Thursday, April 30, 2020

Royal Dutch Shell Cuts Dividends For The First Time Since World War II

I woke up to the news that Royal Dutch Shell (RDS.A) (RDS.B) has cut dividends for the first time since World War 2. The company slashed its quarterly dividend on its shares traded on NYSE from 94 cents/share to 32 cents/share. The turmoil in energy markets, coupled with a glut of oil and a shortage of storage amidst an unprecedented collapse in demand are a sure formula for dividend cuts.

This was an interesting decision, since BP (BP), Exxon Mobil (XOM) and Chevron (CVX) kept dividends unchanged in their most recent press releases. Actually, Chevron raised dividends three months ago, but that was before the recent turmoil in the energy markets.

The last time the group didn’t pay cash dividends was in World War Two, and the last time it cut them - as opposed to a temporary suspension - was during the Great Depression, according to Bernstein.

The last time I bought shares of Royal Dutch Shell was about a decade ago, when it had a track record of annual dividend increases. I also reinvested money from the sale of BP shares into Royal Dutch Shell shares. The company froze dividends in 2010, and by 2011 had lost its track record for consecutive annual dividend increases. 

Since I did not reinvest dividends automatically, and since I stop adding to a position after dividends are kept unchanged, I have not added to the stock in quite some time. As a result, it is small position for me, given the fact that I add to my portfolios every single month, and have done that for almost a decade since last adding to Royal Dutch Shell. This process is outlined in this article on risk management procedures that I follow.

Royal Dutch Shell did increase dividends in 2012, 2013 and 2014, but then kept the dividend unchanged or the next six years.

As part of my risk management process, I sell after a dividend cut. This situation is no different.

The most fascinating fact is that over the past decade, Royal Dutch Shell has distributed $36.32/share in dividends to shareholders. If you bought the stock at $50/share a decade, you recovered over 70% of your initial investment from dividends alone. If you bought at $60 a decade ago, you recovered 60% of your initial investment from dividends alone. Of course, if you held on to it for longer, you would have recovered your whole original purchase price from dividends alone. This is why I believe that dividends represent both a return on investment and a return of investment.

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Crown Castle (CCI) - A Dependable REIT for Income

Crown Castle (CCI) owns, operates and leases more than 40,000 cell towers and approximately 80,000 route miles of fiber supporting small cells and fiber solutions across every major U.S. market. This nationwide portfolio of communications infrastructure connects cities and communities to essential data, technology and wireless service bringing information, ideas and innovations to the people and businesses that need them.

Crown Castle only increased dividends for 5 years in a row. Crown Castle initiated its first dividend in 2014, after converting to a Real Estate Investment Trust.

Crown Castle has managed to grow it consistently since then. The first dividend was 35 cents/share, but was increased to 82 cents/share by the end of 2014. This set the precedent for dividend increases to occur in the fourth quarter of each year. The last dividend increase occurred in October 2019, when the quarterly dividend was increased by 6.70% to $1.20/share.

Between 2014 and 2019, the REIT managed to grow adjusted funds from operations (AFFO) from $3.97/share to $5.69/share. The REIT is expecting to generate $6.12/share in 2020.

I first learned about Crown, American Towers (AMT) and SBA Communications (SBAC) through my regular business interactions in the telecom industry several years ago. I like the business model and fundamentals behind the industry. I like Crown for its dividend, which I believe is well covered and has the ability to grow over time.

Crown offers cell towers under long-term agreements with telecom carriers. A typical tower leases has an initial term of 20 years, which then gets renewed every five years. Those leases cannot be broken easily (perhaps a bankruptcy of a carrier is the only way out from the contractual clauses). There are contractual escalation amounts each year, which ensures growth in profits over time.  There is a considerable amount of red tape in establishing a cell site location, and navigating local laws and regulations. Needless to say, it is not easy to set up towers just like that. It would be difficult for a competitor to set up a tower next door.

