In many articles on dividend investing, I have typically focused on objective factors that I use to screen for dividend stocks. I typically look for a company which has managed to boost dividends for at least ten consecutive years that trades at a price to earnings multiple below 20 and yields at least 2.50%. I also like to see a sustainable dividend payout ratio. I have come up with this set of entry criteria, after evaluating hundreds of dividend stocks.
However, once this screen spits out a list of companies for further research, I spend hours looking at each individual candidate. I look at trends in earnings, returns on equity, revenues, valuation trends and dividend growth from as far back as the beginning of time. I also try to evaluate whether the company has what it takes to keep earning more for the foreseeable future, and maintain its policy of regularly boosting dividends. The more I research dividend stocks, the more subjective the process begins to look like. For example, my guess as to whether Coca-Cola (KO) will be able to sell more product at higher prices and generate higher revenues and profits between 2013 - 2020 is as good as yours. At the same time, while Intel (INTC) is undervalued right now, and has an above average yield and a sustainable dividend payout ratio, I am still unsure about initiating a position in the company. My guess is that future dividend growth might be limited by the volatility in earnings as the company is struggling to gain market share in the mobile semiconductors market.
At the end of the day, I realize that a large portion of investments I make are based on my personal opinions and biases. These come from years of experience investing, as well as working in different fields such as technology, energy, education, professional services etc. This is what makes investing such a unique and challenging field – at the end of the day there are two people with completely opposite views, who both think they are geniuses, but only one of them is going to make money on the transaction. The point which I am trying to make is that just like any other skill, investing is best learned through practice and not by simply reading about it. After all, I would much rather go to a doctor who has several years of practice than visit a doctor who just graduated from medical school.
In addition, through experience I have been able to learn more about companies business models, gain familiarity with their products, and make an educated guess about their future. For example, I have been able to identify several companies which were outside of my entry criteria and invest in them despite the clear violation with my rules. A very helpful tool I use is the list of dividend increases every week. It helps me identify companies that are exhibiting strong momentum in dividends, fueled by a growth in earnings. That is how I have been able to identify companies like Yum! Brands (YUM), Visa (V), Phillip Morris International (PM), Family Dollar (FDO) and Kinder Morgan Inc (KMI). While these companies either had low current yields or short streaks of dividend increases, the common factor behind each one of them was an attractive valuation, as well as the potential for strong earnings and distributions growth. I liked the prospects for each company after analyzing it, and was able to identify the drivers behind future growth through my analysis.
For example, for Phillip Morris International (PM), I liked the fact that the company had exposure to the growing emerging markets. I also liked the fact that its business was not exposed to the litigation risk in the US. In addition, I liked the fact that company was gaining market share through innovation , strategic acquisitions, and had diversified operations worldwide. Check my analysis of PMI.
With Yum! Brands (YUM) I liked the fact that the company was beating McDonald’s (MCD) in international expansion particularly in China. The company has had some issues in China recently, but I believe those to be temporary.
With Visa (V) I liked the fact that the company is part of a global duopoly with Mastercard (MA) in the global credit card market. In the future, the proportion of cashless payments is going to increase. While the market for credit cards is developed in the US, in emerging markets there is the opportunity for hundreds of million people who will sign up for the first card in their lives over the next decade. In addition to that, Visa was cheaper than Mastercard.
With Kinder Morgan (KMI), I liked the fact that it owned general partner interest in two growing master limited partnerships. This meant that the company was poised to capture much higher distributions growth than the underlying assets, because of valuable incentive distribution rights. I also like the fact that the company's CEO has almost all of his net worth in Kinder Morgan, which aligns his interests with those of other shareholders.
I am not saying that investors should blindly purchase any stock that they think would deliver strong results in the future. What I am trying to depict in this article is the fact that investors need to have some method of identifying strong candidates for further research. However, they also need to be flexible, and identify opportunities which their strategy might not catch. In addition, I do not believe that investing is a black and white process, which is why experience is the best strategy for the enterprising dividend investor for the long term.
Full Disclosure: Long PM, V, YUM, KO, FDO, KMI
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This article was featured in the Carnival of Wealth, Perseid Meteor Shower Edition
Wednesday, August 7, 2013
Monday, August 5, 2013
Should I buy dividend stocks now, or accumulate cash waiting for lower prices?
Prices of stocks have increased a lot in 2013. As a result, many dividend investors are shunning purchases, citing high stock prices. This means that they are not reinvesting dividends, and keeping any fresh portfolio contributions in cash. The issue with this strategy is mostly psychological.
These investors are hoping for a correction, that would make investments affordable again. They believe that they are better off waiting for better prices, rather than buy shares at or above the maximum prices they are willing to buy at.
First, an investor can easily afford to wait for attractive valuations. However, it would be difficult to hold on to your cash when it earns practically nothing, but the positions you had set your sights to balloon in value, increase distributions and enjoy rising profits. From a psychological point, you might admit defeat at some point, which unfortunately could be too late.
In general, individual investors are really bad at timing market moves. As a group, they tend to sell near bottoms, and finally give up and buy at the top. This is why most individual investors are better off simply buying and holding stocks, and not making many investment decisions.
Second, because I doubt I am good at market timing, I simply try to allocate my cash at the best valued companies at the moment. I find these best companies by looking at dividend streaks, historical earnings and dividend growth, competitive advantages and existing portfolio positions. Once I have cash on hand, I try to purchase best values available, by taking into account valuation, prospects, and portfolio weights. I therefore try to buy shares every month or so. I do search for values, and although could sacrifice on a dividend streak or minimum yield, I would never sacrifice on quality and valuation. As long as I can find bargains, I would keep doing so.
For example, during the late 1990s, many quality dividend growth stocks such as Coca-Cola (KO), Wal-Mart Stores (WMT) and Johnson & Johnson (JNJ), became grossly overvalued. However, astute dividend investors could have found attractive values in REITs, financials and energy for example. In addition, there were pockets of opportunity from time to time in sectors that temporarily went out of favor such as tobacco for example.
Third, I try to allocate money whenever I get them, because I do not want to miss out on the power of compounding. In theory, I could wait until the perfect price. In reality, I could end up missing out on the perfect price for a long period of time. Therefore, my money would not earn anything for me. For example, assume that my entry criteria requires to invest in a company yielding 3% in real terms. However, I could only find companies yielding 2%. What if I decided to put my money to work at 2%, but I could not find any 3% yielders for five years? It would take ten more years for an investment at 3%, to reach out the same amount of net worth as the 2% yielding one.
