Dividends Unlock Value

Cash sitting on company balance sheet that's not utilized earns no/small return. There's a risk it would be pissed away/wasted on low roi m&a, corp jets, exec comp. 

1. Sending that cash to shareholders, who can deploy at 10%/year (historical annuialized return on US Stocks) is better than having that money rot away at much lower, if any returns.

2. Unused cash on balance sheet is valued at a discount by marketplace, due to lack of visibility as to what would happen to it. Would it be pissed away on corp jets/pet projects or just invested without any thought of profitability?

Cash on the balance sheet is not always going to be valued at 100% by the market.

It’s very likely that this cash on the balance sheet is valued at a discount. 

That’s because there is an opportunity cost to that cash. There is also the possibility that this cash is wasted on bad acquisitions, purchases, corporate jets, management perks. If you have too much cash on hand, the possibility to piss it all away in a heartbeat increases exponentially. Plus, there is a time value of money cost, where the present value of a future outlay is lower and lower the longer you have to wait.

For example, if I receive $100 today in my bank account, I will have $105 in 1 year at a 5% interest rate.

But, if I have to wait to receive that $100 in one year, I am now $5 poorer. (because I miss out on generating a return on that money for a whole year)

Hence, by paying a dividend, the company actually unlocks hidden value that’s stuck on the balance sheet.

If a company does not have uses for cash, it’s going to sit unused on the balance sheet.

As I mentioned above, there is an opportunity cost attached to unused cash on the balance sheet. It gathers the dust of opportunity cost.

For example, if that cash sits on the Balance Sheet earning a minimal return of say 4%, it’s not going to amount to much. It’ll possibly fail to keep up with inflation over time by much.

However, if that cash is distributed to shareholders, they can put it to good use. Long-term returns in the US  Stock Marekt are at 10%/year. 

Hence, investing that money as a shareholder at 10%/year sure beats having that cash gather dust on the balance sheet and make only 4%/year.

Sending this excess cashflow out to shareholders is helpful, because they can reinvest it at a high ROI elsewhere. If they reinvest it into a portfolio of other investments, these shareholders are further diversifying their investments. After all, many companies end up failing. Hence, the prudent thing to do would be to wring out any excess cashflows from them while they are still operating as a going concern, instead of it being pissed away on M&A or executive perks or low ROI projects, and invest it prudently into a diversified portfolio of American Businesses. 

In general, I am a proponent of the idea where businesses reinvest only the cashflows that can be invested at a high hurdle ROI rate. Anything that cannot be deployed intelligently at such a rate, should be sent out to shareholders. 

This is the framework that no other, but Warren Buffett effectively uses at Berkshire Hathaway. He lets managers manage businesses at they see fit. However, when it comes to capital allocation, he asks that they only reinvest capital back into their business, provided they earn a minimum rate of return on these projects (e.g. 15%). If they cannot deploy capital at this hurdle rate, he asks that they send this excess cashflow to him, so that he can deploy it intelligently elsewhere.

These are just a few high level thoughts I have on the topic. I can expand further in future posts.

Eight Dividend Growth Companies Rewarding Shareholders With Raises Last Week

The US Stock Market is one giant dividend growth machine. What is truly remarkable is that the record of dividend payments by US corporations heavily favors rising dividends over declining dividends, almost irrespective of prevailing business conditions.

You can see how annual dividends on S&P 500, which is used as a barometer for the overall health of the US Stock Market, have gone up and up almost uninterruped over the long run. The only correction happened in 2008, when the whole US Economy was on its knees.

US Dividends grow over time, because companies grow earnings over time. You cannot fake the cash that's needed to pay those dividends. Thus, only companies that can make actual profits tend to pay and grow those dividends. Speculative companies typically cannot afford to pay dividends.

I typically focus my attention on companies that have managed to grow dividends for at least a decade. Those are the best companies in the US, with strong competitive advantages, which drown their shareholders with rising torrents of cash each year. Such companies can be found on the lists of dividend champions, dividend aristocrats, dividend kings and dividend achievers.

As part of my reviews, I review the list of dividend increases each week. I use this review as part of my monitoring process. This exercise helps me monitor existing holdings and potentially identify companies for further research.

Last week, there were eight companies that both managed to raise dividends to shareholders, and also have a ten year track record of annual dividend increases under their belt. The companies include:

Avient Corporation (AVNT) operates as a formulator of material solutions in the United States, Canada, Mexico, Europe, South America, and Asia. It operates in two segments, Color, Additives and Inks; and Specialty Engineered Materials.