Companies earn their money by signing up several customers to its towers. The return on investment increases from low single digit percentages for one customer to a double-digit percentage with three or more clients. Therefore, having multiple carriers is good for Crown Castle.

Growth comes from rent escalations, offset by non-renewals. Growth also comes from acquisitions as well.

The risk comes from consolidations with major clients – when the number of potential clients decreases over time, the potential profits are limited. The merger between Sprint and T-Mobile could impact cell tower companies like Crown Castle. However, while Sprint and T-Mobile account for a total of 38% of CCI’s revenues, not all is lost since there is overlap in just 5% of CCI’s towers. In other words, the company would most likely lose a little over 5% of revenues if Sprint & T-Mobile were to merge and shut down overlapping sites right away. In reality, sites can be decommissioned but they would still have to pay until the end of the contractual term. The weighted average remaining lease term on that 5% is five to seven years.

The FFO payout has remained around 80% since 2015. The company converted to a REIT in 2014, after which it immediately ramped up its dividend payout. I find it to be sustainable, and well covered from the dependable rent streams under long-term contracts with escalation clauses.

The REIT is overvalued today. I want to buy Crown Castle sells for 20 times forward FFO and a dividend yield of 4% or better. This translates into an entry price in the $120 - $125/share range, or lower.

Relevant Articles:

A Change of heart on REITs and MLPs
Four High Yield REITs for current income

Sunday, April 26, 2020

Seven Dividend Growth Stocks In The News

As part of my monitoring process, I review the list of dividend increases. I usually focus on the dividend increases for companies with a dividend streak longer than ten years in a row.

There were several notable dividend increases over the past week:

The Southern Company (SO), engages in the generation, transmission, and distribution of electricity. It operates in four segments: Gas Distribution Operations, Gas Pipeline Investments, Wholesale Gas Services, and Gas Marketing Services.

Southern Company raised its quarterly dividend by 3.20% to 64 cents/share. This marks the 19th consecutive year that that Southern has raised the dividend on its common stock.

During the past decade this dividend achiever managed to increase dividends at an annualized rate of 3.60%.
Southern Company managed to grow earnings from $2.36/share in 2010 to $4.50/share in 2019.
The company is expected to earn $3.15/share.

The stock yields 4.40% and sells at 18.30 times forward earnings.

The Travelers Companies, Inc. (TRV) provides a range of commercial and personal property, and casualty insurance products and services to businesses, government units, associations, and individuals in the United states and internationally. The company operates through three segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance.

Traveler's hiked its quarterly dividends by 4% to 85 cents/share. This marked the 16th consecutive year of annual dividend increases for this dividend achiever

During the past decade the company managed to increase dividends at an annualized rate of 10.10%.
Travelers managed to grow earnings from $6.62/share in 2010 to $9.92/share in 2019. The company is expected to earn $9.33/share.

The stock yields 3.40% and sells at 10.80 times forward earnings. Check my analysis of Travelers Companies for more information about the company.

UGI Corporation (UGI) distributes, stores, transports, and markets energy products and related services in the United States and internationally. The company operates through four segments: AmeriGas Propane, UGI International, Midstream & Marketing, and UGI Utilities.

UGI Corporation hiked quarterly dividends by 1.50% to 33 cents/share. This marked the 33rd consecutive year of annual dividend increases for this dividend champion.

During the past decade the company managed to increase dividends at an annualized rate of 8.10%.
UGI Corporation has managed to grow earnings from $1.57/share in 2010 to an adjusted $2.28/share in 2019.

The company is expected to earn $2.58/share.

The stock yields 4.70% and sells at 10.95 times forward earnings.

People's United Financial, Inc. (PBCT) operates as the bank holding company for People's United Bank, National Association that provides commercial banking, retail banking, and wealth management services to individual, corporate, and municipal customers. The company operates in two segments, Commercial Banking and Retail Banking.