In the present market, I find some great companies at low valuations, which unfortunately have imperfections. These imperfections are mostly low streak of dividend increases and low yields. I would hate to start breaking my rules on a more consistent basis however. This might be risky as I might end up overpaying in hindsight or buy something I should not have touched in the first place. I could overpay in hindsight if I purchase a cyclical with a low P/E, whose earnings decrease precipitously and then stay there. This could be the cause with many commodity companies. The list of companies that currently fit my entry criteria is dwindling as we speak, but unfortunately many of these are companies I already have a very high concentration into.
At this time, one of the cheapest sectors is oil and gas services. The three energy companies to consider today include:
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has managed to increase dividends for 13 years in a row. Over the past decade, it has managed to boost distributions by 15.10%/year. Currently, the stock trades at 10.90 times earnings, and yields 4.20%. Check my analysis of COP.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has managed to increase dividends for 26 years in a row. Over the past decade, it has managed to boost distributions by 9.60%/year. Currently, the stock trades at 9.40 times earnings, and yields 3.10%. Check my analysis of Chevron.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company has managed to increase dividends for 31 years in a row. Over the past decade, it has managed to boost distributions by 9%/year. Currently, the stock trades at 9.40 times earnings, and yields 2.70%. Check my analysis of Exxon.
I would not advise putting more than 15-20% of one’s portfolio in a given sector however, in order to reduce risk. If oil prices fall back to the levels we saw during the financial crisis, and stay there for a few years, oil companies might be unable to continue with their generous share repurchases and dividend increases. This doesn't mean this would happen, but the intelligent dividend investor needs to think about probabilities, and build a portfolio that would not permanently lose value and income should a string of unfortunate activities materialize.
In addition, I have gotten a little more creative with companies I like, that are slightly overvalued. For example, I like shares of Coca-Cola, which are trading at a forward 2013 P/E of 19.15 and forward P/E of 2014 of 17.70.
Because I find the stock a little rich to my taste right now, I sold one January 2014 put, with a strike of 40, at around $1.85/contract. If the stock price trades below $40/share at the time of expiration, I would buy the shares at the strike price. However, my cost would be essentially $38.15. This equates to a P/E ratio of 18.20.
Furthermore, I also sold a January 2015 put with a strike of $40 at $4.30/contract. If exercised, this will translate into a cost basis of $35.70/share or a P/E of 15.70.
I like the long-term economics of Coca-Cola, which should benefit from rising demand in emerging markets and integration of North American bottling operations. The company has strong brand name, which provides pricing power and solid profitability. Check my analysis of Coca-Cola.
Full Disclosure: Long WMT, JNJ, KO, CVX, COP,
Relevant Articles:
- Check Out the complete Archive of Articles
- Looking for dividend bargains in an overheated market
- Buy and hold dividend investing is not dead
- When to break your rules
- Dividend Growth Investing is a Perfect Strategy for Young Investors
These investors are hoping for a correction, that would make investments affordable again. They believe that they are better off waiting for better prices, rather than buy shares at or above the maximum prices they are willing to buy at.
First, an investor can easily afford to wait for attractive valuations. However, it would be difficult to hold on to your cash when it earns practically nothing, but the positions you had set your sights to balloon in value, increase distributions and enjoy rising profits. From a psychological point, you might admit defeat at some point, which unfortunately could be too late.
In general, individual investors are really bad at timing market moves. As a group, they tend to sell near bottoms, and finally give up and buy at the top. This is why most individual investors are better off simply buying and holding stocks, and not making many investment decisions.
Second, because I doubt I am good at market timing, I simply try to allocate my cash at the best valued companies at the moment. I find these best companies by looking at dividend streaks, historical earnings and dividend growth, competitive advantages and existing portfolio positions. Once I have cash on hand, I try to purchase best values available, by taking into account valuation, prospects, and portfolio weights. I therefore try to buy shares every month or so. I do search for values, and although could sacrifice on a dividend streak or minimum yield, I would never sacrifice on quality and valuation. As long as I can find bargains, I would keep doing so.
For example, during the late 1990s, many quality dividend growth stocks such as Coca-Cola (KO), Wal-Mart Stores (WMT) and Johnson & Johnson (JNJ), became grossly overvalued. However, astute dividend investors could have found attractive values in REITs, financials and energy for example. In addition, there were pockets of opportunity from time to time in sectors that temporarily went out of favor such as tobacco for example.
Third, I try to allocate money whenever I get them, because I do not want to miss out on the power of compounding. In theory, I could wait until the perfect price. In reality, I could end up missing out on the perfect price for a long period of time. Therefore, my money would not earn anything for me. For example, assume that my entry criteria requires to invest in a company yielding 3% in real terms. However, I could only find companies yielding 2%. What if I decided to put my money to work at 2%, but I could not find any 3% yielders for five years? It would take ten more years for an investment at 3%, to reach out the same amount of net worth as the 2% yielding one.
However, if you had a high allocation to cash in 2007 - 2008, you might have been able to deploy it very well at attractive valuations. Many otherwise quality companies were selling at ridiculously low valuations during this tumultuous time period. The risk of having too much cash however is that it might have been deployed too quickly, at the beginning of the crisis, rather than slowly.
In the present market, I find some great companies at low valuations, which unfortunately have imperfections. These imperfections are mostly low streak of dividend increases and low yields. I would hate to start breaking my rules on a more consistent basis however. This might be risky as I might end up overpaying in hindsight or buy something I should not have touched in the first place. I could overpay in hindsight if I purchase a cyclical with a low P/E, whose earnings decrease precipitously and then stay there. This could be the cause with many commodity companies. The list of companies that currently fit my entry criteria is dwindling as we speak, but unfortunately many of these are companies I already have a very high concentration into.
At this time, one of the cheapest sectors is oil and gas services. The three energy companies to consider today include:
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has managed to increase dividends for 13 years in a row. Over the past decade, it has managed to boost distributions by 15.10%/year. Currently, the stock trades at 10.90 times earnings, and yields 4.20%. Check my analysis of COP.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has managed to increase dividends for 26 years in a row. Over the past decade, it has managed to boost distributions by 9.60%/year. Currently, the stock trades at 9.40 times earnings, and yields 3.10%. Check my analysis of Chevron.
Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company has managed to increase dividends for 31 years in a row. Over the past decade, it has managed to boost distributions by 9%/year. Currently, the stock trades at 9.40 times earnings, and yields 2.70%. Check my analysis of Exxon.
I would not advise putting more than 15-20% of one’s portfolio in a given sector however, in order to reduce risk. If oil prices fall back to the levels we saw during the financial crisis, and stay there for a few years, oil companies might be unable to continue with their generous share repurchases and dividend increases. This doesn't mean this would happen, but the intelligent dividend investor needs to think about probabilities, and build a portfolio that would not permanently lose value and income should a string of unfortunate activities materialize.
