General Mills Delivers another Year of Consistent Dividend Growth

One of the ways I monitor dividend portfolio holdings includes checking on press releases about earnings, dividend increases and major changes. Once I have made an investment in a company, I like to check whether fundamentals are still solid, and whether earnings and dividends keep increasing.

One of the companies I own, General Mills (GIS), increased quarterly dividends over the past week. The company General Mills, Inc. manufactures and markets branded consumer foods in the United States and internationally. The company raised its quarterly dividends by 7.30% to 44 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends by 10.70%/year. Please check my most recent analysis of the company for more details.

Between 2004 and 2014, the company has managed to increase earnings per share from $1.38 to $2.83. This comes out to an average annual increase of 7.40%/year. Earnings are expected to be at $2.82 in 2015 and $3.01 in 2016. The company is experiencing near term headwinds in profitability, as consumers are getting more health conscious. Without further gains in earnings per share, future dividend growth will be limited and will be running on fumes (increases in the dividend payout ratio).

That being said, I still believe the company has what it takes to kick start growing earnings. Some of the things being done include cost containment initiatives, new products being introduced to target health conscious consumers and acquisitions of other brands or companies. The recent acquisition of Annie’s, Annie’s, Inc. is a natural and organic food company, could expand the company’s presence in the fast growing natural and organic food category. Savings from the company’s ongoing Holistic Margin Management (HMM) program are targeted to exceed $400 million in fiscal 2015, and several incremental cost-reduction actions launched in 2015 are expected to contribute to margin improvement in the second half. General Mills has a few initiatives to streamline its North American supply chain network and reduce overhead costs are on track to generate $40 million in cost savings in the second half of fiscal 2015. Cumulative annual savings from these efforts are expected to total between $260 and $280 million in fiscal 2016, and exceed $350 million in fiscal 2017.The company has also used share repurchases in order to reduce the number of shares outstanding from 818 million in 2005 to 632 million in 2014.

The international segment could also provide some long-term growth in earnings. It currently accounts to close to one third of sales. The thing about international sales is that their growth will be lumpy, since it will be heavily affected by currency fluctuations in the short-run.

Currently, the shares are meeting my entry criteria as they are selling at 18.70 times earnings, and yield 3.34%. The dividend payout is at 62%, which is slightly higher than what I want it to be. I may add to my position in the stock in January 2016, if shares are selling below $52.50/share. I have sold some puts on the stock. If exercised, my effective cost will be close to $48/share. If exercised, I would have reached a position size in my portfolio that would prevent me from adding more funds to this company. Given that information and given the slowdown in earnings growth, I view the company as a hold.

Full Disclosure: Long GIS

Relevant Articles:

- How to read my weekly dividend increase reports
- General Mills (GIS) Dividend Stock Analysis
- Rising Earnings – The Source of Future Dividend Growth
- I purchased this dividend machine last week
- Dividends versus Share Buybacks/Stock repurchases

Air Products and Chemicals (APD) Dividend Stock Analysis

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend champion has paid distributions since 1954 and increased dividends on its common stock for 32 years in a row.

The company's last dividend increase was in March 2014 when the Board of Directors approved an 8.50% increase to 77 cents/share. The company's largest competitors include Airgas (ARG), Praxair (PX) and Air Liquide (AIQUY).

Over the past decade this dividend growth stock has delivered an annualized total return of 12.20% to its shareholders.

The company has managed to deliver 5.70% in annual EPS growth since 2004. Analysts expect Air Products and Chemicals to earn $6.47 per share in 2015 and $7.26 per share in 2016. In comparison Air Products and Chemicals earned $4.59/share in 2014. Earnings per share does look a little lower than usual, due to one-time items.

Air Products and Chemicals is expected to post growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia.

While European divisions have been operating in a tough environment, Air Products and Chemicals is attempting to streamline operations and manage costs strategically. The company has been shedding unprofitable operations, and focusing on cost cutting initiatives, in order to boost the bottom line.

In order to grow, the company should focus on increasing volumes in the merchant segment, plus executing new projects on time and budged in the tonnage segment, while focusing on plan efficiency improvements. In addition, focusing on major customers in the electronics and performance materials segment, while also introducing new offerings that could increase margins and returns. Other important opportunities include focusing on the pricing and the right mix of productivity and cost reductions, in order to hit profitability and margin goals set for itself.