The bank hiked its quarterly dividend by 1.40% to 18 cents/share. This was the 27th consecutive annual dividend increase for this dividend aristocrat. During the past decade, the company has managed to increase dividends at an annualized rate of 1.50%/year.

The company managed to grow earnings from 30 cents/share in 2009 to $1.27/share in 2019. However, the low earnings per share in 2009 were as a result of an earnings recession that had lasted since EPS hit a high of 81 cents/share in 1999. They didn't exceed those earnings until 2014.

The company is expected to earn $1.01/share in 2020, but as with all other estimates for this year, take them with a huge grain of salt.

The stock looks attractively valued at 11.80 times forward earnings and the dividend yield looks high at 6.05%.

There was another company that announced its expectations to raise dividends in September. The company is Carlisle Companies (CSL). They did not discuss the amount of the dividend after the hike, but it was a breath of fresh air amidst a sea of turmoil. During the past decade the company managed to increase dividends at an annualized rate of 11.10%. Carlisle still has pretty ambitious goals for tis 2025 Vision – it plans to earn $15/share in 5 years. I wish them success, but they have some tough economic pressures to overcome. For reference, the company earned $8.20/share in 2019 and analysts are now expecting earnings of $6.14/share.

There was also one notable dividend from the list of dividend champions.

Meredith (MDP) which was a dividend champion, suspended dividends last week. This ended a 27 year streak of annual dividend increases. The ten year dividend growth was 9.80%/year annualized.
Just 2 months ago they raised dividends 3.5% to 59.50 cents/share.

CEO's statement from Feb 3rd: "One of the hallmarks of Meredith's business is the very strog and durable cash flow that our portfolio of top media brands generates. We are proud to continue delivering on our goal of consistent annual dividend growth as part of our strategy"

During the last recession in 2008/9, Gannett cut dividends. Newspaper publishing used to be recession resistant, until the internet ate its lunch in the 2000s. I didn’t own the stock, but if I did, I would have sold it.

Anyways, it looks like analysts are expecting that Meredith would earn $5.24/share, which makes it seem like the stock is selling at roughly 2 times earnings. Meredith Corp grew earnings from $2.28/share in 2010 to $4.16/share in 2017. In 2018, earnings fell due to one-time events to $1.47/share. In 2019 it reported a loss of 71 cents/share due to one-time events. I looked into the stock in 2018 and 2019, but for some lucky reason never bought it. It was probably because there were too many one-time items to keep track of, and the fact that traditional print media is in decline. I am skeptical that this company will earn $5.24/share in an environment where companies are slashing advertising budgets.

I also saw a very confusing dividend announcement from 1st Source Financial (SRCE). (Source) I am keeping it in a category of its own. Perhaps I should call it a dividend cut increase? Or a dividend increase cut?

They declared a dividend of 28 cents/share, which is 3.45% lower from the previous two quarterly dividend payments of 29 cents/share. They had last raised dividends from 27 to 29 cents/share in October 2019.

The dividend is 3.70% higher from the dividend paid during the same time last year however.
They sent three dividend payments of 27 cents/share and one dividend payments of 29 cents/share in 2019 for a total of $1.10/share.

They paid 29 cents/share in 2020. If they pay three dividends at 28 cents/share, it comes out to a total of $1.13/share for 2020.

The press release reads like they increased dividends, when in fact they cut the dividend. If they maintain it at 28 cents/share however, the company will be able to still keep streak alive. I don’t own the stock, but I never the less find this very confusing.

It does seem like they have managed to grow earnings from $1.10/share in 2010 to $3.57/share in 2019. During the Global Financial Crisis, earnings nosedived from $1.56/share in 2006 to 72 cents/share in 2009.

I also expect to hear from the following companies next week:

Ameriprise (AMP)
Apple (AAPL)
Exxon-Mobil (XOM) - I don't think they can afford their dividend, but they will most likely skip a raise, and keep it unchanged
Simon Property Group (SPG) – I would not be surprised if they cut dividends.