In addition, I have gotten a little more creative with companies I like, that are slightly overvalued. For example, I like shares of Coca-Cola, which are trading at a forward 2013 P/E of 19.15 and forward P/E of 2014 of 17.70.
Because I find the stock a little rich to my taste right now, I sold one January 2014 put, with a strike of 40, at around $1.85/contract. If the stock price trades below $40/share at the time of expiration, I would buy the shares at the strike price. However, my cost would be essentially $38.15. This equates to a P/E ratio of 18.20.
Furthermore, I also sold a January 2015 put with a strike of $40 at $4.30/contract. If exercised, this will translate into a cost basis of $35.70/share or a P/E of 15.70.
I like the long-term economics of Coca-Cola, which should benefit from rising demand in emerging markets and integration of North American bottling operations. The company has strong brand name, which provides pricing power and solid profitability. Check my analysis of Coca-Cola.
Full Disclosure: Long WMT, JNJ, KO, CVX, COP,
Relevant Articles:
- Check Out the complete Archive of Articles
- Looking for dividend bargains in an overheated market
- Buy and hold dividend investing is not dead
- When to break your rules
- Dividend Growth Investing is a Perfect Strategy for Young Investors
Friday, August 2, 2013
Dr. Pepper Snapple Group (DPS): A Cheap Stock with Dividend Growth Potential
Dr Pepper Snapple Group (DPS) was spun off from Cadbury Schweppes in 2008. It initiated a dividend in 2009, and has managed to consistently raise it, while repurchasing stock.
Analyst expectations are for the company to earn $3.08/share in 2013 and $3.29/share by 2014. I initiated a position in the stock in the prior week,
The company operates under three segments:
Packaged Beverages
This segment is responsible for primarily manufacturing and distribution of packaged beverages and other products, including DPS brands, third party owned brands and certain private label beverages, in the U.S. and Canada. This segment accounts for approximately 73% of sales, but 40% of operating profits.
Latin America Beverages
The Latin America Beverages segment reflects sales in the Mexico and Caribbean markets from the manufacture and distribution of concentrates, syrup and finished beverage. This segment accounts for approximately 7% of sales, but 4% of operating profits.
Beverage Concentrated
This segment is responsible for manufacturing and selling beverage concentrates to customers in US and Canada. Most of conentrates are produced in St Louis, Missouri, which is a risk in and of itself, in case of a natural disaster. This segment accounts for approximately 20% of sales, but 57% of operating profits.
One of the warning signs that I identified from reading the annual report was that 67% of Dr Pepper volumes are distributed through the Coca-Cola affiliated and PepsiCo affiliated bottler systems. I also found out that PepsiCo (PEP) and Coca-Cola (KO) are the two largest customers of the Beverage Concentrates segment, and constituted approximately 30% and 18%, respectively, of the segment's net sales during 2012. The Beverage Concentrates segment's operations generate a significant portion of the company’s overall segment operating profit. On the other hand, using the distribution networks of Coca-Cola & PepsiCo bottling groups could be an advantage, because it could require less investment from Dr. Pepper Snapple Group's part to build out those relationships. This could mean more money for shareholders either through higher dividends or share repurchases.
It is interesting that no one talks about this arrangement, as I could see a lot of issues arising from it. First of all, it looks like an arrangement where the wolf is put in charge of the herd. In other words, a potentially cancelation of one or both contracts could result in a 25% - 30% drop in profits for Dr. Pepper. In addition, failure to properly distribute Dr Pepper products in order to sell their own products, could be another scenario where Coca-Cola and Pepsi can steal market share away from the company.
In 2010, the company made 20 year licensing deals with PepsiCo and Coca-Cola that paid the company $900 and $715 million dollars respectively. As a result, it is recognizing $64.60 million in annual revenue over 25 years. The company used this cash for buybacks and debt reductions.
On the other hand, the 20 year contract with both companies might be too expensive to break by Coke or Pepsi, which could result in a relatively peaceful 18 years for DPS. In addition, I wouldn’t be surprised if either giant decides to try and acquire Dr Pepper Snapple, in order to tap into this cash machine. The only factor preventing this might be the US government’s distaste for monopolies. A cash rich private equity group however, might be able to do just that however. In addition, both agreements could very easily be extended for another 20 years around 2030, and they require that both PepsiCo and Coke meet certain performance conditions.
I view Dr Pepper Snapple Group’s management as very shareholder friendly ones. They are utilizing their steady cash flows to repurchase stock and regularly hike dividends. This is because it has strong brands such as Dr Pepper & Snapple, which have a fiercely loyal customer base. At some point however, I would like to see them expand by adding new products in segments it is not represented, and in other countries.
I also view the company as a very stable consumer staple, which has strong brand names that consumers like. I would say it has competitive advantages, and should continue to churn out plenty of free cash flows for the next 20 years.
The largest portion of revenues are derived from carbonated soft drinks. This segment is not particularly popular with investors, given the declines in consumption over the past decade, in addition to stagnant sales volumes expected due to health concerns by customers. The company is trying to be responsive by introducing low calorie beverages like Dr Pepper 10, 7 UP 10 etc. Given the stable nature of the business brands, I believe that the firm can achieve solid total returns for shareholders, even with anemic growth in the future. They are also increasing the amounts they are spending on advertising, in order to create buzz about the product and maintain the brand, which should bode well for revenues.
Dr Pepper Snapple Group does not have any energy drinks, nor does it have any bottled water to offer. This could be an opportunity for diversifying away from carbonated drinks, and could also provide the company with the ability to expand internationally. This could likely cost a lot of money however, which is why being smart with the shareholder money and not expanding at all costs would be preferred.
The company currently operates in mostly three countries – US, Canada and Mexico ( also Caribbean). This is because the company was acquired by Cadbury Schweppes in 1995. Back in 1999, the parent sold a large part of international distribution rights to Coca-Cola for 155 countries. As a result, the company would be unable to expand internationally, unless it buys back those licensing rights.
While the US represents half of the global soft drinks market, Europe is second at slightly over one-third. Asia Pacific represents about 12%, although it could result in higher growth over time.
Several months ago, DPS purchased the rights for distribution of Snapple in key markets such as China, Japan, Australia, South Korea, Malaysia, Hong Kong and Singapore. This is the right strategy to pursue, in order to capitalize on long-term growth in the emerging markets. The rights to Dr Pepper drink internationally are owned by Coca-Cola or Mondelez International (MDLZ).