The company operates under long-term customer supply contracts, particularly in the gases on-site business. These contracts principally have initial contract terms of 15 to 20 years. There are also long-term customer supply contracts associated with the tonnage gases business within the Electronics and Performance Materials segment. These contracts principally have initial terms of 10 to 15 years. Additionally, they company has several customer supply contracts within the Equipment and Energy segment with contract terms that are primarily 5 to 10 years. Under those contracts, the Company has built a facility on land owned by the customer, and is essentially a de-facto monopoly in the specific geographic area for that customer.

Activist investor Bill Ackman has built a 10% stake in the firm, with his goal likely to push management to improve performance. This could be achieved either by passing on cost increases to customers, cutting costs or a combination of both.

The return on equity has decreased slightly from 15.80% in 2005 to 13.70% in 2014. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.20% per year over the past decade, which is higher than to the growth in EPS. Given the fact that earnings per share have been largely flat for the past five years, dividend growth has been running on fumes, mostly through the expansion of the dividend payout ratio. Without earnings growth, there is a limit to where dividends can rise. However, without certain one-time items, earnings per share are actually better off. Therefore, I am not worried in the case of Air Products & Chemicals.

An 11% growth in distributions translates into the dividend payment doubling every six and a half years. If we look at historical data, going as far back as 1985 we see that Air Products and Chemicals has managed to double its dividend every seven and a quarter years on average.

The dividend payout ratio increased from 40% in 2005 to 65.80%. This is a direct result of dividend growth exceeding earnings growth. Normally, I do not like seeing dividend payout ratios above 60%. In Air Products & Chemicals case however, I think that the payout is sustainable based on expected earnings in 2015. 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, Air Products and Chemicals is overvalued at 23.60 times earnings, yields 2% and has an adequately covered dividend. I would find the shares more appealing on dips below $123/share, equivalent to an entry yield of 2.50%.  I do not plan on adding to this position however, since this is one of the largest holdings in my portfolio. However, I do expect to hold on to this stock.

Full Disclosure: Long APD

Relevant Articles:

- Three Attractive Dividend Paying Companies to Consider
- Twenty Dividend Stocks I Recently Purchased for my 401 (k) Rollover
- Lower Entry Prices Mean Locking Higher Yields Today
- Looking for dividend bargains in an overheated market
- Dividend Investing – Science versus Intuition

Dividend Investors: Avoid Living in the Past

One of the reasons why some have ventured towards the world of dividend growth investing, is due to the marvelous success stories of the past. If you or someone in your family had put a mere $1000 in Coca-Cola (KO), Procter & Gamble (PG) or a Johnson & Johnson (JNJ) thirty years ago, your stake would be worth a lot, and you would likely be earning double digit yields on cost.

Such examples illustrate the true power of dividend growth investing as a strategy that can provide investors with a rising stream of passive income that is directly tied to the fundamental success of the businesses you are investing in. These examples are very inspiring, and show that a patient dividend investor can do pretty well for themselves if they select companies with the following characteristics:

1) A company with competitive advantages, pricing power and a growing market for its products/services
2) A company that generates so much extra cash, and has such a high return on equity, that it ends up increasing dividends for at least a decade
3) A company that is attractively valued at the time of purchase

If you are a serious dividend investor, I would strongly encourage you to study the history of all the greatest dividend growth stocks. This is in order to learn about the factors that had made these companies successful enough, so that they could afford to increase dividends for 40 – 50 years in a row. The knowledge should accumulate over time, and hopefully help you to spot those existing champions that can keep rewarding you with higher dividends or those emerging dividend achievers that can afford to raise distributions for several decades in the future.

However, there are no guarantees that the past performance will continue. The thing is that the world changes, and evolves over time. The destructive forces of capitalism continuously attack any moat out there, in pursuit of gaining market share and more profits. Technological innovations, changes in competitive nature and consumer habits can alter the business model of the company with the best defended moat of today. As a result, dividend investors should not be blinded and emotionally attached to each individual stock in their portfolio.

A few fallen angels from the list of dividend kings include Winn-Dixie and Masco (MAS). Other fallen dividend growth stocks include Bank of America (BAC) and Wachovia (WB).

While I am a buy and hold forever type of an investor, I realize that I would have turnover in my portfolio. As a result, I have several fail-safe mechanisms, whose goal is to protect me from getting too emotionally attached to a single stock, and failing to see that its business is never going to recover.

