Earlier this month, I received questions from a few readers about CVS and Walgreen’s. The share prices behind both companies are taking a beating recently. I discussed the following with readers of my Dividend Growth Investor Newsletter almost three week ago.
Right now, Walgreen's sells for 9.60 times forward earnings and yields 2.80%. Check my analysis of Walgreen's for more information about the company.
CVS Health sells for 7.90 times forward earnings and yields 3.70%. Check my analysis of CVS Health for more information about the company.
If share prices are low when the next newsletter comes out on Sunday, March 24th, there is a high chance that I will buy shares of Walgreen’s (WBA) for my Dividend Growth Investor Portfolio. There is a lower chance that I will add to CVS Health (CVS) however.
I like the valuation and earnings trends for CVS. However, I do not like the dividend freeze that was enacted in 2018, following the acquisition of Aetna. As a dividend investor, I look for companies that have managed to grow dividends for a certain number of consecutive years. This shows to me a commitment to raising dividends. This commitment means something when it is backed by rising earnings per share. Under an ideal scenario, a company will grow earnings and distribute a rising annual dividend per share. I want to buy a share in such a company, and enjoy rising earnings, dividends and share prices over time. Once this virtuous loop ends however, I start asking myself if something is wrong with the business.
As a result, when I see that management is no longer committed to growing dividends, it shows that they do not have a lot of conviction behind their earnings per share growth in the near term. By keeping dividends unchanged, management is really telling me that things are cloudy on the horizon, so that they do not believe that future earnings will justify growing the dividend. Without annual dividend increases, I am essentially stuck wondering whether something is wrong with the business, or this is just a temporary situation.
It is very likely that this is just a temporary measure, in order to get the balance sheet under control, reduce debt, integrate acquisitions etc. Once CVS Health starts raising dividends again, I will consider adding to the stock again. For my investment model to work, I need companies at an attractive valuation, growing earnings and growing dividends. That way I can keep investing every month, reinvesting dividends, and enjoying the organic dividend growth that will propel me to my in monthly dividend income goals over the next decade. If I invest in companies that never raise their dividends, it will take longer to reach my goals of generating sufficient monthly dividend income, which also grow reliably over time.
It is very likely that I am missing out on an incredible bargain today, by not adding to CVS. However, I also see risks of a dividend cut being increased as well. A lot of dividends cuts in the past have occurred in situations with a lot of debt, high payout ratios and particularly major acquisitions.
My basic thought process is that if CVS prospers, I already have exposure to the stock, so I should do ok. If CVS fails, I will likely lose what amount I own there, but would have protected my new capital from going into a sinkhole. Plus, I would have allocated dividends elsewhere, and increased the diversification of my portfolio.
That being said, I am still considering Walgreen’s (WBA) as an addition to my portfolio. I may even consider adding further after that. I have an allocation to Walgreen’s, and want to avoid overly concentrating my efforts in once company as well. I like diversification, which is why I want to own as many companies as I can find, and also to limit their weight in my portfolio to a reasonable amount. I also like spreading my purchases over several months, in order to take advantage of potentially lower prices. The downside to this strategy is when share prices start going up in a linear fashion, and I haven’t build out my full position in a security. However, I believe that there are always good securities to be selected at the right valuation. My goal as a portfolio manager is to manage my risk properly.
I believe that my upside will take care of itself. I do want to place some fail-safe mechanisms in portfolio construction process, in order to reduce the magnitude of my errors when they occur. I also believe in maintaining a disciplined approach when investing my hard earned money. This is why the odds of me adding to CVS Corp are low. CVS Health is a good value today, but has higher risks. Either way, I will keep my holdings in both companies for as long as the dividends are at least maintained. I rarely sell stocks - mostly a dividend cut will prompt me to reassess my thesis, and sell.
Thank you for reading! I would love to hear your opinion at dividendgrowthinvestor@gmail.com
Relevant Articles:
- Rising Earnings – The Source of Future Dividend Growth
- The predictive value of rising dividends
- Five Dividend Growth Investing Lessons I Have Learned Over the Years
- Margin of Safety in Dividends
Thursday, March 28, 2019
Tuesday, March 26, 2019
Three Dividend Stocks Rewarding Shareholders With High Raises
I review the list of dividend increases weekly, as part of my portfolio monitoring process. I usually narrow the list down to companies with at least a ten year history of annual dividend increases.
The next involves reviewing each company in sufficient detail, in order to determine if dividend increases are based on solid fundamentals. This review includes looking at trends in earnings per share, dividends per share, payout ratios as good start. The goal is to determine the likelihood of future dividend increases.