The allure behind the growth story of Coca-Cola (KO) and PepsiCo (PEP) is in the expected growth in emerging markets such as China, India, Russia, Brazil, Turkey and many others. As millions of consumers become middle class in those emerging markets, they would be able to spend their increasing discretionary incomes on items such as sodas, snacks and other purchased beverages.
Overall, I like that Dr. Pepper is shareholder friendly, and manages to distribute a lot of its excess cash flows to shareholders through dividend increases and share buybacks. However, I do not like the fact that the company is dependent on its main competitors Coca-Cola and PepsiCo for a large portion of its revenues and operating income. This is mitigated by its long-term licensing contracts with these two giants, and could be a positive because it provides a lot of cash flows with a limited need for a lot of capital to build a distribution system. In addition, I do not like the fact that Dr Pepper Snapple group is limited to only a select few countries for its operations, and has to purchase this right with shareholder cash. The company is trying to create new healthier beverages, and to expand internationally, which could be very beneficial in the long run.
The reason why had not purchased Dr Pepper till this moment is because I was already invested in the largest two “soda” companies in the world – Coca-Cola (KO) and PepsiCo (PEP) ( although I realize that PepsiCo has a substantial snack operation, I am looking at it from a soda company perspective here). In addition, its operations are mostly limited to North America for legacy brands as it cannot expand abroad. The company does not have a long history of dividend increases, which is mitigated by the fact that it was listed for only five years.
At this time, Coca-Cola (KO) and PepsiCo (PEP) are trading above 20 times earnings, which prevent me from adding money to those positions today. The stock of Dr. Pepper Snapple Group is much cheaper at 16.30times earnings and yielding 3.20%. I also believe that the company would be able to grow cashflows and earnings well over the next 20 years, especially if it manages to expand in Europe, Asia – Pacific and South America.. Long-term growth of Dr Pepper Snapple over the next 20 -30 years would likely be slightly higher than that of its two largest rivals, due to its small relative size.
I recently purchased a very small starting position in the company, because I find it easiest to monitor an investment when you own it. It is difficult to find quality at a cheap price these days, which is why Dr Pepper Snapple Group sounded like an overlooked play. While I am not very happy with the reliance on Coke & PepsiCo mentioned above, or the lack of exposure outside of North America, and the heavy reliance on carbonated drinks, I think there is plenty of opportunity. There is a strong brand name, and opportunities for very good total returns over the next 20 years through stable revenues and earnings, share repurchases and dividend growth. If the company introduces new products to compete in new niches, manages to expand internationally by tapping the cash cow business behind Dr. Pepper and Snapple brands, it can probably achieve a dividend champion status one day. Even if it simply uses excess cashflows to repurchase stock and raise dividends, Dr Pepper Snapple Group should do well for shareholders.
Full Disclosure: Long KO, PEP, DPS, MDLZ
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The company operates under three segments:
Packaged Beverages
This segment is responsible for primarily manufacturing and distribution of packaged beverages and other products, including DPS brands, third party owned brands and certain private label beverages, in the U.S. and Canada. This segment accounts for approximately 73% of sales, but 40% of operating profits.
Latin America Beverages
The Latin America Beverages segment reflects sales in the Mexico and Caribbean markets from the manufacture and distribution of concentrates, syrup and finished beverage. This segment accounts for approximately 7% of sales, but 4% of operating profits.
Beverage Concentrated
This segment is responsible for manufacturing and selling beverage concentrates to customers in US and Canada. Most of conentrates are produced in St Louis, Missouri, which is a risk in and of itself, in case of a natural disaster. This segment accounts for approximately 20% of sales, but 57% of operating profits.
One of the warning signs that I identified from reading the annual report was that 67% of Dr Pepper volumes are distributed through the Coca-Cola affiliated and PepsiCo affiliated bottler systems. I also found out that PepsiCo (PEP) and Coca-Cola (KO) are the two largest customers of the Beverage Concentrates segment, and constituted approximately 30% and 18%, respectively, of the segment's net sales during 2012. The Beverage Concentrates segment's operations generate a significant portion of the company’s overall segment operating profit. On the other hand, using the distribution networks of Coca-Cola & PepsiCo bottling groups could be an advantage, because it could require less investment from Dr. Pepper Snapple Group's part to build out those relationships. This could mean more money for shareholders either through higher dividends or share repurchases.
It is interesting that no one talks about this arrangement, as I could see a lot of issues arising from it. First of all, it looks like an arrangement where the wolf is put in charge of the herd. In other words, a potentially cancelation of one or both contracts could result in a 25% - 30% drop in profits for Dr. Pepper. In addition, failure to properly distribute Dr Pepper products in order to sell their own products, could be another scenario where Coca-Cola and Pepsi can steal market share away from the company.
In 2010, the company made 20 year licensing deals with PepsiCo and Coca-Cola that paid the company $900 and $715 million dollars respectively. As a result, it is recognizing $64.60 million in annual revenue over 25 years. The company used this cash for buybacks and debt reductions.
On the other hand, the 20 year contract with both companies might be too expensive to break by Coke or Pepsi, which could result in a relatively peaceful 18 years for DPS. In addition, I wouldn’t be surprised if either giant decides to try and acquire Dr Pepper Snapple, in order to tap into this cash machine. The only factor preventing this might be the US government’s distaste for monopolies. A cash rich private equity group however, might be able to do just that however. In addition, both agreements could very easily be extended for another 20 years around 2030, and they require that both PepsiCo and Coke meet certain performance conditions.
I view Dr Pepper Snapple Group’s management as very shareholder friendly ones. They are utilizing their steady cash flows to repurchase stock and regularly hike dividends. This is because it has strong brands such as Dr Pepper & Snapple, which have a fiercely loyal customer base. At some point however, I would like to see them expand by adding new products in segments it is not represented, and in other countries.
I also view the company as a very stable consumer staple, which has strong brand names that consumers like. I would say it has competitive advantages, and should continue to churn out plenty of free cash flows for the next 20 years.
The largest portion of revenues are derived from carbonated soft drinks. This segment is not particularly popular with investors, given the declines in consumption over the past decade, in addition to stagnant sales volumes expected due to health concerns by customers. The company is trying to be responsive by introducing low calorie beverages like Dr Pepper 10, 7 UP 10 etc. Given the stable nature of the business brands, I believe that the firm can achieve solid total returns for shareholders, even with anemic growth in the future. They are also increasing the amounts they are spending on advertising, in order to create buzz about the product and maintain the brand, which should bode well for revenues.
Dr Pepper Snapple Group does not have any energy drinks, nor does it have any bottled water to offer. This could be an opportunity for diversifying away from carbonated drinks, and could also provide the company with the ability to expand internationally. This could likely cost a lot of money however, which is why being smart with the shareholder money and not expanding at all costs would be preferred.