My fail safe mechanisms are:

1) Maintaining a diversified dividend portfolio, consisting of at least 40 – 50 individual companies
2) Focus on companies that have raised dividends for at least 10 years in a row
3) Selling a dividend stock after it cuts dividends
4) Reinvesting dividends selectively in other quality companies at fair prices
5) Purchasing companies that have increased earnings and which are not overvalued

In addition, next time you analyze a great company like Coca-Cola (KO), it is important to try and look past the dividend growth history. In other words, do not simply look at the dividend history, and assume the good times would continue indefinitely, without doing any additional research on the company. If the company manages to increase dividends for another 50 years, that is great. However, try to be realistic, and determine if there are growth catalysts that can allow it to keep earning more and paying more in dividends to you. Merely projecting past dividend growth, without doing any due diligence about where future raises could potentially come from, could prove to be costly for your dividend retirement.

In the case of Coca-Cola (KO), the company has hundreds of brands that it sells around the world. In addition, it has a very strong distribution network, and pricing power on its strong brands. The increasing in number of people around the world who can afford the refreshing products the company is offering, will most likely bode well for sales and profits over the next 15 – 20 years.

That being said, even for a great company like Coca-Cola (KO), you should avoid paying more than 20 times earnings at a time. Even for an outstanding company, you need to have a margin of safety by purchasing only when prices are fairly valued. If you overpay for a quality company, and something changes dramatically in a few years, you would lose far more compared to a scenario where you bought at lower prices.

On the other hand however, you should also avoid focusing too much on minutiae, and losing focus on the big picture as well. The worst mistakes I have made involved selling companies because they got a little overvalued, getting impatient because growth slowed down temporarily, and usually purchasing something inferior in the process. There are always reasons not to buy a stock, but unfortunately it would take many years, before you can realistically determine their validity. If you do start with companies that have a proven track record of growing dividends, but then study each company in detail for growth catalysts and fair entry valuations before you buy, you should do well in a diversified portfolio held patiently for the long run.

This is why dividend investing is more art than science. You essentially look for companies that have grown dividends in the past, but need to do your own due diligence in evaluating whether the good times can continue for a couple of decade.

The ultimate goal for you is to generate more dividends from your portfolio every year for the next 20 - 30 years after you retire. In order to achieve your goal, you need to avoid being emotionally attached to the stocks you hold, and be realistic about their position. History doesn’t repeat, but it rhymes.

Full Disclosure: Long KO, PG, JNJ

Relevant Articles:

- Five Metrics of Successful Dividend Companies
- Why Sustainable Dividends Matter
- How to be a successful dividend investor
- Dividend Growth Stocks – The best kept secret on Wall Street
- Emotionless Dividend Investing

Turbocharge Income Growth with Dividend Reinvestment

Many of you are aware of the power of compounding. When you invest in a company that manages to grow dividends every year, and you are able to reinvest those dividends as well, you are turbocharging the growth of your dividend income. If you put in that potent combination in a tax-advantaged account such as a Roth IRA, and you have essentially planted a seed that will generate tax-free income for many years to come.

I usually reinvest dividends automatically only in my tax-deferred accounts such as IRA’s. I always reinvest dividends automatically in tax-deferred accounts, because I am limited in the amount and timing of contributions, and I cannot easily move money from one account to another. I recently reviewed two separate investments I made in Roth IRA on two separate occasions in the past.

The first investment I did in a Roth IRA was in 2009, when I purchased shares of Abbott Laboratories (ABT). After 6 years of reinvesting dividends, I ended up with shares of ABBV and ABT, which are generating approximately 8.90% on the amount I put to work initially. I was able to achieve this merely by checking the button to “reinvest dividends”. I liked the company Abbott between 2008 and 2012 ( prior to its split). I am still holding on to both shares, and I still reinvest those dividends in the Roth IRA.

Four Dependable Dividend Stocks I Bought Last Week

I made a few transactions last week, all of which included existing positions. Overall, it is getting difficult to find attractive companies to invest in these days. However, it is not impossible if you are willing to dig around a little.

