Monday, November 30, 2020

Phil Fisher’s Scuttlebutt Approach to Company Research

Phil Fisher is one of the best investors in the world. He managed portfolios for a small group of clients over a period of several decades. He launched his investment firm at the depths of the Great Depression in 1931, and closed it near the end of his long-life in the 1990s. Sadly, he passed away at the age of 96. It looks like a lot of long-term investors tend to live for a long period of time – Buffett, Fisher, Munger, Kahn, Carrett, Walter Schloss, Ben Graham.

Phil Fisher popularized the concept of investing in promising companies that can grow over time, which can lead to very good long-term returns. He popularized the concept of growth investing in a nutshell.

For example, when he died in 2004, he still held shares of Motorola, that he had purchased many decades before that. The stock had done very well, as evidenced by this price only chart:

 


He also kept a fairly concentrated number of holdings in companies which he held for decades. Phil Fisher did an extensive research of companies, focusing on competitors, suppliers, employees, poring over records and filings, before investing in a company. That is a very time intensive task, but he was very good at it.

Warren Buffett has stated that his investing style has been influenced by Phil Fisher. He claims to be 85% Fisher/15% Ben Graham. As a result, a lot of investors are studying Phil Fisher as much as they can, in an effort to learn how to produce an outstanding investing effort.

There are a few books by Phil Fisher, which are great and very educational. I highly recommend them. For example, his book Common Stocks and Uncommon Profits convinced me to invest in defense contractors a few years ago.

His ideas to focus on future growth, and not just current yield, meshes well with my idea of dividend growth investing and buying companies to build up future yield on cost.

Phil Fisher believed that investors should focus on 15 criteria when deciding where to place their money. The more criteria a given company can meet, the better. he believed that if the job has been correctly done when a common stock was purchased, the time to sell it is almost never.

1. Does the company produce goods or services whose sales are likely to increase substantially for at least the next several years? 

Fisher was interested not in ‘one-off’ growth, nor necessarily in steady, year after-year increases in growth, but rather in ‘greater-than normal growth not only for the next several-year period, but for a considerable time beyond that.’ Fisher does not just extrapolate past sales growth: he seeks to understand how, and therefore to confirm that, past growth can continue into the future.

2. Is management determined to develop new goods or services? 

According to Fisher, ‘companies which have a significant growth prospect for the next few years because of new demand for existing lines, but which have neither policies nor plans to provide for further developments beyond this, may provide a vehicle for a nice one-time profit. [But] they are not apt to provide the means for the consistent gains over 10 or 25 years that are the surest route to financial success.’

3. How effective is a company’s research and development? 

‘If quantitative measurements—such as the annual expenditures on research or the number of employees holding scientific degrees—are only a rough guide and not the final answer to whether a company has an outstanding research organization, how does the careful investor obtain this information? Once again it is surprising what the “scuttlebutt “method will produce.’

4. Does the company have an above-average sales organization? 

The sale of goods and services is the most basic activity that a business undertakes; yet the effectiveness of a company’s sales, advertising and distribution receives far less attention from investors than it should. Here, too, Fisher relies heavily upon scuttlebutt: ‘of all the phases of a company’s activity, none is easier to learn about … Both competitors and customers know the answers. Equally important, they are seldom hesitant to express their views. The time spent by the careful investor n inquiring into this subject is usually richly rewarded.’

5. Does the company have a worthwhile profit margin? 

Although they need not necessarily rise over time, Fisher seeks companies with the largest possible operating margins. Accordingly, whether the company is large or small, new or well established, ‘investors desiring maximum gains over the years had best stay away from low profit-margin or marginal companies.’

6. What is the company doing to maintain or even improve its profit margin? 

Simplified drastically, companies can either raise their prices or reduce their costs. Fisher is somewhat skeptical of the company that maintains or improves its margins exclusively by increasing its prices, and looks for those that also maintain a keen eye towards production, marketing and other cost efficiencies, capital improvements and other innovations.

7. Does the company boast outstanding labor and personnel relations? 

Fisher’s interest in technological excellence and innovation led him towards companies whose employees tended not to be members of a trade union. Further, ‘the company that makes above average profits while paying above-average wages for the area in which it is located is likely to have good labor relations. The investor who buys into a situation in which a significant part of earnings comes from paying below average wages for the area involved may in time have serious trouble on his hands.’

8. Does the company have outstanding executive relations?

‘The company offering [the] greatest investment opportunities will be one in which there is a good executive climate.’ By this Fisher meant (among other things) that executives have confidence in their president and CEO, and that salary and promotion are based upon ability and results. ‘The further a corporation departs from these standards, the less likely it is to be a really outstanding investment.’

9. Does the company have more than a handful of talented managers? 

The less an organization’s survival and success depends on one or a small number of personalities, and the less one executive interferes with the job of another, the better. ‘The organizations where top brass personally interferes with and try to handle routine day-to-day operating matters seldom turn out to be the most attractive type of investments. Cutting across the lines of authority which they themselves have set up frequently results in well-meaning executives significantly detracting from the investment caliber of the companies they run.’

10. How good are the company’s methods of cost analysis and accounting?

No company will create outstanding success or continue it for any period of time if it does not know its costs in such detail that it is able to distinguish its most profitable activities (which it should continue and possibly expand) from its least profitable and unprofitable activities (which it should either improve or discontinue).

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues about how outstanding the company may be compared with its competitors?

In retailing, for example, the way a company handles matters such as the location and duration of leases is very important. In the ‘tech’ field, it is not just the innovations themselves but also their degree of patent and other protection ‘which is a major factor in appraising the attractiveness of a desirable investment.’

12. Does the company have a short- or a long-range outlook?

Some companies conduct their affairs to gain the greatest possible profit today. Others deliberately don’t take jam today so that they can enjoy more jam tomorrow. Fisher seeks the latter and avoids the former type of company. If executives focus too much on the here and-now, for example in their treatment of customers and vendors, they might make poor long-term decisions.

13. Will the company’s growth require so much equity finance that the much larger number of shares outstanding will largely cancel the benefit from this anticipated growth?

Fisher seeks companies whose growth relies mostly upon their own existing resources (shareholders’ funds and retained earnings) and only incidentally upon external resources. In other words, he rejects companies that borrow heavily or issue large amounts of equity to finance their operations.

14. Does the management talk freely to investors about its affairs when things are going well but become mute when troubles occur?

The investor will do well to exclude from investment any company that withholds or tries to hide bad news.’

15. Does the company have a management of unquestionable integrity? 

Fisher noted that a company’s executives will almost always be much more familiar with a company’s affairs than its shareholders are. For this reason, managers can benefit themselves at the expense of shareholders in many ways. Decades before most others, Fisher recognized that ‘probably most costly of all to the investor is the abuse by insiders of their power of issuing common stock options.’ Fisher’s response? ‘There is only one real protection against abuses like these. This is to confine investments to companies [whose] managements have a highly developed sense of trusteeship and moral responsibility to their stockholders. This is a point concerning which the “scuttlebutt “method can be very helpful’.


Naturally, it is obvious that this is a super-investor that should be studied. A lot of people learn that to emulate their investment style, they need to spend a lot of time digging into every detail about a company, competitors and industry. All of this sounds like a lot of work. It is enough to get everyone discouraged.

I recently read the book "The Money Game" once, and then re-read it. The book discussed how Phil Fisher found his investment ideas:

“For years, Phil Fisher espoused what he called "scuttlebutt" as the way to zero in on a new investment, You know a company; you talk to their competitors. You talk to the people who sell them. things and to the people who buy things from them. An engineer, for example, might be enthusiastic about a new oscilloscope he was using, and that would lead you to the oscilloscope maker. People like to talk about their work. If you go to visit the plant of, say, the maker of peripheral computer equipment, it has been my experience that the people there will not only tell you all about peripheral computer equipment; they will tell you all the gossip about the major computer makers.

