Automatic Data Processing (ADP) Dividend Stock Analysis

Automatic Data Processing, Inc.(ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. This Dividend Aristocrat has paid uninterrupted dividends on its common stock since 1974 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 6% increase to 36 cents/share. The largest competitors of Automatic Data Processing include Paychex (PAYX), Convergys (CVG) and CSG Systems International (CSGS).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.70% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 5.90% per year since 2001. Analysts expect ADP to earn $2.52 per share in 2011 and $2.73 per share in 2012. In comparison Automatic Data Processing earned $2.40 /share the company earned in 2010.

The company is expecting to generate higher revenues in 2011 and 2012 as a result of acquisitions, improving client retention rates, and increased North American auto sales, which would boost its Dealer Services segment. While the employment picture in the US is not very rosy at the moment, the economic recovery should lead to additions to jobs in the near term. In addition, the market for payroll outsourcing services is relatively untapped with small and medium sized businesses, which could deliver strong growth for well positioned firms like ADP. International expansion in payroll outsourcing could be another area where ADP could look for to generate growth.

The market for HR Management services, which represent a high portion of ADP’s Employer Services segment, is expected to increase by 4.5% per year until 2014 according to IDC. The market for Business Process Outsourcing, where ADP is trying to expand into, is expected to increase by almost 5% per annum during the same time frame.

The barriers to entry in the payroll outsourcing are very high, as they require sizeable investments in technology and infrastructure in order to process the information for thousands of employees. In addition, this business requires regular investment in technologies in order to stay competitive. This also creates economies of scale for larger processors such as ADP, which further differentiates them from competition.

The company has been able to generate consistently high returns on equity in the 17.50% -25% range over the past decade. 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 14.50% per year over the past decade, which is much higher than the growth in EPS.

A 14% growth in distributions translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1979, we see that Automatic Data Processing has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio has been on the increase, mostly due to the fact that dividend growth was higher than earnings growth. Since the ratio is at 56% now, future dividend growth would be limited by earnings growth and less on the expansion in the payout ratio. 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 Automatic Data Processing is trading at 22 times earnings, yields 2.60% and has a sustainable dividend payout. The stock is slightly over valued per my entry criteria but I will consider adding to my position on dips below $50.

Full Disclosure: Long ADP

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- Six Reliable Dividend Growth Stocks Raising Distributions

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Dividend Stocks make great acquisitions

Dividend Investing is one of the most misunderstood investment strategies. This strategy tries to focus on companies which have strong brands, wide moats and a customer base which is willing to pay a premium for the product or service the company is providing. These quality characteristics allow select dividend stocks to generate growing earnings per share, and generate excess cash flows each year. This excess financial liquidity is what provides the fuel for a corporate culture, where dividends are increased every year.

It is important to pay reasonable valuations for dividend growth stocks however, as buying them at ridiculous P/E ratios could lead to subpar returns over time. The nature of products and services that some of the best dividend stocks in the world deliver however makes them relatively immune from recessions. As a result, even during recessions and the bear markets caused by the recessions, these companies are able to generate strong earnings. This allows these corporations to pay and even increase distributions, thus providing investors a return on their investment even during the most trying of times for them.

These characteristics are what make dividend growth stocks the best investment in the world. One of the dangers of dividend growth stocks is that these features make them attractive takeover candidates. In a diversified portfolio of dividend equities, investors could reasonably expect to have a few companies that get acquired over time. Readers of this site might remember that with the Anheuser-Busch (BUD) acquisition in 2008, the Rohm-Hass (ROH) buyout in 2009 by Dow Chemical (DOW) as well as the most recent news about the potential acquisition of Family Dollar (FDO). The most recent evidence that dividend growth stocks have high chances of getting acquired includes the offer from Carl Icahn to buy Clorox (CLX) at a premium. Check my analysis of Clorox.

Other notable dividend growth stocks that have been acquired over the years include GEICO by Berkshire Hathaway (BRK.B), Gillette by Procter & Gamble (PG) and Alcon (ACL) by Nestle (NSRGY).

