Clorox (CLX) Delivers a Disappointing Dividend Increase

The Clorox Company (CLX) manufactures and markets consumer and professional products worldwide. Last week, the company increased quarterly dividends by 4.20% to 74 cents/share. This marked the 37 consecutive annual dividend increase for this dividend champion. It was a disappointing increase however, which is much lower than what I am expecting. This is also the slowest dividend increase since 2006, when dividends were raised by 3.60% to 29 cents/share.

I still like the company, and would continue holding onto the stock I own, based on my original analysis of Clorox. However, I would not be adding to the company in the near future, because the annual dividend growth is lower than my 6% annual dividend growth target. In addition, the stock is trading at the top of my acceptable valuation range of 20 times earnings, although the yield at 3.20% is pretty decent, and sustainable for the time being. The company earned $4.32/share in 2013, and is expected to earn $4.33/share in 2014 and $4.50/share in 2015.

I also do not like the fact that revenues have increased from $4.324 billion in 2004 to $5.623 billion in 2013, but total net income went from 549 million to 572 million. Earnings per share went from $2.56 in 2004 to $4.30 in 2013, mainly due to massive share buybacks in 2005 and 2006. Those share buybacks resulted in negative book values per share, which are scaring novice investors. Many investors are thrown off from the supposed high debt levels for Clorox, but I am not seeing any reason for worry. The company could easily pay off all of its long-term debt within less than 3 – 4 years based off its free cash flow. Of course, in the current low yield environment, the incentive is to lock in those ridiculously low rates, not repay debt with cash that can deliver higher value to shareholders or by reinvesting in the business.

The chart below teaches one important lesson for dividend growth investors. The lesson is that dividend growth rates can fluctuate over time, and are not going to be consistent every single year. It is important to understand this, in order to avoid having unreasonable expectations. It is also important to note that one should not panic and sell, because of one or two years where the dividend is not increased fast enough. Year over year dividend growth can be lumpy, yet the ten year average growth could turn out to positively surprise investors. There were nine quarters between 2000 and 2002 and six quarters between 2003 and 2004, where dividend payments were unchanged. Despite this, annual dividend payments still increased every year during that period. However, investors who panicked and sold because they didn’t like the freeze missed out on a dividend that almost tripled.

Decl Date	Qtrly Dividends	Increase %
05/12/14	0.74	4.23%
05/12/13	0.71	10.94%
05/14/12	0.64	6.67%
05/18/11	0.6	9.09%
05/19/10	0.55	10.00%
06/11/09	0.5	8.70%
05/14/08	0.46	15.00%
05/24/07	0.4	29.03%
11/15/06	0.31	6.90%
11/16/05	0.29	3.57%
11/17/04	0.28	3.70%
07/16/03	0.27	22.73%
07/16/02	0.22	4.76%
07/19/00	0.21	5.00%
07/20/99	0.2	11.11%
07/14/98	0.18	12.50%
07/16/97	0.16	10.34%
07/17/96	0.145	9.43%
07/19/95	0.1325	10.42%
07/19/94	0.12	6.67%
03/19/93	0.1125	7.14%
04/16/92	0.105	7.69%
04/19/91	0.0975	8.33%
04/20/90	0.09	16.13%
04/21/89	0.0775	19.23%
03/18/88	0.065	18.18%
04/21/87	0.055	15.79%
04/18/86	0.0475	11.76%
04/29/85	0.0425	13.33%
04/30/84	0.0375	15.38%

Full Disclosure: Long CLX

Relevant Articles:

- Clorox Company (CLX) Dividend Stock Analysis
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Genuine Parts Company (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, the Dominican Republic, Mexico, and Canada. This dividend king has paid dividends since 1948 and has managed to increase them for 58 years in a row.

The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 7% increase in the quarterly dividend to 57.50 cents /share. The company’s peer group includes W.W. Grainger (GWW), Autozone (AZO) and Advanced Auto Parts (AAP).

Over the past decade this dividend growth stock has delivered an annualized total return of 14% to its shareholders.

The company has managed to deliver an 8% average increase in annual EPS over the past decade. Genuine Parts Company is expected to earn $4.60 per share in 2014 and $4.93 per share in 2015. In comparison, the company earned $4.40/share in 2013.

Genuine Parts Company does have a record of consistent share repurchases. Between 2004 and 2014, the number of shares decreased from 176 million to 156 million.

Future growth could be driven by acquisitions, expansions in same-store sales and somewhat by adding new locations. The company’s near term prospects should be aided by sales growth, triggered by the expansion in the US economy. It should also be able to leverage its distribution networks to increase sales in acquired companies. 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. The industry will force a lot of smaller competitors out, which could result in more opportunities for Genuine Parts Company. Long-term growth will be driven by internal growth and acquisitions.