I first sold my last shares of Family Dollar (FDO). The company will be acquired by Dollar Tree (DLTR) in a few months, for mostly in cash, which leaves no further upside. The company was one of my best performers ever, and has more than tripled since 2008. The sad part is that I didn’t add as aggressively as I should have. Hindsight is of course always 20/20 – in Family Dollar case however I expected fundamentals to improve, yet my valuation was often very conservative. I have held on to the shares, despite the limited upside present at this moment, since I was hoping for a correction. Market timing is a fools errand, so I guess I managed to make a few mistakes right away. Why am I saying that – to share experiences, and hopefully someone can learn from my mistakes. If you do not regularly review investments made, you will never realize whether you are making mistakes, and you will never learn.

I used those funds to add to my position in Ameriprise Financial (AMP). Ameriprise Financial, Inc., through its subsidiaries, provides various financial products and services to individual and institutional clients in the United States and internationally. The company has increased dividends for 9 years in a row. The five year dividend growth rate is at 27.20%/year, mostly due to the fact that distributions grew faster than profits. Ever since I profiled the company in 2013, I made a few purchases in it. However, the stock went up too quickly and I didn’t like the entry yield. However, I do like the company’s business model, and find assets to be sticky. I think that it has a bright future ahead, although the ride will be bumpy. If stock prices go lower, the shares will be available at even better valuations. The stock is selling for 16 times earnings and pays 1.75%. Check my analysis of Ameriprise Financial.

I also added to my position in three Real Estate Investment Trusts (REITs) on Friday. I am somewhat cautious on REITs these days however, as I believe that there is further downside. I would not be surprised if prices go lower from here, thus enabling better entry valuations. With interest rates expected to increase at some point in the near future, buying REITs today sounds like a crazy decision. The reason why I am buying REITs is in order to get broader exposure to the sector. The second reason I like REITs is because if the economy keeps improving, there will be more business activity, higher demand for real estate for rent or lease, and hopefully better rent increases when leases are renewed. Third, I do not believe interest rates will go up that much beyond 4% - 5% for the 10-year Treasury. I also think this will be more of a gradual process, that will take several years, and will not happen overnight. This would allow REITs to slowly rollover their maturing obligations over the next decade, and would not have an immediate impact for several years. The impact of potentially higher interest rates will be offset again by increased occupancy rates, and increased rent growth rates. The fourth reason is that I like the dependable rent streams, generated under the trusts mentioned below, under long-term leases. In addition, the higher current yields will provide some extra cashflow that will come in handy if the stock market has a more extended drop over the next few years. Everyone has been giddy with excitement from the successful 6 year bull market, so something “unexpected” is bound to be around the corner to shake out the weak hands. Only during downturns do many investors realize how comforting it is to count on the cash dividends, and not only on fickle capital gains.

The companies I added to include:

HCP, Inc. (HCP) is an independent hybrid real estate investment trust. The fund invests in real estate markets of the United States. It primarily invests in properties serving the healthcare industry including sectors of healthcare such as senior housing, life science, medical office, hospital and skilled nursing. This dividend champion has rewarded shareholders with a raise for 30 years in a row. The ten year dividend growth rate is 2.70%/year. The REIT sells for 13.40 times FFO and yields 5.60%. Check my analysis of HCP.

Omega Healthcare Investors, Inc. (OHI) is a real estate investment firm. The firm invests in the real estate markets of United States. It invests in healthcare facilities, primarily in long-term healthcare facilities in order to create its portfolio. This dividend achiever has rewarded shareholders with a raise for 13 years in a row. The ten year dividend growth rate is 10.90%/year. The REIT sells for 13.30 times FFO and yields 5.60%. Check my analysis of Omega Healthcare Investors.

W. P. Carey Inc. (WPC) is an independent equity real estate investment trust. The firm primarily invests in commercial properties that are generally triple-net leased to single corporate tenants including office, warehouse, industrial, logistics, retail, hotel, R&D, and self-storage properties. This dividend achiever has rewarded shareholders with a raise for 18 years in a row. The ten year dividend growth rate is 7.50%/year. The REIT sells for 13.70 times FFO and yields 5.80%. Check my analysis of W.P. Carey.

Full Disclosure: Long AMP, HCP, WPC, OHI

Relevant Articles:

- Five Things to Look For in a Real Estate Investment Trust
- Four Dividend Stocks for the Long Run
- Dividend Growth Stocks Are Still Great Acquisition Targets
- I bought this quality dividend paying stock last week
- How to invest for dividends when markets are overvalued