Some investors might not believe that having your stocks sold at a premium is such a bad deal. The issue is however, that these companies would do very well, irrespective who owns them. Such quality dividend stocks would likely keep growing, earnings more over time, and paying higher dividends to owners. This would also make these businesses more valuable as well. As a result, by selling at lower valuations today, dividend investors would not be able to capitalize on this future growth. In addition, investors would receive a lump sum in cash, and would have to do additional work in order to find a suitable substitute for the company getting acquired.

Full Disclosure: Long CLX, FDO, PG, NSRGY

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- Dividend Growth Investing Gets No Respect

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- Dividend Growth Stocks – The best kept secret on Wall Street

Master Limited Partnerships: The Perfect Dividend Stocks

Master limited partnerships typically are engaged in the transportation of oil and gas across a vast network of pipelines. While prices of energy products fluctuate greatly, the volume transported does not change by much. In addition, once a pipeline is built, there is little in maintenance expenses for this long term asset and there is little if any competition in the particular geographic area for transporting energy products like oil or gas. As a result, master limited partnerships are able to pass most of their distributable cash flows to investors in the form of distributions. In effect, master limited partnerships are the perfect dividend growth stocks, as they pay above average yields and they also consistently grow distributions at least once per year.

The list of consistent dividend raisers was dominated by master limited partnerships. The companies which rewarded their investors with higher dividend incomes include:

Kinder Morgan Energy Partners, L.P. (KMP), which owns and manages energy transportation and storage assets, raised its quarterly distributions to $1.15/unit. This master limited partnership is a dividend achiever, which has increases its quarterly distributions for 15 years in a row. Yield: 6.30% (analysis)

Kinder Morgan (KMI) owns the general partner interest of Kinder Morgan Energy Partners, L.P. (NYSE: KMP), one of the largest publicly traded pipeline limited partnerships in America, and has limited partner interests in KMP and Kinder Morgan Management, LLC (NYSE: KMR). The company increased its quarterly distribution for the first time since going public in April 2011, to 30 cents/share. Yield: 4.20%

ONEOK, Inc. (OKE), a diversified energy company, operates as a natural gas distributor primarily in the United States. ONEOK Inc is the general partner behind ONEOK Partners (OKS). The company raised its quarterly dividend by 8% to 56 cents/share. ONEOK, Inc. has raised dividends to shareholders for nine consecutive years. Yield: 3% (analysis)

ONEOK Partners, L.P. (OKS) engages in the gathering, processing, storage, and transportation of natural gas in the United States. This master limited partnership increased its quarterly distributions to 58.5 cents per unit. ONEOK Partners has increased its quarterly distribution n each of the past six years. This MLP currently yields 5.30%.

Duncan Energy Partners L.P. (DEP) engages in gathering, transporting, marketing, and storing natural gas, as well as in transporting and storing natural gas liquids (NGLs), and petrochemical and refined products in the United States. This master limited partnership increased its quarterly distributions to 46 cents per unit. Duncan Energy Partners has increased its quarterly distributions in each of the past five years. This MLP yields 4.30%.

Magellan Midstream Partners, L.P. (MMP) , together with its subsidiaries, engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. This master limited partnership raised its quarterly distributions to 78.50 cents/unit. This dividend achiever has raised distributions for 11 years in a row. Yield: 5.20%

TransMontaigne Partners L.P. (TLP), which operates as a terminaling and transportation company increased its quarterly distributions to 62 cents per unit. TransMontaigne Partners has increased its quarterly distribution in each of the past seven years. This MLP currently yields 7%.

The notable non-MLP companies which announced dividend hikes over the past week included:

The J. M. Smucker Company (SJM), which engages in the manufacture and marketing of branded food products in the United States and internationally increased its quarterly distribution to 48 cents/share. The change represents an increase of nine percent, adding to the ten percent increase approved by the Board earlier this calendar year. This dividend achiever has raised distributions for 14 years in a row. Yield: 2.40%

C. R. Bard, Inc. (BCR), which engages in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide, increased its quarterly dividend by 5.60% to 19 cents per share. C. R. Bard, Inc. is a dividend aristocrat, which has increased its quarterly dividend for 41 consecutive years. The stock currently yields 0.70%.

