Altria Group's 6% Dividend Hike

When companies decide to share a portion of their earnings with their shareholders, it is a sign of prudent fiscal discipline. Shareholders who are rewarded on a timely basis in the form of dividend payments are less likely to sell their holdings, even during a steep market correction. However, when companies decide to raise their distributions they exert strong confidence in their near-term performance. This dividend increase is a strong bullish signal especially if it comes after a long string of consecutive dividend increases.

Several companies announced that their boards of directors have approved dividend increases. The companies include:

Altria Group, Inc. (MO), which engages in the manufacture and sale of cigarettes and other tobacco products in the United States, increased its quarterly dividend by 6.3% to 34 cents per share. The stock currently yields 7.50%. Check my analysis of the stock.

MGE Energy, Inc. (MGEE), which engages in generating, purchasing, transmitting, and distributing electricity, increased its quarterly dividend by 8% to 14 cents per share. MGE Energy, Inc. is a dividend achiever, which has increased its quarterly dividend for 34 consecutive years. The stock currently yields 3.90%.

HCC Insurance Holdings, Inc. (HCC), which provides property and casualty, surety, group life, accident, and health insurance coverage, as well as related agency and reinsurance brokerage services to commercial customers and individuals., increased its quarterly dividend by 8% to 13.50 cents per share. HCC Insurance Holdings, Inc. is a dividend achiever, which has increased its quarterly dividend in each of the past thirteen years. The stock currently yields 1.90%.

Delta Natural Gas Company, Inc. (DGAS), which sells and distributes or transports natural gas to customers in central and southeastern Kentucky., increased its quarterly dividend by 1.6% to 32.50 cents per share. The company has raised dividends consistently since 2005. The stock currently yields 5.20%.

G&K Services, Inc. (GKSR), which provides branded identity apparel and facility services programs in North America., increased its quarterly dividend by 7% to 7.5 cents per share The stock currently yields only 1.30%.

Alliance Financial Corporation (ALNC), which which provides various banking products and services to commercial, retail, government, and investment management customers, increased its quarterly dividend by 7.7% to 28 cents per share. The stock currently yields 4.00%.

Guess?, Inc. (GES), which designs, markets, distributes, and licenses lifestyle collections of apparel and accessories for men, women, and children., increased its quarterly dividend by 25% to 12.5 cents per share. The stock currently yields 1.40%.

ESSA Bancorp, Inc. (ESSA), which provides financial services to individuals, families, and businesses in Pennsylvania, increased its quarterly dividend by 25% to 5 cents per share. The stock currently yields only 1.20%.

Harris Corporation (HRS), which operates as a communications and information technology company that serves government and commercial markets worldwide, increased its quarterly dividend by 10% to 22 cents per share. The stock currently yields 1.90%.

In summary I view Altria's dividend increase as a bullish sign for the company stock. The company seems to be following its policy of consistent dividend increases that it used to follow before the spin-offs of Philip Morris International (PM) and Kraft Foods (KFT) I do however also own some Philip Morris International in order to benefit from international exposure to the tobacco sector.

Full Disclosure: Long PM and MO

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V.F. Corporation (VFC) Dividend Stock Analysis

V.F. Corporation, together with its subsidiaries, engages in the design, manufacture, and sourcing of branded apparel and related products for men, women, and children in the United States. It owns a portfolio of brands in the jeanswear, outerwear, packs, footwear, sportswear, and occupational apparel categories. The company is also a member of the S&P Dividend Aristocrats index.
V.F. Corporation has consistently increased dividends for 36 consecutive years. The company last announced a dividend raise in October 2008.

Over the past decade this dividend growth stock has delivered an average total return of 5.70% annually. The stock price decreased from its all time highs of $96.20 in 2007 to a multi-year low of $38.22 in 2008, before strongly recovering from its lows.

