Most consumer staples are also called defensive companies, because their earnings and dividends do not decline by much during recessions. During economic recoveries however, their earnings and dividends tend to increase also. Because they are mostly mature and large companies, growth expectations are low, which usually leads to low valuations.
The thing that truly appeals to me in consumer staples includes the recurring nature of their revenues, which are generated from a wide number of products that customers love and buy regularly. Most consumer staples offer products with strong recognizable brands, for which customers are willing to pay a slight premium for. A customer, who is used to Gillette razorblades and shaving crème or foam for years, is not going to downgrade their experience merely in order to save a few dollars, but end up with cuts all over their faces. If you have used Colgate toothpaste for years, chances are very high that you would keep purchasing a tube every month or so. The nature of the products that consumer staple companies offer, satisfy basic human needs, which are satisfied only when the branded product is exhausted. Once it is all used up, the consumer needs to go ahead and purchase the product again, thus ensuring a repeatable stream of sales for the company for decades to come from each consumer it wins over.
Consumer staple companies also benefit from strong distribution networks and economies of scale in production. They have wide moats. The distribution networks help the products to be easily accessible to the everyday consumer, and increase the likelihood of a repeated sale. The economies of scale allow companies to allocate their costs over a larger pool of product, thus resulting in negligible per unit in additional cost. For example, a company like Procter & Gamble (PG) has a better staying power than an upstart consumer-staples company, because P&G can reach out tens of millions of consumers in the US through advertising, as it already generates billions in revenues and already has millions of customers buying its products. The global scale of manufacturing also makes it cheaper to make its products, relative to a smaller competitor.
Furthermore there are always plenty of opportunities for growth, driven either through acquisitions or international expansion. In addition, the general level of increase in populations over time also leads to an organic growth kicker for consumer staples.
The fact that consumer staple products are relatively inelastic, meaning that people use those in good times and bad, translates into a stable stream of recurring revenues for these companies. This translates into stable cash flow generation, that provides the fuel behind dividend payments, share buybacks and acquisitions.
If you think about it, as long as people use hygiene products such as toothpaste and shampoos, eat food like ice-cream, cookies, jelly and canned soup, chances are that consumer staple companies should do well over time. Even if you get a consumer staple company whose customer base grows by 1%/year, you can generate very decent returns over time. This is because the company would be able to pass on rising costs to consumers, deploy some excess cash flows to repurchase some stock on a regular basis, make strategic acquisitions, and make operations more efficient. If you add in a small starter yield of 2 – 3% today, chances are that these factors described previously could easily translate into a minimum very conservative annual earnings per share growth of 6% - 7% for decades.
Some of the huge macro trends that Consumer Staples are riding include the increasing prosperity in the emerging market world, where over a billion people would be lifted out of poverty and join the middle class within a couple decades. In addition, some demographics trends that no one is paying attention to includes the baby boom in the US, as well as the potential for a baby boom in China, as the one child per couple policy seems to be phased out by the government. Even the population ageing in developed countries such as Japan or those Western European ones could be a boom for consumer staples. As people age, they would want to do so in dignity, which could only translate into more sales for the likes of Johnson & Johnson (JNJ), Procter & Gamble (PG) etc.
The time to purchase these companies is when valuations are low, and avoid overpaying, as this would mean that the next decade of growth is already baked in the stock price. The perfect time to purchase could be when there is a temporary snafu at the company, such as the Tylenol scare for Johnson & Johnson in 1983 or the 2010 recalls again at Johnson & Johnson (JNJ). The financial crisis of 2007 – 2009, also created an environment where quality companies such as Procter & Gamble (PG), Clorox (CLX), Colgate-Palmolive (CL) and PepsiCo (PEP), to name a few, were on sale at some of the lowest valuations in years.
After you purchase those companies, your job is to sit patiently and collect those growing dividends. Only if prices become terribly overvalued, north of 30 times forward earnings should you consider thinking about trimming. So far, even if you held on through the 1972 Nifty Fifty bubble, or the 1999 – 2000 bubble, the rising earnings tide on those companies eventually bailed out the long-term investor. Just be mindful that if you sold a company that raises earnings and dividends like clockwork at 30 – 40 times earnings, chances are that any replacements you find might look cheaper, but wont offer the same level of quality.
Unfortunately, many consumer staples companies I like are overvalued. A few which are fairly valued today include:
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. This dividend king has raised distributions for 53 years in a row. In the past decade, Johnson & Johnson has managed to boost dividends by 9.70%/year. The stock currently sells for 16.50 times forward earnings and yields 3%. Check my analysis of Johnson & Johnson for more information about the company.
Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. This dividend champion has raised distributions for 45 years in a row. In the past decade, Altria has managed to boost dividends by 11.60%/year. The stock currently sells for 18.60 times forward earnings and yields 4.10%. Check my analysis of Altria information about the company.
Diageo plc (DEO) manufactures and distributes premium drinks such as Johnnie Walker, Crown Royal, Buchanan’s, J&B, Baileys, Smirnoff, Captain Morgan, Guinness, Shui Jing Fang, and Yenì Raki.. The company has raised dividends for 15 years in a row. In the past decade, the company has managed to boost dividends by 5.80%/year. Currently, the stock is selling for 20.20 times forward earnings and yields 3%. Check my analysis of Diageo for more details.
Full Disclosure: Long JNJ, CLX, PG, CL, PEP, MO, DEO,
Relevant Articles:
- Are dividend investors concentrating too much on consumer staples?
- Strong Brands Grow Dividends
- 39 Dividend Champions for Further Research
- What dividend stocks would I buy if I were just starting out as a dividend investor
Wednesday, April 29, 2015
Monday, April 27, 2015
Four Quality Dividend Machines Hiking Distributions
Over the past week, there were four quality dividend paying companies, which announced that they are raising dividends for their shareholders. As a long-term shareholder, I like it when I am essentially paid to hold companies. I like it even better when that company I own regularly increases the amount of cash they send my way. I also view the near term rate of change in dividend hikes as a management indication about their expectations for earnings growth. One of the easiest ways for a time-starved investor like myself to monitor those dividend hikes on companies I own is my broker Interactive Brokers. I receive notifications about dividend payments that were just approved, and quarterly results that are about to be released.
In the past week, there were four companies that raised dividends, which also attracted my attention. I have shares in the first three. The last one is a company I have been monitoring.
Unilever (UL) increased its quarterly dividend by 6% to 30.20 eurocents/share. This marked the 20th consecutive annual dividend increase for this international dividend achiever. The ten year dividend growth rate is 6.20% /year. The stock slightly overvalued at 21.80 times forward earnings and yields 2.90%. Check my analysis of Unilever.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides various financial products and services to individual and institutional clients in the United States and internationally. The company raised its quarterly dividends by 15.50% to 67 cents/share. This marked the tenth consecutive dividend increase for this dividend achiever. The five year annual dividend growth is 27.20%/year, which is normal for companies in the initial phases of dividend growth. The shares are selling for 13.10 times forward earnings and yield 2.10%. Check my analysis of Ameriprise Financial. I decided to make a small addition to my position last week.
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. It operates in three segments: Consumer, Pharmaceutical, and Medical Devices. The company raised its quarterly dividend by 7.10% to 75 cents/share. This marked the 53rd consecutive annual dividend increase for this dividend king. The ten year dividend growth is 9.70%/year. The shares are selling for 16.50 times forward earnings and yield 3%. Unfortunately, Johnson & Johnson is one of my largest positions, which is why I may refrain from putting more capital there. Check my analysis of Johnson & Johnson.
Costco Wholesale Corporation (COST), together with its subsidiaries, operates membership warehouses. The company raised its quarterly dividend by 12.70% to 40 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate for Costco is 16.40%/year. The stock is over valued at 28.30 times forward earnings and yield 1.10%. I have been following Costco for several years and really like the business, but I never really saw a good valuation to initiate a position in it.
Full Disclosure: Long AMP, JNJ, UL
Relevant Articles:
- How to read my weekly dividend increase reports
- International Dividend Stocks – Pros and Cons
- How to Manage Your Dividend Portfolio
- How to stay motivated on your road to financial independence
- Margin of Safety in Dividends
In the past week, there were four companies that raised dividends, which also attracted my attention. I have shares in the first three. The last one is a company I have been monitoring.
Unilever (UL) increased its quarterly dividend by 6% to 30.20 eurocents/share. This marked the 20th consecutive annual dividend increase for this international dividend achiever. The ten year dividend growth rate is 6.20% /year. The stock slightly overvalued at 21.80 times forward earnings and yields 2.90%. Check my analysis of Unilever.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides various financial products and services to individual and institutional clients in the United States and internationally. The company raised its quarterly dividends by 15.50% to 67 cents/share. This marked the tenth consecutive dividend increase for this dividend achiever. The five year annual dividend growth is 27.20%/year, which is normal for companies in the initial phases of dividend growth. The shares are selling for 13.10 times forward earnings and yield 2.10%. Check my analysis of Ameriprise Financial. I decided to make a small addition to my position last week.
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. It operates in three segments: Consumer, Pharmaceutical, and Medical Devices. The company raised its quarterly dividend by 7.10% to 75 cents/share. This marked the 53rd consecutive annual dividend increase for this dividend king. The ten year dividend growth is 9.70%/year. The shares are selling for 16.50 times forward earnings and yield 3%. Unfortunately, Johnson & Johnson is one of my largest positions, which is why I may refrain from putting more capital there. Check my analysis of Johnson & Johnson.
Costco Wholesale Corporation (COST), together with its subsidiaries, operates membership warehouses. The company raised its quarterly dividend by 12.70% to 40 cents/share. This marked the 12th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate for Costco is 16.40%/year. The stock is over valued at 28.30 times forward earnings and yield 1.10%. I have been following Costco for several years and really like the business, but I never really saw a good valuation to initiate a position in it.
Full Disclosure: Long AMP, JNJ, UL
Relevant Articles:
- How to read my weekly dividend increase reports
- International Dividend Stocks – Pros and Cons
- How to Manage Your Dividend Portfolio
- How to stay motivated on your road to financial independence
- Margin of Safety in Dividends
Friday, April 24, 2015
Ross Stores (ROST) Dividend Stock Analysis
Ross Stores, Inc. (ROST), together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. It primarily offers apparel, accessories, footwear, and home fashions. Ross Stores is a dividend achiever, which has raised dividends for 21 years in a row.
The most recent dividend increase was in February 2015, when the Board of Directors approved a 17.50% increase in the quarterly dividend to 23.50 cents/share.
The company’s largest competitors include TJ Companies (TJX), Kohl’s (KSS) and Macy’s (M).
Over the past decade this dividend growth stock has delivered an annualized total return of 21.90% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. Ross Stores is expected to earn $4.84 per share in 2015 and $5.41 per share in 2016. In comparison, the company earned $4.42/share in 2014.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 293 million in 2005 to 209 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to share repurchases, I will take what I can.