The last review point includes valuation. In general, I try to avoid overpaying for companies. To me it means not paying more than 20 times earnings for a stock. Valuation is more art than science however ( as is investing in general). This is why it is important to look at relative valuations and growth in the opportunity set, not just focus on absolute numbers.
These steps keep me in fighting shape, and help me monitor as many companies in the investable dividend growth universe in advance. This helps me to be prepared when the right opportunity at the right price comes along.
Over the past week, there were three companies which raised dividends to shareholders. Each company has a minimum ten year streak of annual dividend increases under its belt. The companies include:
Raytheon Company (RTN) develops integrated products, services, and solutions for the defense and other government markets worldwide. It operates through five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. The company increased its dividend by 8.70% to 94.25 cents/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. During the past decade, Raytheon has managed to grow dividends by 12%/year. Between 2008 and 2018, Raytheon managed to grow its earnings per share from $3.92 to $10.14. Repurchasing 31% of shares outstanding as of December 2008, obviously helped in earnings per share growth too.
The stock is attractively valued at 15.50 times forward earnings and yields 2.10%.
The next involves reviewing each company in sufficient detail, in order to determine if dividend increases are based on solid fundamentals. This review includes looking at trends in earnings per share, dividends per share, payout ratios as good start. The goal is to determine the likelihood of future dividend increases.
The last review point includes valuation. In general, I try to avoid overpaying for companies. To me it means not paying more than 20 times earnings for a stock. Valuation is more art than science however ( as is investing in general). This is why it is important to look at relative valuations and growth in the opportunity set, not just focus on absolute numbers.
These steps keep me in fighting shape, and help me monitor as many companies in the investable dividend growth universe in advance. This helps me to be prepared when the right opportunity at the right price comes along.
Over the past week, there were three companies which raised dividends to shareholders. Each company has a minimum ten year streak of annual dividend increases under its belt. The companies include:
Raytheon Company (RTN) develops integrated products, services, and solutions for the defense and other government markets worldwide. It operates through five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint. The company increased its dividend by 8.70% to 94.25 cents/share. This marked the 15th consecutive annual dividend increase for this dividend achiever. During the past decade, Raytheon has managed to grow dividends by 12%/year. Between 2008 and 2018, Raytheon managed to grow its earnings per share from $3.92 to $10.14. Repurchasing 31% of shares outstanding as of December 2008, obviously helped in earnings per share growth too.
The stock is attractively valued at 15.50 times forward earnings and yields 2.10%.
Williams-Sonoma, Inc. (WSM) operates as a multi-channel specialty retailer of various products for home. It operates through two segments, E-commerce and Retail. The retailer boosted its quarterly dividend by 11.60% to 48 cents/share. This marked the 14th year of annual dividend increases for this dividend achiever. During the past decade, Williams-Sonoma has managed to grow its dividends by 13.50%/year.
Between 2008 and 2019, Williams-Sonoma managed to grow earnings from $1.76/share to $4.09/share. The company is expected to earn $4.33/share in 2019.
The stock is attractively valued at 13.20 times forward earnings and offers a dividend yield of 3.40%.
International Bancshares Corporation (IBOC) is a financial holding company, which provides commercial and retail banking services. The company increased its dividend by 19.05% to 50 cents/share. This marked the tenth year of annual dividend increases for the company. International Bancshares Corporation did cut its dividends during the financial crisis. However, it has been a decade since this event occurred, leaving enough time to recover and establish a ten year streak of annual dividend increases. Nevertheless, over the past decade, this bank has managed to grow dividends by 1.30%/year.
The company managed to grow earnings from $1.92/share in 2008 to $3.24/share in 2018.
The stock is attractively valued at 11.40 times earnings and offers a dividend yield of 5.40%.
Relevant Articles:
- Three Dividend Increases In Focus
- How to invest when the market is at all time highs?
- How to value dividend stocks
Relevant Articles:
- Three Dividend Increases In Focus
- How to invest when the market is at all time highs?
- How to value dividend stocks
Monday, March 25, 2019
I just bought these ten dividend growth stocks
Good Morning,
Subscribers to the Dividend Growth Investor newsletter received ten ideas for research on Sunday. The newsletter included information behind each company, and relevant research behind each company listed. I discussed how much I am allocating to each investment when I initiate my buy orders at the open on Monday.
In addition to that, subscribers will obtain an updated list of dividend portfolio holdings.
Premium readers get a first glimpse of the process I use to allocate fresh capital into ten ideas each month. I will continue adding $1,000/month to this portfolio, and provide educational input on the complete process of dividend portfolio management. The process includes researching investments, adding companies to the portfolio, and then monitoring the portfolio regularly while tracking the progress towards its long-term goals. By using broker Robinhood, I am spending zero on commissions.