Bar Harbor Bankshares (BHB) operates as the holding company for Bar Harbor Bank & Trust that offers various banking products and services to individuals, businesses, not-for-profit organizations, and municipalities in Hancock, Washington, and Knox Counties.. The company increased its quarterly dividend to 27.50 cents per share. Bar Harbor Bankshares has increased its quarterly dividend in each of the past eight years.. The stock currently yields 3.90%.

Lindsay Corporation (LNN) designs, manufactures, and sells automated agricultural irrigation systems that are primarily used in the agricultural industry to increase or stabilize crop production while conserving water, energy, and labor in the United States and internationally. The company increased its quarterly dividend by 5.90% to 9 cents per share. Lindsay Corporation has increased its quarterly dividend in each of the past nine years.. The stock currently yields 0.50%.

I recently sold my position in ONEOK Inc (OKE), which I accumulated at an average price in the low to mid 50s in 2010, at a very handsome profit. I then rolled the proceeds into units of ONEOK Partners (OKS), which at the time yielded almost twice as much as ONEOK Inc. While ONEOK Inc will grow dividends at a rapid pace for the next three years, the higher current yield of the partnership (OKS) as well as the opportunity for distribution growth and large tax deferral of the distribution make it a better investment.

Full Disclosure: Long OKS, KMR, KMI

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- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors

- Dividend Achievers Offer Income Growth and Capital Appreciation

- Dividend Aristocrats list for 2011

- Kinder Morgan Partners – One Company three ways to invest

Aflac (AFL) Dividend Stock Analysis

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. Aflac is a dividend aristocrat which has paid uninterrupted dividends on its common stock since 1973 and increased payments to common shareholders every year for 28 years.

The most recent dividend increase was in 2010, when the Board of Directors approved a 7.10% increase to 30 cents/share.

Over the past decade this dividend growth stock has delivered an annualized total return of 5.20% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 16.20% per year since 2001. Analysts expect Aflac to earn $6.21 per share in 2011 and $6.45 per share in 2012. In comparison Aflac earned $4.95 /share the company earned in 2010.

The company would likely be able to generate high single digit revenue increases on new distribution channels in Japan as well as unveiling new products, which would satisfy insurance needs of its clients. The company’s number of agents in Japan rose in 2010 by almost 5 percent.

One of the biggest risks behind Aflac could be its bond portfolio, which has exposure to European financials as well as European sovereign debt. Another risk behind Aflac , albeit small, is that the earthquake in Japan could dampen growth in the near term. Aflac is offering its products in almost 90% of Banks in Japan, and more branches are expected to start pushing the products in the coming years. The real growth kick could be in the US, where a small portion of US businesses offer Aflac's policies. The fact that Aflac has build a strong brand in the US, based off the white duck, is another strong differentiator.

The company has been able to increase its return on equity from 13.60% in 2001 to 22% by 2010. 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 21.30% per year over the past decade, which is much higher than the growth in EPS.

An 21% growth in distributions translates into the dividend payment doubling almost every three and a half years. If we look at historical data, going as far back as 1984, we see that Aflac has actually managed to double its dividend every four and a half years on average. Most recently however, dividend growth has waned to the high single digit percentage increases.

Over the past decade the dividend payout ratio has been on the increase, mostly due to the fact that dividend growth was higher than earnings growth. The ratio is low at 23%, so there is room for future dividend growth. 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 10 times earnings, yields 2.70% and has a sustainable dividend payout. The stock is attractively valued per my entry criteria and I have recently added to my position on the dip below $48.