And not only that, they will tell you about the components within the computers because their friends, 'the computer engineers, have told them which components are exciting and every last one of these birds is in the stock market. and looking for sexy stocks just like you are. That fellow who has just taken you through the plant will tell you, in the company cafeteria, that he has just exercised his options, hocked his stock in his own company, and loaded up with Pazoomis Computer Machine Tool. You have only one problem, and that is, if you spend all of your time gossiping with computer engineers, when are you going to do whatever it is that you do? (You would have another problem if you did have the time to pursue all this scuttlebutt, and that is that engineers can be just as fanciful as stockbrokers, and a beautiful piece of equipment does not necessarily come from the most profitable company. And Pazoomis Computer Machine Tool may be just about to get swamped by Kearney and Trecker, and Giddings and Lewis, their competitors.)

Well, Phil Fisher is an honest man, and one day he sat down and made a study of where his successful ideas had come from. After many, many years in the business of scouting and evaluating. ideas, and after building up an incredible network of acquaintances and contacts throughout a variety of industries, he found that only one sixth of the good ideas had come from the scuttlebutt network. And the other five sixths? "Across the nation I had gradually come to know and respect a small number of men whom I had do outstanding work of their own in selecting common stocks for growth. . . . since they were trained investment men, I could usually get rather quickly their opinion upon the key matters .... I always try to find the time to listen once to any investment man .... " In other words, he found some smart people. That is one of the most important of the Irregular Rules, find smart people, because if you can do that, you can forget a lot of the other rules”

This was a very eye-opening quote for me. That’s because it explained to me why many of you are probably reading me. It also explains why you should read not just me, but perhaps others too. It also explains to me why other dividend bloggers follow me, and then I see my ideas on their articles a few weeks or months after I have posted it in the first place.

I have usually been against people blindly following others into investments. It strikes me as looking for investment tips and buying blindly on a hunch, which could turn out poorly and lead to investors not learning anything in the process. However, that quote made me see it in a new light.

Namely, if you develop your own process, you can still follow other investors that you respect. If they come up with investing ideas, you scrutinize them, analyze them, and check off the boxes on your investment checklist. If you learn about an investment from someone else, and it fits everything that you are looking for in your investment process, there is no shame in buying the investment. Of course, it makes sense to follow a few trusted investors that way, and be on the lookout for other good investors to follow. After looking at my investment journal, I am pretty sure that I invested in Visa a decade ago because I saw Buffett buying it, followed by a high dividend increase for the company. It also looked better than Mastercard to me at the time.

That being said, you should follow other investors, but you should still do your own analysis. Back in 2012 – 2013, I was also following Buffett into IBM. His words resonated with me, but I had more experience with Accenture. In the end I bought both companies, but in retrospect I should have bought Accenture over IBM.

Since this article is already getting too long, I would just stop right here. I hope you enjoyed it and have a further list for your education as an investor.


Relevant Articles:


These Books Shaped My Investing Strategy

The importance of pricing and valuation in dividend investing

How to Invest Like Warren Buffett

 

Friday, November 27, 2020

Six Companies Rewarding Their Thankful Shareholders With a Raise

There were several companies over the past week which announced their intent to raise dividends to shareholders. It is always great to see companies that are able to extend their long streaks of annual dividend increases. I find dividend increases to be a good indicator of how company executives feel about the near-term business environment. It also shows their confidence in the company’s growth prospects. 

Factors that boards of directors consider when setting the dividend include future earnings expectations, payout ratio and dividend yield relative to those at peer companies, as well as returns available on other income-oriented investments.

This is why I find it very helpful to review dividend increases every week for established dividend growth companies. To be included in this list, a company should have managed to reward shareholders with a dividend hike for at least ten years in a row.

I review these press releases as part of my monitoring process. For the purposes of this article, I narrowed the list of dividend increases down to a more manageable level.

I focused on companies that can afford to grow dividends for at least a decade. I figured that a company which has managed to boost dividends during a recession and an expansion, or even longer, is better suited for further research by a long-term dividend growth investor like me.

In my previews, I look at the most recent dividend increase, and compare it to the ten year average. While there are some year-over-year fluctuations in dividend growth, it is helpful to see if dividend growth is decelerating.

In addition, it is helpful to review trends in earnings and dividends, alongside dividend payout ratios. This is another indicator of dividend safety.

Last, but not least, I also try to review the valuation behind every company. I prefer to buy future dividend income at attractive valuations; overpaying for future dividend income is not a good business decision.

Over the shortened Thanksgiving week, we had six companies hiking distributions to their thankful shareholders. I have had the first five of these companies consistently raising dividends during Thanksgiving week for the past several years that I have been writing these review. The companies include:

Hormel Foods Corporation (HRL) produces and markets various meat and food products in the United States and internationally. The company operates through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.

Hormel Foods increased its quarterly dividend by 5.40% to 24.50 cents/share, marking the 55th consecutive annual dividend increase for this dividend king. Hormel Foods has managed to increase distributions at an annualized rate of 16% over the past decade.

Between 2010 and 2020, Hormel managed to triple its earnings from 73 cents/share to $1.69/share.
Analysts expect Hormel to earn $1.80/share in 2021. It looks like earnings per share have plateaued for three years in a row if analyst projections are correct. 

I believe that the stock price is overvalued at 26 times forward earnings. The stock yields 2.10%. I may consider it if it dips below $36/share. Check my analysis of Hormel for more information about the company.

Becton, Dickinson and Company (BDX) develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide.

The company’s dividend eked out a small 5.10% increase to 83 cents/share. Becton Dickinson has raised its dividend for the 49th consecutive year. If BD hikes dividends in 2021, this dividend champion will be upgraded to the elite dividend king status. Over the past decade, Becton Dickinson has managed to boost dividends at an annualized rate of 8.90%.

The company earned $5.49/share in 2010 and analysts expect Becton Dickinson to earn $12.53/share in 2021. 

The stock seems fairly valued at 18.15 times forward earnings and a dividend yield of 1.45%. The rate of dividend growth has slowed down, and if you want to review earnings per share, you would have to dig a little deeper into things such as purchase accounting adjustments and other items that the company deems as one-time events.

McCormick & Company, Incorporated (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates in two segments, Consumer and Flavor Solutions.

McCormick managed to hike its quarterly dividend by 9.70% to 68 cents/share. This marks the 35th consecutive year that this dividend champion has increased its quarterly dividend. McCormick has managed to boost dividends at annualized rate of 9% over the past decade.

The company earned $2.75/share in 2010, and managed to grow this to $5.24/share in 2019.
Analysts expect that McCormick will earn $5.71/share in 2019.

Unfortunately, this great company is overvalued at 32.50 times forward earnings and yields 1.45%. Check my analysis of McCormick for more information about the company.

Hingham Institution for Savings (HIFS) provides various financial products and services to individuals and small businesses in the United States.

The company increased its quarterly dividend to 47 cents/share, which is a 4.40% increase over the dividend paid during the same time last year. This dividend champion has consistently increased regular quarterly cash dividends over the last twenty-five years. The bank also announced a special dividend in the amount of 70 cents/share. During the past decade, it has managed to increase dividends at an annualized rate of 6.10%.

The company managed to grow earnings from $4.81/share in 2010 to $17.83/share in 2019.
The stock is fairly valued at 10.80 times earnings and offers a dividend yield of 0.85%.

The York Water Company (YORW) impounds, purifies, and distributes drinking water. It also owns and operates three wastewater collection systems and two wastewater treatment systems.

The company raised its quarterly dividend by 4% to 18.74 cents/share. This is the twenty-third consecutive year that this dividend achiever has increased its dividend. During the past decade, York Water has managed to grow its distribution at an annualized rate of 3.20%.

York Water has stated that it has managed to pay dividends every year since 1816, but I have been unable to find any history on distribution payments that goes beyond 1912. If anyone from the company’s IR department is reading, I would love to see the data behind this claim.

The company earned $0.71/share in 2010 and managed to grow earnings to $1.11/share in 2019.

Analysts expect the company to earn $1.25/share in 2020.