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Dividend Momentum from Five Dividend Growth Stocks
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Lindsay Corporation Hikes Dividends
14 Dividend Growth Stocks I Bought Last Month

Wednesday, April 22, 2020

Target and Illinois Tool Works Are Not Dividend Kings (yet)

I came up with the term Dividend King in 2010. I used the term dividend king to describe a company, which has increased dividends for 50 years in a row.

As part of my annual reviews, I updated the list of dividend kings annually. It is a lot of fun to check corporate histories and update the list. There were 28 dividend kings in 2020.

However, it looks like other websites and articles show versions of the dividend kings list with more companies. Many of these articles show a larger number of dividend kings. Notably, they include two companies as dividend kings, which are not dividend kings yet.

This bothered me, because I thought I had missed these two companies initially. I tried to determine how I missed them. So I dug a little deeper than usual. 

The companies included incorrectly in the dividend kings list by other websites include Target and Illinois Tool Works. It is relatively easy to determine that Target has increased dividends for less than 50 years in a row by going to its corporate website, and reviewing the dividend history going back to 1967.

Target kept dividends unchanged in 1970 and 1971. Target didn’t start growing dividends until 1972. As of the time of this writing in 2020, Target would have a 49-year streak of consecutive annual dividend increases. Target would be eligible to become a dividend king in 2021. 

For Illinois Tool Works, the research goes a little further. Unfortunately, the company does not list its dividend history going as far back as the 1960s like Target does. We only see data going back to 1990, and we have to manually adjust it for the stock splits during that era too. The dividend history on the ITW website is lacking historical data. Therefore, we would have to rely on other information, in order to check its track record of annual dividend increases.

The company does list in its 2019 annual report that ITW’s annual dividend payment has increased for more than 56 consecutive years, except during a period of government controls in 1971. Source: 2019 ITW Annual Report 

This sentence has confused a lot of folks, because they take the company’s word that it is a dividend king, and has increased dividends for 56 years in a row. That is impossible, because the company also admits that it didn’t increase dividends in 1971 “due to government controls”. Since we are in 2020, that would mean that the company has not increased dividends for more than 49 years in a row, assuming it raised dividends without interruption since 1972. Perhaps Illinois Tool Works could be a dividend king in 2021, assuming it doesn’t blame any further government interruption for its lack of ability to build a record of annual dividend increases to qualify as a dividend king.

I found their annual report statement to be odd due to the above. I also found the reference to government controls to be odd, after reviewing the text of the order ( Source: Internal Revenue Bulletin found and shared by

Per the text, it looks like companies were unable to grow dividends by more than 4% from the highest dividend paid in 1969, or 1970 or 1971. This was all voluntary of course, but we know from evaluating the history of dividend kings that there were at least 28 companies that raised dividends even during those tumultuous “government controls”. Plus, we should also include the companies like Winn Dixie, AON, Ohio Casualty and the others that used to be part of the list ofdividend kings, but fell off for one reason or another.

I went ahead and dug further to my old stocks manuals. I found out the 2005 Moody’s Manual, which does show that Illinois Tool Works kept dividends unchanged in 1970 and 1972. However, it does show that the company managed to grow the annual dividend beginning in 1972. The data since 2005 is widely available, and it could easily be confirmed that the company has raised dividends since 2005 every single year.

So the verdict is final - Target and Illinois Tool Works are not dividend kings yet. They are still great companies that may be good to consider at the right price.

As an investor, I believe it is important to do your own research. You may have to dig in, and look for information from the original source, rather than rely exclusively on third-parties. This is a good skill that would help develop your independent thinking, and potentially set you apart from the crowd. It is good to have the attitude to trust, but verify as well.

An equally important, if not more important skill is being able to communicate with smart investors, who you can learn from and hopefully reciprocate back. 