The company currently operates in mostly three countries – US, Canada and Mexico ( also Caribbean). This is because the company was acquired by Cadbury Schweppes in 1995. Back in 1999, the parent sold a large part of international distribution rights to Coca-Cola for 155 countries. As a result, the company would be unable to expand internationally, unless it buys back those licensing rights.
While the US represents half of the global soft drinks market, Europe is second at slightly over one-third. Asia Pacific represents about 12%, although it could result in higher growth over time.
Several months ago, DPS purchased the rights for distribution of Snapple in key markets such as China, Japan, Australia, South Korea, Malaysia, Hong Kong and Singapore. This is the right strategy to pursue, in order to capitalize on long-term growth in the emerging markets. The rights to Dr Pepper drink internationally are owned by Coca-Cola or Mondelez International (MDLZ).
The allure behind the growth story of Coca-Cola (KO) and PepsiCo (PEP) is in the expected growth in emerging markets such as China, India, Russia, Brazil, Turkey and many others. As millions of consumers become middle class in those emerging markets, they would be able to spend their increasing discretionary incomes on items such as sodas, snacks and other purchased beverages.
Overall, I like that Dr. Pepper is shareholder friendly, and manages to distribute a lot of its excess cash flows to shareholders through dividend increases and share buybacks. However, I do not like the fact that the company is dependent on its main competitors Coca-Cola and PepsiCo for a large portion of its revenues and operating income. This is mitigated by its long-term licensing contracts with these two giants, and could be a positive because it provides a lot of cash flows with a limited need for a lot of capital to build a distribution system. In addition, I do not like the fact that Dr Pepper Snapple group is limited to only a select few countries for its operations, and has to purchase this right with shareholder cash. The company is trying to create new healthier beverages, and to expand internationally, which could be very beneficial in the long run.
The reason why had not purchased Dr Pepper till this moment is because I was already invested in the largest two “soda” companies in the world – Coca-Cola (KO) and PepsiCo (PEP) ( although I realize that PepsiCo has a substantial snack operation, I am looking at it from a soda company perspective here). In addition, its operations are mostly limited to North America for legacy brands as it cannot expand abroad. The company does not have a long history of dividend increases, which is mitigated by the fact that it was listed for only five years.
At this time, Coca-Cola (KO) and PepsiCo (PEP) are trading above 20 times earnings, which prevent me from adding money to those positions today. The stock of Dr. Pepper Snapple Group is much cheaper at 16.30times earnings and yielding 3.20%. I also believe that the company would be able to grow cashflows and earnings well over the next 20 years, especially if it manages to expand in Europe, Asia – Pacific and South America.. Long-term growth of Dr Pepper Snapple over the next 20 -30 years would likely be slightly higher than that of its two largest rivals, due to its small relative size.
I recently purchased a very small starting position in the company, because I find it easiest to monitor an investment when you own it. It is difficult to find quality at a cheap price these days, which is why Dr Pepper Snapple Group sounded like an overlooked play. While I am not very happy with the reliance on Coke & PepsiCo mentioned above, or the lack of exposure outside of North America, and the heavy reliance on carbonated drinks, I think there is plenty of opportunity. There is a strong brand name, and opportunities for very good total returns over the next 20 years through stable revenues and earnings, share repurchases and dividend growth. If the company introduces new products to compete in new niches, manages to expand internationally by tapping the cash cow business behind Dr. Pepper and Snapple brands, it can probably achieve a dividend champion status one day. Even if it simply uses excess cashflows to repurchase stock and raise dividends, Dr Pepper Snapple Group should do well for shareholders.
Full Disclosure: Long KO, PEP, DPS, MDLZ
Relevant Articles:
- Check Out the complete Archive of Articles
- Capitalize on China’s Growth with these dividend stocks
- Strong Brands Grow Dividends
- Why Dividend Growth Stocks Rock?
- Elevent Dividend Stocks I Purchased Last Week
Wednesday, July 31, 2013
Eleven Dividend Paying Stocks I Purchased Last Week
In a previous article, I outlined that it is getting more difficult to find quality dividend paying stocks to buy. Most of the usual suspects like Kimberly-Clark (KMB) or Colgate-Palmolive (CL) are very overvalued today, which prevents me from adding to my positions there. Other companies like Chevron (CVX) are attractively valued today, but unfortunately my portfolio is overweight in them. Currently I find the oil sector to be cheap and have some of the lowest P/E ratios in the market. However, I would hate to be concentrated in one sector which is exposed to the fluctuating prices in its commodity products.
In this current environment, I am starting to deviate slightly from my entry criteria on a more consistent basis. I usually avoid paying over 20 times earnings for a company for which I expect earnings and dividend growth, and which I could see holding on for the next 20 years. However, I am willing to bend the rules on consecutive dividend increases or minimum yield requirements. Over the past five years, I have increasingly come to realize that buying a quality company as a long term investment at a reasonable valuation is more important than simply purchasing a company that fits a certain set of quantitative criteria.
Over the past week, I purchased stock in eleven businesses. I have outlined these businesses below. Some of these purchases represented additions to existing positions, although a few represented new positions.
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. Aflac has managed to boost dividends for 30 years in a row, and has a ten year dividend growth rate of 19.30%/annum. The company is really cheap at 9.70 times earnings, but has the capacity to grow profits in the foreseeable future through strategic partnerships in Japan and US markets and increasing number of sales associates. One of the opportunities for growth could be US, which accounts for roughly only a quarter of revenues. It is amazing that a company deriving 70-75% of revenues from Japan could achieve such astounding growth over the past 30 years. Currently, the stock trades at 9.70 times earnings and yields 2.30%. Check my analysis of Aflac.
American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. I like the fact that management is aggressively purchasing assets, acquiring companies and working towards increasing Funds from Operations for shareholder distributions. I can easily view this REIT becoming the next Realty Income in a few years. The risk of course is that they overpay for acquisitions, and this ends up costing existing shareholders big time. The REIT has raised dividends since going public in 2011. This REIT currently yields 6.20%.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. I am attracted to the above average yield on ConocoPhillips, in comparison to Exxon and Chevron. Unfortunately Chevron is already one of my highest weighted positions, which is why ConocoPhillips was the second US oil choice. I am building my position in the stock with this purchase. The company is extremely well run, has a history of disposing out of non-core assets such as Lukoil stock (LUKOY) and Kashagan Project, and sending cash to shareholders in the process. The company has increased dividends for 13 years in a row, and has managed to boost them by 15.10%/year over the past decade. Currently, the stock trades at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. The company has a portfolio of strong brands in North America, and is cheaper than its two larger rivals. The opportunities involved are gaining back international distribution rights to its name and expanding non carbonated products. Even if it doesn't do these things, the company can easily repurchase of stock each year, grow earnings in the low single digits and pay a 3% dividend, for a total return of high single digits or low double digits. Currently, the stock trades at 15.60 times earnings and yields 3.30%.