The stock is overvalued at 37.22 times forward earnings and sells at a dividend yield of 1.60%. 

South Jersey Industries, Inc. (SJI) provides energy-related products and services. The company engages in the purchase, transmission, and sale of natural gas.

The company hiked its quarterly dividend by 2.50% to 30.25 cents/share. With this announcement, SJI has increased its dividend for 22 consecutive years. During the past decade, this dividend achiever has managed to boost distributions at an annualized rate of 6.90%.

Analysts expect that South Jersey Industries will generate $1.56/share in 2019.

The stock is fairly valued at 15.80 times forward earnings and offers a dividend yield of 4.90%. Sadly, the dividend payout ratio is at 78%, which means that the pace of future dividend growth will be slow at best.

Relevant Articles:

Dividend Achievers Offer Income Growth and Capital Appreciation Potential
Ten Companies Rewarding Investors With Dividend Hikes Last Week
Nine Dividend Growth Stocks With Growing Yields on Cost
Eleven Dividend Growth Stocks For Further Research

Monday, November 23, 2020

Nine Cash Machines Hiking Dividends Last Week

 I review the list of dividend increases every week, as part of my review process. I focus my attention on companies that raised dividends in the current week, and have at least a ten-year track record of annual dividend increases.

Only a company with a strong cash flow generating business can afford to grow dividends for a long period of time. Therefore, a business growing dividends for at least a decade is worth looking at for further research.

There were nine companies that fit the criteria. You can view the five companies in the table below:

Aflac Incorporated (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. The company raised its quarterly dividend by 17.86% to 33 cents/share. This marked the 38th consecutive annual dividend increase for this dividend aristocrat. During the past decade Aflac has managed to grow dividends at an annualized rate of 6.80%. Between 2009 and 2019, Aflac managed to boost earnings from $1.59/share to $4.43/share. Aflac is expected to generate $4.93/share in 2020.  Right now the stock is attractively valued at 8.90 times forward earnings. Aflac yields 3%.

McCormick & Company Incorporated (MKC) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. The company operates in two segments, Consumer and Flavor Solutions.  The company hiked quarterly dividends by 9.68% to 68 cents/share, marking the 34th year of consecutive annual dividend increases for this dividend aristocrat. McCormick has managed to increase dividends at an annualized rate of 9.04% during the past decade. Between 2009 and 2019, McCormick has managed to grow earnings from $2.27/share to $5.24/share. The company is expected to earn $5.71/share in 2020. The stock is not cheap at 32.20 times forward earnings. McCormick yields 1.50%.

Brown-Forman Corporation (BF.B) manufactures, bottles, imports, exports, markets, and sells various alcoholic beverages.  The company raised its quarterly dividend by 3% to 17.93 cents/share. This marked the 37th year of annual dividend increases for this dividend aristocrat. During the past decade, Brown-Forman has managed to boost dividends at an annualized rate of 8%. Brown-Forman managed to grow earnings from 81 cents/share in 2010 to $1.72/share in 2020. The company expects to earn $1.92/share in 2021. The stock is overvalued at 41.50 times forward earnings and yields 0.90%.

NIKE, Inc. (NKE), designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. The company hiked its quarterly dividend by 12.24% to 27.50 cents/share, marking the 19th year of consecutive annual dividend increases. Nike has hiked dividends at an annualized rate of 13.195 over the past decade. Between 2009 and 2019, Nike managed to grow earnings from 76 cents/share to $1.60/share. Nike is expected to earn $2.86/share in 2020. The stock is overvalued at 46.50 times forward earnings and yields 0.80%.

First Financial Corporation (THFF) provides various financial services. It offers non-interest-bearing demand, interest-bearing demand, savings, time, and other time deposits. The company hiked its semi-annual dividend by 1.90% to 53 cents/share. This marked the 32nd year of consecutive annual dividend increases for this dividend champion. Over the past decade, it has managed to grow distributions at an annualized rate of 1.36%. First Financial Indiana managed to increase earnings from $1.73/share in 2009 to $3.80/share in 2019. The company is expected to generate $3.65/share in 2020. The stock is cheap at 10.22 times forward earnings. The stock yields 2.85%.

Matthews International Corporation (MATW) provides brand solutions, memorialization products, and industrial technologies worldwide. The company hiked its quarterly dividend by 2.40% to 21.50 cents/share. This marked the 26th annual dividend increase for this dividend champion. Over the past decade, it has managed to hike distributions at an annualized rate of 11.80%. The company earned $1.90/share in 2009 and is expected to earn $2.90/share in 2019. The stock is fairly valued at 9.50 times forward earnings and offers a dividend yield of 3.10%.

American Equity Investment Life Holding Company (AEL) provides life insurance products and services in the United States. The company raised its annual dividend by 6.67% to 32 cents/share. This marked the 18th year of annual dividend increases for this dividend achiever. During the past decade, American Equity has managed to grow dividends at an annualized rate of 14.10%. The company grew earnings from $1.18/share in 2009 to $2.68/share in 2019. Analysts expect earnings to hit $2.86/share in 2020. The stock looks cheap at 9.50 times earnings. It yields a little over 1.15%.

Royal Gold, Inc. (RGLD), acquires and manages precious metal streams, royalties, and related interests. The company hiked its quarterly dividend by 7.14% to 30 cents/share, marking the 20th consecutive increase in its dividend. Royal Gold has a ten year annualized dividend growth rate of 12.72%. The company has managed to grow earnings from $1.07/share in 2009 to $3.03/share by 2019. Royal Gold is expected to earn $3.65/share in 2020. The stock is not cheap at 30.10 times forward earnings. It yields 1.10%.

Spire Inc. (SR) engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial, and other end-users of natural gas in the United States. The company operates in two segments, Gas Utility and Gas Marketing. Spire hiked its quarterly dividend by 4.42% to 65 cents/share. This marked the 18th consecutive year of annual dividend increases for this dividend achiever. During the past decade, the company has managed to grow dividends at an annualized rate of 4.41!. The ten year rate is equivalent to the rate of the latest dividend increase, which is somethign you seldom see.

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Thursday, November 19, 2020

My General Philosophy on Dividend Growth Stocks

In my previous article, I discussed in brief how I come up with investment ideas. I also wanted to share with you my general philosophy on understanding dividend growth stocks. 

In general, I look for a history of annual dividend increases. This is indicative of a business that generates a lot of free cash flow, which is a sign of a successful business model. 

I then dig into that business, in order to understand if it has some competitive advantages, which would allow it to continue succeeding. I also dig further into the business fundamentals, in order to determine if the rise in dividends per share was supported by a growth of earnings per share, and not because the dividend payout ratio was increasing. 

I look to understand how cyclical the business model is, which is a fancy way of saying that I want earnings that do not decline by a lot during recessions, but still participate on the upside during economic growth. Sustainable earnings can pay sustainable dividends through the ups and downs of the economic cycle. I want to buy companies at an attractive valuation, which can continue growing earnings, raising dividends and hopefully grow in value as well. 

I focus on valuation, although valuation is more art than science these days. A company with a low P/E is not necessarily cheap, because it is probably not growing earnings and dividends by much. If it pays a high portion of earnings as dividends, it may have a place in my portfolio, but I would not expect high returns.

For a company with a high P/E ratio, I expect high earnings and dividends growth over time. That company could find its place in my portfolio too.

I also evaluate how defensible or sustainable those earnings are too. I take a higher preference for defensible earnings streams, the types that consumer staples companies or healthcare and some utilities generate. It seems like the whole world has awaken to these valuable earnings streams however, and has bid them up. I am patient, and on the lookout to add to these companies that millions of consumers worldwide use on a daily basis, and have them ingrained into their recurring purchasing decisions.