The company has managed to deliver a 6.80% average annual increase in its EPS between 1999 and 2008. V.F. Corporation is expected to earn $4.90 share in FY 2009, followed by $5.50/share in FY 2010. The company is currently experiencing some short term in demand, which has led to a drop in revenues. If this recession proves to be a short one, the company would certainly manage to hit its annual goals of 8% annual revenue growth. The company’s foreign operations do have the ability to generate strong revenue growth over time. Another part of V.F. Corp’s growth strategy entails buying brands that could utilize the company’s extensive distribution network and result in economies of scale to produce the new apparel brands at a lower cost.

The Return on Equity has generally remained stable around 17% with the exception of 2000 and 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 11.90% annually since 1999, which is higher than the growth in EPS. Much of the increase came from V.F. Corporation’s 90% dividend increase in 2006. If we take this big increase out of the dividend growth calculation, we would see that the company typically raises distributions by an average of 3% to 5% annually.
A 12 % growth in dividends translates into the dividend payment doubling every six years, whereas at a 4% growth rate it could take 18 years for the dividend payment to double. If we look at historical data, going as far back as 1986, V.F. Corporation has actually managed to double its dividend payment every eight years on average.


The trends in the dividend payout ratio have closely tracked short term EPS weakness in 2000 and 2001 by rising to disproportionate levels. It also fell to 24% before the company decided to drastically raise distributions by 90% in 2006. The ratio has largely remained under 50% over the past decade, which is a good sign. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently V.F. Corporation is attractively valued, trading at 14 times earnings, yields 3.50% and has an adequately covered dividend payment. I would be looking forward to initiating a small position in V.F. Corporation (VFC) on dips.

Full Disclosure: No position at the time of writing

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Financial Stocks for Dividend Investors

Financial stocks, which used to be great dividend investments, have had their share of troubles over the past two years. The sector has rebounded sharply since hitting its lows in March. Since the major dividend growth stories of the past such as Bank of America (BAC) and US Bancorp (USB) have cut dividends, most dividend growth investors seem to have a very low allocation to the sector. As a result dividend investors could suffer inferior risk adjusted returns in the future since they won't own any financial stocks.

There are several alternatives for investors who are underweight the financial sector right now. One of them involves purchasing shares in some of US insurance companies such as Aflac (AFL) or Chubb (CB), which offer decent yields and have a long history of dependable dividend growth.

Another alternative is buying shares in the five major Canadian banks, which seem to have escaped the financial meltdown. While none of them have increased their dividends in over one year, they have not cut them either. In addition to that major Canadian banks spot very decent yields as well. It is important to check individual payout ratios in order to gauge the sustainability of the dividend payments. The major Canadian banks include
Toronto-Dominion Bank (TD) , Bank of Montreal (BMO), Royal Bank of Canada (RY), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS).

Buying Preferred stocks could also be a decent bet on the long recovery of US financial institutions. Preferred shares have a higher ranking than ordinary shares in the event of a bankruptcy, but a lower priority relative to bonds. Preferred stocks do not have voting rights but have a fixed dividend payment, just like a bond. Preferred stockholders are also first in line to receive dividend payments, which are typically fixed. They don’t typically get to share in the prosperity of the enterprise however as preferred stock dividends do not increase. In tough economic conditions however, preferred stock dividends are much less likely to be cut or suspended; as long as the company continues operating as a going concern preferred stock dividends continue getting paid. In addition to that if you buy a cumulative preferred stock, the company is obligated to pay distributions to you even if it skips a few payments. That is of course as long as the company is not bankrupt. These two ETFs PFF and PGF are good vehicles to gain exposure to preferred stocks. Most of the issues they hold are in the financial sector.

Some investors also believe that the major US financial institutions would one day return to their former glory. This could mean that companies like Bank of America (BAC), Citigroup (C) and US Bancorp (USB) could yield very decent returns if they were to increase distributions to their 2007 levels. This option of getting exposure to financials is the riskiest of all, since most of the TARPed financial institutions are already paying billions in dividends to the Treasury every year. In addition to that the Treasury and other strategic investors might elect to convert their preferred stock into common, which would dilute existing shareholders. Last but not least it is very difficult to forecast how the US banking industry would look like a few years from now. Just because a bank survives the meltdown, does not mean it would be a solid long-term investment.
The strong gains off the March lows have definitely pushed financial stocks in overbought territory. Thus, if you believe that owning US banks provides you with the best exposure to the US financial sector, you might consider waiting to buy them on pullbacks.