Full Disclosure: Long AFL

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- Six Notable Dividend Increases for the week

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Four Dividend Stocks safer than US Treasuries

Over the past few weeks, financial markets have gotten concerned about the possibility that US congress would not raise the debt ceiling on US government debt. The implications range from credit downgrades on US Treasuries to de facto default by the US government if it chooses to delay payment of Social Security Benefits. Currently, US Treasuries are rated AAA, and are regarded as the safest investment instrument in the world. As a result, institutions and foreign governments hold trillions of dollars of this highly liquid and safe investment. The high budget deficits as well as the high level of US government debt however, have some experts doubting whether the status quo of US Treasuries as “safe investments” will change.

So if investors doubt the safety of an instrument rated AAA by credit agencies, what alternatives do investors looking for AAA safe investments currently have? I did a little research and found several dividend growth stocks, which have global operations that currently spot AAA ratings.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 49 years in a row. Over the past decade, Johnson & Johnson has raised annual distributions at 13% per year. Yield: 3.40% (analysis)

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. This dividend aristocrat has increased dividends for 29 years in a row. Over the past decade, Exxon Mobil has raised annual distributions at 7.10% per year. Yield: 2.30% (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers worldwide. The company is a member of the dividend aristocrats index, and has increased dividends for 36 years in a row. Over the past decade, ADP has raised annual distributions at 14.50% per year. Yield: 2.70% (analysis)

Microsoft Corporation (MSFT) develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The company has increased dividends for 6 years in a row. Over the past five years, Microsoft has raised annual distributions at 11.40% per year. Yield: 2.40% (analysis)

Generally, purchasing the stock of any of these four companies would likely provide investors with greater total returns over the next 5, 10 or 30 years. In addition, three of these companies have a history of growing dividends for several decades. As a result, investors in these companies can expect a rising dividend income stream, that would exceed inflation over time.

Full Disclosure: Long JNJ, ADP, XOM

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- Exxon Mobil (XOM) Dividend Stock Analysis

- Ten Dividend Stocks Beating Inflation

- Dividend Aristocrats list for 2011

- Reinvesting Dividends Pays Off

Eleven Outstanding Businesses Raising Dividends

It takes an outstanding business to increase dividends for decades, and outstanding businesses are often outstanding long-term investments. Weak businesses simply can’t and don’t raise dividends for decades. Below I have highlighted ten exceptional businesses, each of which has raised distributions for over 5 years in a row, and which also announced dividend increases over the past week:

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals in North America. This master limited partnership announced increase in quarterly distributions to 60.50 cents/unit, which represents a 5.2 percent increase over the $0.575 per unit distribution rate declared with respect to the second quarter of 2010. Enterprise Product Partners is a dividend achiever, which has consistently increased distributions for 14 years in a row. Yield: 5.60% (analysis)

Walgreen Co. (WAG), together with its subsidiaries, engages in the operation of a chain of drugstores in the United States, increased its quarterly dividend by 28.60% to 22.50 cents per share. Walgreen Co. is a dividend aristocrat, which has increased its quarterly dividend in each of the past 36 years. The stock currently yields 2.10%. (analysis)

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. National Retail Properties increased its quarterly distributions by 1.30% to 38.50 cents per share. This dividend achiever has increased quarterly distributions for 22 years in a row. Yield: 6% (analysis)

Plains All American Pipeline, L.P. (PAA) engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquefied petroleum gas and other natural gas-related petroleum products (LPG) in the United States and Canada. This master limited partnership increased its quarterly distributions to 98.25 cents per unit. Plains All American Pipelineis a dividend achiever which has increased its quarterly distributions in each of the past 11 years. The stock currently yields 6.10%.

Targa Resources Partners LP (NGLS), which provides midstream natural gas and natural gas liquid (NGL) services in the United States increased its quarterly distribution by 2.20% to 57 cents per unit. The company operates through two divisions, Natural Gas Gathering and Processing; and NGL Logistics and Marketing. Targa Resources Partners has increased its quarterly distribution in each of the past 5 years. The stock currently yields 6.40%.

Genesis Energy, L.P. (GEL), which operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States, increased its quarterly distributions to 41.50 cents per unit. Genesis Energy, L.P has increased its quarterly distributions in each of the past 8 years. The stock currently yields 6.20%.