Speaking of analyzing companies, I have shared with you my screening process over the past 12 – 13 years on my regular website. My screening process goes hand in hand with stock analysis, at least the quantitative side of it. It goes something like this:

1) A long track record of annual dividend increases. I use 25 years, but could go as low as 10 years

2) A minimum dividend growth of 6%/year over the past decade. I can fiddle around with this 
percentage too, and can go as low as 3%, or the annual inflation rate over the past decade. I want the past 1, 3, 5, and 10 years to have that minimum percentage of annualized dividend growth.

3) A dividend payout ratio below 60%. I want a lower payout ratio in general, in order to minimize the risk of a dividend cut during temporary earnings hit during the next recession. This ratio also needs to be adjusted for certain industries such as Utilities and Tobacco, which tend to distribute most of their earnings as dividends. You also need to use FFO for REITs, and be more comfortable with higher payouts. In my dividend analyses, I review trends in payout ratios, but for screening purposes, that would be a little tough to do.

4) A history of earnings growth. I find it helpful to observe trends in earnings per share over the past decade, and identify whether I like a company or not. In general, I want a consistent growth in earnings, and want to avoid companies that are no longer growing the bottom line. Sometimes you need to do additional research to gain comfort behind the trends however.

5) A P/E ratio that is below a certain number. This number varies, depending on the underlying conditions we are in. That means interest rates, the P/E of the stock market etc. When rates were 8% - 10%, a P/E of 10 would have been a good yardstick. When rates on 30 year Treasury Bonds are lower than 2%, even a P/E of 25 or 30 could signify a relatively cheap stock.

6) I used to have a minimum yield requirement, but I have dropped those when I realized that some of the best dividend growth stocks in the past were low yielding but high growth ones. I do follow the principle of building a portfolio of companies in the three types of dividend yield/growth.

Of course, I do not look at each one of these parameters in isolation. I try to combine all of these parameters into one full understanding of a company.

Armed with this knowledge, you can take a stab at the list of dividend aristocrats for example, and start digging further.

Relevant Articles:

Tuesday, November 17, 2020

Terry Smith on Investing in Tobacco Stocks

Terry Smith is a British fund manager, who has an impressive track record over the past decade at the fund he founded, Fundsmith. Some call him the British Warren Buffett.

I recently identified an interesting video of him discussing the tobacco industry. I wanted to share it with you, and include a transcript of his comments too:

Check the video here. https://twitter.com/DividendGrowth/status/1325799553065349121

You can read the full transcript from here:

"I mean they obviously own the number one brand in the world - Marlboro. One of our theories. I think it's a fact actually on the tobacco industry is that the tobacco industry is an illustration of the of the reverse of that great Reaganism. He said the nine most dangerous words in the English language are "I'm from the government and I'm here to help". 

The tobacco industry is an illustration that the best business you can be in is one that the government attempts to stop, because if you do a chart of the tobacco industry over many decades you'll find it wasn't a particularly strong performer until the government tried to stop it. And then the government got involved by pack warnings and then the surgeon general's pack warnings. Then litigation by the states, then litigation that was on a federal level ,then bans on advertising and marketing and now bans on packaging and so on. This has led to two things which have been hugely beneficial to their financial status (their operations, their returns, their profits, their cash flows and to us as shareholders.

And those are one: These are industries which have got fabulous returns on capital. In the end they're basically selling an addictive product. They will never face a new competitor. 

If you go into your boardroom and say I got a really good idea to the economics of tobacco. I think we should get in the industry it will be a very short conversation. Nobody's ever going to enter the industry.

 And normally the way in which super returns are competed away is by people entering the business. It can't happen.

So they've got this wonderful business with these fabulous returns and there's no one brand and they can't spend any money on advertising marketing or now packaging. What's not to like?

And then the final frontier. I mean, of course if you think you've got this brilliant brand down there and you're going to compete with Marlboro How do you do it? You can't advertise. No. 

And also with plain packaging, apart from the fact that all the statistics show it hasn't caused an iota of downturn in actual smoking; If you go into a shop, and there's no display of anything other green packs with horrible photographs on them, and you want something to smoke, you say something like: Do you have any Marlboro? Because you can't see what it is. It's all right. So I mean the Government's intervention is, I mean ,we are very very inclined to invest in things that the government thinks is a bad idea and they'll try and stop. "

It is interesting that he has had a position in Philip Morris International (PM) for the past decade. It is one of the largest positions in his mutual fund. 

Tobacco companies in general are undervalued today, with the likes of Altria (MO), British American Tobacco (BTI) and Philip Morris International (PM) selling at very cheap valuations. You may also like this video of Warren Buffett and Charlie Munger discussing tobacco companies, which I discussed before.

Another interesting fact is that Michael Burry, who is famous for his bets against housing right before the 2007 - 2009 Financial Crisis, just initiated a position in Altria Group (MO). It is fascinating to watch a lot of value investors seeing the opportunity in tobacco companies today.

Relevant Articles:

Warren Buffett and Charlie Munger on Investing in Tobacco Stocks

What if Altria went to zero?

Analysis of Altria's Recent Deal Activity

Altria (MO) - a recession proof high yield dividend stock

Philip Morris International versus Altria


Monday, November 16, 2020

Eleven Dividend Growth Stocks That Grew Dividends Last Week

My monitoring process involves reviewing notable information for companies on my watchlist and companies on my portfolio. A fairly significant chunk is spent reviewing the dividend growth universe for value. I also review the list of dividend increases every week, but focus on the ones that have at least a ten year track record of annual dividend increases.

It is a helpful tool to help me see the pace of dividend growth for companies I may be interested. It is also a helpful exercise to familiarize myself with companies that I may have not looked at before, and potentially place them on my list for further research. I like to review a lot of companies, and watch them operate in real time. This trains me to hopefully identify certain patterns that may be helpful in my stock research and selection process. 

That process is also a nice summary of what I look for in a company. I view a long streak of dividend increases as an indication of quality. Only a limited number of companies end up being able to grow dividends for ten years in a row. This is my investable universe. I review the most recent dividend increase, and compare it to the past five and ten years. It is helpful to see a company whose growth is fairly consistent over time. It is also helpful to compare this growth along with the growth in earnings per share, and observing the payout ratio as well. In general, dividend growth investing is about selecting a company that grows earnings and dividends in lockstep, and grows intrinsic value as a result. Last but not least, we are looking to acquire such a company without overpaying for it. Valuation is part art, part science, because the right multiple depends on variable such as growth, dependability of the earnings stream, industry and interest rates. 

In general, I look for companies that can continue to thrive, no matter what the underlying economic conditions are. It is amazing that no matter what we went through in 2020, there are so many companies that are resilient enough, so that they can continue growing their dividends. Find a company so good that it can increase its dividend and share buyback during a pandemic.

During the past week, the following companies managed to increase dividends to shareholders:

ManpowerGroup Inc. (MAN) provides workforce solutions and services in the Americas, Southern Europe, Northern Europe, and the Asia Pacific Middle East region.

The company increased its semi-annual dividend by 7.35% to $1.17/share. This marked the tenth consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 11.40%. 

Earnings are cyclical and rise and fall with the economy. Earnings peaked at $5.73/share in 2007, fell to a loss of $3.26/share in 2010, before rebounding to $8.56/share in 2018.  Manpower Group is expected to earn $3.32/share in 2020. 

Right now the stock is selling for 26.20 times forward earnings and yields 2.70%.

Aaron’s, Inc. (AAN) operates as a specialty retailer of consumer electronics, computers, residential and office furniture, household appliances, and accessories in the United States and Canada.

The company increased its quarterly dividend by 12.50% to 4.50 cents/share. This marked the seventeenth consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 11.90%. 

The company earned $1.37/share in 2009.  Aaron's is expected to earn 5.13/share in 2020. 

Right now the stock is selling for 11.70 times forward earnings and yields 0.30%.

Microchip Technology Incorporated (MCHP) develops, manufactures, and sells semiconductor products for various embedded control applications in the Americas, Europe, and Asia.

The company increased its quarterly dividend by 0.14% to 36.85cents/share. This marked the 19th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 0.75%.  

Between 2009 and 2019, the company grew earnings from $1.31/share to $2.23/share. Microchip Technology is expected to earn $6.26/share in 2020. 

