Commerce Bancshares (CBSH) Dividend Stock Analysis

Commerce Bancshares, Inc. (CBSH)operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth.

The company is a member of the dividend champions list, and has increased dividends for 42 years in a row. In addition to paying a cash dividend, this bank also pays a 5% stock dividend at the end of each year.

Over the past decade, this dividend stock has delivered an annual total return of 7.50% on average.

At the same time earnings per share have increased only by 1.70% since 2000. The EPS trend has been down since 2006. For 2010 and 2011 however analysts are expecting EPS to increase to $2.63 and $2.93. This would be much higher in comparison to FY 2009 EPS of $2.07. This regional bank is one of the financial institutions that didn’t cut dividends during the financial crisis. Over the past decade the company has also managed to decrease the average number of shares outstanding by 2.5% annually. The company generates 61% of its revenues from net interest income, 12% comes from Card Income, while service charges and wealth management account for 10% each.

The annual dividend per share has increase by 10.60% per year since 2000, which was higher than the growth in EPS. A 10% increase in dividends leads to dividend payment doubling every 7 years on average. Since 1986 the company has indeed managed to double its dividend payments every seven years on average.

The dividend payout ratio has doubled, mostly due to the fact that the company has shared a higher proportion of its earnings in the form of dividends and due to the downward trend in earnings since 2006.

Between 2006 and 2009, the return on equity has been decreasing sharply from 16% to less than 10%. This was in contrast to stability in the ROE between 14 and 16 over the preceding five years.

Overall I find Commerce Bancshares to be attractively valued at 15.50 times earnings, yield of 2.50% and having an adequately covered dividend. I would consider initiating a position in the stock on dips below $37.60.

Full Disclosure: None

Relevant Articles:

- 33 Dividend Champions to Consider

- Twenty Dividend Increases in the news

- Best Dividends Stocks for the Long Run

- Six things I learned from the financial crisis

Genuine Parts (GPC) Dividend Stock Analysis

Genuine Parts Company (GPC) distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. The company operates in four segments: Automotive Parts Group, Industrial Parts Group, Office Products Group, and Electrical/Electronic Materials Group. This dividend king has increased distributions for 54 consecutive years.

Over the past decade, this dividend stock has delivered an annual total return of 11.40%.

At the same time earnings per share have increased only by 1.40% per year since 2000. For 2010 analysts expect an increase in EPS by 12.80% to $2.82. For FY 2011 analysts expect the company to earn $3.15/share, which would represent an increase of 11.70% in comparison with the results in FY 2010.
The growth in EPS was helped by stock buybacks, where the company repurchased about 1% of their outstanding stock each year over the past decade. The company’s near term prospects should be aided by sales growth, triggered by the expansion in the US economy. Margins should also be higher on cost cutting and higher volumes. Longer term the company could benefit from increased complexity of vehicles and the rising number of automobiles. The company seems to be very conservative in its finances and has a low level of debt coupled with strong cash flow from operations to fund future dividend increases.

Dividends per share increased by 4.20% on average since the year 2000. A 4% growth in dividends translates into dividend payments doubling every 18 years. Since 1987 the company has manage to double its quarterly dividend every eleven and a half years on average.

The dividend payout ratio has remained above 50% in six of the past ten years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has remained above 16% with the exception of 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently the company trades at a P/E of 16, yields 3.80% and has a dividend payout ratio of 60%. Given the low growth in dividends and earnings over the past decade, I would have to require a higher current yield and a lower dividend payout ratio before initiating a position in the stock. I would initiate a small position in the stock provided that it trades below $41, and the payout ratio is lower than 60%.

Full Disclosure: None

Relevant Articles:

- Ten Dividend Kings raising dividends for over 50 years
- Where are the original Dividend Aristocrats now?
- Buy and hold dividend investing is not dead
- Dividend ETF or Dividend Stocks?

Dividend investing timeframes- what's your holding period?

One of the most common issues that dividend investors face is the holding period for their dividend stocks. It seems that dividend investors are divided in two camps on the issue. One of the camps believes in active allocation of capital, where positions are continually adjusted depending on company performance, market performance or relative portfolio weights, to name a few reasons. In an era where it is possible to buy and sell dividend stocks within nanoseconds, holding on for more than a few years seems like eternity to some. The other camp is focused on the long-term holding of dividend stocks. The second camp believes in buy and hold investing, an arcane strategy, which is termed obsolete during bear markets, but is widely praised during bull markets. So what should the holding period of an enterprising dividend investor be?