Omega Healthcare Investors, Inc. (OHI) operates as a real estate investment trust (REIT) in the United States. The company invests in healthcare facilities, principally long-term healthcare facilities in the United States. Omega Healthcare Investors increased its quarterly distributions by 5.30% to 40 cents per share. Omega Healthcare Investors has increased quarterly distributions for ten years in a row. Yield: 7.50%

A.O. Smith Corporation (AOS), which engages in the manufacture and sale of water heating equipment to the residential and commercial markets in the United States and internationally increased its quarterly dividend by 14.30% to 16 cents per share. A.O. Smith Corporation is a dividend achiever, which has increased its quarterly dividend in each of the past 18 years. The stock currently yields 1.50%.

Healthcare Services Group, Inc. (HCSG), which provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States increased its quarterly dividend to 15.875 cents per share. Healthcare Services Group, Inc. has increased its quarterly dividend in each of the past 8 years. The stock currently yields 3.60%.

Cummins Inc (CMI). which designs, manufactures, distributes, and services diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide increased its quarterly dividend by 52.40% to 40 cents per share. Cummins Inc has increased its quarterly dividend in each of the past 6 years. The stock currently yields 1.60%.

Tanger Factory Outlet Centers, Inc. (SKT), which engages in acquiring, developing, owning, operating, and managing factory outlet shopping centers increased its quarterly distributions to 20 cents per share. Tanger Factory Outlet Centers is a dividend achiever which has increased its quarterly distributions in each of the past 19 years. The stock currently yields 2.90%.

I would consider adding to my position in Walgreen on dips below $36, which would be an equivalent yield of 2.50%. I used to be a big fan of National Retail Properties, however the fact that their FFO Payout Ratio is almost 100%, makes me rate this stock a hold for the moment.

Full Disclosure: Long NNN and WAG

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- Walgreen (WAG) Dividend Stock Analysis

- Dividend Achievers Offer Income Growth and Capital Appreciation

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Chubb (CB) Dividend Stock Analysis 2011

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. Chubb is a dividend aristocrat which has paid uninterrupted dividends on its common stock since 1902 and increased payments to common shareholders every year for 46 years.

The most recent dividend increase was in 2010, when the Board of Directors approved a 5.40% increase to 39 cents/share. The largest competitors of Chubb include Berkshire Hathaway (BRK.B). Cincinnati Financial (CINF) and Travelers Corp (TRV).

Over the past decade this dividend growth stock has delivered an annualized total return of 7.40% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 10.90% per year since 2005. Analysts expect Chubb to earn $5.60 per share in 2011 and $5.85 per share in 2012. In comparison Chubb earned $6.76 /share the company earned in 2010.

The company has been able to increase its return on equity from 2% in 2001 to 14% by 2010. The reason for the massive increase was due to the depressed state of earnings in 2001- 2002. 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 8.30% per year over the past decade, which is much higher than the growth in EPS. I expect future growth in dividends to be closer to 10% over the next decade.

An 8% growth in distributions translates into the dividend payment doubling almost every nine years. If we look at historical data, going as far back as 1984, we see that Chubb has actually managed to double its dividend every eight years on average.

Over the past decade the dividend payout ratio has remained below 50%, with the exception of 2001 and 2002. 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 Chubb is trading at 8.80 times earnings, yields 2.50% and has a sustainable dividend payout. The stock is attractively valued per my entry criteria which is why I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long CB

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Best Canadian Dividend Stocks

As a dividend growth investor, I typically hold mostly US based dividend stocks. There are several reasons behind that, which I outlined in this article on the best international dividend stocks. Another reason why I hold US based multinationals has been outlined in this article.

Canadian dividend stocks seems to be having characteristics that make them similar to their US counterparts. First, most Canadian stocks pay a regular distribution every quarter. Second, most Canadian blue chips pay a stable or rising dividend. This is unlike most European companies for example, which typically target a payout ratio based off earnings. Last, US investors get 15% of their Canadian dividend income withheld at the source. At tax time however, US investors get an offsetting credit against this tax withholding in taxable accounts. So the net effect is zero for most high income investors.