The price for the monthly subscription is just $6/month to new subscribers who sign up for the service. The price for the annual subscription is only $65/year for new subscribers. This is a limited time offer however. Starting on April 1, the monthly rate goes up to $7 and the annual goes up to $76/year. If you subscribe at the low introductory rate today, the price will never increase for you.
If you want to give my newsletter a try, you may do so by signing up here:
Once you sign up, I will add you to my premium mailing list, and you will receive all exclusive content related to the portfolio.
The ultimate goal of this portfolio is to generate $1,000 in monthly dividend income. I will track my progress towards our goal every month. I plan to track this portfolio in real time over the next few years, and track our progress towards our goal. I view this exercise mostly as an educational tool, that will hopefully show how I build and manage a dividend portfolio.
Thank you for reading Dividend Growth Investor.
Subscribers to the Dividend Growth Investor newsletter received ten ideas for research on Sunday. The newsletter included information behind each company, and relevant research behind each company listed. I discussed how much I am allocating to each investment when I initiate my buy orders at the open on Monday.
In addition to that, subscribers will obtain an updated list of dividend portfolio holdings.
Premium readers get a first glimpse of the process I use to allocate fresh capital into ten ideas each month. I will continue adding $1,000/month to this portfolio, and provide educational input on the complete process of dividend portfolio management. The process includes researching investments, adding companies to the portfolio, and then monitoring the portfolio regularly while tracking the progress towards its long-term goals. By using broker Robinhood, I am spending zero on commissions.
The price for the monthly subscription is just $6/month to new subscribers who sign up for the service. The price for the annual subscription is only $65/year for new subscribers. This is a limited time offer however. Starting on April 1, the monthly rate goes up to $7 and the annual goes up to $76/year. If you subscribe at the low introductory rate today, the price will never increase for you.
If you want to give my newsletter a try, you may do so by signing up here:
Once you sign up, I will add you to my premium mailing list, and you will receive all exclusive content related to the portfolio.
The ultimate goal of this portfolio is to generate $1,000 in monthly dividend income. I will track my progress towards our goal every month. I plan to track this portfolio in real time over the next few years, and track our progress towards our goal. I view this exercise mostly as an educational tool, that will hopefully show how I build and manage a dividend portfolio.
Thank you for reading Dividend Growth Investor.
Wednesday, March 20, 2019
Dividend Growth Investor Newsletter – March 2019 Edition
The March 2019 edition of the Dividend Growth Investor newsletter comes out this Sunday, March 24. This will be the ninth edition of the dividend investment newsletter that I started last year.
It will list ten dividend growth stocks I plan to purchase on Monday, March 25. Each company is analyzed in detail, following my format for evaluating companies. The goal for the analysis is to evaluate the dividend for safety, while also checking on the fundamentals that will allow that dividend to grow over time. The companies listed are attractively valued, and will be bought by my personal portfolio. I use commission-free broker Robinhood, in order to keep investment costs low.
We have 37 companies in our portfolio right now. The new edition that comes out on Sunday may increase the number of portfolio holdings, depending on the availability of quality ideas at a good price when I run my screens on Friday. I find most of the companies in the portfolio to be good values today.
Long-term readers know that I am a long-term investor who buys stocks and holds them for years. Each investment is made with the intention to hold it for years. Given that I am investing real money in these companies, I am extra careful in what I purchase for long-term dividend income. After nine months of operating, we have already had 16 dividend increases so far. I believe we are on the right track to hit the portfolios stated long-term dividend goals of generating $1,000 in monthly dividend income.
The newsletter is much more than a list of top ten dividend stocks however. This newsletter focuses on a real portfolio, that I am building from scratch. The newsletter shows how I make portfolio selections, and how to build a portfolio from scratch and monitor its progress along the way.
I am showing the process I used to build my own personal dividend portfolio for the past decade. I am using the principles of screening, monitoring, valuation, company analysis to get to a list of companies to buy each month, and to build that portfolio along the way.
While we discuss how to build a dividend portfolio by making regular investments, I believe this newsletter can be helpful to retired investors, not just those in accumulation phase.
You can get a 7 day risk free trial by signing up for the newsletter. I am pricing it at $65/year or $6/month only until the end of the month. I believe that for less than 20 cents/day, you can learn from my investing experience, and obtain a list of ten attractively valued dividend stocks for further research. This is a great value.
You can subscribe using this Paypal form:
Once you subscribe, I will add you to my exclusive email list, and you will be able to receive premium information about the dividend growth investor portfolio. If you subscribe today however, your price will never increase. I guarantee it.
It will list ten dividend growth stocks I plan to purchase on Monday, March 25. Each company is analyzed in detail, following my format for evaluating companies. The goal for the analysis is to evaluate the dividend for safety, while also checking on the fundamentals that will allow that dividend to grow over time. The companies listed are attractively valued, and will be bought by my personal portfolio. I use commission-free broker Robinhood, in order to keep investment costs low.