Smart dividend investors should be able to synthesize the best features of both camps on the subject of buy and hold, in order to determine their optimum holding period. Extreme views such as buy and hold forever or buy and sell for five nanoseconds/years should be avoided. Investors should therefore hold stocks for as long as it makes business sense for them to hold on.
In most cases, it takes time for a position to work in your favor. This is particularly true for dividend growth stocks, where low current yields coupled with strong dividend growth result in substantial yields on cost after several years of patience. Investors who focus on stocks like Procter & Gamble (PG), McDonald’s (MCD) or Johnson & Johnson (JNJ) despite their current yields, could generate sufficient dividend income streams over time. Thus, as long as these companies continue to perform well, by enjoying earnings growth to fuel dividend increases, they should be held and added to on any temporary price weakness. While investors should expect to hold on to their shares theoretically forever, in reality they might have to sell positions if things change. If circumstances do change however, and any of these stocks deteriorates to the extent of cutting dividends, then it should be sold, even if held for less than a few years.

When investors purchase dividend stocks, they should expect to hold on to them forever. As a result, investors should assess the viability of their dividend income stream sources, in order to ensure that they are not focusing on chasing hot ideas today, which might cost them in the future. Many investors chase high yield stocks for current income these days, particularly because in the current low interest environment it is extremely difficult to live off interest. The dangers to this strategy are two- fold. The first danger is that without an understanding of the business, investors might purchase an income producing asset which doesn’t deliver sustainable distributions. Canadian royalty trusts such as Pengrowth (PGH) and Penn West (PWE)are examples of this idea. Most Canroys always seem to deliver high current yields, despite cutting dividend payments to the bone. This is because their stock prices have gone down over the past few years, right after Canada announced that it would be phasing out the structure in 2006. Investors who were short-sighted to only chase high yields for current income without understanding why such high yields were being paid in the first place, should have been better off purchasing long term treasury bonds instead.

The other issue with high yielding stocks such as MLPs, REITs or Utilities, is that when interest rates start rising again they could get out of favor with investors. When interest rates increase, investors would demand higher yields from the above mentioned types of stocks, which would push their prices down. In addition to that, since most of these types of companies grow exclusively by selling more shares ( units) or through additional debt offerings, their cost of capital would be increasing. This might even put current distributions at risk of a cut.

This being said, higher yielding stocks could have a place in your portfolio in order to generate current income until your dividend growth stocks generate high yields on cost.

The types of stocks which should be held forever, until proven otherwise, in a diversified dividend portfolio include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ has been consistently increasing its dividend for 48 consecutive years. Annual dividend payments have increased by an average of 13.40% annually since 2000.(analysis)

McDonald's Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. Annual dividend payments have increased by an average of 28.20% annually since 2000. (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. Abbott Laboratories has increased dividends for 38 years in a row. The company has managed to increase its annual dividend by 8.60% on average over the past decade. (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has rewarded shareholders with dividend increases for 47 consecutive years. Annual dividends have increased by 11.80% on average over the past decade. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores has consistently increased dividends every year for 36 years. Annual dividends have increased by an average of 18.30 % per annum since 2000. (analysis)

To summarize, my holding period is forever, unless some unseen factor causes me to sell. After the sale I would typically try to allocate the cash to a new or existing position in the same sector, while keeping the income loss to a minimum. What is your holding period?

Full Disclosure: Long JNJ, MCD, ABT, PG, CL and WMT

Relevant Articles:

- A dividend portfolio for the long-term
- Dividend Investing Works in All Markets
- Highest Yielding Dividend Stocks of S&P 500
- Will higher taxes bring dividend stocks down?

Top Dividend Stocks for 2010, 3Q Update

The third quarter of 2010 was characterized by a rebound in global equity markets, which lead to rising stock prices. Income hungry investors are starting to realize that certain safe-havens such as US Treasury bonds do not look as attractive as dividend stocks. This has pushed many dividend stocks higher, particularly the ones with sustainable and growing distributions.

Back at the end of 2009 I selected four dividend stocks as part of a competition. The stocks that I selected were representative of the tobacco, real estate, master limited partnerships and utilities sectors. The main characteristic of these sectors was that they consist of stocks with above average yields. The higher yield not only softened investor losses during the second quarter of 2010, but also produced very good performance over the third quarter.