The company raised quarterly dividends by 4.90% to $0.27/share. This is the 13th consecutive annual dividend increase for this dividend achiever.  In the past 5 years, annualized dividend growth has been at 7.20%.

Between 2014 and 2023, the company's earnings went from $0.86/share in 2014 to $0.83/share in 2024.

Avient is expected to earn $2.64/share in 2024.

The stock sells for 18.35 times forward earnings and yields 2.22%.

A. O. Smith Corporation (AOS) manufactures and markets residential and commercial gas and electric water heaters, boilers, heat pumps, tanks, and water treatment products in North America, China, Europe, and India.

The company raised quarterly dividends by 6.25% to $0.34/share. This is the 31st consecutive annual dividend increase for this dividend aristocrat. The company has managed to grow dividends at an annualized rate of 18.20%. The five year annualized rate of dividend growth is 9.90%, and decelerating.

The company has managed to grow dividends at an annualized rate of 16.20% over the past decade.

Between 2014 and 2023 the company grew earnings from $1.15/share to $3.71/share.

The company is expected to earn $3.96/share in 2024.

The stock sells for 20.40 times forward earnings and yields 1.70%. 

Agree Realty Corporation  (ADC) is a fully integrated real estate investment trust (“REIT”) primarily focused on the ownership, acquisition, development and management of retail properties net leased to industry leading tenants. 

The REIT increased monthly dividends by 1.20% to $0.253/share. The monthly dividend reflects an annualized dividend amount of $3.036 per common share, representing a 2.4% increase over the annualized dividend amount of $2.964 per common share from the fourth quarter of 2023. This is the 12th consecutive annual dividend increase for this dividend achiever.

The company has managed to grow dividends at an annualized rate of 5.90% over the past decade.

Agree Realty Corporation grew FFO from $2.18/share in 2014 to $3.58/share in 2023.

The REIT is expected to generate FFO of $4.09/share  in 2024.

The REIT sells for 18 times forward FFO and yields 4.13%.

Canadian Natural Resources Limited (CNQ) acquires, explores for, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids (NGLs).

The company raised quarterly dividends by 7.10% to $0.5625/share. This will make 2025 the 25th consecutive year of dividend increases by Canadian Natural, with a CAGR of 21% over that time.

The company has managed to grow dividends at an annualized rate of 16.84%.

Between 2014 and 2023, the company grew earnings from $1.80/share to $3.77/share.

Canadian Natural Resources is expected to earn $3.57/share in 2024.

The stock sells for 14.50 times forward earnings and yields 4.35%.

Calvin B. Taylor Bankshares, Inc. (TYCB) operates as the holding company for Calvin B. Taylor Banking Company that provides commercial banking products and services.

The company raised quarterly dividends by 2.90% to $0.36/share. This dividend champion has managed to grow distributions for 35 years in a row. Over the past decade, the company has managed to grow dividends at an annualized rate of 3.60%.

Earnings per share went from $1.39 in 2013 to $4.89 in 2023.

The stock sells for 12.60 times earnings and yields 2.91%.

Northwest Natural Holding Company (NWN) provides regulated natural gas distribution services to residential, commercial, and industrial customers in the United States.

The company raised quarterly dividends by 0.50% to $0.49/share. This is the 69th year of consecutive annual dividend increases for this dividend king. Over the past decade, the company managed to grow dividends at an annualized rate of 0.60%.

Between 2014 and 2023 the company managed to grow earnings from $2.16/share to $2.59/share.

The company is expected to earn $2.31/share in 2024.

The stock sells for 17.25 times forward earnings and yields 4.92%.

THOR Industries, Inc. (THO) designs, manufactures, and sells recreational vehicles (RVs), and related parts and accessories in the United States, Germany, Canada, rest of Europe, and internationally. 

The company raised quarterly dividends by 4.20% to $0.50/share. This is the 15th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 7.63%.

Between 2015 and 2024, the company grew earnings from $3.75/share to $4.98/share.

The company is expected to earn $5/share in 2025.

The stock sells for 22 times forward earnings and yields 1.82%.

Terreno Realty Corporation (TRNO) acquires, owns and operates industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C.

The company raised its quarterly dividends by 8.90% to $0.49/share. This is the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, this company has managed to grow dividends at an annualized rate of 12.70%.

Between 2014 and 2023, the REIT managed to grow FFO/share from $0.86 to $2.23.