As consumers become more price sensitive, companies like Ross Stores that provide quality merchandise at a discount tend to profit. Based on historical performance, it looks like this is a recession resistant business, which could deliver results in good and bad years.
Future growth will be aided by opening new stores in the US, as well as starting international expansion like competitor T.J. Companies.
The important factor for Ross is that it needs its buyers to select and purchase quality inventory that will sell quickly. In fact, it has managed to achieve that, as evidenced by its low inventory turnover of 2 months or so, versus three months for the average department store. When you manage to sell inventory quickly, you reduce the need for further discounting of inventory, and you reduce the costs associated with storing inventory for too long. In addition, bargain shoppers are more likely to increase the frequencies of their visits if the stores are constantly re-stocked with fresh new inventory on the shelves.
The company’s stores offer everyday low pricing on department store brands, which are sold at significant discounts off competitors. There is a broad assortment of goods, which creates a “treasure hunt” type environment for shoppers. The self-help type of the store reduces need for labor relative to competitors. In addition, I think there is a lower risk of disruption by the internet for the type of store like Ross or TJ Max, due to nature of its merchandise and treasure hunt mentality of shoppers there.
For Ross, it is important for buyers to have solid relationships in order to snap quality merchandise quickly and at discounted prices. Competition for that merchandise is intense, which is why speed and relationships and scale matter. Ross Stores does have quite have the scale in terms of 600 buyers negotiating with 8000 vendors in order to fill, the stores and 4 distribution centers in order to obtain the right inventory for the right stores at the appropriate time. However, its larger competitor has almost three times the number of stores as Ross, and twice as much buyers. However, Ross Stores has managed to grow operations rapidly, and still has room to expand its geographic reach beyond the 33 states it is in and the 1362 stores it currently owns and operates. Of those stores, 1210 are under the Ross Stores brand and 152 are dd’s Discounts brand.
The company expects that it would ultimately be able almost double stores in the US ( 1500 Ross Stores and 500 DD discount Stores). At a rate of 5% – 6% growth in number of stores, this could be achieved within 12 – 14 years. If Ross Stores also manages to grow same-store sales alongside with new store openings, and if it also manages to expand internationally, it could achieve high earnings growth over the next decade.
The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.
A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1995, we could see that Ross Stores has indeed managed to double dividends almost every three years on average.
In the past decade, the dividend payout ratio has remained steady, and it has only increased slightly to 18% 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.
Ross Stores has also managed to grow its high return on equity from 24.90% in 2006 to 43.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, Ross Stores is overvalued at 21.40 times forward earnings and yields 0.90%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I would consider initiating a small position in the stock on dips below $96/share.
Full Disclosure: None
Relevant Articles:
- How to read my stock analysis reports
- How to become a successful dividend investor
- Investors Should Look for Organic Dividend Growth
- Rising Earnings – The Source of Future Dividend Growth
- Time in the market is more important than timing the market
The most recent dividend increase was in February 2015, when the Board of Directors approved a 17.50% increase in the quarterly dividend to 23.50 cents/share.
The company’s largest competitors include TJ Companies (TJX), Kohl’s (KSS) and Macy’s (M).
Over the past decade this dividend growth stock has delivered an annualized total return of 21.90% to its shareholders. Future returns will be dependent on growth in earnings and starting dividend yields obtained by shareholders.
The company has managed to deliver a 22.80% average increase in annual EPS over the past decade. Ross Stores is expected to earn $4.84 per share in 2015 and $5.41 per share in 2016. In comparison, the company earned $4.42/share in 2014.
Earnings per share have also been aided by share buybacks. The number of shares outstanding has decreased from 293 million in 2005 to 209 million by 2015. I like the fact that management is focused on delivering excess cashflow and then sharing that cashflow with shareholders in the form of higher dividends and share buybacks. While I would prefer special dividends to share repurchases, I will take what I can.
As consumers become more price sensitive, companies like Ross Stores that provide quality merchandise at a discount tend to profit. Based on historical performance, it looks like this is a recession resistant business, which could deliver results in good and bad years.
Future growth will be aided by opening new stores in the US, as well as starting international expansion like competitor T.J. Companies.
The important factor for Ross is that it needs its buyers to select and purchase quality inventory that will sell quickly. In fact, it has managed to achieve that, as evidenced by its low inventory turnover of 2 months or so, versus three months for the average department store. When you manage to sell inventory quickly, you reduce the need for further discounting of inventory, and you reduce the costs associated with storing inventory for too long. In addition, bargain shoppers are more likely to increase the frequencies of their visits if the stores are constantly re-stocked with fresh new inventory on the shelves.
The company’s stores offer everyday low pricing on department store brands, which are sold at significant discounts off competitors. There is a broad assortment of goods, which creates a “treasure hunt” type environment for shoppers. The self-help type of the store reduces need for labor relative to competitors. In addition, I think there is a lower risk of disruption by the internet for the type of store like Ross or TJ Max, due to nature of its merchandise and treasure hunt mentality of shoppers there.
For Ross, it is important for buyers to have solid relationships in order to snap quality merchandise quickly and at discounted prices. Competition for that merchandise is intense, which is why speed and relationships and scale matter. Ross Stores does have quite have the scale in terms of 600 buyers negotiating with 8000 vendors in order to fill, the stores and 4 distribution centers in order to obtain the right inventory for the right stores at the appropriate time. However, its larger competitor has almost three times the number of stores as Ross, and twice as much buyers. However, Ross Stores has managed to grow operations rapidly, and still has room to expand its geographic reach beyond the 33 states it is in and the 1362 stores it currently owns and operates. Of those stores, 1210 are under the Ross Stores brand and 152 are dd’s Discounts brand.
The company expects that it would ultimately be able almost double stores in the US ( 1500 Ross Stores and 500 DD discount Stores). At a rate of 5% – 6% growth in number of stores, this could be achieved within 12 – 14 years. If Ross Stores also manages to grow same-store sales alongside with new store openings, and if it also manages to expand internationally, it could achieve high earnings growth over the next decade.
The annual dividend payment has increased by 25% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will likely exceed growth in earnings per share given that the payout ratio has room for expansion.
A 25% growth in distributions translates into the dividend payment doubling almost every three years on average. If we check the dividend history, going as far back as 1995, we could see that Ross Stores has indeed managed to double dividends almost every three years on average.
In the past decade, the dividend payout ratio has remained steady, and it has only increased slightly to 18% 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.
Ross Stores has also managed to grow its high return on equity from 24.90% in 2006 to 43.20% in 2015. I generally like seeing a high return on equity, which is also relatively stable or rising over time.
Currently, Ross Stores is overvalued at 21.40 times forward earnings and yields 0.90%. Despite the fact that I typically require a higher initial yield, I like the growth story and the growth prospects behind this company. I would consider initiating a small position in the stock on dips below $96/share.
Full Disclosure: None
Relevant Articles:
- How to read my stock analysis reports
- How to become a successful dividend investor
- Investors Should Look for Organic Dividend Growth
- Rising Earnings – The Source of Future Dividend Growth
- Time in the market is more important than timing the market
Wednesday, April 22, 2015
How to Make Money in Your Sleep with Forever Dividend Investing
The process of identifying a great company, and purchasing it at an attractive price is part art, part science. While I have tried to narrow it down to a few quantitative factors, my detailed analysis of each company could bring an unexpected turn of events in determining qualitative nature of things.
In reality, once you have purchased shares of a quality company at fair prices, your job is done. You should stop checking the quote page every five minutes, and turn off your computer. Collect your dividends, and pick up a hobby. And please, listen to your wife and take the Christmas lights off. It is April after all.
This is contrary to what everyone else is telling you to do. You have been told that buy and hold means buy and monitor. And this could be true to a certain extent. However, over the course of a year, there could typically be only a few material events that could impact your analysis of a dividend paying company. One of them would be what is in the annual report, another could be the rate of change in dividends, while a third could be related to corporate events such as mergers, spin-offs, etc.
And then, even if you do monitor those items, and found out something that might make you rethink your opinion on the company, should that be a sell signal? Many times investors see a red flag, and immediately jump for the exits. In reality, the real world is bumpy, and companies, economies and people hit roadblocks all the time. A company that never hit a roadblock is probably really good at cooking the books.
What I am trying to say here is that while monitoring your company is important, in reality, it doesn’t really produce much in actionable information for you. For example, just because cash flows from operations have declined for two years in a row, dividend coverage has been inadequate and dividend growth has stalled, this might not be a reason to sell. A company that experiences those things might also face a falling stock price as well. In reality however, a turnaround could be just right around the corner, which could put it back on the track to dividend growth.
As a dividend investor, your goal is not to obsess over quarterly information or others opinions, as even annual information might end up as “noise” in the grand scheme of things for long-term investors. Your goal is to do a lot of prep work in understanding the companies you are buying, buy them at a decent price, and then be diversified in at least 30 -40 companies representative of as many sectors as possible. Most investors are usually pretty bad at forecasting turns of events. What might look as a flop today, could turn out to be a non-event in the grand scheme of things. Therefore, do not try to compound your mistakes by reading too much into the noise that is all around you.
As an investor, you are your own worst enemy. You are subject to emotions such as fear and greed, which can consume you entirely. Unlike your regular job however, in investing, the amount of time you spend on your portfolio could be inversely proportional to the amount of success you have. This is because the more information you get, the higher the illusion that your decision is better. In reality, because nothing is known about the future of companies with any certainty, more information could usually mean that you simply looked at the facts that you wanted to pick, while ignoring the ones that you didn’t like.
I see investors make rash decisions, because they have too much time on their hands. If a company they hold freezes its dividend, they are thinking about selling right that second. They are not giving the company time to work itself out of a temporary blip. Your goal is to avoid rash decisions, which could be costly down the road. Remember back in 2013 when all dividend bloggers were selling Intel (INTC) because it failed to increase dividends after 5 quarters? In reality, they should have held on, and done absolutely nothing, because the company was doing all the work in quietly compounding their money. Things looked terrible in the short-term, and the level of noise that Intel was going the way of the dodo probably made it safer for those investors to sell rather than hold. Then a few quarters later, Intel raised dividends and is selling at much higher prices today. Activity is bad when it comes to investing.
Which leads me to the most important things about investing in dividend growth stocks: “The money in the stock market is made by sitting, not by thinking”. In other words, time in the market is more important than timing the market.
A good company will grow and compound on its own, even if you do not read its annual report for the next 30 years. The smart investor would hold on to that compounding machine to their grave. Most ordinary investors would not do that however, because they are fearful that their paper gains would evaporate. They are also constantly trying to forecast the turn of events, rather than going along for the ride. When I posted an article on why I would not sell even after a 1000% increase in prices, most responses I received were that it would be silly to not sell after a ten-bagger. In reality, of the 50 or so companies that you would buy in your dividend portfolio, there would be a few exceptional ones that would perform phenomenally. These will be the candidates that would bring a large portion of the gains in dividends and portfolio values for your portfolio. The rest would do just fine probably, while as much as 20% could outright end up failing within a decade or so.