In my case, I have managed to accumulate by accident a readership of smart readers, who tend to provide very good feedback, and ask great questions. I get to learn from them, and they hopefully from me. I find that by interacting with other investors, you can learn more together, than on your own. 

Relevant Articles:

- Dividend Kings ListEvolution of the dividend kings list over the yearsIllinois Tool Works (ITW) Dividend Stock AnalysisTarget: An Attractively Valued Dividend Champion on Sale

Monday, April 20, 2020

Costco Hikes Dividends by 7.70%

The past week was an interesting one. There were three major companies with long streaks of annual dividend increases that also managed to hike dividends. I discussed two already - Procter & Gamble (PG) and Johnson & Johnson (JNJ). One company that I own, Sonoco (SON), actually kept dividends unchanged. It would be interesting how the other companies listed here raise dividends this month.

The third dividend increase over the past week is Costco (COST). Costco Wholesale Corporation, operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. You may have seen its stores mentioned in news stories, where long-lines of shoppers are waiting to get in the store. You may have also seen Costco material on empty shelves that used to have toilet paper before.

That company managed to increase its quarterly dividend by 7.70% to 70 cents/share on April 15th. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 13.70%.

Costco has paid special dividends on three separate occasions over the past decade. The company paid $7/share in 2012, when taxes on dividends were supposed to increase ( they didn't). Costco also distributed $5/share in 2015. The last special dividend occurred in 2017, and it was for $7/share. 

Costco is a great company that cares about its employees, customers and shareholders, and has created a unique business model that benefits all stakeholders. The ability to distribute special dividends shows this to me. The company is a rarity today, since it has largely kept the number of shares outstanding stagnant. It favors special dividends to share buybacks, so it is a company after my own heart.

The dividend growth was supported by strong earnings growth. Earnings per share increased from $2.47/share in 2009 to $8.26/share in 2019. Prior to the financial crisis, the peak earnings for Costco were in 2008 at $2.98/share. This makes the decrease to $2.47/share not that bad. Otherwise, earnings per share have been trending upwards. The company is expected to generate $8.75/share in 2020. While earnings projections for this year are going to pose a challenge, I think that Costco may be one of the few companies today, which will likely grow earnings per share in 2020.

The company tends to offer a large quantity of limited variety products at competitive prices. Costco buys directly from vendors in bulk. It also has a quick inventory turnover. This results in generating cash from a sale before having to pay the supplier invoices. Shoppers are loyal to Costco, and employees love working there. Employees are paid very competitively, which is why they stick around, reducing costly turnover. Most of the profits are coming from recurring membership fees, as Costco largely sells its merchandise at a price to cover its expenses.

Charlie Munger, the investing partner of Warren Buffett is a director at Costco since 1997. He has seen the inner workings of the retail giant closely for over two decades. This statement of his is insightful about the inner workings of Costco:

"It has a frantic desire to serve customers a little better every year. When other companies find ways to save money, they turn it into profit. Sinegal passes it on to customers. It's almost a religious duty. He's sacrificing short-term profits for long-term success."

Costco has also maintained a relatively stable dividend payout ratio. It has largely remained between 25% in 2013 to a high of 32% in 2016. This is a fairly tight range, and shows that dividend growth was entirely driven by growth in earnings per share.

I have liked Costco's business model, and have also been a member for several years. I believe that this is a business built to last, which will be successful in the long-term. However, the valuation has always stopped me from initiating a position in the stock, which seems like a mistake in hindsight.

High Price
 $ 62.12
Low Price
 $  93.51
P/E High
P/E Low

The stock has not sold at less than 20 times earnings since 2011 - 2012. This is fascinating.

Currently, Costco is selling for 36.40 times forward earnings and pays a dividend yield of 0.90%. While it has a high valuation and a low yield, we can expect a higher dividend growth. At the right balance of yield and growth may come the right opportunity for the enterprising dividend investor.

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