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. I like this global technology juggernaut, the ability to consistently repurchase shares, raise dividends for 16 years and its vision to earn $20/share by 2015. The company has increased dividends for 18 years in a row, and has managed to boost them by 18.80%/year over the past decade. Currently, the stock trades at 14 times earnings and yields 1.90%. Check my analysis of IBM.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company is a global drink giant, responsible for 1.8 billion drink servings to the world every single day. There is a strong brand name, a global distribution network and opportunity for growth in emerging markets. While I really like the company, I had not added to the stock for a while until 2012, which resulted in much lower allocation to this quality company. I am trying to rectify that, and if Coke ever sells at 15 times earnings, I would be a buyer. The company has increased dividends for 51 years in a row, and has managed to boost them by 9.80%/year over the past decade. Currently, the stock trades at 19.40 times 2013 earnings and yields 2.80%. Check my analysis of Coca-Cola.
McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The golden arches is another stock, which is priced attractively here today, and which can deliver plenty of value over the next 20 years. It is a globally recognized brand, has pricing power, and has continually managed to reinvent itself. With its “Plan to Win” strategy, the company targets 3-5% growth in annual sales and 6-7% growth in operating earnings. Add in a 3% yield, and a 2% reduction in stock through share repurchases, and you can easily expect very good results over time. The company has increased dividends for 36 years in a row, and has managed to boost them by 28.40%/year over the past decade. Currently, the stock trades at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’s.
Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. I slightly overpayed for this REIT, since I locked in an entry yield below 5%. However, I believe that the company is well managed, and like the distributions which are paid monthly, and regularly increased. Existing management has a strong track record of acquiring quality assets, looks at developing expertise in areas where not many competitors are looking, and tries to increase profits for shareholders. The company has increased dividends for 19 years in a row, and has managed to boost them by 4.20%/year over the past decade. Currently, the REIT yields 4.90%. Check my analysis of Realty Income.
Target Corporation (TGT) operates general merchandise stores in the United States. I like the perceived quality of Target relative to Wal-Mart. The stores look more upscale than the Wal-Marts of the world, and target customers with higher incomes. In addition, the company is much smaller, and just starting to expand internationally. I view this as an opportunity. Management is trying to earn $8/share by 2017, which would make shares purchased today even cheaper. The company has increased dividends for 46 years in a row, and has managed to boost them by 18.60%/year over the past decade. Currently, the stock trades at 16.80 times earnings and yields 2.40%. Check my analysis of Target.
Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services. The bank cut dividends in 2009, after receiving $25 billion from US Treasury. Since 2011 however, it has started increasing distributions, which are slightly less than the highs reached in 2008. When I last analyzed Wells-Fargo in May, I was not very happy about the company, because of near term weakness. However, I came to realize a few weeks later that I was deviating from my mantra of investing for the next 20 years, rather than for the next one. I sold some naked puts, and last week I initiated a small position in the bank. Currently, the stock trades at 11.80 times earnings and yields 2.80%. Check my analysis of Wells Fargo.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This is the largest retailer in the world, which has a tremendous scale of operations and immense pricing power. The company’s bright spot include its international operations, which could easily reach domestic ones in 10 – 15 years. I like the low valuation, which is pricing very low growth in earnings per share over the next decade. The company has increased dividends for 39 years in a row, and has managed to boost them by 18.10%/year over the past decade. Currently, the stock trades at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart.
These shares are not purchased at the low valuations I took for granted up until the days of early 2013. However, most of the companies listed above are having some of the lowest valuations that you can find today. The positions in American Realty Capital Properties Dr Pepper Snapple Group and Wells Fargo have not raised dividends for at least ten years in a row, however I believe these franchises offer compelling long-term potential to achieve that. IBM does not yield much to fit my entry criteria, but has a low P/E, excellent growth and a consistent history of share repurchases.
Full Disclosure: Long AFL, ARCP, COP, DPS, IBM, KO, MCD, O, TGT, WFC, WMT, KMB, CL ,CVX
Relevant Articles:
- Check Out the complete Archive of Articles
- Why most dividend investors never succeed
- Sixteen Great Dividend Champions on Sale
- Look beyond P/E ratios dividend investors
- How to invest when the market is at all time highs?
In this current environment, I am starting to deviate slightly from my entry criteria on a more consistent basis. I usually avoid paying over 20 times earnings for a company for which I expect earnings and dividend growth, and which I could see holding on for the next 20 years. However, I am willing to bend the rules on consecutive dividend increases or minimum yield requirements. Over the past five years, I have increasingly come to realize that buying a quality company as a long term investment at a reasonable valuation is more important than simply purchasing a company that fits a certain set of quantitative criteria.
Over the past week, I purchased stock in eleven businesses. I have outlined these businesses below. Some of these purchases represented additions to existing positions, although a few represented new positions.
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. Aflac has managed to boost dividends for 30 years in a row, and has a ten year dividend growth rate of 19.30%/annum. The company is really cheap at 9.70 times earnings, but has the capacity to grow profits in the foreseeable future through strategic partnerships in Japan and US markets and increasing number of sales associates. One of the opportunities for growth could be US, which accounts for roughly only a quarter of revenues. It is amazing that a company deriving 70-75% of revenues from Japan could achieve such astounding growth over the past 30 years. Currently, the stock trades at 9.70 times earnings and yields 2.30%. Check my analysis of Aflac.
American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. I like the fact that management is aggressively purchasing assets, acquiring companies and working towards increasing Funds from Operations for shareholder distributions. I can easily view this REIT becoming the next Realty Income in a few years. The risk of course is that they overpay for acquisitions, and this ends up costing existing shareholders big time. The REIT has raised dividends since going public in 2011. This REIT currently yields 6.20%.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. I am attracted to the above average yield on ConocoPhillips, in comparison to Exxon and Chevron. Unfortunately Chevron is already one of my highest weighted positions, which is why ConocoPhillips was the second US oil choice. I am building my position in the stock with this purchase. The company is extremely well run, has a history of disposing out of non-core assets such as Lukoil stock (LUKOY) and Kashagan Project, and sending cash to shareholders in the process. The company has increased dividends for 13 years in a row, and has managed to boost them by 15.10%/year over the past decade. Currently, the stock trades at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. The company has a portfolio of strong brands in North America, and is cheaper than its two larger rivals. The opportunities involved are gaining back international distribution rights to its name and expanding non carbonated products. Even if it doesn't do these things, the company can easily repurchase of stock each year, grow earnings in the low single digits and pay a 3% dividend, for a total return of high single digits or low double digits. Currently, the stock trades at 15.60 times earnings and yields 3.30%.