In order to find the best Canadian dividend stocks, I obtained a list of Canadian Dividend Achievers. These are Canadian companies, which have increased dividends for the past five or more consecutive years.

I then screened the list based off my entry criteria:

1. Dividend Yield of at least 2.50%
2. P/E Ratio below 20
3. Dividend Payout Ratio less than 60%

Only one of these stocks is traded on NYSE, and the rest are traded on the OTC market. The symbols used above also include the ones for the Toronto Stock Exchange.

On a side note, I was surprised that none of the Canadian banks appeared on this screen. Despite the fact that the Canadian banks such as Bank of Montreal (BMO), Toronto-Dominion Bank (TD), Royal Bank of Canada (RY), Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce (CM) were not affected by the financial crisis of 2007 - 2009, they did freeze dividends for almost 2 years. Chances are however, that within a few short years, these companies would be able to build another streak of consecutive dividend increases.

Full disclosure: Long TD

Relevant Articles:

- Best International Dividend Stocks

- International Dividend Achievers for diversification

- International Over Diversification

- My Entry Criteria for Dividend Stocks

This article was included in the Carnival of Personal Finance #318: The Breaking Bad Edition

Target Corporation (TGT) Dividend Stock Analysis

Target Corporation (TGT) operates general merchandise stores in the United States. As of January 29, 2011, Target Corporation operated 1,750 stores in 49 states and the District of Columbia under Target and SuperTarget names. The company is member of the S&P 500 and the S&P Dividend Aristocrats indexes. Target has paid uninterrupted dividends on its common stock since 1965 and increased payments to common shareholders every year for 44 years.

The most recent dividend increase was in June 2011, when the Board of Directors approved an 20% increase to 30 cents/share. The largest competitor of Target Stores includes Wal-Mart Stores (WMT).

Over the past decade this dividend growth stock has delivered an annualized total return of 4.10% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 11.40% per year since 2002. Analysts expect Target Stores to earn $4.17 per share in 2012 and $4.48 per share in 2013. This would be a nice increase from the $4.00 /share the company earned in 2011. On average the company has managed to repurchase 2.80% of its stock annually over the past decade.

The company differentiates itself from Wal-Mart (WMT) by catering to a more upscale audience in comparison to the world’s number one retailer. In addition, Target has started a campaign to renovate almost one quarter of its existing stores in order to add fresh foods to their assortment of goods offered. In addition, it is planning on increasing its store count by over 1%/year in the next few years, as well as enjoying higher same-store sales boosted by clever advertising. Future growth could be aided by the company’s recent news that it plans to acquire 220 retail locations in Canada for almost $2 billion. In addition to that, Target plans to open 100- 150 new stores in Canada over the next two years. While this deal would be dilutive to earnings per share over the next two years, it should add to overall profitability going forward.

While it is a major retailer, the company also has significant operations related to its RED Card, which allows shoppers to obtain a 5% discount on nearly all purchases. This loyalty program is expected to add two percent to same-store sales and result in positive EPS by 2012. On the other hand, Target is looking to sell its credit card receivables portfolio, worth almost $7 billion dollars to a strategic buyer. While the company saves on transaction costs by having its own store credit card, it takes on credit risk, which could detract from profitability.

The company has been able to generate a return on equity in between 15% and 19% over the past decade. 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 14.90% per year over the past decade, which is much higher than the growth in EPS.

A 15% growth in distributions translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1986, we see that Target has actually managed to double its dividend every six years on average.

Over the past decade the dividend payout ratio has increased from 14% in 2002 to 21% in 2011. This has mostly been as a result of dividend growth being faster than earnings growth. 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 Target is trading at 11.40 times earnings, yields 2.60% and has a sustainable dividend payout. The company fits my entry criteria and I would consider initiating a position in the stock subject to availability of funds.