Right now the stock is selling for 20.15 times forward earnings and yields 1.20%.

Snap-on Incorporated (SNA) manufactures and markets tools, equipment, diagnostics, and repair information and systems solutions for professional users worldwide. It operates through Commercial & Industrial Group, Snap-on Tools Group, Repair Systems & Information Group, and Financial Services segments.

Snap-On raised its quarterly dividend by 13.89% to$1.23/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, the company has managed to grow dividends at an annualized rate of 12.60%. 

The company earned $4.07/share in 2009 and managed to grow that earnings stream to $12.41/share in 2019. Snap-On is expected to earn $10.74/share in 2020. 

Right now the stock is selling for 15.95 times forward earnings and offers a dividend yield of 2.87%.

Assurant, Inc. (AIZ) provides lifestyle and housing solutions that support, protect, and connect consumer purchases in North America, Latin America, Europe, and the Asia Pacific. The company operates through three segments: Global Lifestyle, Global Housing, and Global Preneed.

The company raised its quarterly dividend by 4.76% to 66 cents/share. This marked the 17th year of annual dividend increases for this dividend achiever. During the past decade, it has managed to grow dividends at an annualized rate of 15.20%. 

Between 2009 and 2019, Assurant managed to grow earnings from $3.63/share to $5.84/share. The company is expected to earn $8.97/share in 2020. 

Right now the stock is selling for 14.90 times forward earnings and yields 2%.

Automatic Data Processing, Inc. (ADP) provides cloud-based human capital management solutions worldwide. It operates through two segments, Employer Services and Professional Employer Organization (PEO).

The company raised quarterly dividends by 2.20% to 93 cents/share. This marked the 45th consecutive annual dividend increase for this dividend champion. Over the past decade ADP has managed to grow dividends at an annualized rate of 10.60%. 

Between 2009 and 2019, the company managed to increase earnings from $2.63/share to $5.70/share. The company is expected to generate $5.63/share in 2020. 

Right now, the stock is selling for 30.50 times forward earnings and yields 2.20%.

Service Corporation International (SCI) provides deathcare products and services in the United States and Canada. The company operates through Funeral and Cemetery segments.

The company raised quarterly dividends by 10.53%to 21 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. Over the past decade SCI has managed to grow dividends at an annualized rate of 16.23%. 

The company managed to grow earnings from $0.49/share in 2009 to $1.99/share by 2019. Service Corporation International is expected to earn $2.60/share in 2020. 

Right now the stock is selling for 19.20 times forward earnings and yields 1.70%.

Southside Bancshares, Inc. (SBSI) operates as the bank holding company for Southside Bank that provides a range of financial services to individuals, businesses, municipal entities, and nonprofit organizations.

The company raised its quarterly dividend by 3.23% to 32 cents/share. This marked the 26th consecutive year of annual dividend increases for this dividend champion. During the past decade, it has managed to grow dividends at an annualized rate of 12.50%. 

Between 2009 and 2019, Southside Bancshares managed to grow earnings from $2.05/share to $2.20/share. The company is expected to earn $2.23/share in 2020. 

Right now the stock is selling for 13.30 times forward earnings and yields 4.30%.

Atmos Energy Corporation (ATO) engages in the regulated natural gas distribution, and pipeline and storage businesses in the United States. It operates through Distribution, and Pipeline and Storage segments.

Atmos increased its quarterly dividend by 8.70% to 62.50 cents/share. This was a higher rate of increase than the ten year average of 4.95%/year over the past decade.  This was the 37th year of annual dividend increases for this dividend champion.

Between 2009 and 2019, Atmos managed to grow earnings from $2.07/share to $4.35/share. The company is expected to earn $5.02/share in 2020. 

Right now the stock is selling for 20.35 times forward earnings and yields 2.45%.

Lancaster Colony Corporation (LANC) manufactures and markets specialty food products for the retail and foodservice markets in the United States. The company operates in two segments, Retail and Foodservice.

The company raised its quarterly dividends by 7.15% to 75 cents/share. This marked the 58th consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to grow distributions at an annualized rate of 8.65%. 

Lancaster Colony managed to boost earnings from $3.17/share in 2009 to $4.97/share in 2019. The company is expected to generate $5.61/share in 2020. The stock is selling at 31.20 times forward earnings and yields 1.70%.

MDU Resources Group, Inc. (MDU) engages in regulated energy delivery, and construction materials and services businesses in the United States. The company's Electric segment generates, transmits, and distributes electricity for residential, commercial, industrial, and municipal customers in Montana, North Dakota, South Dakota, and Wyoming

MDU Resources hiked its quarterly dividend by 2.40% to 21.25 cents/share. This marked the 29th consecutive year of annual dividend increases for this dividend champion. During the past decade, the company has managed to boost distributions at an annuazlied rate of 2.7%. 

MDU resources has failed to grow earnings per share since 2007, when EPS was at $2.36. The company is expected to earn $1.83/share in 2020. 

Right now the stock is selling at 13.60 times forward earnings and yields 3.40%.

As usual this is just a list of companies that raised dividends last week. It is not a recommendation to buy or sell companies. I use this exercise of monitoring dividend increases as part of my monitoring process. It helps me decide which companies to put on my list for further research and which ones to discard for the time being.

Relevant Articles:

Wednesday, November 11, 2020

Warren Buffett and Charlie Munger on Investing in Tobacco Stocks

As a dividend growth investor, I have owned shares in major tobacco companies such as Altria (MO), Phillip Morris International (PM) and British American Tobacco (BTI). I like the nature of the product being sold, the pricing power, the inelastic demand for an addictive product and the fact that these companies have managed to defy expectations. Tobacco companies have managed to grow earnings, dividends and intrinsic values over time, showering their shareholders with torrents of cash in the process. 

In fact, Altria was the best performing stock in the S&P 500 between 1957 and 2003, compounding investor capital at 19.75%/year.



Tobacco companies are under fire today for some reason, perhaps ethical investing being a chief one. Another being increased regulation that could make tobacco illegal, or somehow infringe upon their strong brands. It is possible that legalization of cannabis or the introduction of alternative tobacco products could impair the model of tobacco companies. That may explain why Altria lit several billion on fire in late 2018 by acquiring a stake in JUUL. Either way, PMI seems to be well positioned of the three companies with its iQOS product.

Perhaps investors believe that management teams have not done a good job in enhancing shareholder value. I do not know why these companies are so cheap, despite the fact that they have done a good job growing earnings ( well, sans PMI but it still has at least maintained earnings). Either way, companies like Altria, PMI and British American Tobacco are sold at very low valuations today. Even if they never grew, if these companies can at least maintain cashflows to pay their dividends, an investor can easily recoup their investment within 12 - 15 years from dividends alone.

If valuations are so low, I ask myself the question as to why wouldn't someone from the private equity industry or another consumer staple company simply go ahead and acquire the types of Altria for example at less than 10 times earnings. They could easily offer $60/share, which is perhaps 13 - 14 times forward earnings, and finance the investment with cheap long-term debt. I believe that this is due to ethical concerns. I saw an interesting video from the 1997 Berkshire Hathaway Shareholder meeting, where Buffett and Munger discuss their attitude towards investing in tobacco companies. I believe this attitude is shared by many other investors. It is possibly the reason why tobacco offers such a good valuation today. I believe it is an opportunity, but my risk averse side warns me that a high yield in this environment is also indicative of a high risk. The risk is that I am buying a value trap, which cuts dividends along the way, impairing my projections. 

You can watch the video from the 1997 meeting here: https://www.youtube.com/watch?v=c2OR0nrIClo

I am attaching a transcript too: 

"WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: My name is Michael Hooper. I’m from Grand Island, Nebraska. I applaud Berkshire for starting the Class B shares.

My question deals with tobacco stocks, which have been beaten down lately. Does Berkshire own any tobacco stocks, and are some of these stocks attractive now that prices are down on some of them? And in particular, a company called UST. Thank you.