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. I like this global technology juggernaut, the ability to consistently repurchase shares, raise dividends for 16 years and its vision to earn $20/share by 2015. The company has increased dividends for 18 years in a row, and has managed to boost them by 18.80%/year over the past decade. Currently, the stock trades at 14 times earnings and yields 1.90%. Check my analysis of IBM.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company is a global drink giant, responsible for 1.8 billion drink servings to the world every single day. There is a strong brand name, a global distribution network and opportunity for growth in emerging markets. While I really like the company, I had not added to the stock for a while until 2012, which resulted in much lower allocation to this quality company. I am trying to rectify that, and if Coke ever sells at 15 times earnings, I would be a buyer. The company has increased dividends for 51 years in a row, and has managed to boost them by 9.80%/year over the past decade. Currently, the stock trades at 19.40 times 2013 earnings and yields 2.80%. Check my analysis of Coca-Cola.
McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The golden arches is another stock, which is priced attractively here today, and which can deliver plenty of value over the next 20 years. It is a globally recognized brand, has pricing power, and has continually managed to reinvent itself. With its “Plan to Win” strategy, the company targets 3-5% growth in annual sales and 6-7% growth in operating earnings. Add in a 3% yield, and a 2% reduction in stock through share repurchases, and you can easily expect very good results over time. The company has increased dividends for 36 years in a row, and has managed to boost them by 28.40%/year over the past decade. Currently, the stock trades at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’s.
Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. I slightly overpayed for this REIT, since I locked in an entry yield below 5%. However, I believe that the company is well managed, and like the distributions which are paid monthly, and regularly increased. Existing management has a strong track record of acquiring quality assets, looks at developing expertise in areas where not many competitors are looking, and tries to increase profits for shareholders. The company has increased dividends for 19 years in a row, and has managed to boost them by 4.20%/year over the past decade. Currently, the REIT yields 4.90%. Check my analysis of Realty Income.
Target Corporation (TGT) operates general merchandise stores in the United States. I like the perceived quality of Target relative to Wal-Mart. The stores look more upscale than the Wal-Marts of the world, and target customers with higher incomes. In addition, the company is much smaller, and just starting to expand internationally. I view this as an opportunity. Management is trying to earn $8/share by 2017, which would make shares purchased today even cheaper. The company has increased dividends for 46 years in a row, and has managed to boost them by 18.60%/year over the past decade. Currently, the stock trades at 16.80 times earnings and yields 2.40%. Check my analysis of Target.
Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services. The bank cut dividends in 2009, after receiving $25 billion from US Treasury. Since 2011 however, it has started increasing distributions, which are slightly less than the highs reached in 2008. When I last analyzed Wells-Fargo in May, I was not very happy about the company, because of near term weakness. However, I came to realize a few weeks later that I was deviating from my mantra of investing for the next 20 years, rather than for the next one. I sold some naked puts, and last week I initiated a small position in the bank. Currently, the stock trades at 11.80 times earnings and yields 2.80%. Check my analysis of Wells Fargo.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This is the largest retailer in the world, which has a tremendous scale of operations and immense pricing power. The company’s bright spot include its international operations, which could easily reach domestic ones in 10 – 15 years. I like the low valuation, which is pricing very low growth in earnings per share over the next decade. The company has increased dividends for 39 years in a row, and has managed to boost them by 18.10%/year over the past decade. Currently, the stock trades at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart.
These shares are not purchased at the low valuations I took for granted up until the days of early 2013. However, most of the companies listed above are having some of the lowest valuations that you can find today. The positions in American Realty Capital Properties Dr Pepper Snapple Group and Wells Fargo have not raised dividends for at least ten years in a row, however I believe these franchises offer compelling long-term potential to achieve that. IBM does not yield much to fit my entry criteria, but has a low P/E, excellent growth and a consistent history of share repurchases.
Full Disclosure: Long AFL, ARCP, COP, DPS, IBM, KO, MCD, O, TGT, WFC, WMT, KMB, CL ,CVX
Relevant Articles:
- Check Out the complete Archive of Articles
- Why most dividend investors never succeed
- Sixteen Great Dividend Champions on Sale
- Look beyond P/E ratios dividend investors
- How to invest when the market is at all time highs?
Monday, July 29, 2013
Looking for dividend bargains in an overheated market
With prices on many stocks I follow reaching new highs, it is getting more difficult to find attractive places for my investment dollars. Because of the above factors, I have ventured into modifying my entry criteria slightly, in order to adapt to the current environment in 2013. I definitely feel out of step with the current market however.
I usually screen the list of dividend champions and dividend contenders about once every month using my entry criteria, in order to find attractively valued securities. In addition, I also review dividend increases every week, in order to uncover hidden dividend gems.
After I come up with a list of cheap companies, I try to perform a more detailed review of financials, business prospects and competitive strengths, in order to gain a more thorough understanding of the company’s business model.
In most cases however, chances are that I have analyzed before the companies on the dividend champions and dividend contenders lists. As a result, I just check the last time anything material happened between my analysis time and the purchase date. The beauty of dividend investing is that knowledge is cumulative – if you understood the business model of Coca-Cola in 2011, along with risks and opportunities, your knowledge is most likely still relevant. Things could change over time of course, as Coca-Cola (KO) acquired North America bottling operations from CCE in 2010. For most of your dividend champions, there are not going to be changes in the business model over several years. By reviewing the annual reports, one can easily keep up with any other annual changes like new markets, new products as well as obtaining information about the most recent trends in fundamentals.
Unfortunately, most of the companies I usually focus on have been overpriced. For the companies that I find attractively priced today, I already have an above average allocation to them. Unfortunately, my principles of holding a diversified portfolio prevent me from concentrating my holdings too much. For example, I find Phillip Morris International (PM) and Chevron (CVX) to be attractively priced today. Unfortunately, all two of these companies are in the top five of my holdings. As a result, I would need to look elsewhere for opportunities.
There are also many opportunities with the oil and gas majors these days, many of which trade under 10 times earnings, and offer above average yields. However, investors should avoid concentrating portfolios too much in a given sector. This is because oil and gas companies earnings could suffer if commodity prices dropped from here. If your income portfolio has more than 15 - 20% in a given sector, chances are you might be overly concentrated to it.