On the contrary, a company that really hits it bad, is going to fail no matter how much you monitor it. You would be unable to determine when to exit the losing company at the time, as some events could mean the end for some companies but not the others. For other companies these same events could mean that the bottom is in and the business is about to turn a corner. For example, I have found that when a company cuts or eliminates dividends, this is a sign that management is really bearish on the business. This is the situation when I sell my shares. If I am wrong and they start growing it again, I will review the situation and get back in. During the financial crisis, several companies that cut dividends such as Washington Mutual, eventually went bankrupt, thus wiping out their sharehoders. Others such as Bank of America (BAC) or Citigroup (C) lost over 90% of their stock value and annual dividend income and haven’t recovered yet. On the other hand however, the perfect time to buy Wells Fargo (WFC) and US Bank (USB) was when the companies cut dividends. At the time of the trouble, you can’t reasonably expect to know if this is a short-term bump or the beginning of the end. Therefore, your monitoring is likely not a value add activity.
I wrote this article, because I have been thinking about the management of my portfolio, should I be unable to manage it any more. After all, there are 62,000 Fedex (FDX) vehicles in the world, so the chance of being hit by one is out there. I know that whoever gets my money ( family, charity etc) is not going to be as knowledgeable about investments as I think I am. Therefore, my goal is to build a portfolio that could last for several decades after I am gone. This means that this is a passive portfolio, consisting of companies which have enduring competitive advantages, that does not need to be monitored or tweaked constantly. The only goal of this portfolio is to distribute the dividends to the beneficiaries, and nothing else.
Looking at my portfolio, I am fairly confident that it can serve its purpose well. I am fairly certain that at least some of the companies I own will be around 30 - 40 years from now, and would be profitable never the less. Therefore, whoever benefits from the dividends from my portfolio, would not even need to know the difference between preferred stock and livestock. My dividend cash machine would work for decades, distributing that income to those beneficiaries, without much need for constant supervision. And no, I do not own any Twitter (TWTR) or Facebook (FB).
I can afford to do nothing, because my portfolio consists of a vast number of reliable blue chip companies from a variety of sectors. These are stodgy, mature companies whose profits are derived from hundreds of products sold across the globe. True, some of them might fail in 5-10-20 years, but the rest would produce reliable long-term growth, that would more than compensate for the failures. The facts supporting doing absolutely nothing are the performance statistics of individual investors, which show that those who trade the most have the lowest returns. This proves that doing nothing could be beneficial to your portfolio results, contrary to ordinary thinking. An investment portfolio is like a bar of soap: The more you touch/handle it, the smaller it gets.
The second fact supporting this strategy is a study by Jeremy Siegel on the performance of the original 500 firms in the S&P 500 from 1957. If you had simply bought all of those 500 corporations in 1957, and then did absolutely nothing other than reinvesting dividends and receiving shares in spin-offs, you would have actually outperformed S&P 500 for 50 years.
The third fact supporting doing nothing is the performance of the Corporate Leaders Trust, which was set up in 1930s, in order to invest in 30 leading blue chip corporations of the time. Approximately 75 years later, it has done pretty well by utilizing a totally passive approach. This so called ghost portfolio held on to the same companies for decades, and selling when dividends were eliminated. A $10,000 investment in 1942 would have turned out to $16.60 million by the end of 2013. This investment would also be delivering annual dividends of a quarter of million dollars. Dividend reinvestment works wonders when placed into practice on a diversified portfolio of blue chip dividend stocks.
To summarize, being a gentleman of leisure is my true calling. Because most of the companies I own are global brands that have recurring revenue streams from hundreds of products sold globally, one can afford to not monitor those if a situation like that arises. That being said, as long as I am in charge, I would likely continue my weekly process of scanning for dividend increases, checking annual reports, looking for undervalued companies to buy, and researching new or existing portfolio components. My goal is to be familiar and keep up with all dividend champions and dividend achievers. That way, I would be prepared to act quickly if the right opportunity arises. For those companies I already own, the goal is to be as passive as possible. Now I have to go out and find a hobby to occupy that extra free time of mine...
Full Disclosure: Long WFC
Relevant Articles:
- The Perfect Dividend Portfolio
- Turbocharge Income Growth with Dividend Reinvestment
- What dividend stocks would I buy if I were just starting out
- How to be a successful dividend investor
- Comparing your results to S&P 500 could be dangerous for dividend investors
In reality, once you have purchased shares of a quality company at fair prices, your job is done. You should stop checking the quote page every five minutes, and turn off your computer. Collect your dividends, and pick up a hobby. And please, listen to your wife and take the Christmas lights off. It is April after all.
This is contrary to what everyone else is telling you to do. You have been told that buy and hold means buy and monitor. And this could be true to a certain extent. However, over the course of a year, there could typically be only a few material events that could impact your analysis of a dividend paying company. One of them would be what is in the annual report, another could be the rate of change in dividends, while a third could be related to corporate events such as mergers, spin-offs, etc.
And then, even if you do monitor those items, and found out something that might make you rethink your opinion on the company, should that be a sell signal? Many times investors see a red flag, and immediately jump for the exits. In reality, the real world is bumpy, and companies, economies and people hit roadblocks all the time. A company that never hit a roadblock is probably really good at cooking the books.
What I am trying to say here is that while monitoring your company is important, in reality, it doesn’t really produce much in actionable information for you. For example, just because cash flows from operations have declined for two years in a row, dividend coverage has been inadequate and dividend growth has stalled, this might not be a reason to sell. A company that experiences those things might also face a falling stock price as well. In reality however, a turnaround could be just right around the corner, which could put it back on the track to dividend growth.
As a dividend investor, your goal is not to obsess over quarterly information or others opinions, as even annual information might end up as “noise” in the grand scheme of things for long-term investors. Your goal is to do a lot of prep work in understanding the companies you are buying, buy them at a decent price, and then be diversified in at least 30 -40 companies representative of as many sectors as possible. Most investors are usually pretty bad at forecasting turns of events. What might look as a flop today, could turn out to be a non-event in the grand scheme of things. Therefore, do not try to compound your mistakes by reading too much into the noise that is all around you.
As an investor, you are your own worst enemy. You are subject to emotions such as fear and greed, which can consume you entirely. Unlike your regular job however, in investing, the amount of time you spend on your portfolio could be inversely proportional to the amount of success you have. This is because the more information you get, the higher the illusion that your decision is better. In reality, because nothing is known about the future of companies with any certainty, more information could usually mean that you simply looked at the facts that you wanted to pick, while ignoring the ones that you didn’t like.
I see investors make rash decisions, because they have too much time on their hands. If a company they hold freezes its dividend, they are thinking about selling right that second. They are not giving the company time to work itself out of a temporary blip. Your goal is to avoid rash decisions, which could be costly down the road. Remember back in 2013 when all dividend bloggers were selling Intel (INTC) because it failed to increase dividends after 5 quarters? In reality, they should have held on, and done absolutely nothing, because the company was doing all the work in quietly compounding their money. Things looked terrible in the short-term, and the level of noise that Intel was going the way of the dodo probably made it safer for those investors to sell rather than hold. Then a few quarters later, Intel raised dividends and is selling at much higher prices today. Activity is bad when it comes to investing.
Which leads me to the most important things about investing in dividend growth stocks: “The money in the stock market is made by sitting, not by thinking”. In other words, time in the market is more important than timing the market.
A good company will grow and compound on its own, even if you do not read its annual report for the next 30 years. The smart investor would hold on to that compounding machine to their grave. Most ordinary investors would not do that however, because they are fearful that their paper gains would evaporate. They are also constantly trying to forecast the turn of events, rather than going along for the ride. When I posted an article on why I would not sell even after a 1000% increase in prices, most responses I received were that it would be silly to not sell after a ten-bagger. In reality, of the 50 or so companies that you would buy in your dividend portfolio, there would be a few exceptional ones that would perform phenomenally. These will be the candidates that would bring a large portion of the gains in dividends and portfolio values for your portfolio. The rest would do just fine probably, while as much as 20% could outright end up failing within a decade or so.
On the contrary, a company that really hits it bad, is going to fail no matter how much you monitor it. You would be unable to determine when to exit the losing company at the time, as some events could mean the end for some companies but not the others. For other companies these same events could mean that the bottom is in and the business is about to turn a corner. For example, I have found that when a company cuts or eliminates dividends, this is a sign that management is really bearish on the business. This is the situation when I sell my shares. If I am wrong and they start growing it again, I will review the situation and get back in. During the financial crisis, several companies that cut dividends such as Washington Mutual, eventually went bankrupt, thus wiping out their sharehoders. Others such as Bank of America (BAC) or Citigroup (C) lost over 90% of their stock value and annual dividend income and haven’t recovered yet. On the other hand however, the perfect time to buy Wells Fargo (WFC) and US Bank (USB) was when the companies cut dividends. At the time of the trouble, you can’t reasonably expect to know if this is a short-term bump or the beginning of the end. Therefore, your monitoring is likely not a value add activity.
I wrote this article, because I have been thinking about the management of my portfolio, should I be unable to manage it any more. After all, there are 62,000 Fedex (FDX) vehicles in the world, so the chance of being hit by one is out there. I know that whoever gets my money ( family, charity etc) is not going to be as knowledgeable about investments as I think I am. Therefore, my goal is to build a portfolio that could last for several decades after I am gone. This means that this is a passive portfolio, consisting of companies which have enduring competitive advantages, that does not need to be monitored or tweaked constantly. The only goal of this portfolio is to distribute the dividends to the beneficiaries, and nothing else.
Looking at my portfolio, I am fairly confident that it can serve its purpose well. I am fairly certain that at least some of the companies I own will be around 30 - 40 years from now, and would be profitable never the less. Therefore, whoever benefits from the dividends from my portfolio, would not even need to know the difference between preferred stock and livestock. My dividend cash machine would work for decades, distributing that income to those beneficiaries, without much need for constant supervision. And no, I do not own any Twitter (TWTR) or Facebook (FB).
I can afford to do nothing, because my portfolio consists of a vast number of reliable blue chip companies from a variety of sectors. These are stodgy, mature companies whose profits are derived from hundreds of products sold across the globe. True, some of them might fail in 5-10-20 years, but the rest would produce reliable long-term growth, that would more than compensate for the failures. The facts supporting doing absolutely nothing are the performance statistics of individual investors, which show that those who trade the most have the lowest returns. This proves that doing nothing could be beneficial to your portfolio results, contrary to ordinary thinking. An investment portfolio is like a bar of soap: The more you touch/handle it, the smaller it gets.
The second fact supporting this strategy is a study by Jeremy Siegel on the performance of the original 500 firms in the S&P 500 from 1957. If you had simply bought all of those 500 corporations in 1957, and then did absolutely nothing other than reinvesting dividends and receiving shares in spin-offs, you would have actually outperformed S&P 500 for 50 years.