The annual dividend payment has increased by 6.20% per year over the past decade, which is lower than the growth in EPS.

A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. If we check the dividend history, going as far back as 1983, we could see that Genuine Parts Company has actually managed to double dividends every ten years on average.

The dividend payout ratio has decreased slightly from 53% in 2004 to under 49% by 2013. 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 been on a rise from 16.30% in 2004 to 21.60% in 2013. 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 stock is attractively valued, as it trades at a forward P/E of 19 and yields 2.70%. I would consider initiating a position on dips, and subject to availability of funds.

Full Disclosure: None

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Should I buy more high yielding stocks in order to retire early?

Most readers know I focus on dividend growth stocks, which are companies that tend to grow distributions every year. I search for companies that typically yield more than 2.50%, have demonstrated growth in earnings and dividends over the past decade, and have a strong foundation that can support further distribution growth.

Per my dividend retirement plan, I expect to be able to cover expenses through dividend portfolio around sometime 2018.

However, I do focus on a lot of companies where average yield is somewhere in the 3% - 4% range. These companies have sustainable dividends, and dependable dividend growth rates, that are very likely to exceed 6%/year for the next decade.

Some readers have asked me however, why don’t I merely focus my attention on higher yielding stocks, that pay anywhere between 6% – 8% today, and speed up my financial independence. I could load up my portfolio with companies like:

Kinder Morgan Energy Partners, L.P. (KMP) operates as a pipeline transportation and energy storage company in North America. This master limited partnership has managed to increase distributions for years in a row, and currently yields 7.50%. Check my analysis of Kinder Morgan.

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.This  real estate investment trust has managed to increase dividends for years in a row, and currently yields 7.60%.

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. This real estate investment trust has managed to increase dividends for years in a row, and currently yields 5%. Check my analysis of Realty Income.

I equate higher yielding companies with higher risk. In a competitive marketplace for stock securities, a reasonable investor cannot expect to find higher yielding stocks, without incurring higher risks.

If a real estate investment trust (REIT) wants to buy an apartment complex that generates an 8% yield, it might not be a very good idea to issue stock or debt to investors that yields more than 8%. However, even if they end up paying a lower yield on equity or debt, but they need to refinance that debt in a few more years at higher rates, this could be bad for dividend incomes. The problem with most high yielding companies is that they are pass through entities, which essentially share all of their free cash flows with investors, by sending out fat dividend checks. This leaves those companies exposed to hiccups in financial markets, which are vital for their growth and for access to capital.

In addition, there is always the increased risk that those pass-through entity structures are abolished by the Tax authorities. With a pass-through structure like a REIT, master limited partnership (MLP), or a Trust, there is no taxation at the entity level. All the taxation occurs at the individual shareholder level. In comparison, corporations like Coca-Cola (KO) pay taxes at the corporate level, and then individual investors pay taxes on dividends they receive in taxable accounts. This is why pass-through entities like Realty Income, American Realty Capital Properties, Kinder Morgan Energy Partners can afford to pay such fat dividend yields – they essentially do not pay income taxes and rely on capital markets for capital on capital spending, and acquisitions. However, if the revenue starved governments decides to get a higher share of the tax mix, they could start taxing those entities. This would effectively reduce attractiveness of pass-through entities, lead to steep dividend cuts, and losses for investors.

This is why I believe that there is generally a higher risk of a dividend cut with high yielding stocks.

In addition, there is a high risk of lack of dividend growth. This will reduce purchasing power of my principal, and result in constant downgrade to my lifestyle.

I also believe that by owning a portfolio consisting predominantly of pass through entities, I am taking a concentrated risk, which is contrary to the ideas of diversification I have been preaching on for the past six –seven years.

If I needed $30,000 in annual dividend income, but only had a portfolio worth $500,000, I could do two things. The fist is to design a portfolio with an average yield of 6%, and call it a day. The second thing would be to invest in a mix of more reasonably priced companies, wait for a few more years of savings and patiently compounding my capital before achieving my goal. The risk with the first scenario is that those higher yielding stocks stop growing dividends, which would reduce purchasing power of my income. In addition, if there are dividend cuts, my lifestyle would be even worse off. If you need $30,000 to live on in year one, you would likely need $30,900 in year two assuming a 3% inflation.

What good is a high dividend stock that yields 6% today, if it gives me a 50% chance of a dividend eliminations within next decade, compared to a stock yielding 3% that has only a 10%-15% chance of a dividend cut. If I earn 6% this year, but next year I get a 50% dividend cut, I am not better off eventually than an investor who started out with a 3% yield that was unchanged in year two. As an investor, my goal is to maintain and increase my real income, and only suffer the least amount of losses. If I just focus on the yields today, I might end up missing out on the risks I am taking in the process.

