt Biddle Properties (UBA)

I updated Praxair (PX), which merged with German company Linde a few months ago to the new company/symbol Linde (LIN). Based on the latest dividend announcement, it looks like the new company is continuing the dividend history of Praxair.

As a result, there are 129 dividend champions in the US.

There were several dividend increases over the past month from the dividend champion companies. These include:

Yrs Annual Increases
Old Rate
New Rate
ABM Industries Inc.
 $  0.1750
 $  0.1800
Abbott Laboratories
 $  0.2800
 $  0.3200
AT&T Inc.
 $  0.5000
 $  0.5100
Ecolab Inc.
 $  0.4100
 $  0.4600
Erie Indemnity Company
 $  0.7825
 $  0.8400
Franklin Resources
 $  0.2000
 $  0.2300
Nucor Corp.
 $  0.3800
 $  0.4000
Pentair Ltd.
 $  0.1750
 $  0.1800
SEI Investments Company
 $  0.3000
 $  0.3300
Stryker Corp.
 $  0.4700
 $  0.5200
Universal Health Realty Trust
 $  0.6700
 $  0.6750

I have decided to discontinue updating the list of dividend champions for several reasons.

First of all, there is someone else who has taken on the task of updating the list of dividend champions, contenders and challengers. I have a great respect for this, given the fact that I know how time consuming this process can be. I am hopeful that they can continue updating the list for years to come. If they don't, I am sure that someone else can pick up the torch. Either way, I have a backup process in place to update the list of dividend champions. But for the time being, it is no use to duplicate effort.

Second, I do not as much interest from my readers about those monthly updates of the dividend champions list. Readers tend to enjoy other articles I write, because of my personal spin on the situation. Given the fact that updating the list of dividend champions takes a lot of time, right around the time I am busy with updates for my dividend growth investor newsletter, I am choosing to prioritize my premium offering.

This was a great exercise in updating the dividend champions list however. It is a great exercise in independent thinking. For example, I disagree with some of the additions in the current list of dividend champions. Notably, the following companies have not increased dividends for 25 years in a row (e.g. Realty Income went public in 1994, so they would be eligible to become a dividend champion by the end of 2019):

Years Annual Increases
Artesian Resources
Realty Income

In addition, the other list does not include Abbott Labs (ABT), which has increased dividends for 47 years in at row. The company split into two in 2013, when it spun-off Abbvie. Therefore, I believe that the company with the legacy name should inherit the historical record of annual dividend increases. If you disagree with this thinking, you should also remove Altria (MO) from the list of dividend champions. The latter spun-off Kraft in 2007 and Phillip Morris International (PM) in 2008, but is on the list of dividend champions. I believe that you need to have a consistency in methodology, when maintaining a list of companies.

Of course, the other list from Justin Law updates roughly 800 companies, which is why we  should not be too picky. This is a massive undertaking to take on a monthly basis, as it is a gargantuan amount of work.

Thank you for reading along! The rest of the articles will continue next week!

Relevant Articles:

Dividend Champions, Contenders & Challengers: The most complete list of US dividend growth stocks available
October 2018 Dividend Champions List
December 2018 Dividend Champions List
RIP David Fish

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