Over the years, I’ve built my own model
to identify the best dividend paying companies. The core of my investment
strategy has been built around dividend growth. Overtime, I didn’t want to
limit myself among a short list of 19 or 51 companies and rather starting the
study of a wider group; the achievers.
The Dividend Achievers Index refers to
all public companies that have successfully increased their dividend payments for at least ten consecutive years.
At the time of writing this article, there were 265 companies that achieved
this milestone. With the right combination of metrics, this list is probably
the best starting point to build your dividend growth portfolio or to find your
next addition.
As we start a new year, I’m fairly
positive about the upcoming months. I believe 2018 will mark the 10th
consecutive year of this bullish market. I’ve selected two companies from the Achievers
list that should continue to reach higher levels this year.
HASBRO (HAS)
Source: Ycharts
Business Model
Hasbro is a
worldwide leader in children and family entertainment. It is mostly known for
its numerous toy brands such as Playskool, Tonka, Milton Bradley and Parker
Brothers. Hasbro is the 2nd largest toy company behind Mattel, and has several
trademarked franchises such as Transformers, Star Wars and Marvel Action
Heroes. In 2014, it outbid Mattel and won Disney’s Frozen line of products.
This is when it started to become interesting. Toward the end of 2017, there
were rumors around of Hasbro looking to potentially purchase Mattel…
Main Strengths
Hasbro (HAS) has
found a niche for itself. The company has developed a few icon brand names such
as Transformers, Nerf and Play-Doh, but Hasbro's real talent lies in licensing
others' toys. Hasbro has
now 2 impressive partners named Disney (DIS) and Activision Blizzard (ATVI).
The first one enabled Hasbro to pursue consistent
growth through Disney Princess, Marvel Super Heroes and Star Wars figurines.
The latter kept Hasbro in the loop with a direct connection through video
games.
Potential Downsides
In 2017 Hasbro stock
price has dropped by over 10% over a 3 month period due to concerns around
future growth. After Hasbro published a strong quarter, shares fell immediately.
Also, Toy's R Us raised some concerns about their financial situation. 60% of Hasbro revenues are in U.S. This leaves little room for currency volatility. On
the other hand, it puts Hasbro in a strong position to benefit from the boost in
U.S. consumer spending. While Hasbro has been on a great uptrend, the company
is becoming more dependent on Disney’s future success.
Dividend Growth Perspectives
While Hasbro has
offered steady dividend increases over the past years, its payout ratio remains
under control at 45%. Since the company can count on many Star Wars and Marvels
movies in the upcoming 5 years, you can expect strong dividend growth for this
period. We expect a double-digit dividend growth rate for the next decade.
Investment Thesis
A play on Hasbro
is a play on the success of a proven formula. Without any surprise, each Super
Heroes movie or Star Wars movie comes in as record breaking blockbusters. For
each success, there will be tons of figurines and derivative products created. Hasbro excels in this industry and will likely have the lion shares of licences.
Indeed, its licensing deal with Disney enables Hasbro to sell princesses and
Frozen character figures. Not to mention the upcoming Frozen movie in 2018.
Through its business with Disney, Hasbro has assured itself of strong revenues
for the next five years at the very least. Hasbro will also benefit from two more
Star Wars movies.
VALUATION
It has been quite a roller coaster for Hasbro in 2017. After surging during the first half of the year, investors’ concerns
around Toy’R’Us financial problems plummeted the stocks by 17% over the last 6
months. This probably created one of the best opportunities for dividend growth
investors.
I also used the DDM to determine a fair
value for Hasbro. I’ve used a 10% dividend growth rate for the first 10 years as
the company will continue to benefit from the wave created by Star Wars and
Marvels movies. Then, I reduced the growth rate to 7.5% and used a 10% discount
rate.
Intrinsic Value
|
Discount Rate (Horizontal)
|
||
Margin of Safety
|
9.00%
|
10.00%
|
11.00%
|
20% Premium
|
$243.61
|
$145.01
|
$102.80
|
10% Premium
|
$223.31
|
$132.92
|
$94.24
|
Intrinsic Value
|
$203.01
|
$120.84
|
$85.67
|
10% Discount
|
$182.71
|
$108.76
|
$77.10
|
20% Discount
|
$162.41
|
$96.67
|
$68.54
|
Buy the stock on the dip, there is more
than a 20% discount on this one.