Another attractive factor behind dividend investing however is that once you select a great company at a good price, you can simply hold on to it. You can choose to perform small portfolio tweaks here and there, but even if you don’t you should still do just as well doing little. Monitoring your positions is important as well however, as things do change over time. If I were retired and living off my portfolio, I would not really care whether stocks are up or down, as long as fundamentals are intact and companies are showering me with cash on a recurring basis. As an investor in the accumulation phase however, the problem is that while you would benefit from dividend growth, you would fail to turbocharge your income growth because you are not reinvesting your pile of growing dividend payments.
I have been able to identify several companies with low price/earnings ratios, adequate dividend coverage and yields, which have good long-term business and dividend growth prospects:
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company has raised distributions for 30 years in a row, and has a five year dividend growth rate of 10.90%/annum. Currently, the stock is trading at 9.70 times earnings and yields 2.30%%. Check my analysis of Aflac.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. The company has raised distributions for 9 years in a row, and has a five year dividend growth rate of 20.60%/annum. Currently, the stock is trading at 17.20 times earnings and yields 2.40%. Check my analysis of Ameriprise Financial.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised distributions for 26 years in a row, and has a five year dividend growth rate of 9.20%/annum. Currently, the stock is trading at 9.60 times earnings and yields 3.10%. Check my analysis of Chevron.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised distributions for 5 years in a row, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 17.30 times earnings and yields 3.80%. Check my analysis of Philip Morris International.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has raised distributions for 46 years in a row, and has a five year dividend growth rate of 20.50%/annum. Currently, the stock is trading at 16.80 times earnings and yields 2.40%. Check my analysis of Target Corporation.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised distributions for 39 years in a row, and has a five year dividend growth rate of 13.50%/annum. Currently, the stock is trading at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart Stores.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has raised distributions for 13 years in a row, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
McDonald’'s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The company has raised distributions for 36 years in a row, and has a five year dividend growth rate of 13.90%/annum. Currently, the stock is trading at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’'s.
In modifying my entry criteria, I can accept a shorter streak of dividend increases, and even a lower current yield. However, I would never sacrifice on company quality, and I would not purchase shares trading above twenty times earnings.
Full Disclosure: Long AFL, CVX, PM, TGT, WMT, COP, APD, KO
Relevant Articles:
- Check Out the complete Archive of Articles
- How to invest when the market is at all time highs?
- Is the Dividend Craze Over?
- The World’s Best Dividend Portfolio
- Lower Entry Prices Mean Locking Higher Yields Today
- Carnival of Wealth, Back to School Edition
I usually screen the list of dividend champions and dividend contenders about once every month using my entry criteria, in order to find attractively valued securities. In addition, I also review dividend increases every week, in order to uncover hidden dividend gems.
After I come up with a list of cheap companies, I try to perform a more detailed review of financials, business prospects and competitive strengths, in order to gain a more thorough understanding of the company’s business model.
In most cases however, chances are that I have analyzed before the companies on the dividend champions and dividend contenders lists. As a result, I just check the last time anything material happened between my analysis time and the purchase date. The beauty of dividend investing is that knowledge is cumulative – if you understood the business model of Coca-Cola in 2011, along with risks and opportunities, your knowledge is most likely still relevant. Things could change over time of course, as Coca-Cola (KO) acquired North America bottling operations from CCE in 2010. For most of your dividend champions, there are not going to be changes in the business model over several years. By reviewing the annual reports, one can easily keep up with any other annual changes like new markets, new products as well as obtaining information about the most recent trends in fundamentals.
Unfortunately, most of the companies I usually focus on have been overpriced. For the companies that I find attractively priced today, I already have an above average allocation to them. Unfortunately, my principles of holding a diversified portfolio prevent me from concentrating my holdings too much. For example, I find Phillip Morris International (PM) and Chevron (CVX) to be attractively priced today. Unfortunately, all two of these companies are in the top five of my holdings. As a result, I would need to look elsewhere for opportunities.
There are also many opportunities with the oil and gas majors these days, many of which trade under 10 times earnings, and offer above average yields. However, investors should avoid concentrating portfolios too much in a given sector. This is because oil and gas companies earnings could suffer if commodity prices dropped from here. If your income portfolio has more than 15 - 20% in a given sector, chances are you might be overly concentrated to it.
Another attractive factor behind dividend investing however is that once you select a great company at a good price, you can simply hold on to it. You can choose to perform small portfolio tweaks here and there, but even if you don’t you should still do just as well doing little. Monitoring your positions is important as well however, as things do change over time. If I were retired and living off my portfolio, I would not really care whether stocks are up or down, as long as fundamentals are intact and companies are showering me with cash on a recurring basis. As an investor in the accumulation phase however, the problem is that while you would benefit from dividend growth, you would fail to turbocharge your income growth because you are not reinvesting your pile of growing dividend payments.
I have been able to identify several companies with low price/earnings ratios, adequate dividend coverage and yields, which have good long-term business and dividend growth prospects:
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. The company has raised distributions for 30 years in a row, and has a five year dividend growth rate of 10.90%/annum. Currently, the stock is trading at 9.70 times earnings and yields 2.30%%. Check my analysis of Aflac.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. The company has raised distributions for 9 years in a row, and has a five year dividend growth rate of 20.60%/annum. Currently, the stock is trading at 17.20 times earnings and yields 2.40%. Check my analysis of Ameriprise Financial.
Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised distributions for 26 years in a row, and has a five year dividend growth rate of 9.20%/annum. Currently, the stock is trading at 9.60 times earnings and yields 3.10%. Check my analysis of Chevron.
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised distributions for 5 years in a row, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 17.30 times earnings and yields 3.80%. Check my analysis of Philip Morris International.
Target Corporation (TGT) operates general merchandise stores in the United States. The company has raised distributions for 46 years in a row, and has a five year dividend growth rate of 20.50%/annum. Currently, the stock is trading at 16.80 times earnings and yields 2.40%. Check my analysis of Target Corporation.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has raised distributions for 39 years in a row, and has a five year dividend growth rate of 13.50%/annum. Currently, the stock is trading at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart Stores.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. The company has raised distributions for 13 years in a row, and has a five year dividend growth rate of 13.10%/annum. Currently, the stock is trading at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
McDonald’'s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The company has raised distributions for 36 years in a row, and has a five year dividend growth rate of 13.90%/annum. Currently, the stock is trading at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’'s.
In modifying my entry criteria, I can accept a shorter streak of dividend increases, and even a lower current yield. However, I would never sacrifice on company quality, and I would not purchase shares trading above twenty times earnings.
Full Disclosure: Long AFL, CVX, PM, TGT, WMT, COP, APD, KO
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