Full Disclosure: Long WMT

Relevant Articles:

- Wal-Mart (WMT): A High Dividend Growth Stock

- My Entry Criteria for Dividend Stocks

- Walgreen (WAG) Dividend Stock Analysis

- Family Dollar Stores (FDO) Dividend Stock Analysis

Weekend Reading Links - July 10, 2011

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From Dividend Growth Investor

• Realty Income (O) Dividend Stock Analysis
• Best Dividend Stocks for 2011– Q2 Update
• Four Future Dividend Achievers Boosting Distributions
• 16 Core Dividend Stocks for your income portfolio
• Eight Golden Geese Laying Golden Eggs for Shareholders

Articles From DIV-Net Members

• Dividends4Life presented 9 High Yield REITs With Growing Dividends
• Dividend Growth Investor presented Best Dividend Stocks for 2011– Q2 Update
• Barel Karsan presented Universal Power Group: Cheap
• Dividend Mantra presented Freedom Fund Update - July 2011
• The Dividend Guy presented How To Build a 6 Figure Income Dividend Portfolio with $600 per month
• 40percent 20years presented Update of the Swedish elite Dividend
• The Market Capitalist presented Stock Volatility, Market Timing & Limit Orders
• Dividend Monk presented Step 7: Finish Big
• The Passive Income Earner presented Portfolio Addition: Power Financial Corp. (PWF)
• The Dividend Pig presented ConocoPhillips Dividend Stock Analysis

There are some really good articles here, please take time and read a few of them.

Realty Income (O) Dividend Stock Analysis

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. Realty Income is a real estate investment trust widely known among its investors as the monthly dividend company. The company is a dividend achiever, which has increased its dividend for 16 years in a row by raising its monthly distributions several times per year.

Over the past decade this dividend growth stock has delivered a total return of 15% per annum to its shareholders.

Realty Income owned 2496 retail properties at the end of 2010. The company’s properties which are leased by 122 retail and other consumer businesses in 32 industries are located in 49 states. Most new properties acquired are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. The average remaining lease life was 11.4 years in 2010. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, occupants are also responsible for future rent increases based on increases in the consumer price index, fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Due to the stability of company's revenue streams and above average yield, the company might be a good pick for investors who are seeking current retirement income.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2010. Realty Income distributed $1.722 /share in 2010. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $425 million.

Over the past decade FFO has increased by 3.90% on average.

Over the past decade distributions have increased by 4.90% per annum. A 5% annual gowth in distributions translates into dividends doubling every 14 years. In 2010 the company has raised distributions by 0.90%.

The FFO payout ratio has increased to 94.10% in 2010, which is higher than the range over the past decade. In addition, FFO payout ratio of over 90% is not very sustainable for a real estate investment trust.

The main risk for the company is if occupancy rate decreases. About 3% - 4% of the company’s properties face lease expirations each year, which is why it has to be able to find new tenants. The company could try to sell properties which are not occupied currently however, which might be problematic in the current market for real estate. The portfolio occupancy rate for Realty Income hit a record low of 96.60% in 2010, which was down slightly from 96.80% in 2009. Another negative for the company is the fact that it typically expands its operations through additional sales of its common stock, which dilutes the stakes of existing stockholders.

Realty Income acquired 186 new properties in 2010 for $713.5 million dollars. The average lease term was 15.70 years and the initial weighted average lease rate was 7.90%. The company’s strategy is to acquire existing seasoned properties, which are already profitable and where profits far exceed the rent the retailer pays to Realty Income. This characteristic makes it more likely for the retailer to renew their lease after the 15 -20 year term is up. In addition to that, the company is spending a lot of time, effort and research to uncover new areas of investment which would allow the company to increase FFO and dividends.

Realty Income has also acquired 13 properties so far in 2011 for $18.40 million and also has signed definitive purchase agreements to acquire 33 additional properties for $544 million. The tenants of these properties include Caterpillar, FedEx, International Paper, Walgreen Co, Cinemark, T-Mobile, Coca Cola Enterprises and others.

The company owns and actively manages a diverse mix of properties, which provide a stable and dependable income stream for the company’s shareholders. Realty Income currently yields 5.10% and has raised distributions and FFO’s for over 16 years in a row. I believe that Realty Income is a good addition to any dividend growth portfolio, since it provides growing income and also provides diversification into commercial real estate.