The third fact supporting doing nothing is the performance of the Corporate Leaders Trust, which was set up in 1930s, in order to invest in 30 leading blue chip corporations of the time. Approximately 75 years later, it has done pretty well by utilizing a totally passive approach. This so called ghost portfolio held on to the same companies for decades, and selling when dividends were eliminated. A $10,000 investment in 1942 would have turned out to $16.60 million by the end of 2013. This investment would also be delivering annual dividends of a quarter of million dollars. Dividend reinvestment works wonders when placed into practice on a diversified portfolio of blue chip dividend stocks.
To summarize, being a gentleman of leisure is my true calling. Because most of the companies I own are global brands that have recurring revenue streams from hundreds of products sold globally, one can afford to not monitor those if a situation like that arises. That being said, as long as I am in charge, I would likely continue my weekly process of scanning for dividend increases, checking annual reports, looking for undervalued companies to buy, and researching new or existing portfolio components. My goal is to be familiar and keep up with all dividend champions and dividend achievers. That way, I would be prepared to act quickly if the right opportunity arises. For those companies I already own, the goal is to be as passive as possible. Now I have to go out and find a hobby to occupy that extra free time of mine...
Full Disclosure: Long WFC
Relevant Articles:
- The Perfect Dividend Portfolio
- Turbocharge Income Growth with Dividend Reinvestment
- What dividend stocks would I buy if I were just starting out
- How to be a successful dividend investor
- Comparing your results to S&P 500 could be dangerous for dividend investors
Tuesday, April 21, 2015
Dividend Growth Stocks Increase Intrinsic Value Over Time
Dividend growth stocks get no respect. These slow and steady companies tend to produce results for long-term investors, who plan on holding for at least 10 - 20 years. Unfortunately today, the average investor has a much shorter time-frame in mind ( which probably explains why so many fail and never use the stock market for its true potential as a powerful wealth generator for retirement)
Dividend growth stocks are quiet compounding machines, that satisfy customer demands, constantly improve their operations, adapt their offerings to the changing consumer demands, while also innovating and growing their market share in their respective industries.
Over time, those companies manage to increase sales, earnings and dividends, which make them more valuable. This increases their intrinsic value to investors, who generate a rising inflation adjusted stream of income through dividends, and unrealized capital gains to those who are patient enough to sit and wait. Thus those investors end up having their cake and eating it too.
I always talk how I never want to pay more than 20 times earnings even for the best quality dividend growth stock. However, I am willing to hold on to a company I own, even if it sells for 30 times earnings today. This is because I have a long-term mindset when it comes to holding stocks. I know that a company that sells for 30 times earnings today, but manages to grow earnings by 8% – 9% per year for the next 20 years will be able to deliver satisfactory returns for my capital.
This is the reason why my upper limit is always 20 times earnings, and not something like $100/share entry price target ( from a company with $5 in EPS). A quality dividend growth company with $5/share this year, will probably earn much more than that in year two, a higher amount in year three etc. As a result, intrinsic value will be higher, since the business will be generating much more profit, and have the capacity to shower shareholders with a higher amount of cash dividends. Let’s say that EPS grows by 7%/year, and the stock pays a 3% dividend yield. This mean that the intrinsic value will be $100 in year one, $107 in year 2, and $114.49 in year three. Therefore, sitting in cash and waiting for the perfect price might leave the market timing investor in the dust over time.
This could be best explained by looking at Johnson & Johnson (JNJ) shares since 2002. You can see that earnings per share increased from $2.16 in 2002 to $5.70 by 2014. At the same time the share price increased from $53.71 to $104.57. For the patient dividend investor, it made sense to buy the shares since 2005. It also made sense to patiently hold on to the shares, since earnings and dividends increased, which also propelled the intrinsic value higher.
The intrinsic value increased from $43.20 to $114. The intrinsic value is derived by essentially multiplying the annual earnings by a P/E of 20. This is a rough approximation using a limited data set, since I did not want to use too much numbers and assumptions in trying to make a point on intrinsic value.
You can see that the stock has been selling below 20 times earnings since 2005. An investor who bought and held essentially was rewarded with increasing intrinsic value over time, despite fluctuations in the share price. The dividend investor was able to ignore fluctuations in the share price because they were paid a higher dividend every single year. When a company you own increases dividends, you know that its intrinsic value is growing. However, you never know how long it would take for the stock market to recognize that increase in value. If you had to rely only on the judgment of the stock market, and had to sell stock to live off in retirement, you could be in for a big trouble when stock prices are flat or down for extended periods of time. However, if you live off dividends, you do not have to worry about stock markets or price fluctuations. This is because a successful company that manages to earn more over time, will also send you cold hard cash every quarter. This means that you will not have to sell stock, and your ownership stake will not be reduced because of that. In addition, you will not have to speculate and bet your retirement on stock prices increasing every single year.
I believe for my investing that I should put money to work each month. Even if I end up paying high prices, which are not exceeded for 5 – 10 years, I won’t care, as long as the internal compounding is still going on, and there are reasons to believe it will continue. With this disciplined strategy, I might end up purchasing shares at multi-year highs. However, I would also have the discipline to keep purchasing shares of quality companies even when everyone is scared during the next bear market, recession or bank crisis. As you can see from the table above, buying at all time highs is not a problem, as long as someone does not overpay and as long as the business keeps growing. While buying at the depths of the bear market was very smart in hindsight, the investor does not really need to wait for a correction before initiating a position. If they choose the right business, its management will do the heavy lifting by compounding earnings, dividends and propel intrinsic values higher.
At the end of 2014, the shares were selling at $104.57/share and close to 18 times earnings. If someone wants to time the stock to a price of $91.20/share for 16 times earnings, they are taking a risk in lost opportunity cost. This is because if earnings keep going higher by 6%/year, the intrinsic value will increase in lock-step. Therefore, it gets less and less likely with the passing of each year that a price of $91 will be less likely to be seen again. Therefore, if you quibble over a few dollars or cents in share price, you are likely to miss out on the big moves that truly count. In the case of Johnson & Johnson, the big move is 5- 6% annual growth in earnings per share, coupled with a 3% - 3.50% annual dividends.
At the end of the day, if you believe that US will have a better and stronger economy in 30 years, a diversified portfolio of US businesses is the best bet on that prosperity for the average investor. In addition, if we were to get lower prices from here, I would be able to deploy any dividends I receive at much lower prices and valuations than today. I view that as a win-win for the long-term dividend investor. Actually, the best thing that could happen for someone who is just starting their investing journey is to start putting money to work during a period of depressed stock prices. This was the period between late 2008 to late 2012, when a lot of companies were selling for cheap prices, while everyone was waiting for a double-dip recession or hyperinflation.
Relevant Articles:
- Mistakes of Omission Can Be Costlier than Mistakes of Commission
- Opportunity Costs for Dividend Investors
- Why would I not sell dividend stocks even after a 1000% gain?
- Optimal Cash Allocation for Dividend Investors
- Dividend Growth Stocks – The best kept secret on Wall Street
Dividend growth stocks are quiet compounding machines, that satisfy customer demands, constantly improve their operations, adapt their offerings to the changing consumer demands, while also innovating and growing their market share in their respective industries.
Over time, those companies manage to increase sales, earnings and dividends, which make them more valuable. This increases their intrinsic value to investors, who generate a rising inflation adjusted stream of income through dividends, and unrealized capital gains to those who are patient enough to sit and wait. Thus those investors end up having their cake and eating it too.
I always talk how I never want to pay more than 20 times earnings even for the best quality dividend growth stock. However, I am willing to hold on to a company I own, even if it sells for 30 times earnings today. This is because I have a long-term mindset when it comes to holding stocks. I know that a company that sells for 30 times earnings today, but manages to grow earnings by 8% – 9% per year for the next 20 years will be able to deliver satisfactory returns for my capital.
This is the reason why my upper limit is always 20 times earnings, and not something like $100/share entry price target ( from a company with $5 in EPS). A quality dividend growth company with $5/share this year, will probably earn much more than that in year two, a higher amount in year three etc. As a result, intrinsic value will be higher, since the business will be generating much more profit, and have the capacity to shower shareholders with a higher amount of cash dividends. Let’s say that EPS grows by 7%/year, and the stock pays a 3% dividend yield. This mean that the intrinsic value will be $100 in year one, $107 in year 2, and $114.49 in year three. Therefore, sitting in cash and waiting for the perfect price might leave the market timing investor in the dust over time.
This could be best explained by looking at Johnson & Johnson (JNJ) shares since 2002. You can see that earnings per share increased from $2.16 in 2002 to $5.70 by 2014. At the same time the share price increased from $53.71 to $104.57. For the patient dividend investor, it made sense to buy the shares since 2005. It also made sense to patiently hold on to the shares, since earnings and dividends increased, which also propelled the intrinsic value higher.
The intrinsic value increased from $43.20 to $114. The intrinsic value is derived by essentially multiplying the annual earnings by a P/E of 20. This is a rough approximation using a limited data set, since I did not want to use too much numbers and assumptions in trying to make a point on intrinsic value.
You can see that the stock has been selling below 20 times earnings since 2005. An investor who bought and held essentially was rewarded with increasing intrinsic value over time, despite fluctuations in the share price. The dividend investor was able to ignore fluctuations in the share price because they were paid a higher dividend every single year. When a company you own increases dividends, you know that its intrinsic value is growing. However, you never know how long it would take for the stock market to recognize that increase in value. If you had to rely only on the judgment of the stock market, and had to sell stock to live off in retirement, you could be in for a big trouble when stock prices are flat or down for extended periods of time. However, if you live off dividends, you do not have to worry about stock markets or price fluctuations. This is because a successful company that manages to earn more over time, will also send you cold hard cash every quarter. This means that you will not have to sell stock, and your ownership stake will not be reduced because of that. In addition, you will not have to speculate and bet your retirement on stock prices increasing every single year.
I believe for my investing that I should put money to work each month. Even if I end up paying high prices, which are not exceeded for 5 – 10 years, I won’t care, as long as the internal compounding is still going on, and there are reasons to believe it will continue. With this disciplined strategy, I might end up purchasing shares at multi-year highs. However, I would also have the discipline to keep purchasing shares of quality companies even when everyone is scared during the next bear market, recession or bank crisis. As you can see from the table above, buying at all time highs is not a problem, as long as someone does not overpay and as long as the business keeps growing. While buying at the depths of the bear market was very smart in hindsight, the investor does not really need to wait for a correction before initiating a position. If they choose the right business, its management will do the heavy lifting by compounding earnings, dividends and propel intrinsic values higher.