With a more moderate dividend growth stocks yielding somewhere between 2.50% - 3.50% today, I have a better chance of reaching my goals, having a sustainable income stream, and a better fighting chances against dividend cuts and inflation.

I believe that I only need to get rich once. Therefore, my goal is to be patient, and build my dividend foundation slowly and carefully, rather than be in a hurry, and avoiding excessive risks.


Relevant Articles:

- The Four Percent Rule is Dependent on Dividend Yields
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Dollar Cost Averaging Versus Lump Sum Investing

Dollar cost averaging is a process, where the same amount of funds is allocated to preset investment/s at regular intervals of time. It is widely believed that investors who choose to systemically allocate funds towards their investments are reducing their risk of investing their whole amount at the top of the price range.

Most individuals use dollar cost averaging to purchase investments. The reason behind these actions is the fact that most individuals are able to allocate funds for investing once a month or every two weeks for example, depending on the frequency with which they are able to save money. If our investor is able to save 15% of their illustrative $1000 monthly salary, which is paid every two weeks or twice/month, they would be able to allocate anywhere between $150 - $225 every month towards their retirement investments. The $225/month is derived for the situation where a person who is paid bi-weekly ends up receiving three paychecks instead of three. Either way, the typical 401 (k) investor would purchase the same funds whenever they get paid. The typical dividend investor would likely accumulate new contributions with any distributions from their portfolios, before they make their stock investments. Depending on portfolio sizes, minimum amount of purchases and amount of distributions per month, dividend investors end up purchasing different dividend stocks on a regular basis, which closely mimics the practice of dollar cost averaging.

Unfortunately, few investors have large amounts of cash simply sitting around, that they need to dollar cost average. For those lucky enough to have this happen to them, dollar cost averaging can be a tool to minimize risk of purchasing at the top. It would also help them in gaining more experience in the markets, particularly if they had none whatsoever previously. For lottery winners or those lucky individuals who happen to obtain a lump sum of cash, dollar cost averaging might be a great way to handle the bounty.

In order to test whether dollar cost averaging gives investors an advantage over lump sum investing, I obtained monthly data for the Vanguard S&P 500 mutual fund (VFINX) between 1981 and 2013. In order to calculate dollar cost averaging results for a given year, I would put $100 in investment every month beginning in the last day of the last month of the previous year, up until the last day of November for the next year. For lump-sum amounts, I would put a theoretical $1200 investment either at the closing prices for the previous year. I would then multiply the number of shares accumulated for both dollar cost averaging and lump sum investing times the ending prices by the end of the current year. Next, I would then compare which strategy delivered better results for the given year.

Year	Lump Sum	DCA	Result
1981	$     1,096.25	$     1,132.79	DCA Outperforms
1982	$     1,430.91	$     1,445.19	DCA Outperforms
1983	$     1,404.76	$     1,230.79	Lump - Sum Outperforms
1984	$     1,244.75	$     1,255.54	DCA Outperforms
1985	$     1,470.59	$     1,307.08	Lump - Sum Outperforms
1986	$     1,312.00	$     1,161.11	Lump - Sum Outperforms
1987	$     1,272.20	$     1,079.40	Lump - Sum Outperforms
1988	$     1,396.01	$     1,281.65	Lump - Sum Outperforms
1989	$     1,576.53	$     1,358.14	Lump - Sum Outperforms
1990	$     1,159.66	$     1,210.21	DCA Outperforms
1991	$     1,562.62	$     1,364.10	Lump - Sum Outperforms
1992	$     1,298.09	$     1,287.25	Lump - Sum Outperforms
1993	$     1,309.69	$     1,259.67	Lump - Sum Outperforms
1994	$     1,214.18	$     1,214.05	Lump - Sum Outperforms
1995	$     1,649.00	$     1,414.38	Lump - Sum Outperforms
1996	$     1,474.57	$     1,357.91	Lump - Sum Outperforms
1997	$     1,598.02	$     1,382.72	Lump - Sum Outperforms
1998	$     1,543.42	$     1,401.32	Lump - Sum Outperforms
1999	$     1,453.02	$     1,357.42	Lump - Sum Outperforms
2000	$     1,091.35	$     1,115.29	DCA Outperforms
2001	$     1,055.63	$     1,162.53	DCA Outperforms
2002	$       933.95	$     1,066.36	DCA Outperforms
2003	$     1,542.02	$     1,428.79	Lump - Sum Outperforms
2004	$     1,328.79	$     1,304.03	Lump - Sum Outperforms
2005	$     1,257.31	$     1,255.83	Lump - Sum Outperforms
2006	$     1,387.64	$     1,319.41	Lump - Sum Outperforms
2007	$     1,264.78	$     1,208.97	Lump - Sum Outperforms
2008	$       755.72	$       888.44	DCA Outperforms
2009	$     1,518.14	$     1,476.44	Lump - Sum Outperforms
2010	$     1,379.02	$     1,365.85	Lump - Sum Outperforms
2011	$     1,223.41	$     1,194.23	Lump - Sum Outperforms
2012	$     1,389.95	$     1,264.06	Lump - Sum Outperforms
2013	$     1,586.04	$     1,392.64	Lump - Sum Outperforms