WARREN BUFFETT: Yeah. We have owned — we won’t comment on what we own now — but we have owned tobacco stocks in the past. We’ve never owned a lot of them, although we may have made a mistake by not owning a lot of them. But we’ve owned tobacco stocks in the past, and I’ve had people write me about whether we should do it or not.

We own a newspaper in Buffalo. It carries tobacco advertising. We don’t — well, actually, Charlie’s a director of a sensational warehouse chain called Costco, which used to be called PriceCostco. You know, they sell cigarettes.

So we are part of the distribution chain in — with a hundred percent-owned subsidiary in the Buffalo News. And so we have felt that if we felt they were attractive as an investment, we would invest in tobacco stocks.

We made a decision some years ago that we didn’t want to be in the manufacture of chewing tobacco. We were offered the chance to buy a company that has done sensationally well subsequently, and we sat in a hotel in Memphis in the lobby and talked about it, and finally decided we didn’t want to do it.

Can I give you some —?

CHARLIE MUNGER: But it wasn’t because we thought it wouldn’t do well. We knew it was going to do well.

WARREN BUFFETT: We knew it was going to do well.

But now, why would we take the ads for those companies, or why would we own a supermarket, for example, that sells them, or a 7-Eleven, you know, or a convenience store that sells them or something of the sort, and not want to manufacture them? I really can’t give you the answer to that precisely.

But I just know that one bothers me and the other doesn’t bother me. And I’m sure other people would draw the line in a different way.

So the fact that we’ve not been significant holders of tobacco stocks has not been because they’ve been on a boycotted list with us. It just means that overall we were uncomfortable enough about their prospects over time that we did not feel like making a big commitment in them.

Charlie?

CHARLIE MUNGER: Yeah. I think each company, each individual, has to draw its own ethical and moral lines, and personally, I like the messy complexity of having to do that. It makes life interesting.

WARREN BUFFETT: I hadn’t heard that before. (Laughter)

We’ll make him in charge of this decision.

CHARLIE MUNGER: Yeah, no, no. But I don’t think we can justify our call, particularly. We just — we have to draw the line somewhere between what we’re willing to do and what we’re not, and we draw it by our own lights.

WARREN BUFFETT: We owned a lot of bonds at one time of RJR Nabisco, for example, some years back. And should we own the bonds and not own the stocks?

Should we own, you know — should be willing to own the stock but not be willing to own the business? Those are tough calls.

Probably the biggest distributor of — the biggest seller — of cigarettes in the United States is probably Walmart, but — just because they’re the biggest seller of everything. They’re the biggest seller of Gillette products, and they’re huge.

And you know, do I find that morally reprehensible? I don’t. If I owned — we owned all of Walmart, we’d be selling cigarettes at Walmart. But other people might call it differently, and I wouldn’t disagree with them."

I believe it is fascinating to see Warren and Charlie's attitude towards investing in tobacco companies. This is as relevant today as it were relevant in 1997. That was around the time of the Master Settlement Agreement, which basically removed a lot of uncertainty from tobacco. That was a time when tobacco companies were a bargain, but were about to become a better bargain. But long-term patient shareholders ultimately made out like bandits.

The tobacco company they are referring to from Memphis, TN is probably "American Snuff Company". It was acquired by the Pritzker Family in 1986, and sold to Reynolds Tobacco in 2006 for $3.5 billion. The Pritzker's acquired the company for $400 million in 1986. (Source)

I have also learned another mention of tobacco companies from Buffett, from the book "Barbarians at the Gate". 

"When Buffett came on the line, Gutfreund put him on a speaker phone and laid out the situation in detail. What should they do?

Go for it, Buffett advised. Once one of RJR’s largest shareholders, he knew tobacco and liked it. “I’ll tell you why I like the cigarette business,” he said. “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

Would Buffett himself like to join forces with Salomon? No, the investor said, not this time. Cigarettes were a fine investment, but owning a tobacco company, with its social baggage and all that Death Merchant business, wasn’t a burden Buffett felt he was ready to bear. “I’m wealthy enough where I don’t need to own a tobacco company and deal with the consequences of public ownership,” he said."

It looks like Buffett and Munger understand that tobacco companies are a great investment that could be immensely profitable. However, they are concerned about their public image at this time. Ethics are personal, and beliefs vary from individual to individual of course.

Either way, I continue seeing tobacco companies doing what has made them successful for investors.

They raise prices, cut costs, and enjoy a sort of regulatory advantage, since it is impossible to penetrate the market without advertising. While volume growth has been negative in the developed world, rising prices have more than compensated for it each year and over time.

Relevant Articles:

What if Altria went to zero?

Analysis of Altria's Recent Deal Activity

Altria (MO) - a recession proof high yield dividend stock

Philip Morris International versus Altria

Monday, November 9, 2020

Nine Dividend Growth Stocks Rewarding Owners With A Raise

I review the list of dividend increases every week, as part of my portfolio monitoring process. I leverage several of my dividend investing resources for this effort.

I started by reviewing the list of all dividend increases for the week. I then narrowed the list down to the companies that have managed to boost dividends for at least ten years in a row. I also focused on companies that had a meaningful combination of yield and dividend growth.

The companies for this week’s review include:

AmerisourceBergen Corporation (ABC) sources and distributes pharmaceutical products in the United States and internationally.

The company raised its quarterly dividend by 4.76% to 44 cents/share. This marked the 17th year of consecutive annual dividend increases for this dividend achiever. During the past decade, the company has managed to increase dividends at an annualized rate of 20.89%.

Between 2009 and 2019, the company grew earnings from $1.66/share to $4.04/share. The company is expected to earn $8.42/share in 2021. 

The stock is selling for 12.30 times forward earnings and offers a dividend yield of 1.70%.

BOK Financial Corporation (BOKF) operates as the financial holding company for BOKF, NA that provides various financial products and services in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. It operates through three segments: Commercial Banking, Consumer Banking, and Wealth Management. 

The company raised its quarterly dividend by 2% to 52 cents/share. This marked the 16th year of consecutive annual dividend increases for this dividend achiever. During the past decade, the company has managed to increase dividends at an annualized rate of 7.80%.

Between 2009 and 2019, BOK Financial managed to grow earnings from $2.96/share to $7.03/share. The company is expected to earn $5.88/share in 2020. The stock is selling for 10.20 times forward earnings and yields 3.50%

Evergy, Inc. (EVRG), through its subsidiaries, engages in the generation, transmission, distribution, and sale of electricity in Kansas and Missouri. 

Evergy raised its quarterly dividend by 5.90% to 53.50 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, Evergy has managed to increase distributions at an annualized rate of 4.95%.

Between 2009 and 2019 Evergy managed to grow earnings from $1.58/share to $2.79/share. The company is expected to earn $3/share in 2020. 

The stock sells for 18.35 times forward earnings and yields 3.90%.

Lincoln National Corporation (LNC) through its subsidiaries, operates multiple insurance and retirement businesses in the United States. It operates through four segments: Annuities, Retirement Plan Services, Life Insurance, and Group Protection. 

The company increased its quarterly dividends by 5% to 42 cents/share. This marked the elevents consecutve annual dividend increase for this dividend achiever. During the past decade, the company has managed to raise dividends at an annualized rate of 19.95%.

Lincoln Financial has cyclical earnings per share. At the cyclical peak in 2007 it earned $5.13/share. By 2019, it earned $4.38/share. The company is expected to earn $6.80/share in 2020. 

The stock sells for 5 times forward earnings and yields 4.90%.

Rockwell Automation, Inc. (ROK) provides industrial automation and digital transformation solutions. It operates in two segments, Architecture & Software, and Control Products & Solutions. 

The company raised its quarterly dividend by 4.90% to $1.07/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. During the past decade, it managed to increase distributions at an annualized rate of 13%.

Between 2009 and 2019, the company managed to grow earnings from $1.18/share to $6.22/share. The company is expected to earn $5.44/share in 2020. 