At the end of 2014, the shares were selling at $104.57/share and close to 18 times earnings. If someone wants to time the stock to a price of $91.20/share for 16 times earnings, they are taking a risk in lost opportunity cost. This is because if earnings keep going higher by 6%/year, the intrinsic value will increase in lock-step. Therefore, it gets less and less likely with the passing of each year that a price of $91 will be less likely to be seen again. Therefore, if you quibble over a few dollars or cents in share price, you are likely to miss out on the big moves that truly count. In the case of Johnson & Johnson, the big move is 5- 6% annual growth in earnings per share, coupled with a 3% - 3.50% annual dividends.
At the end of the day, if you believe that US will have a better and stronger economy in 30 years, a diversified portfolio of US businesses is the best bet on that prosperity for the average investor. In addition, if we were to get lower prices from here, I would be able to deploy any dividends I receive at much lower prices and valuations than today. I view that as a win-win for the long-term dividend investor. Actually, the best thing that could happen for someone who is just starting their investing journey is to start putting money to work during a period of depressed stock prices. This was the period between late 2008 to late 2012, when a lot of companies were selling for cheap prices, while everyone was waiting for a double-dip recession or hyperinflation.
Relevant Articles:
- Mistakes of Omission Can Be Costlier than Mistakes of Commission
- Opportunity Costs for Dividend Investors
- Why would I not sell dividend stocks even after a 1000% gain?
- Optimal Cash Allocation for Dividend Investors
- Dividend Growth Stocks – The best kept secret on Wall Street
Monday, April 20, 2015
Five Dividend Paying Companies Rewarding Shareholders With Higher Dividends
One of the ways to monitor my portfolio and the list of dividend growth companies is by checking for dividend increases each week. I achieve that in my process of reviewing press releases. In addition, my broker is really good at notifying me about upcoming earnings releases or recent dividend announcements for the companies I own.
There were a few companies I find interesting, which I have highlighted below:
Kinder Morgan, Inc. (KMI) operates as an energy infrastructure and energy company in North America. The company operates through Natural Gas Pipelines, CO2, Terminals, Products Pipelines, Kinder Morgan Canada, and Other segments. The company raised its quarterly dividend to 48 cents/share, which represented a 14.30% increase over the distribution paid at the same time last year. The yield based on the new distribution is a very respectable 4.40%. Kinder Morgan has raised dividends since going public in 2011. However, the Kinder Morgan Pipeline that it absorbed in 2014 and to which KMI was a general partner to, had managed to increase distributions for 18 years in a row.
Kinder Morgan is my largest position at close to 6%. When the merger of the partnerships into the General Partner was announced, there were some very optimistic projections shared with shareholders. For example, dividends per share were expected to reach $2 in 2015, followed by annual growth of 10%/year. I believe that with the slowdown in oil prices, there could be a corresponding decline in production of oil and possibly natural gas. This could impact volumes on pipelines, and could reduce demand for building new pipeline projects out there. This slowdown will likely be a good opportunity for someone like Kinder Morgan to further strengthen its grip on fee generating assets in the US, as it could use its stock as currency to acquire companies or assets directly at bargain prices. In addition, Kinder Morgan does not have to spend all of its cashflows on dividends, and could accumulate cash on balance sheet. This could be a very good competitive advantage relative to any other major US pipeline, which constantly sell shares to fund major new projects.
That being said, even if dividend growth and cash flows only grow by 5%/year for the next decade, current shareholders will do pretty well. That’s because a stock that has a 4.40% - 4.50% yield today, which also grows at 5%/year will likely be worth at least 50% - 60% more within a decade. Add in reinvested distributions, and it is quite possible that money and income will more than double after a decade under this pessimistic forecast.
CSX Corporation (CSX), together with its subsidiaries, provides rail-based transportation services in the United States and Canada. It offers traditional rail services, and transports intermodal containers and trailers. The company raised its quarterly distributions by 12.50% to 18 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate as 25.20%/year, while the 5 year dividend growth rate is 16.50%/year. The stock sells for 16 times forward earnings and yields 2.20%. I would add the stock to my list for further research. I have meant to put more railroads on my list, but valuations have not been very attractive. Hopefully sentiment turns gloomy in the short-run, so that more attractive opportunities are present for those like me in the accumulation phase.
The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. The company raised dividends by 3% to 66.29 cents/share. This marked the 59th consecutive annual dividend increase for this dividend king. This is also the slowest rate of dividend increases by P&G since the 3.70% increase in dividends in 1988. Back in 1986, the company also raised quarterly dividends by a paltry 3.80%. What makes those two dates stick out is the fact that the company had maintained dividends steady for 7 quarters in a row prior to the increases. Therefore the annual increases were likely smaller than 3%. However, the company was committed to rewarding its investors with an annual dividend raise and maintain its status of a dividend growth stock. Its business turned around and it managed to continue its streak of consistent dividend growth. If someone got scared from the slowdown in dividend growth and sold in the 1980s, they would have missed out since dividends rose over 16 times over the next 30 years. The shares are overvalued at 20.70 times forward earnings and yield 3.20%. While I would not add to P&G at present levels, I think the company is still a good hold for long-term investors. Check my last analysis of P&G. I will be posting an updated analysis shortly.
Discover Financial Services (DFS) operates as a direct banking and payment services company in the United States. It operates in two segments, Direct Banking and Payment Services. The company raised its quarterly dividends by 16.70% to 28 cents/share. This marked the 5th consecutive dividend increase for the company. The shares are attractively valued at times earnings and yield 1.90%. I like the valuation on this company relative to its rivals, and would add it to my list for further research.
PPG Industries, Inc. (PPG) manufactures and distributes coatings, specialty materials, and glass products. The company raised its quarterly dividends by 7.50% to 72 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. The ten year dividend growth is 3.90%/year. The shares are selling for 19.80 times forward earnings and yield 1.30%. I have taken a pass on PPG Industries before, mostly because I did not feel comfortable with the wild fluctuations in earnings for this cyclical company. I would still put it on my list for further analysis, in order to understand how it managed to grow earnings so quickly in the past three years. Sometimes, it is helpful to look back at ideas I have passed on and determine whether something could be learned from this mistake of omission.
Full Disclosure: Long KMI, PG
Relevant Articles:
- How to create a bulletproof dividend portfolio
- Five Metrics of Successful Dividend Companies
- How long does it take to manage a dividend portfolio?
- Return on Investment with Dividend Stocks
- The work required to have an opinion
There were a few companies I find interesting, which I have highlighted below:
Kinder Morgan, Inc. (KMI) operates as an energy infrastructure and energy company in North America. The company operates through Natural Gas Pipelines, CO2, Terminals, Products Pipelines, Kinder Morgan Canada, and Other segments. The company raised its quarterly dividend to 48 cents/share, which represented a 14.30% increase over the distribution paid at the same time last year. The yield based on the new distribution is a very respectable 4.40%. Kinder Morgan has raised dividends since going public in 2011. However, the Kinder Morgan Pipeline that it absorbed in 2014 and to which KMI was a general partner to, had managed to increase distributions for 18 years in a row.
Kinder Morgan is my largest position at close to 6%. When the merger of the partnerships into the General Partner was announced, there were some very optimistic projections shared with shareholders. For example, dividends per share were expected to reach $2 in 2015, followed by annual growth of 10%/year. I believe that with the slowdown in oil prices, there could be a corresponding decline in production of oil and possibly natural gas. This could impact volumes on pipelines, and could reduce demand for building new pipeline projects out there. This slowdown will likely be a good opportunity for someone like Kinder Morgan to further strengthen its grip on fee generating assets in the US, as it could use its stock as currency to acquire companies or assets directly at bargain prices. In addition, Kinder Morgan does not have to spend all of its cashflows on dividends, and could accumulate cash on balance sheet. This could be a very good competitive advantage relative to any other major US pipeline, which constantly sell shares to fund major new projects.
That being said, even if dividend growth and cash flows only grow by 5%/year for the next decade, current shareholders will do pretty well. That’s because a stock that has a 4.40% - 4.50% yield today, which also grows at 5%/year will likely be worth at least 50% - 60% more within a decade. Add in reinvested distributions, and it is quite possible that money and income will more than double after a decade under this pessimistic forecast.
CSX Corporation (CSX), together with its subsidiaries, provides rail-based transportation services in the United States and Canada. It offers traditional rail services, and transports intermodal containers and trailers. The company raised its quarterly distributions by 12.50% to 18 cents/share. This marked the 11th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate as 25.20%/year, while the 5 year dividend growth rate is 16.50%/year. The stock sells for 16 times forward earnings and yields 2.20%. I would add the stock to my list for further research. I have meant to put more railroads on my list, but valuations have not been very attractive. Hopefully sentiment turns gloomy in the short-run, so that more attractive opportunities are present for those like me in the accumulation phase.
The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged goods. The company operates through five segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. The company raised dividends by 3% to 66.29 cents/share. This marked the 59th consecutive annual dividend increase for this dividend king. This is also the slowest rate of dividend increases by P&G since the 3.70% increase in dividends in 1988. Back in 1986, the company also raised quarterly dividends by a paltry 3.80%. What makes those two dates stick out is the fact that the company had maintained dividends steady for 7 quarters in a row prior to the increases. Therefore the annual increases were likely smaller than 3%. However, the company was committed to rewarding its investors with an annual dividend raise and maintain its status of a dividend growth stock. Its business turned around and it managed to continue its streak of consistent dividend growth. If someone got scared from the slowdown in dividend growth and sold in the 1980s, they would have missed out since dividends rose over 16 times over the next 30 years. The shares are overvalued at 20.70 times forward earnings and yield 3.20%. While I would not add to P&G at present levels, I think the company is still a good hold for long-term investors. Check my last analysis of P&G. I will be posting an updated analysis shortly.
Discover Financial Services (DFS) operates as a direct banking and payment services company in the United States. It operates in two segments, Direct Banking and Payment Services. The company raised its quarterly dividends by 16.70% to 28 cents/share. This marked the 5th consecutive dividend increase for the company. The shares are attractively valued at times earnings and yield 1.90%. I like the valuation on this company relative to its rivals, and would add it to my list for further research.
PPG Industries, Inc. (PPG) manufactures and distributes coatings, specialty materials, and glass products. The company raised its quarterly dividends by 7.50% to 72 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. The ten year dividend growth is 3.90%/year. The shares are selling for 19.80 times forward earnings and yield 1.30%. I have taken a pass on PPG Industries before, mostly because I did not feel comfortable with the wild fluctuations in earnings for this cyclical company. I would still put it on my list for further analysis, in order to understand how it managed to grow earnings so quickly in the past three years. Sometimes, it is helpful to look back at ideas I have passed on and determine whether something could be learned from this mistake of omission.
Full Disclosure: Long KMI, PG
Relevant Articles:
- How to create a bulletproof dividend portfolio
- Five Metrics of Successful Dividend Companies
- How long does it take to manage a dividend portfolio?