Overall, lump-sum investing performed better in 25 out of 33 years. Dollar cost averaging performed better in only 8 out of 33 years. Not surprisingly, these were the years when the stock market was either flat or declined. As a result, dollar cost averaging reduces investor’s risk when things were difficult, but at the expense of foregone gains when things went well. Because stocks have a historical tendency to move up over time, investors who practice dollar cost averaging might be at a disadvantage. Of course, for those who practice dollar cost averaging because they didn’t have the lump-sum in the first place, this is still the best way to accumulate a sizeable nest egg.

In this exercise we did not look at other key components of investment which deals with investment selection, analysis, valuation and purchase. We assumed that these decisions have already been made. In reality however, there could be a situation where our investor might not find any potential assets that have sufficient low valuation to merit investment in them. Most index investors or savers in a 401 (k) invest regardless of overall valuations.

Full Disclosure: Long S&P 500 Index Fund in my 401 (k)

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Family Dollar Stores (FDO) Dividend Stock Analysis

Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low- and middle-income consumers in the United States. This dividend champion has paid dividends since 1976 and has managed to increase them for 38 years in a row.

The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 19.10% increase in the quarterly dividend to 31 cents /share. The company’s peer group includes Dollar General (DG), Dollar Tree (DLTR), and Wal-Mart Stores (WMT).

Over the past decade this dividend growth stock has delivered an annualized total return of 6.60% to its shareholders.

The company has managed to deliver a 10.40% average increase in annual EPS over the past decade. Family Dollar is expected to earn $3.15 per share in 2014 and $3.51 per share in 2015. In comparison, the company earned $3.83/share in 2013.

Family Dollar has a record of consistent share repurchases. Between 2004 and 2014, the number of shares decreased from 172 million to 115 million.

Future earnings per share growth will come from new store openings, same store sales growth, streamlining costs and reducing the number of shares outstanding. The big risk is the fact that there are so many dollar stores in the US, that future growth will likely hit a roadblock in the next five – ten years. In addition, a potential entry by Wal-Mart in the dollar store space could be detrimental for companies like Family Dollar.

The company recently announced it will close 370 underperforming stores in 2014. However, it also plans to increase number of stores by 525, which would still result in a net addition to store count. In addition, if you reduce number of locations where you are losing money, your bottom line would increase overall. Therefore, I do not think that this is such bad news after all. In addition, the company plans to slow down the number of store openings to 350- 400 in 2015, which is still close to a 4 – 5% growth in number of stores.

Given current store counts of about 8,000 locations, this could translate into store counts doubling in 20 years. The company is usually having stores in small towns, and those locations are usually viewed as a convenience neighborhood mart for shoppers. Its consumers are usually female, earnings less than $30,000/year, and 40% are relying on government assistance. I think that the proximity of Family Dollar stores is one of the factors that can result in repeating sales, and converting those customers into loyal followers. Family Dollar Stores has also managed to increase the variety of foods, including refrigerated ones, and qualify for inclusion in the food stamp program. Family Dollar’s limited time offerings also create excitement for consumers, and differentiates the chain from its competitors. In addition, it is increasingly accepting credit cards in its stores, which creates convenience for its customers.

The annual dividend payment has increased by 13.60% per year over the past decade, which is higher than the growth in EPS.

A 13.60% growth in distributions translates into the dividend payment doubling every five years on average. If we check the dividend history, going as far back as 1985, we could see that Family Dollar has actually managed to double dividends every six years on average.

The dividend payout ratio has increased slightly from 21% in 2004 to under 25% by 2013. 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 been on a rise from 19.70% in 2004 to 30.60% in 2013. 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 stock is attractively valued, as it trades at a forward P/E of 17.10 and yields 2.20%. For the first six years of my dividend growth journey, I used Family Dollar as an example of a good company which was always above my buy price. Now, I would view it as a buy on dips below $50/share. However, I think growth is slowing down, there will be new pressures on the sector. As a result, I might only add there if I am out of other ideas at the time cash is available for investment.

Full Disclosure: Long FDO, WMT

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