I review the list of dividend increases as part of my monitoring process. I find it helpful to observe the companies I own execute on their business plans, and watch them allocate money, and gauge their business sentiment through watching their dividend actions.
The mental model I focus on looks for established companies that grow earnings, and generate more cashflows than they know what to do with. While some companies in the initial growth phases need all capital to grow the business, for most corporations in the US, there is excess cashflow left at the end of the year. There is also a limit as to how long you can profitably reinvest all cashflows too.
As a general rule, I prefer excess cashflows to be distributed to shareholders, in order to reduce the amount of wasteful acquisitions, spending on projects with low returns on investment, or just stocking up cash for no reason, which executives could waste on new headquarters, corporate jets etc.
I look for companies that grow earnings over time, which also manage to grow that excess cashflows and thus manage grow dividends for a certain number of years. Growing earnings, growing dividends and growing intrinsic values over time go hand in hand.
During the past week, there were four companies that raised dividends to shareholders. Every single one of those companies have managed to increase dividends for at least ten consecutive years. The companies include:
V.F. Corporation (VFC) engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products for men, women, and children in the Americas, Europe, and the Asia-Pacific. It operates through four segments: Outdoor, Active, and Work.
The company raised its quarterly dividend by 2.10% to 49 cents/share. This marked the 48th consecutive year of dividend increases for this dividend aristocrat. V.F. Corp has managed to grow distributions at an annualized rate of 13% over the past decade.
Earnings per share went from $1.29/share in 2010 to $1.70/share in 2019. This is down from 2018’s earnings per share of $3.15.
The company is expected to generate $1.12/share in 2021 and $2.58/share in 2022.
Due to weakness in earnings this year, the company is selling at 67.70 times forward earnings. Even if earnigns were to normalize in 2022 however, V.F. Corp still seems expensive at close to 30 times forward earnings. The stock yields 2.60%, which does not seem well covered this year. It is a little better covered based on FY 2022 earnings. At this time I view the stock as a hold, but I would not be interested to add more.
Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, products worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.
The company raised its quarterly dividend by 3% to $1.35/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, it has managed to grow distributions at an annualized rate of 21.50%.
Earnings per share increased from $5.28/share in 2010 to $14.48/share in 2019.
The company is expected to earn $9.72/share in 2020 and $11.99/share in 2021.
The stock is selling at 22.90 times forward earnings and yields 2.40%. I think it is a little pricey, and believe it may be a better value on dips.
A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products in North America, China, Europe, and India. It operates through two segments, North America and Rest of World.
The company raised its quarterly dividend by 8.30% to 26 cents/share.
This is the 27th consecutive annual dividend increase for this dividend aristocrat. During the past decade, A.O. Smith has managed to grow distributions at an annualized rate of 21.50%/year.
Earnings per share increased from 60 cents/share in 2010 to $2.22/share in 2019.
The company is expected to generate $1.87/share in 2020 and $2.29/share in 2021.
A.O. Smith is a little pricey at 29.60 times forward earnings. The stock yields 1.90%. It may be a better value on dips, provided that its short-term issues are finally resolved. The company is unlikely to exceed 2018’s earnings per share of $2.58 soon. That may be an opportunity if it does return to the path of profitable growth. It may be too expensive if earnings per share flatline.
Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.
The company raised its quarterly dividend by 10.40% to 53 cents/share. This marked the 15th year of consecutive annual dividend increases for this dividend achiever. During the past decade, this company has managed to grow distributions at an annualized rate of 14.60%.
Earnings per share increased from $1.83/share in 2011 to $4.49/share in 2020.
The company is expected to generate $6.25/share in 2021 and $6.04/share in 2022.
Williams-Sonoma is priced fairly at 16.80 times forward earnings and yields 2%.
Relevant Articles:
- Dividend Growth Investing Principles