TEXAS INSTRUMENTS (TXN)
Source: Ycharts
Business Model
Texas Instruments is the world's largest
analog chipmaker and a key supplier of embedded chips into a host of
applications. For those who don’t know, analog chips are like translators; they
convert real-world signals such as sound and temperature into digital signals
that have the potential to be processed. The company is present in various
segments with a strong focus on industrial and automotive sectors. The “other”
segment now includes its famous calculators.
Main Strengths
Instead of simply building an army of
engineers, Texas Instruments has also built an army of salesmen! Its marketing
department is able to sell Texas Instruments technology to various industries. This brings
additional revenues and fuels the R&D department with more cash flow than
its peers. Through strong manufacturing expertise and economy of scale, the
company has been able to expand its margins on a consistent basis.
Potential Downsides
The personal electronics segment (26%) is
more at risk. Chips for such devices evolve rapidly, and there is lots of
competition. It used to be Texas Instruments biggest segment in 2013 (32% of sales), and it
was down to a 2nd position at 26% three years later. Texas Instruments puts its energy in
developing longer life cycle chips in the industrial and automotive sector.
This looks like a good move for the long haul. Also, both industrial and
automotive sectors are cyclical, and could hurt Texas Instruments fundamentals in a few
years. But overall, there are not many catastrophes coming its way.
Dividend Growth Perspectives
Texas Instruments is not only a long-time dividend
grower; it also gained the mention of a super-powered dividend stock. Over the
past five years, management increased its dividend by 195.2% for a 24.17%
annualized rate. Management makes a clear focus on returning cash to its
shareholders. Texas Instruments is a real cash generating machine. While its distributions
rate skyrocketed, both payout and cash payouts remain under control.
Investment Thesis
Texas Instruments has the size ($89 billion in market
cap) to benefit from economies of scale, and stay ahead of the competition.
While there isn’t much revenue growth over the past five years, the company’s
future looks bright. Texas Instruments benefitted from a fragmented market to purchase many
manufacturers at a low price, and consolidate its position in the analog chip
business. With the rise of the Internet of Things, its chips will have the
possibility of use in various other industries in the future. The company is
also investing massively in R&D and its marketing sales team. It enables Texas Instruments to get more clients as its sales team is out in the field to push revenue
to another level.
Valuation:
In order to find Texas Instruments fair value, I use a
double stage dividend discount model. Since Texas Instruments payout ratios are under 50% and
the business is still booming, I expect management to keep a double-digit
dividend growth policy for the next decade. I then reduced the growth rate at
7% to be more conservative. I also expect a return of 10% on my investment
since Texas Instruments evolves in the technology sector.
Intrinsic Value
|
Discount Rate (Horizontal)
|
||
Margin of Safety
|
9.00%
|
10.00%
|
11.00%
|
20% Premium
|
$205.74
|
$135.90
|
$101.04
|
10% Premium
|
$188.60
|
$124.58
|
$92.62
|
Intrinsic Value
|
$171.45
|
$113.25
|
$84.20
|
10% Discount
|
$154.31
|
$101.93
|
$75.78
|
20% Discount
|
$137.16
|
$90.60
|
$67.36
|
Please read the Dividend Discount Model limitations to understand my calculations fully. Even if Texas Instruments jumped by over 40% in 2017, there is still room for growth in 2018. It may be a great addition on dips, as lower prices translate into higher potential for dividends and total returns.
Final Thought
I don’t know about you, but I appreciate
when authors put their money where their mouth is. After all, there is little
credibility to read positive articles on stocks when the author doesn’t even
put a penny on them. I bought shares of Texas Instruments and Hasbro during
2017. So far, Texas Instruments (TXN) has been a great performer and I expect Hasbro (HAS) to post some
solid after Holiday sales. I may be wrong and the market could go sideways.
After all, this bull has to rest at one point. The good part is that I know
that both Texas Instruments and Hasbro will continue to do well and raise their dividend even if
the rest of the market slowdown.
This
is a guest post written by Mike McNeil, author of the Dividend Guy Blog and
co-founder of Dividend Stocks Rock. Mike is currently investing $100,000 in a
100% dividend growth portfolio as the market trades at an all-time high.
Disclaimer:
Mike is long TXN and HAS