- Return on Investment with Dividend Stocks
- The work required to have an opinion
Friday, April 17, 2015
Philip Morris International (PM) Dividend Stock Analysis
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. Its portfolio of brands comprise Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company was created in 2008 when Altria (MO) spun-off its international tobacco operations into Philip Morris International. Between 2008 and 2013, I believed Philip Morris International to be the security I like best. As a result it is one of my largest positions.
Philip Morris International has managed to boost dividends in every single year since 2008. The last dividend increase was in September 2014, when the quarterly dividend was raised by 6% to $1/share. The quarterly dividend has increased from 46 cents/share in 2008. The chart below shows dividends from 2008 to 2015. There were only 3 dividend payments made in 2008, and for 2015 it assumes that the dividend stays unchanged at $1/quarter. It is likely that it will be increased in October 2015, but it is unclear at this time what the increase will be.
In the future, the company can grow earnings per share through acquisitions, entry into new markets, through price increases that exceed decreases in demand, increase in market shares, through new product offerings (such as e-cigarettes) and through share buybacks. I would be curious to see whether PMI tries to diversify beyond tobacco in the future, into other areas such as packaged food for example or alcoholic beverages. The company is committed to returning 100% of cashflow to shareholders, which it has achieved through dividends and share buybacks.
Everyone is aware of the legislation risks behind tobacco companies, and dangers of tobacco investing. As a result, I am not going to discuss those. For those who do not like companies like PMI due to ethical considerations, I respect that. However, please do not try to impose your own ethical considerations on others.
The main positive for PMI is that the company is not dependent on the mercy of a single government and a single market, in terms of unfavorable legislation or bans on tobacco products. For example, the fact that Australia initiated plain packaging laws on cigarettes was not a blow to globally diversified companies like PMI. In addition, even if this plain packaging law spreads to the UK or a few other countries, the diversified nature of PMI’s operations could soften the blow. On the other hand however, it is more cumbersome to deal with 180 governments, which all have different laws and regulations regarding the manufacturing, processing and sale of tobacco products. The fact that a single government entity cannot throw a deadly blow to PMI is a plus. The other positive is that tobacco usage in certain places like emerging markets is actually growing. The downside is that profits per unit are higher in the developed world, and lower in emerging markets.
PMI has managed to increase earnings per share from $2.75 in 2007 to $5.26 in 2013. Since then, earnings per share have decreased and are expected to fall to $4.35 for 2015.
The drop in earnings per share has pushed the dividend payout ratio up, and resulted in slowing down of dividend growth. In itself, a high payout ratio for a tobacco company is not as big of a problem.
However, when earnings per share are dropping, it is a slight cause for concern. The company has recently canceled its stock buyback program. Since May 2008, when PMI began its first share repurchase program, the company has spent an aggregate of $37.7 billion to repurchase 601.4 million shares. This represented 28.5% of the shares outstanding at the time of the spin-off in March 2008. The average price was $62.61 per share. However, the company is not repurchasing any shares for the time being, citing unfavorable currency fluctuations. In comparison, Philip Morris International has one of the most consistent share buyback programs between 2008 and 2014.
In 2014, PMI exceeded its one-year gross productivity and cost savings target of $300 million. In 2015, PMI's productivity and cost savings initiatives will include, continued enhancement of production processes, the harmonization of tobacco blends, the streamlining of product specifications and number of brand variants, supply chain improvements and overall spending efficiency across the company. This is something that could help in attaining future growth in earnings.
In general, I like PMI because the company has a wide moat. This means that its products have strong brand names, pricing power and loyal customer usage. In addition, PMI usually is number one or number two in most of its major markets in Europe, EMEA, ASIA etc. This strong advantage results in recurring sales and earnings for shareholders for years. This wide moat is the reason why I am willing to sit out any short-term turbulence in Philip Morris International. Since my holding period is the next 20 - 30 years, I am willing to sit out short-term weakness ( 3 - 5 years) if I believe that a company has solid long-term potential.
In contrast, Altria (MO) has done spectacularly well since 2008. The most interesting thing to learn is that in 2008, everyone (myself included) believed that PMI will do much better than Altria. Quite on the contrary however, Altria did better because it had a lower P/E ratio and a higher starting yield, which was coupled with consistently high growth in earnings per share. The moral of the story is that when it is conventional wisdom to accept something as a given, the real money making opportunity could be to pursue the alternative viewed as less desirable. By defying skeptics, Altria has rewarded its shareholders much better than PMI since 2008. However, Altria is riskier, since it derives most of its profits from US tobacco sales. The next major source of earnings is its stake in brewer SAB Miller.
Shares of Philip Morris International are not selling for 17.90 times forward earnings and yield 5.10%, with a payout ratio of 92%. If you adjust forward earnings for currency of $1.15/share, the forward P/E drops to 14.20 and payout ratio drops to 72.70%. After looking at the data, I would not consider adding to PMI today. Of course, it is one of my largest positions, so common sense on diversification tells me that I should not buy more even if I wanted to. I believe that in the long-run, PMI’s profits will likely rebound. The nice thing is that I will be paid a high dividend in the process, which I can allocate into other interesting opportunities.
I do not like it when the dividend payout ratios is too high for companies I own and where earnings have been flat or going lower. While the risk that the company will cut dividends is low, since it has some room to maneuver after it has canceled stock buybacks, the risk for a dividend cut increases the longer the payout stays closer to 100%. I would like PMI to prove skeptics wrong, and return back to growing earnings. We all know that without rising earnings, dividend growth cannot be achieved in a sustainable fashion. That being said, I still think the long-term picture (10 - 20 years down the road) is solid however once short-term woes are behind us.
Full Disclosure: Long PM and MO
Relevant Articles:
- How to become a successful dividend investor
- Altria Group (MO): A Smoking Hot Dividend Champion
- Dividends versus Share Buybacks/Stock repurchases
- Philip Morris International versus Altria
- Five Dividend Paying Companies with Consistent Share Buybacks
Wednesday, April 15, 2015
Does Paying a Dividend Reduce a Company’s Value?
One of the biggest misconceptions about dividend investing is that the value of your investment decreases by the amount of the dividend you received. This is a logical fallacy that I hear time and again, and really makes me lose hope in the human race. The origins of the fallacy are that it confuses stock prices with stock values. If after reading this article you come up with the conclusion that I do not understand the concept behind ex-dividend date, then chances are that you are confusing stock prices with stock values.
There is a difference between price you pay and value you receive. One can easily find stock prices on the internet or in newspapers. Stock prices fluctuate widely, by going from exuberant highs to depressing lows.
The value of companies however does not fluctuate that much on a daily basis. I am referring of course to the intrinsic value of the business, which would be realized in an arms-length transaction involving the sale of the whole company. While it is quite possible to purchase quality shares at a discount to intrinsic value, it is quite rare that a private seller would dispose of his/her total stake in a company at a fire-sale price.
There is a difference between price you pay and value you receive. One can easily find stock prices on the internet or in newspapers. Stock prices fluctuate widely, by going from exuberant highs to depressing lows.
The value of companies however does not fluctuate that much on a daily basis. I am referring of course to the intrinsic value of the business, which would be realized in an arms-length transaction involving the sale of the whole company. While it is quite possible to purchase quality shares at a discount to intrinsic value, it is quite rare that a private seller would dispose of his/her total stake in a company at a fire-sale price.
Monday, April 13, 2015
Six Companies Showering Shareholders with Higher Dividends
Checking for dividend increases is one of the tools I use to monitor my portfolio holdings and companies I am interested in. I have found that the rate of growth in company dividends shows the near term management sentiment in profitability for the enterprise. If management expects business as usual, they are much more likely to stay the course and maintain the rate of dividend increases from prior years. However, if tougher business environment is expected on the horizon, wise management will curtail dividend growth or might halt further increases in distributions.
In the past week, there were several companies that announced increases in dividends, which I am interested in. In addition, a company I have been monitoring initiated a dividend for the first time.
QUALCOMM Incorporated (QCOM) designs, develops, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, and the United States. The company operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). The company raised its quarterly dividend by 14.30% to 48 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate is 21.70%/year. This is typical for companies in the initial stage of dividend growth. Currently, Qualcomm is selling for 13.80 times forward earnings and yields 2.80%. While I have been familiar with the company since the days of the dot-com boom, I would add it on my list for further more detailed research.
Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products in the United States and internationally. This master limited partnership increased its quarterly distribution to 37.50 cents/unit. This represents an increase of 5.60% over the distribution paid at the same time last year. This master limited partnership has managed to increase distributions to unitholders for 16 years in a row. In the past decade, distributions have increased at a rate of 6.60%/year. I first initiated a position in 2010, but sold in 2013 to pursue Kinder Morgan and ONEOK Partners ( and later ONEOK). I would be interested in initiating a position back in Enterprise Products Partners at current yields above 5%. The current yield is close to 4.50% now. I should probably post an updated analysis of the partnership as well.
Plains All American Pipeline, L.P. (PAA), through with its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, natural gas liquids (NGL), natural gas, and refined products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. Plains All American Pipeline raised its quarterly distributions to 68.50 cents/unit, which represents an increase of 8.70% over the distribution paid at the same time last year. This master limited partnership has raised distributions to unitholders for 14 years in a row. In the past decade, distributions have increased at a rate of 8.30%/year. Currently, this MLP yields 5.50%. I will add it on my list for further research. As a side note, the General Partner Plains GP Holdings, L.P. (PAGP) raised distributions as well. However, unlike other General Partners this one has a lower yield at 3.20%
Genesis Energy, L.P. (GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. This MLP raised its quarterly distribution to cents/unit, which represents an increase of 10.90% over the distribution paid at the same time last year. This master limited partnership has raised distributions to unitholders for 12 years in a row. In the past decade, distributions have increased at a rate of 14%/year. Currently, this MLP yields 5.50%. I will add it on my list for further research.
Airgas, Inc. (ARG) supplies industrial, medical and specialty gases, and hard goods. The company operates through two segments, Distribution and All Other Operations. Airgas increased its quarterly dividend by % to cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate is 28.40%/year, which again is typical for companies in the initial phase of dividend growth. The shares are currently overvalued at 22 times forward earnings and yield 2.25%. I would add the company to my list for further research. On a side note, I own shares of competitor Air Products & Chemicals (APD) so I am familiar with the industry. However, the industry as a whole does not offer an attractive entry price today.
Constellation Brands, Inc. (STZ), together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company initiated its first dividend payment in 45 years of 31 cents/share for it’s a shares (STZ) and 28 cents/share for its B shares (STZB). The company is overvalued at 25.10 times forward earnings and yields 1%. The forward earnings of $4.85 for 2015 are a nice increase from the $1.19/share earned in 2005. I would add the company on my list for further research. However, I prefer Diageo (DEO), since it offers a better value today.
In general, I am looking for quality companies that are attractively valued, which have a track record of raising dividends, and which could grow earnings in the future. It is helpful to own a company with a decent initial yield, which has sustainable dividend and can grow that dividend in lockstep with growth in earnings.
