A long streak of dividend increases is a signal of a quality company which is probably a good idea for further research. As part of my monitoring process, I review the list of dividend increases every week. I usually focus on companies with an established track record of dividend increases that is at least ten years long. The next step involves reviewing the dividend growth history relative to the latest increase, in order to evaluate the robustness of dividend increases. This step is performed alongside a review of trends in fundamentals, such as earnings per share and dividend payout ratios, in order to estimate the likelihood of future dividend growth. The last step involves taking a stab at valuation. After all, even the best company in the world is not worth investing in at the wrong price.
This process is in addition to my screening process. The monitoring, idea generation and investment processes are part mechanical, part qualitative. I do not believe that successful investment can be summarized neatly to a simple formula, because investing is part art, part science. Anyone who claims to follow “the science of investing” is probably an expensive advisor who will charge you thousands of dollars to set up a portfolio of high fee funds for you, and then charge you high management fees forever. Astute dividend investors know to keep costs low by avoiding expensive middlemen in their investment activities. This lets you keep more money working hard for you. But I am getting sidelined from my main point here.
Over the past week, there were three companies that raised dividends to shareholders. The companies have a ten year track record of increasing annual dividends. The companies include:
Colgate-Palmolive Company (CL) manufactures and sells consumer products worldwide. The company operates through two segments, Oral, Personal and Home Care; and Pet Nutrition.
Colgate increased its quarterly dividend by 2.40% to 43 cents/share. This increase marked the 56th consecutive year of annual dividend increases for this dividend king. The latest increase is slower than the ten year average of 7.80%. The slowdown in dividend growth is not a surprise to observant analysts however.
Colgate Palmolive has been unable to materially grow earnings per share since at least 2012. Between 2008 and 2018, earnings per share went from $1.83 to $2.75. A big help came from the repurchase of almost 20% of shares outstanding since 2007. The company is expected to generate $2.83/share in 2019.
Right now the stock is overvalued at 23.70 times forward earnings and yields 2.55%. Due to the high valuation, and the lack of earnings growth for over 6 years, I view the stock as a hold. The dividend is adequately covered for now at a forward payout ratio of 60.80%, but without growth in earnings, future dividend increases will be nominal until they hit a wall.
Oracle Corporation (ORCL) develops, manufactures, markets, sells, hosts, and supports application, platform, and infrastructure solutions for information technology (IT) environments worldwide. The company provides services in three primary layers of the cloud: Software as a Service, Platform as a Service, and Infrastructure as a Service.
Oracle raised its quarterly dividend by 26.30% to 24 cents/share. 2019 is the tenth year of rising annual dividends for Oracle, despite the fact that the Board of Directors doesn’t raise the dividend every single year. Since initiating dividends in 2009 at 5 cents/share, dividend growth has been phenomenal to the new quarterly distribution of 24 cents/share. Earnings per share increased from $1.06/share in 2008 to an adjusted $3.12/share in 2018. Oracle is expected to generate $3.41/share in 2019.
Right now, the stock looks attractively valued at 15.50 times forward earnings and offers a dividend yield of 1.80%. I should probably add it to my list for further research.
W.P.Carey (WPC) is a real estate investment trust, which invests in high-quality single-tenant industrial, warehouse, office and retail properties subject to long-term leases with built-in rent escalators. Its portfolio is located primarily in the U.S. and Northern and Western Europe.
Last week, the REIT boosted its quarterly dividend to $1.032/share, which was a 0.2 cents/share increase over the previous quarterly payment. The new dividend will be 2.20% higher than the distributions paid this time last year. At this rate, the forward dividend growth will be 1%/year, which is very slow. The compensating factor is the higher yield. The recent run-up in the share price however means that the current yield is lower at 5.35%. It pays to be opportunistic in acquiring slower growth companies – for example in December W.P. Carey was yielding close to 6.50% at one point. An extra percentage of return could sure help in the long run. Of course, an extra percentage of growth would be helpful as well to existing holders.
Between 2008 and 2018, W.P. Carey has managed to boost AFFO/share from $3.09 to $5.39/share. W.P. Carey expects to generate AFFO in the range of $4.95 to $5.15 per diluted share in 2019. This guidance for a reduction in AFFO/share is a possible reason for the really slow dividend increase, especially when the AFFO payout ratio is at 83% at the low end of the range. The REIT is selling for 15.60 times forward AFFO and yields 5.35%.
The stock price has really shot up this year, but this is probably because it simplified the business to be more of a REIT and less of a REIT investment manager, which is pushing FFO multiples to be more in line with the likes of Realty Income and National Retail Propertoes. But REITs have been on fire, as the FED has indicated that future interest rate hikes will be more difficult to come by. Check my analysis of W.P. Carey for more information about the REIT.
- How to read my weekly dividend increase reports
- How to value dividend stocks
- What is Dividend Growth Investing?
- Three Characteristics of Successful Dividend Investors
- Five Things to Look For in a Real Estate Investment Trust