The stocks that I selected were not only attractively valued at the time, but also had sustainable and growing distributions. The companies include:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The monthly dividend company has paid rising dividends for 16 years in a row. Right now this dividend achiever yields 5.10% ( analysis)

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets in North America. The second largest master limited partnership in the US has raised distributions for 14 years in a row. This dividend achiever yields 6.40% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. The New York based utility company has raised dividends for 36 years in a row. This dividend aristocrat current yields 4.90% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. This global tobacco powerhouse has raised dividends every year since it was spun out of parent Altria Group (MO) in 2008. It offers not only a high yield, and a sustainable dividend, but also solid dividend growth potential. Yield: 4.50% (analysis)

Some of the companies such as Realty Income and Con Edison look overstretched at the moment. The hunt for yield has pushed these companies to levels of relative yield not seen for a while. Furthermore, given the slow dividend growth that they have experienced, I do not find them worthy of adding new money to these positions. The price you pay today would affect your total returns in the future. As a result, investors putting in new money in stocks like Realty Income (O) and Con Edison (ED) might not generate the same level of total returns as investors who bought the stocks at the end of 2008 for example. This being said however, these stocks are still at least a hold, as their dividends appear to be safe. But if you are in a DRIP plan in one of those stocks, you might be better off allocating the dividends in something more attractively valued.

Overall the picks I selected outperformed the picks of the other bloggers in the competition for a second quarter in a row. Here’s the ranking:

Blogger Performance

Dividend Growth Investor +21.34%

The Wild Investor +8.35%

Zach Stocks +0.84%

My Traders Journal -1.31%

WheredoesallmyMoneygo -2.90%

Intelligent Speculator -7.86%

Million Dollar Journey -10.46%

The Financial Blogger -15.24%

Four Pillars -27.07%

While I own all of the stocks mentioned above, this stock picking competition is not representative of how investors should invest money. I believe that in order to be successful at dividend investing, one has to build a diversified portfolio of stocks, representative of as many sectors as possible. I would also add geographic diversification as a plus, as well as the need to build positions slowly over time, by dollar cost averaging.

Full Disclosure: Long ED,PM, KMR, O

Relevant Articles:

- Reinvest Dividends Selectively
- Four Characteristics of The Best Dividend Growth Stocks
- 2010’s Top Dividend Plays
- Dividend Investors are getting paid for waiting

Nucor Corporation (NUE) Dividend Stock Analysis

Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. The company operates through three segments: Steel Mills, Steel Products, and Raw Materials. This dividend champion has managed to increase distributions for 37 years in a row. At the company's latest dividend increase in December 2009, the dividend was increased by 2.90%.

Over the past decade this dividend stock has delivered a 17.60% annual return on average to its shareholders. This is after a 50% drop off its all-time-highs achieved in 2008.

The company reported a loss of $0.94/share for FY 2009, which reflected a 50% drop in revenues and was lower than the $5.98/share reported in FY 2008. For FY 2010 analysts expect Nucor to earn $1.10/share, followed by a steep jump to $3.30/share in FY 2011.
The company’s business model is highly cyclical and thus dependent on the economic situation at the moment. Characteristic of cyclical industries is that P/E ratios are lowest when the economy is at its peak, since earnings per share are highest. On the other hand during recessions the P/E ratio is highest since earnings are depressed. Long term growth in earnings will be driven by expansion through acquisitions, which would result in greater pricing power, as well as industry consolidations and stronger cost controls in relation to materials expense. The US steel industry has been in a consolidation mode over the past decade, which could help companies in mantaining pricing power.

The company has managed to increase its quarterly dividends at a pace of 28.30% per year. Obviously this strong dividend growth reflected the strong earnings growth, fueled by the increasing demand and prices for commodities up until the global financial crisis of 2007-2009. The company paid a special dividend between 2005 and 2008 as well.

The dividend payout ratio follows the volatility in earnings. Currently the payout looks unsustainable based off FY 2010 actual and expected earnings. Based off FY 2011 earnings however it does looks sustainable and also leaves some room for a small increase this year.

The return on equity also seems to follow the erratic pattern in earnings. It was low between 2000 and 2003, after which it stayed above 28% until 2009. Whether the increased economic activity worldwide leads to an increase in return on equity for Nucor remains to be seen.

Currently the company is trading at a forward P/E of 28.70, yields 3.80% and doesn’t seem to have a well covered distribution. However, based on estimates for FY 2011 earnings the company trades at a P/E of 12.10 and has an adequately covered dividend with some room to grow the distribution. The company’s financial position is a little bit more volatile in comparison with other dividend champions, but it should provide decent exposure to basic materials sector for dividend portfolios. I would add to my underweight position in this risky stock on dips.

Full Disclosure: Long NUE

Relevant Articles:

- 8 Dividend Achievers Strike Back

- A dividend portfolio for the long-term

- Dividend Aristocrats List for 2009

- Best Dividends Stocks for the Long Run