Full Disclosure: Long KMI, APD, OKE, DEO
Relevant Articles:
- Buying Quality Companies at a Reasonable Price is Very Important
- How to read my weekly dividend increase reports
- Dividend Stocks Provide Protection in Any Market
- Why Dividend Growth Stocks Rock?
- Buy and Hold means Buy and Monitor
In the past week, there were several companies that announced increases in dividends, which I am interested in. In addition, a company I have been monitoring initiated a dividend for the first time.
QUALCOMM Incorporated (QCOM) designs, develops, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, and the United States. The company operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). The company raised its quarterly dividend by 14.30% to 48 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate is 21.70%/year. This is typical for companies in the initial stage of dividend growth. Currently, Qualcomm is selling for 13.80 times forward earnings and yields 2.80%. While I have been familiar with the company since the days of the dot-com boom, I would add it on my list for further more detailed research.
Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, petrochemicals, and refined products in the United States and internationally. This master limited partnership increased its quarterly distribution to 37.50 cents/unit. This represents an increase of 5.60% over the distribution paid at the same time last year. This master limited partnership has managed to increase distributions to unitholders for 16 years in a row. In the past decade, distributions have increased at a rate of 6.60%/year. I first initiated a position in 2010, but sold in 2013 to pursue Kinder Morgan and ONEOK Partners ( and later ONEOK). I would be interested in initiating a position back in Enterprise Products Partners at current yields above 5%. The current yield is close to 4.50% now. I should probably post an updated analysis of the partnership as well.
Plains All American Pipeline, L.P. (PAA), through with its subsidiaries, engages in the transportation, storage, terminalling, and marketing of crude oil, natural gas liquids (NGL), natural gas, and refined products in the United States and Canada. The company operates in three segments: Transportation, Facilities, and Supply and Logistics. Plains All American Pipeline raised its quarterly distributions to 68.50 cents/unit, which represents an increase of 8.70% over the distribution paid at the same time last year. This master limited partnership has raised distributions to unitholders for 14 years in a row. In the past decade, distributions have increased at a rate of 8.30%/year. Currently, this MLP yields 5.50%. I will add it on my list for further research. As a side note, the General Partner Plains GP Holdings, L.P. (PAGP) raised distributions as well. However, unlike other General Partners this one has a lower yield at 3.20%
Genesis Energy, L.P. (GEL) operates in the midstream segment of the oil and gas industry in the Gulf Coast region of the United States. This MLP raised its quarterly distribution to cents/unit, which represents an increase of 10.90% over the distribution paid at the same time last year. This master limited partnership has raised distributions to unitholders for 12 years in a row. In the past decade, distributions have increased at a rate of 14%/year. Currently, this MLP yields 5.50%. I will add it on my list for further research.
Airgas, Inc. (ARG) supplies industrial, medical and specialty gases, and hard goods. The company operates through two segments, Distribution and All Other Operations. Airgas increased its quarterly dividend by % to cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. The ten year dividend growth rate is 28.40%/year, which again is typical for companies in the initial phase of dividend growth. The shares are currently overvalued at 22 times forward earnings and yield 2.25%. I would add the company to my list for further research. On a side note, I own shares of competitor Air Products & Chemicals (APD) so I am familiar with the industry. However, the industry as a whole does not offer an attractive entry price today.
Constellation Brands, Inc. (STZ), together with its subsidiaries, produces, imports, and markets beer, wine, and spirits in the United States, Canada, Mexico, New Zealand, and Italy. The company initiated its first dividend payment in 45 years of 31 cents/share for it’s a shares (STZ) and 28 cents/share for its B shares (STZB). The company is overvalued at 25.10 times forward earnings and yields 1%. The forward earnings of $4.85 for 2015 are a nice increase from the $1.19/share earned in 2005. I would add the company on my list for further research. However, I prefer Diageo (DEO), since it offers a better value today.
In general, I am looking for quality companies that are attractively valued, which have a track record of raising dividends, and which could grow earnings in the future. It is helpful to own a company with a decent initial yield, which has sustainable dividend and can grow that dividend in lockstep with growth in earnings.
Full Disclosure: Long KMI, APD, OKE, DEO
Relevant Articles:
- Buying Quality Companies at a Reasonable Price is Very Important
- How to read my weekly dividend increase reports
- Dividend Stocks Provide Protection in Any Market
- Why Dividend Growth Stocks Rock?
- Buy and Hold means Buy and Monitor
Friday, April 10, 2015
Ameriprise Financial (AMP) Dividend Stock Analysis
Ameriprise Financial, Inc. (NYSE:AMP), through its subsidiaries, provides a range of financial products and services in the United States and internationally. Ameriprise operates in five segments - Advice & Wealth Management, Asset Management, Annuities, Protection and Corporate & Other. The company was created as a result of a spin-off from American Express (NYSE:AXP) in 2005. Ameriprise Financial has paid dividends since 2005, and has increased them every year since then.
The company's last dividend increase was in April 2014 when the Board of Directors approved a 11.50% increase in the quarterly distribution to 58 cents /share. The company's peer group includes Principal Financial Group (NYSE:PFG), Northern Trust (NASDAQ:NTRS) and Waddell & Reed (NYSE:WDR).
Since going public in 2005, this dividend growth stock has more than doubled in price.
The company has managed to deliver a 12% average increase in annual EPS since 2004. Analysts expect Ameriprise Financial to earn $9.76 per share in 2015 and $11.14 per share in 2016. In comparison, the company earned $8.74/share in 2014. Over the next five years, analysts expect EPS to rise by 17%/year.
Ameriprise Financial has actively used share buybacks to reduce the number of shares outstanding from 247 million in 2005 to 191 million by 2014.
The company operates in five segments. I expect that in the future, its growth will likely come from the Advice & Wealth Management and Asset Management segments, while Annuities and Protection segments will shrink as a percentage of the overall revenue pie.
• Advice & Wealth Management (32.20% of Operating Income); This segment provides financial planning and advice, as well as full-service brokerage services, primarily to retail clients through our advisors. A significant portion of revenues in this segment is fee-based, driven by the level of client assets, which is impacted by both market movements and net asset flows.
• Asset Management (32% of Operating Income); This segment provides investment advice and investment products to retail, high net worth and institutional clients on a global scale through Columbia Management in the US and Threadneedle, which operates internationally. Revenues in the Asset Management segment are primarily earned as fees based on managed asset balances, which are impacted by market movements, net asset flows, asset allocation and product mix.
• Annuities (25.70% of Operating Income); This segment provides RiverSource variable and fixed annuity products to individual clients. The RiverSource Life companies provide variable annuity products through our advisors, and our fixed annuity products are distributed through both affiliated and unaffiliated advisors and financial institutions. Revenues for the variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. Revenues for the fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.
• Protection (10% of Operating Income); This segment provides a variety of products to address the protection and risk management needs of our retail clients, including life, disability income and property casualty insurance. The primary sources of revenues for this segment are premiums, fees and charges we receive to assume insurance-related risk. The company earns net investment income on owned assets supporting insurance reserves and capital supporting the business. Ameriprise Financial also receives fees based on the level of assets supporting variable universal life separate account balances.
• Corporate & Other (#N/A). This segment consists of net investment income or loss on corporate level assets, including excess capital held in Amerprise subsidiaries and other unallocated equity and other revenues as well as unallocated corporate expenses
Overall, I am very bullish on companies that offer the tools to assist the 60 million Baby Boomers in their retirement. As there are 10,000 boomers retiring each day, there is the need for financial planning advice. Financial advisors help individual investors craft a plan, and execute it, while trying to create a long-term relationship with the client. The future growth of the company would come from building and retaining long-term relationships with customers. The company has an active sales force of 9,600 financial advisers, which help address customers' needs by selling them Ameriprise products. Almost 75% of its advisors are independent franchisees, who have the right to use the Ameriprise name. Approximately 25% of them are employees of the company.
I believe that investors who utilize the services of a financial advisor are more likely to stick to that advisor. As a result, I believe that investor assets with an adviser at a place such as Ameriprise are stickier than assets under a mutual fund company such as T.Rowe Price. The personal relationship with a client can provide benefits to both the inexperienced investor and the adviser. And a company like Ameriprise can offer an integrated approach to wealth management, and utilize its position in providing annuities and insurance products as well. It also helps that Ameriprise has positioned itself well as the place to obtain financial planning advise. The added risk for Ameriprise is that the advisers could take clients away if they switched to a competitor. However half of the company’s advisers have been with Ameriprise for over a decade, and have an average tenure of 18 years.
Future growth will also be dependent on attracting more client money both domestically and internationally. Future growth will also be aided by strategic acquisitions, which will expand the pool of assets under management. A rising market generally helps in increasing assets under management, which is accretive to revenues and profitability.
Rising stock prices will results in higher revenues and profits. On the contrary, if stock prices were to take a breather or even decrease, this will provide a headwind against further profit growth. In the long run, security prices generally tend to follow an upwards trend. Therefore, it might be a good idea to hope for a stock market correction, before initiating a position in a company like Ameriprise. A correction could provide for an even better entry price.
The return on equity has been pretty consistent between 8 and 11% between 2005 and 2012.The only dip was in 2008, during the depths of the financial crisis. Since then, this indicator has been going up and is reaching 20% in 2014. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.
The annual dividend payment has increased by 27.20% per year over the past five years, which is higher than the growth in EPS. This was possible because as a new dividend payer, Ameriprise started paying out a small amount, which was later increased significantly.
The dividend payout ratio has increased from 5% in 2005 to 25.90% in 2014. 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 Ameriprise Financial is attractively valued at 12.90 times forward earnings, yields 1.85% and has a sustainable distribution. I recently added to my position in the stock and plan on adding to it further if current yield is closer to 2.50%.
Full Disclosure: Long AMP, TROW
Relevant Articles:
- Eaton Vance (EV) Dividend Stock Analysis
- T. Rowe Price Group (TROW) Dividend Stock Analysis
- Four Dependable Dividend Stocks I Bought Last Week
- Key Ingredients for Successful Dividend Investing
- Companies I am Considering for my Roth IRA
The company's last dividend increase was in April 2014 when the Board of Directors approved a 11.50% increase in the quarterly distribution to 58 cents /share. The company's peer group includes Principal Financial Group (NYSE:PFG), Northern Trust (NASDAQ:NTRS) and Waddell & Reed (NYSE:WDR).
Since going public in 2005, this dividend growth stock has more than doubled in price.
The company has managed to deliver a 12% average increase in annual EPS since 2004. Analysts expect Ameriprise Financial to earn $9.76 per share in 2015 and $11.14 per share in 2016. In comparison, the company earned $8.74/share in 2014. Over the next five years, analysts expect EPS to rise by 17%/year.
Ameriprise Financial has actively used share buybacks to reduce the number of shares outstanding from 247 million in 2005 to 191 million by 2014.