Full disclosure: Long O

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- Dividend Achievers Offer Income Growth and Capital Appreciation

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Best Dividend Stocks for 2011– Q2 Update

I entered into a stock picking competition at the end of 2010, where I had to select four stocks that would do great in 2011. Instead, I selected four great dividend growth stocks, which have excellent long-term prospects. The companies all have strong brands, a diversified mix of products sold globally, and a tendency to raise dividends regularly out of their rising earnings.

You could read the reasons why I selected these four companies in this article. The companies include:

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. Johnson & Johnson is a member of the elite dividend aristocrats index, and has increased distributions for 49 years in a row. Yield: 3.40% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units (GBUs): Beauty and Grooming, Health and Well-Being, and Household Care. Procter & Gamble is a member of the elite dividend aristocrats index, and has increased distributions for 55 years in a row. Yield: 3.30% (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. The company has consistently raised distributions since its spinoff from Altria (MO) in 2008. Yield: 3.80% (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia, Middle East and Africa (AMEA). PepsiCo is a member of the elite dividend aristocrats index, and has increased distributions for 39 years in a row. Yield: 2.90% (analysis)

This portfolio has been able to deliver a 8.90% total return so far in 2011, compared to a 5.90% total year to date return for the S&P 500. This puts me in the top two of the competition so far this year:

Intelligent Speculator +9.35%

Dividend Growth Investor +8.89%

My Traders Journal +8.67%

Million Dollar Journey +8.06%

Beat the Index +2.48%
Where Does My Money Go -1.01%

The Financial Blogger -3.74%
Money Smarts Blog -5.72%
Wild Investor -7.69%

I am a firm believer in diversification. As a result the companies listed above should not be the only investments that comprise a dividend growth portfolio. Even with solid companies it pays to diversify across sectors, countries and even asset types in order to avoid risk of ruin. As a result in my personal portfolio I hold approximately 40 individual securities.

Full disclosure: Long JNJ, PG, PM, PEP

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Four Future Dividend Achievers Boosting Distributions

The dividend achievers index is comprised of companies based in the US, which have increased their annual dividends for ten or more consecutive years. I typically look for companies which have raised distributions for at least ten years in a row, before considering a stock for potential addition to my portfolio. My reasoning is that only a company which has a strong business model characterized by stable and growing earnings can afford to consistently increase dividends every year for one decade. However, I still try to keep ahead by getting acquainted with the companies which might be eligible for inclusion in the list a few years from now.

There were four companies which have raised dividends for over five years in a row, which also announced that their Boards have approved dividend hikes over the past week:

Energy Transfer Equity, L.P. (ETE), through its direct and indirect investments in the limited partner and general partner interests in Energy Transfer Partners, L.P., engages in midstream, intrastate, and interstate transportation of natural gas, as well as in storage of natural gas in the United States. The Board of Directors approved a quarterly distribution of $0.625 per unit , which represents an increase of 11.6% on an annualized basis. This master limited partnership has boosted distributions for five years in a row. Yield: 5.60%

General Mills, Inc. (GIS) engages in the manufacture and marketing of branded consumer foods worldwide. The company’s Board of Directors approved an 8.90 % dividend increase to 30.50 cents/share. This dividend stock has raised distributions for 8 years in a row. Yield: 3.30%
Oil-Dri Corporation of America (ODC) engages in the development, manufacture, and marketing of sorbent products in the United States and internationally. The company’s Board of Directors approved a 6.30% dividend increase to 17 cents/share. This dividend stock has raised distributions for 9 years in a row. Yield: 3.20%

Darden Restaurants, Inc. (DRI), through its subsidiaries, owns, operates, and franchises full service restaurants in the United States and Canada. The company’s Board of Directors approved a 34.40% dividend increase to 43 cents/share. This dividend stock has raised distributions for 7 years in a row. Yield: 3.50%

Full Disclosure: None

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