Terreno is expected to generate FFO of $2.42/share in 2024.

The stock sells for 26.20 times forward FFO and yields 3.10%.

Warren Buffett and Strategy Diversification

Many investors discuss Buffett on diversification, and conclude that he ran a "concentrated portfolio"

This is missing the nuance that he was diversified in terms of strategies he followed, especially in his early years. The best investors in the world tend to build their investment records by following a multi-strategy approach. Buffett is no exception, as this post will demonstrate.

Buffett was a very successful fund manager. He was able to compound money at close to 30%/year before fees for 14 years in his partnership.

What built his wealth was the fact that Buffett obtained 25% of any profits over 6% that the partnership generated.

Many investors are not fully aware that when he ran the Buffett Partnership, Warren Buffett essentially followed three different strategies

He focused on:

1. Generally undervalued securities ("Generals") - These were generally undervalued securities, where Buffett waited for valuation to correct upwards.

2. Work-Outs - stock affected by corporate events like mergers & acquisitions, spin-offs, reorganizations &liquidations. Buffett did mention that this strategy would produce relatively stable earnings from year to year, .

3. Control Situations These were events where the partnership would initiate a large enough position in a company and try to influence corporate policy. 

A famous control situation is Berkshire Hathaway (BRK.A), which started out as an undervalued position.

Enjoy a more detailed overview from the 1957 Buffett Partnership Letters below:

You can read the Buffett Partnership Letters from 1957 - 1970 there:

Buffett Partnership Letters

The best investors in the world tend to build their investment records by following a multi-strategy approach.  That provides diversification in returns. We saw how this has been the case with Warren Buffett in his early years. He has also followed a similar strategy in his later years with Berkshire Hathaway as well. 

The same has been the case with other great investors such as Peter Lynch and Ben Graham for example. We will be discussing those investors (and more) in future posts. Please stay tuned!

Five Dividend Growth Companies Raising Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. It's helpful as one of the things I use to review how existing holdings are doing. It's also helpful to potentially add new companies on my radar for further research.

I typically focus my attention on companies that have managed to increase dividends annually for at least a decade. This is a good way to gauge quality, and put a company on my list for further review from there.

Over the past week, there were five companies that managed to increase dividends and also have a ten year track record of annual dividend increases:

American Financial Group, Inc. (AFG) is an insurance holding company that provides specialty property and casualty insurance products in the United States.

The company increased quarterly dividends by 12.70% to $0.80/share. This is the 19th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 12.40%.

Between 2014 and 2023, the company grew earnings from $1.43/share to $1.77/share.

The company is expected to earn $11.01/share in 2024.

The stock sells for 12.20 times forward earnings and yields 2.30%.

Arrow Financial Corporation (AROW) is a bank holding company, which provides commercial and consumer banking, and financial products and services.

The company raised quarterly dividends by 3.70% to $0.28/share. This is the 31st year of consecutive annual dividend increases for this dividend champion. Over the past decade, the company has managed to grow dividends at an annualized rate of 3.40%.

Between 2014 and 2023, the company grew earnings from $1.43/share to $1.77/share.

Arrow Financial is expected to earn $2.05/share in 2024. 

The stock sells for 13.50 times forward earnings and yields 4%.

Bank OZK (OZK) provides various retail and commercial banking services for individuals and businesses in the United States. 

Bank OZK raised quarterly dividends by 2.50% to $0.41/share. That's a 10.80% raise over the dividend paid during the same time last year. This is the 28th year of consecutive annual dividend increases for this dividend aristocrat. Over the past decade, the company has managed to raise dividends at an annualized rate of 14.70%.

Between 2014 and 2023, the company grew earnings from $1.53/share to $5.89/share.

The company is expected to earn $6.02/share in 2024.

The stock sells for 7 times forward earnings and yields 3.88%. 

Lockheed Martin Corporation (LMT) a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments. 

The company raised quarterly dividends by 4.80% to $3.30/share. This is the 21st consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 9.80%.

Between 2014 and 2023, the company grew earnings from $11.41/share to $27.65/share.

The company is expected to earn $26.54/share in 2024.

The stock sells for 22.85 times forward earnings and yields 2.18%.

RPM International Inc. (RPM) manufactures and sells specialty chemicals for the industrial, specialty, and consumer markets worldwide. 

RPM increased its quarterly dividends by 10.90% to $0.51/share. This is the 51st consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to raise dividends at an annualized rate of 6.50%.