These options could either be used on a standalone basis or in a combination. As a dividend growth investor I currently own mostly insurers and have a position in one of the Canadian banks. I might add to my Canadian exposure, which also provides international diversification for my portfolio.

Full Disclosure: Long AFL, CB and TD

This article was included in the Carnival of Personal Finance 221- Labour Day Edition

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Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated, through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance in the USA and Japan. The company is member the S&P Dividend Aristocrats index.
Aflac has consistently increased dividends for 27 consecutive years. The company announced a 16.70% dividend raise in October 2008.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 3.90% annually. The stock fell from its all time high of $68.81 in 2008 to a multi-year low of $10.83 in March 2009, before recovering by 300% off its lows.

The company has managed to deliver a 10.80% average annual increase in its EPS between 1999 and 2008. Aflac is expected to earn $4.70 share in FY 2009, followed by $5.15/share in FY 2010. The company generates over 70% of its revenues in Japan. New distribution channels in the country for Aflac’s supplemental health and life insurance plans, which are not covered by Japanese healthcare, would drive sales in the future. The brand recognition that the company is building in the US should also be a strong driver of growth over time, in addition to focusing on retirement services targeting the baby boomers.

The Return on Equity has ranged over the past decade between a low of 12% and a high of 19%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 22.90 % annually since 1999, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the amounts this insurer has spent on stock buybacks.
A 23 % growth in dividends translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1986, Aflac has actually managed to double its dividend payment every four and a half years on average.

The dividend payout ratio has increased rather sharply over the past two years, but is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Aflac is trading at 16 times 2008 earnings, yields 2.70% and has an adequately covered dividend payment. I would be looking forward to adding to my position in Aflac (AFL) on dips below $37.30.

Full Disclosure: Long AFL

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Cincinnati Financial’s Dividend Surprise

Cincinnati Financial (CINF) surprised investors in a positive way, after the provider of property, casualty, personal, and life insurance products to businesses and individuals in the United States upped its quarterly dividend from 39 to 39.5 cents/share.

Kenneth W. Stecher, president and chief executive officer, commented, "The company has consistently increased dividends for 48 years, and the board of directors chose to continue that record for the benefit of our shareholders. This action demonstrates their confidence in our strong capital, liquidity and financial flexibility and in our initiatives to improve earnings performance."

The company last increased its dividend in 2008. If it hadn’t raised it in 2009, the Cincinnati, Ohio based insurer would have been booted out of both the dividend aristocrats and dividend achievers indexes.

The company is a hold for me right now, as it has pretty disappointing short-term EPS prospects. Its insurance premiums are under pressure on increased competition. It might not be able to cover its dividend payment by a factor of 2 until 2010 or 2011.
Half of the company’s investment portfolio was allocated to equities in 2007. The losses in the stock markets and an initiative to reduce equity exposure lead to a decrease in the equity exposure to 33% in 2008.

Three other companies announced dividend hikes over the past week as well.

Getty Realty Corp. (GTY), which engages in the ownership and leasing of retail motor fuel and convenience store properties, and petroleum distribution terminals, increased its quarterly dividend from 47 to 47.50 cents per share. This dividend achiever currently yields 8.50%.

ITC Holdings Corp. (ITC), which invests in the electricity transmission grid to improve electric reliability, improve access to markets, and lower the overall cost of delivered energy, increased its quarterly dividend by 4.90% to 32 cents per share. This is the fourth consecutive dividend increase for ITC Holdings Corp. since the company went public in 2005. The stock currently yields 2.60%.

Nordson Corporation (NDSN), which manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing., increased its quarterly dividend by 4.10% to 19 cents per share. This represents the 46th consecutive year of annual dividend increases for this dividend achiever. The stock currently yields 1.50%.

Full disclosure: Long CINF

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