The stock sells for 33 times forward earnings and yields 1.70%.

Mercury General Corporation (MCY),  engages in writing personal automobile insurance in the United States. 

Mercury General hiked its quarterly dividend by 0.40% to 63.25 cents/share, marking the 34th consecutive annual dividend increase for this dividend champion. The company's rate of dividend growth was 0.76%/year over the past decade.

Between 2009 and 2019, Mercury General earnings went from $7.32/share to $5.78/share. The company is expected to earn $4.50/share in 2020.  

The stock sells for 9.30 times forward earnings and yields 6.10%

Commerce Bancshares, Inc. (CBSH) operates as the bank holding company for Commerce Bank that provides retail, mortgage banking, corporate, investment, trust, and asset management products and services to individuals and businesses. It operates through three segments: Consumer, Commercial, and Wealth. 

The company declared a dividend of 27 cents/share, coupled with a 5% stock dividend. When you increase number of shares by 5%, but you keep the dividend unchanged, you are in effect increasing the dividend by 5%.Over the past decade, Commerce Bank has managed to grow distributions at an annualized rate of 6.36%

This is the 53rd year of annual dividend increases for Commerce Bancshares, which is a dividend king.

Between 2009 and 2019, earnings per share increased from $1.28 to $3.58. The company is expected to earn $2.83/share in 2020. 

The stock sells for 22 times forward earnings and yields 1.70%.

Emerson Electric Co. (EMR), a technology and engineering company, provides solutions to industrial, commercial, and consumer markets worldwide. It operates through Automation Solutions and Commercial & Residential Solutions segments. 

Emerson Electric increased its quarterly dividend by 1% to 50.50 cents/share. This marked the 64th consecutive annual dividend increase for this dividend king. During the past decade, Emerson Electric has managed to grow dividends at an annualized rate of 4.05%.

The company is expected to earn $3.46/share in 2020. Earnings per share have been largely flat between 2008 and 2019, rising from $3.06/share to $3.24/share. The stock is overvalued at 22.90 times forward earnings and yields 2.90%.

Utah Medical Products, Inc. (UTMD) manufactures and distributes medical devices for the healthcare industry in the United States, Europe, and internationally.

The company raised its quarterly dividend by 1.80% to 28.50 cents/share. This marked the 18th year of consecutive annual dividend increases. During the past decade, the company has been able to grow dividends at an annualized rate of 1.75%.

Between 2009 and 2019 the company raised its earnings from $1.72/share to $3.94/share. 

The stock is selling for 25.60 times earnings and yields 1.40%.

This is a list of companies for further review. Most seem attractive as businesses, but that doesn’t mean that they should be invested in at any price, regardless of valuation.

Relevant Articles:

Thursday, November 5, 2020

If you had to own one company for a generation..

I have often been asked to name my best idea by people who have not heard much about me apparently. Regular readers know that I am a very big fan of diversification. I like owning a lot of quality companies, purchased at attractive valuations, which I can then hold on for decades. I rarely sell. The only factors these days that would cause me to sell are a dividend cut or an acquisition in cash. I invest money to work every month, and I do not have an upper limit on the number of companies to hold.

That being said, I always strive to improve upon my process and expand my circle of competence about different companies. It is great to expand my toolkit, and checklist to incorporate different criteria to include when evaluating companies, their moats and qualitative as well as quantitative characteristics. I review different companeis from different industries, and follow different investors with different investment styles. One such investor that I have been studying is Terry Smith from British fund company Fundsmith. I will have to do a more detailed review of Terry’s investment style in the future, but I will just let you know that he is a great investor with a fantastic track record. 

His head of investment research is Julian Robins. The company holds annual meetings with shareholders, which are recorded and uploaded for everyone to see on the internet. I really enjoyed the 2018 meeting. In it, Julian Robins discussed the factors he would look for if he were to select a company that he would put all of his net worth in, and a company that should provide for several generations of his offspring. Naturally, this discussion is very helpful.That’s because it approaches investing as a way to buy into a business to hold in a family for generations, rather than a speculation that treats stocks as lottery tickets. 

You can view it starting in minute 59 of the video. But here is a rough transcript I put down for easier viewing:

“If you had to own just one company for 50 years

You have to start looking for certain characteristics

First of all you want a big market

You want something which doesn’t have a lot of regulatory or reputational risk

You wanta company which is number one in that big market

But which at the same time has not got tremendously big market share

It’s no good if it’s a big market but it’s got a 90% market share

If you had to buy a business for your family that would sustain you for the next five generations what would it be

My company is L’Oreal

So if you think of the cosmetics market I mean 

We all want to look good

Your market is basically seven and a half billion people 

It’s a two hundred and twenty billion dollar per year market

L’Oreal is the number one player, but it does 26 billion euros of sales per year, it’s got a 12% market share

It’s got a family control, which is good because it means it is not gonna do dumb things

The numbers look great, the market always grows even during the financial crisis the cosmetic market generally goes well

It’s got eight brands of over a billion in sales

It’s got 30 great brands

It’s got positions in all parts of the market

Luxury and cheap 

positions in all parts of the sort of geographies in terms of developed markets and emerging markets 

It’s extremely well run although that could change over the years”

I think that this is a fantastic mental model to have in mind. I also like the example being used. This model could be replicated and used when evaluating future investments.

That being said I wanted to mention that I disagree about concentration. I believe individual investors should be diversified, and not limit number of holdings they own. I am biased, because my best ideas were after what I believed to be my 20 best ideas. I also know enough to state that out of 100 companies I may own, I could not tell you which would be the best and which would be the worst ideas as seen from the year 2050. While it is an interesting idea to ponder about the type of business you would hold if you could own just one business, in reality we can own as many businesses as we can find. So please do not view this as an article telling you to own just one business. It is mostly a mental model for the types of factors to look for in evaluating quality businesses for a diversified portfolio. 

It does seem to be part of their Fund Smith Portfolio:

While great investors can concentrate in their 20 or 30 best ideas, I believe this to be riskier for ordinary investors who may not have the skillset to pull it off. After all, life is easier with a margin of safety. You only need to get rich once. There is no reason to take too much risk with money that is important for you, to make more money than you may need. You do not want to go back to go.

To add to the model, Terry Smith is known for his three factor approach to investing:

- Only invest in good companies

- Don’t overpay

- Do nothing

It basically means to acquire quality companies at good valuations, and then sit tight, while waiting for the power of compounding to do the heavy lifting for you.

L’Oreal was an international dividend aristocrat, but sadly it lost the noble title in 2020 after it kept dividends unchanged due to Covid-19. I think that it can easily keep raising dividends in the future, based on the growth vectors listed in the transcript above.


Source: L'Oreal Presentation

It does have a lot of tailwinds going in its direction however, so it would likely be more valuable 20 – 30 years from now. Hopefully it won’t be mismanaged badly by then. But even so, a great business can usually recover easily from a period of mismanagement. 

Now, L’Oreal is a great quality company. The problem is that it is often overvalued. The problem with quality companies is that they are often seen as overvalued. However, the market usually misprices these companies. I believe that a company with durable brands and sustinabale earnings, coming from repetitive purchases that would grow over time will most probably grow earnings over time. 

Particularly when it reinvests back into the business in projects that have high expected rates of return. 

This would result in higher earnings over time, and higher dividends for shareholders out of that excess cashflow being generated over time. All of this would make the business even more valuable over time. 

When you have branded products that the consumer wants, and which have inelastic demand, you can afford to increase prices and your business is somewhat immune from the economic cycles. Therefore, a company with a P/E of 30 that grows earnings at 6%/year for 30 years would be cheaper than a cyclical company with a P/E of 10 that may or may not grow profits over time by more than the rate of inflaiton.

I read some research recently that the market is very poor at recognizing the longevity of cash flows from successful consumer staples companies.  If properly handled, consumer brands should be able to last for generations and thus sustain their competitive advantage and the superior returns that bring over time.

Investors often underestimate the durability of supernormal returns, thus structurally undervaluing these companies.