The company operates in five segments. I expect that in the future, its growth will likely come from the Advice & Wealth Management and Asset Management segments, while Annuities and Protection segments will shrink as a percentage of the overall revenue pie.
• Advice & Wealth Management (32.20% of Operating Income); This segment provides financial planning and advice, as well as full-service brokerage services, primarily to retail clients through our advisors. A significant portion of revenues in this segment is fee-based, driven by the level of client assets, which is impacted by both market movements and net asset flows.
• Asset Management (32% of Operating Income); This segment provides investment advice and investment products to retail, high net worth and institutional clients on a global scale through Columbia Management in the US and Threadneedle, which operates internationally. Revenues in the Asset Management segment are primarily earned as fees based on managed asset balances, which are impacted by market movements, net asset flows, asset allocation and product mix.
• Annuities (25.70% of Operating Income); This segment provides RiverSource variable and fixed annuity products to individual clients. The RiverSource Life companies provide variable annuity products through our advisors, and our fixed annuity products are distributed through both affiliated and unaffiliated advisors and financial institutions. Revenues for the variable annuity products are primarily earned as fees based on underlying account balances, which are impacted by both market movements and net asset flows. Revenues for the fixed annuity products are primarily earned as net investment income on assets supporting fixed account balances, with profitability significantly impacted by the spread between net investment income earned and interest credited on the fixed account balances.
• Protection (10% of Operating Income); This segment provides a variety of products to address the protection and risk management needs of our retail clients, including life, disability income and property casualty insurance. The primary sources of revenues for this segment are premiums, fees and charges we receive to assume insurance-related risk. The company earns net investment income on owned assets supporting insurance reserves and capital supporting the business. Ameriprise Financial also receives fees based on the level of assets supporting variable universal life separate account balances.
• Corporate & Other (#N/A). This segment consists of net investment income or loss on corporate level assets, including excess capital held in Amerprise subsidiaries and other unallocated equity and other revenues as well as unallocated corporate expenses
Overall, I am very bullish on companies that offer the tools to assist the 60 million Baby Boomers in their retirement. As there are 10,000 boomers retiring each day, there is the need for financial planning advice. Financial advisors help individual investors craft a plan, and execute it, while trying to create a long-term relationship with the client. The future growth of the company would come from building and retaining long-term relationships with customers. The company has an active sales force of 9,600 financial advisers, which help address customers' needs by selling them Ameriprise products. Almost 75% of its advisors are independent franchisees, who have the right to use the Ameriprise name. Approximately 25% of them are employees of the company.
I believe that investors who utilize the services of a financial advisor are more likely to stick to that advisor. As a result, I believe that investor assets with an adviser at a place such as Ameriprise are stickier than assets under a mutual fund company such as T.Rowe Price. The personal relationship with a client can provide benefits to both the inexperienced investor and the adviser. And a company like Ameriprise can offer an integrated approach to wealth management, and utilize its position in providing annuities and insurance products as well. It also helps that Ameriprise has positioned itself well as the place to obtain financial planning advise. The added risk for Ameriprise is that the advisers could take clients away if they switched to a competitor. However half of the company’s advisers have been with Ameriprise for over a decade, and have an average tenure of 18 years.
Future growth will also be dependent on attracting more client money both domestically and internationally. Future growth will also be aided by strategic acquisitions, which will expand the pool of assets under management. A rising market generally helps in increasing assets under management, which is accretive to revenues and profitability.
Rising stock prices will results in higher revenues and profits. On the contrary, if stock prices were to take a breather or even decrease, this will provide a headwind against further profit growth. In the long run, security prices generally tend to follow an upwards trend. Therefore, it might be a good idea to hope for a stock market correction, before initiating a position in a company like Ameriprise. A correction could provide for an even better entry price.
The return on equity has been pretty consistent between 8 and 11% between 2005 and 2012.The only dip was in 2008, during the depths of the financial crisis. Since then, this indicator has been going up and is reaching 20% in 2014. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.
The annual dividend payment has increased by 27.20% per year over the past five years, which is higher than the growth in EPS. This was possible because as a new dividend payer, Ameriprise started paying out a small amount, which was later increased significantly.
The dividend payout ratio has increased from 5% in 2005 to 25.90% in 2014. 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 Ameriprise Financial is attractively valued at 12.90 times forward earnings, yields 1.85% and has a sustainable distribution. I recently added to my position in the stock and plan on adding to it further if current yield is closer to 2.50%.
Full Disclosure: Long AMP, TROW
Relevant Articles:
- Eaton Vance (EV) Dividend Stock Analysis
- T. Rowe Price Group (TROW) Dividend Stock Analysis
- Four Dependable Dividend Stocks I Bought Last Week
- Key Ingredients for Successful Dividend Investing
- Companies I am Considering for my Roth IRA
Wednesday, April 8, 2015
The Value of Dividend Growth
Many investors who invest for income focus exclusively on yield, in order to build the necessary income stream to support them in retirement. While yield is one factor to consider, successful dividend investing is the outcome of focusing one’s attention to quality stocks that can grow earnings and dividends over time, and purchasing those at attractive valuations. Unfortunately, over the past century, inflation has been eating away the purchasing power of your dollars. As a result, companies that can grow distributions over time are much more desirable for income investors, since they will maintain purchasing power of their distributions without the need to reinvest these distributions. Companies that can grow revenues and earnings over time are much more likely to reward their investors with consistent dividend raises.
The value of dividend growth is most evident when someone attempts to reach a target level of dividend income. Investors in the accumulation stage, who focus on yield alone, can only rely on new fund additions and dividend reinvestment to grow their income. Dividend investors who focus on dividend growth in addition to dividend reinvestment and addition of new funds have a third tool to aid them in their goals. As we saw in actual examples I showed before, high yields, growing dividends and dividend reinvestment can result in turbocharging of dividend growth.
For example, let’s assume that an investor has a $100,000 portfolio in dividend stocks yielding 3% with no dividend growth. Their dividend income would be $3,000/year. However, if a second investor had purchased dividend growth stocks yielding 3% that also grow distributions at 6%/year with his funds, and didn't add any money, his projected dividend income would have grown to $3,180/year. In order to have generated the additional $180 in annual dividend income at 3%, the first dividend investor would have had to add $6,000 simply to keep up with the second investor. Over time, the second investor would generate higher income than the first one, who has to keep adding money simply to keep up. If the second investor also reinvests distributions and adds new money, they can reach their investment goals much faster.
The types of quality income stocks that can generate both earnings and dividend growth include:
Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. This dividend champion has raised distributions for 45 years in a row. In the past decade, Altria has managed to boost dividends by 11.60%/year. The stock currently sells for 18.30 times forward earnings and yields 4.10%. Check my analysis of Altria information about the company.
T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. This dividend champion has raised distributions for 29 years in a row. In the past decade, T. Rowe Price has managed to boost dividends by 16.60%/year. The stock currently sells for 16.90 times forward earnings and yields 2.50%. Check my analysis of T. Rowe Price for more information about the company.
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. This dividend king has raised distributions for 52 years in a row. In the past decade, Johnson & Johnson has managed to boost dividends by 9.70%/year. The stock currently sells for 16.90 times forward earnings and yields 2.80 %. Check my analysis of Johnson & Johnson for more information about the company.
Emerson Electric Co. (EMR) provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. This dividend king has raised distributions for 58 years in a row. In the past decade, Emerson Electric has managed to boost dividends by 8.10%/year. The stock currently sells for 15.10 times forward earnings and yields 3.40%. I last analyzed the company on this site a couple years ago. I need to post my updated analysis soon.
While all of these companies are great, another important factor of long-lasting success in dividend investing is diversification. By owning at least 30 individual stocks representative of as many industries that make sense, investors would lessen the risk that a few bad apples can decimate their retirement portfolio.
Full Disclosure: Long MO, TROW, JNJ, UTX, EMR
Relevant Articles:
- Dividend Champions - The Best List for Dividend Investors
- Dividend Kings List for 2015
- Rising Earnings – The Source of Future Dividend Growth
- The Perfect Dividend Portfolio
- Successful Dividend Investing Requires Patience
The value of dividend growth is most evident when someone attempts to reach a target level of dividend income. Investors in the accumulation stage, who focus on yield alone, can only rely on new fund additions and dividend reinvestment to grow their income. Dividend investors who focus on dividend growth in addition to dividend reinvestment and addition of new funds have a third tool to aid them in their goals. As we saw in actual examples I showed before, high yields, growing dividends and dividend reinvestment can result in turbocharging of dividend growth.
For example, let’s assume that an investor has a $100,000 portfolio in dividend stocks yielding 3% with no dividend growth. Their dividend income would be $3,000/year. However, if a second investor had purchased dividend growth stocks yielding 3% that also grow distributions at 6%/year with his funds, and didn't add any money, his projected dividend income would have grown to $3,180/year. In order to have generated the additional $180 in annual dividend income at 3%, the first dividend investor would have had to add $6,000 simply to keep up with the second investor. Over time, the second investor would generate higher income than the first one, who has to keep adding money simply to keep up. If the second investor also reinvests distributions and adds new money, they can reach their investment goals much faster.
The types of quality income stocks that can generate both earnings and dividend growth include:
Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally. This dividend champion has raised distributions for 45 years in a row. In the past decade, Altria has managed to boost dividends by 11.60%/year. The stock currently sells for 18.30 times forward earnings and yields 4.10%. Check my analysis of Altria information about the company.
T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. This dividend champion has raised distributions for 29 years in a row. In the past decade, T. Rowe Price has managed to boost dividends by 16.60%/year. The stock currently sells for 16.90 times forward earnings and yields 2.50%. Check my analysis of T. Rowe Price for more information about the company.
Johnson & Johnson (JNJ), together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide. This dividend king has raised distributions for 52 years in a row. In the past decade, Johnson & Johnson has managed to boost dividends by 9.70%/year. The stock currently sells for 16.90 times forward earnings and yields 2.80 %. Check my analysis of Johnson & Johnson for more information about the company.
Emerson Electric Co. (EMR) provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. It operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. This dividend king has raised distributions for 58 years in a row. In the past decade, Emerson Electric has managed to boost dividends by 8.10%/year. The stock currently sells for 15.10 times forward earnings and yields 3.40%. I last analyzed the company on this site a couple years ago. I need to post my updated analysis soon.
While all of these companies are great, another important factor of long-lasting success in dividend investing is diversification. By owning at least 30 individual stocks representative of as many industries that make sense, investors would lessen the risk that a few bad apples can decimate their retirement portfolio.
Full Disclosure: Long MO, TROW, JNJ, UTX, EMR
Relevant Articles:
- Dividend Champions - The Best List for Dividend Investors
- Dividend Kings List for 2015
- Rising Earnings – The Source of Future Dividend Growth
- The Perfect Dividend Portfolio
- Successful Dividend Investing Requires Patience