Between 2015 and 2024, the company managed to grow earnings from $1.81/share to $4.58/share.

The business is expected to earn $5.52/share in 2025.

The stock sells for 23 times forward earnings and yields 1.60%.

Relevant Articles:

- Six Dividend Growth Stocks Increasing Dividends Last Week

- Five Dividend Achievers Raising Dividends Last Week

- Six Dividend Growth Stocks Rewarding Shareholders With Raises

- Four Dividend Growth Stocks Raising Dividends Last Week

Six Dividend Growth Stocks Increasing Dividends Last Week

I review the list of dividend increases each week, as part of my monitoring process. This exercise helps me monitor existing holdings and potentially identify companies for further research.

Dividend increases offer a good gauge for management's opinion on near terms business conditions and their affect on company cashflows. As a result, dividend increases can provide a good overview of management's assessment of the business environment. Changes in the pace in dividend increases could provide valuable insight about the business, in conjunction with other factors at play, that could potentially provide investors with a slight edge.

I identified six companies that increased dividends last week. All of these companies have managed to increase dividends for at least a decade. My short review of each company is listed below:

Accenture plc (ACN) is a professional services company, provides strategy and consulting, industry X, song, and technology and operation services worldwide. 

Accenture raised quarterly dividends by 14.70% to $1.48/share. This is the 19th consecutive annual dividend increase for this dividend achiever. The company managed to grow dividends at an annualized rate of 10.30% over the past decade.

The company's earnings increased from $4.87/share in 2015 to $11.57/share in 2024.

The company is expected to earn $12.81/share in 2025. 

The stock sells for 27.30 times forward earnings and yields 1.70%. 

City Holding Company (CHCO) operates as a holding company for City National Bank of West Virginia that provides various banking, trust, and investment management, and other financial solutions in the United States.

The company raised quarterly dividends by 10.50% to $0.79/share. This is the 12th consecutive annual dividend increase for this dividend achiever. The company managed to grow dividends at an annualized rate of 6.20% over the past decade.

The company managed to grow earnings from $3.40/share in 2014 to $7.62/share in 2023.

The company is expected to earn $7.75/share in 2024. 

The stock sells for 15.10 times forward earnings and yields 2.70%. 

Farmers & Merchants Bancorp, Inc. (FMAO) operates as the bank holding company for The Farmers & Merchants State Bank that provides commercial banking services to individuals and small businesses in Northwest Ohio and Northeast Indiana.

Farmers & Merchants Bancorp raised quarterly dividends by 0.60% to $0.2213/share. This is the 30th consecutive annual increase in the Company’s regular dividend payment. The company managed to grow dividends at an annualized rate of 7.70% over the past decade.

The company's earnings increased from $1.04/share in 2014 to $1.67/share in 2023.

The company is expected to earn $1.59/share. 

The stock sells for 17.40 times forward earnings and yields 3.20%. 

Fortis Inc. (FTS) operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries.

Fortis raised quarterly dividends by 4.20% to $0.615/share. ( That's Canadian Dollars). This marks the 51st consecutive annual dividend increase for this dividend king.

The company's earnings increased from $1.41/share in 2014 to $3.10/share in 2023.

The company is expected to earn $3.23/share in 2024. 

The stock sells for 19 times forward earnings and yields 4%. 

Honeywell International Inc. (HON) engages in the aerospace technologies, building automation, energy and sustainable solutions, and industrial automation businesses in the United States, Europe, and internationally.

Honeywell increased quarterly dividends by 4.60% to $1.13/share. This is the 14th year of consecutive annual dividend increases for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 9.50%.

The company managed to grow earnings from $5.40/share in 2014 to $8.53/share in 2023.

The company is expected to earn $10.10/share in 2024. 

The stock sells for 20.60 times forward earnings and yields 2.20%. 

McDonald's Corporation (MCD) operates and franchises restaurants under the McDonald’s brand in the United States and internationally.

McDonald's increased quarterly dividends by 6% to $1.77/share. McDonald's has a strong history of returning capital to its shareholders and has raised its dividend for 48 consecutive years since paying its first dividend in 1976. The company managed to grow dividends at an annualized rate of 7.20% over the past decade.

The company is expected to earn $11.82/share in 2024. 

The stock sells for 20.60 times forward earnings and yields 2.20%. 

Relevant Articles:

- Five Dividend Achievers Raising Dividends Last Week

- Six Dividend Growth Stocks Rewarding Shareholders With Raises

- Two Dividend Raises From Last Week