A researcher went back to 1973, and asked themselves what would have been the highest P/E they could have paid for a quality consumer staple that year, and still earn 7% annualized return ( before dividends). They found out that they could have paid 281 times earnings for L’Oreal in 1973 or 241 times earnings for Altria, and still generated 7% annualized return (before dividends). 

These companies were not selling at such high valuations of course, and adding dividends would have further turbocharged returns. This just goes to show you that the future growth expectations may be lower than actual growth. 

That doesn’t mean to go out and buy a stock at any valuation of course, since the future is uncertain. What worked in the past may not work in the future, so a margin of safety should be required in terms of valuation and diversification. However you should never forget that valuation and growth are attached at the hip in a solid value investing framework. You should always look at P/E in conjunction with earnings stability and growth.

Relevant Articles:

Buying Quality Companies at a Reasonable Price is Very Important

Does diversification lead to lower quality of investments in a dividend portfolio?

Market Declines: An Opportunity to Acquire Quality Dividend Stocks

Diversified Dividend Portfolios – Don’t forget about quality

Monday, November 2, 2020

Busiest Week for Dividend Increases Since February

There were 62 dividend increases last week. Last week was the busiest week for dividend increases since February 2020. This was right before we went into a lockdown - perhaps two or three weeks prior to it.

Perhaps Corporate America believes that the worst is over in terms of economic activity. The pace of dividend increases shows me that management teams have a relatively optimistic view on near term business activity. I view dividend increases as an instant check on management near-term expectations. 

I noticed this fact, as part of my monitoring process of reviewing dividend increases. I check the list of dividend increases to evaluate the performance of companies I already own and to identify companies for further research.

I focus my attention on companies with an established streak of annual dividend increases, in order to identify strong businesses that generate excess cash flows that grow over time. I usually look for companies that have managed to grow dividends for at least a decade.

Next, I review the most recent dividend increase to its historical trends, in order to determine if things are improving, decelerating or keeping pace. I also like to review the pace of dividend increases relative to earnings growth, in order to determine if distributions are growing on a solid ground. I also like to review the payout ratio, in order to determine dividend safety.

Last but not least, I review valuation. Valuation is not a formula - it is a combination of P/E, earnings growth, safety of the earnings stream on a relative basis for all other available investments.

I compiled the list of dividend growth stocks, which managed to increase dividends last month and also have at least a ten year history of annualized dividend increases:


One note for me is that Black Hills Corp (BKH) has managed to boost dividends for 50 years in a row, making it one of the newest additions to the list of dividend kings.

Just wanted to mention that this list is not a recommendation for you to buy or sell. It is just a list of companies that raised dividends last month. Each company has managed to grow dividends for at least a decade.

I discussed what I look at when evaluating companies at the beginning of the article

Relevant Articles:

Eleven Companies Rewarding Shareholders With Regular Dividend Increases

Three Companies Raising Dividends to Shareholders

Eight Dividend Growth Stocks Rewarding Shareholders With a Raise

Six Companies Demonstrating A Commitment to Shareholder Returns

Thursday, October 29, 2020

How to find companies for my dividend portfolio

I am a buy and hold dividend growth investor. This means that I build my portfolio patiently. It also means that I rarely sell. I buy stocks to hold for decades, and would do so for as long as the dividend is not cut or for as long as a company is not acquired. This inactivity keeps investment fees and costs low.

It also reduces the impact of behavioral errors. I believe that time in the market beats timing the market. I try to buy companies that I would be comfortable owning even if the stock market closed for a decade. 

To paraphrase Warren Buffett “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

I have discussed how I evaluate each company in detail. But I have not discussed how I find companies to research and potentially invest in a more comprehensive way.

Today I will share with you the general process I use to find companies for investment. 

One of the goals of my newsletter is to try and share how I operate as an investor. My goal is to help you become a more rounded investor, so as you can create your own investing process that would help you to achieve your investment goals and objectives. While I would hope that you would stay and follow my journey over the years, I would be happier if you end up as an investor who can follow their own system, and be an independent thinker that would take their financial future in their own hands.

I wanted to share with you the process I follow to identify companies for further research, and potential acquisition. 

My process has evolved over time of course, but there are a few places where I look for investment ideas.

The first place is the good old list of dividend aristocrats. It is a well-known and widely distributed list of S&P 500 companies which have managed to increase dividends for at least 25 years in a row.

Membership is restrictive, but I like the quality and the fact that this list includes great businesses and it is not too exhaustive either. The list has ranged from 40 to 65 members over the past 10 – 15 years. If you managed to learn about each company, you will likely have a list of companies that make sense to you from a business perspective. The next step is either to consider acquiring the ones that are attractively valued, or to wait for the right price for the companies that seem expensive.

I generally screen the list by focusing on growth in earnings per share, dividends per share growth versus valuation, payout ratios etc. 

The second place is the list of dividend champions, contenders and challengers. It is updated monthly, and includes over 800 companies. The number of companies raising dividends for over 25 years is double the Dividend Aristocrats list, because it includes companies that are not part of the S&P 500. It doesn’t have liquidity or market capitalization requirement either.

This list also includes a list of companies that have increased dividends for over 10 years or over 5 years. It has a lot of useful data as well.

The third place I look is the monitoring process, where I review dividend increases every week. I like reviewing the press release for nuance, and try to gauge the management optimism. Sometimes, they read that we are in a situation where it is business as usual. Other times they seem too optimistic. After reading it for a few years, you may get a hang of it too.

A fourth place is through checkups of activity, including press releases, large sudden drops or increases in share price etc. While I review the list of dividend champions, dividend aristocrats and my portfolio holdings, I still learn about major moves in other businesses that I may want to study.

A fifth place is by scuttlebutt. Basically, in my daily life, I look at products, services, ideas, trends etc. You can identify investable opportunities this way. This is also an interesting way to admit that a lot of the missed opportunities I have had have been underneath my nose all those years.

If you like a certain product or service, you should always check and see if there is a company behind it. If that company is publicly traded, you may want to put it on your list for research. This idea is inspired by Peter Lynch.

Sometimes we overcomplicate life. Some of the best investment opportunities are right under our noses. I am reminded about Wal-Mart, Target, Lowe’s, Home Depot, Microsoft, Apple, Starbucks, Hormel, Altria, etc.

I recently saw a video, about a very simple investing process. The eat them, drink them, smoke them and go to the doctor portfolio. You may check it out from here - https://www.youtube.com/watch?v=U23fhx06SUQ&feature=youtu.be

Sometimes, I like a company, and decide to review some of its peers. I may end up owning stakes in all of them.

The sixth place is primary the most dangerous one. I follow a lot of dividend investors and other investors. Sometimes I see a lot of them buying a stock, perhaps because they are blindly following each other. Or perhaps because they are all seeing a good value, possibly because the stock had a catalyst that makes it a value. It is dangerous to be a lemming and blindly follow others, because you may be following them into their bad ideas, lose conviction, and ignore their best ideas. Also, you are not learning much by following others. Groupthink may influence you, which could be bad for your investment returns. 

I believe it is best to have your own process to follow, because you are not at the mercy of others for ideas. Plus, no single investors out there, even Warren Buffett is right 100% of the time. If you follow someone, make sure to follow all of their investment ideas. However, also make sure you have your own process to decide for yourself if a stock is a buy or an avoid.

For example, Buffett received a lot of negative publicity recently, after he sold his airline stocks. In my opinion, that was a bad decision in the first place. After he sold at a loss, everyone out there started saying that he has lost his touch. After Apple went up to $135/share however, everyone started signing poraises for him again. Right now, he is sitting on an unrealized gain of $76 billion, and few are saying that he has lost his touch. And overall, his gains on Apple are higher than his losses on airlines and IBM.

Today, I discussed six places I look for, in my quest for uncovering companies for further research. I believe it is important to have a good population of quality companies, before going to the next stage of screening, evaluating and ultimately buying good companies for my portfolio. 



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