We have 37 companies in our portfolio right now. The new edition that comes out on Sunday may increase the number of portfolio holdings, depending on the availability of quality ideas at a good price when I run my screens on Friday. I find most of the companies in the portfolio to be good values today.
Long-term readers know that I am a long-term investor who buys stocks and holds them for years. Each investment is made with the intention to hold it for years. Given that I am investing real money in these companies, I am extra careful in what I purchase for long-term dividend income. After nine months of operating, we have already had 16 dividend increases so far. I believe we are on the right track to hit the portfolios stated long-term dividend goals of generating $1,000 in monthly dividend income.
The newsletter is much more than a list of top ten dividend stocks however. This newsletter focuses on a real portfolio, that I am building from scratch. The newsletter shows how I make portfolio selections, and how to build a portfolio from scratch and monitor its progress along the way.
I am showing the process I used to build my own personal dividend portfolio for the past decade. I am using the principles of screening, monitoring, valuation, company analysis to get to a list of companies to buy each month, and to build that portfolio along the way.
While we discuss how to build a dividend portfolio by making regular investments, I believe this newsletter can be helpful to retired investors, not just those in accumulation phase.
You can get a 7 day risk free trial by signing up for the newsletter. I am pricing it at $65/year or $6/month only until the end of the month. I believe that for less than 20 cents/day, you can learn from my investing experience, and obtain a list of ten attractively valued dividend stocks for further research. This is a great value.
You can subscribe using this Paypal form:
Once you subscribe, I will add you to my exclusive email list, and you will be able to receive premium information about the dividend growth investor portfolio. If you subscribe today however, your price will never increase. I guarantee it.
Monday, March 18, 2019
Three Dividend Increases In Focus
A long streak of dividend increases is a signal of a quality company which is probably a good idea for further research. As part of my monitoring process, I review the list of dividend increases every week. I usually focus on companies with an established track record of dividend increases that is at least ten years long. The next step involves reviewing the dividend growth history relative to the latest increase, in order to evaluate the robustness of dividend increases. This step is performed alongside a review of trends in fundamentals, such as earnings per share and dividend payout ratios, in order to estimate the likelihood of future dividend growth. The last step involves taking a stab at valuation. After all, even the best company in the world is not worth investing in at the wrong price.
This process is in addition to my screening process. The monitoring, idea generation and investment processes are part mechanical, part qualitative. I do not believe that successful investment can be summarized neatly to a simple formula, because investing is part art, part science. Anyone who claims to follow “the science of investing” is probably an expensive advisor who will charge you thousands of dollars to set up a portfolio of high fee funds for you, and then charge you high management fees forever. Astute dividend investors know to keep costs low by avoiding expensive middlemen in their investment activities. This lets you keep more money working hard for you. But I am getting sidelined from my main point here.
Over the past week, there were three companies that raised dividends to shareholders. The companies have a ten year track record of increasing annual dividends. The companies include:
Colgate-Palmolive Company (CL) manufactures and sells consumer products worldwide. The company operates through two segments, Oral, Personal and Home Care; and Pet Nutrition.
Colgate increased its quarterly dividend by 2.40% to 43 cents/share. This increase marked the 56th consecutive year of annual dividend increases for this dividend king. The latest increase is slower than the ten year average of 7.80%. The slowdown in dividend growth is not a surprise to observant analysts however.
Colgate Palmolive has been unable to materially grow earnings per share since at least 2012. Between 2008 and 2018, earnings per share went from $1.83 to $2.75. A big help came from the repurchase of almost 20% of shares outstanding since 2007. The company is expected to generate $2.83/share in 2019.
Right now the stock is overvalued at 23.70 times forward earnings and yields 2.55%. Due to the high valuation, and the lack of earnings growth for over 6 years, I view the stock as a hold. The dividend is adequately covered for now at a forward payout ratio of 60.80%, but without growth in earnings, future dividend increases will be nominal until they hit a wall.
Oracle Corporation (ORCL) develops, manufactures, markets, sells, hosts, and supports application, platform, and infrastructure solutions for information technology (IT) environments worldwide. The company provides services in three primary layers of the cloud: Software as a Service, Platform as a Service, and Infrastructure as a Service.
Oracle raised its quarterly dividend by 26.30% to 24 cents/share. 2019 is the tenth year of rising annual dividends for Oracle, despite the fact that the Board of Directors doesn’t raise the dividend every single year. Since initiating dividends in 2009 at 5 cents/share, dividend growth has been phenomenal to the new quarterly distribution of 24 cents/share. Earnings per share increased from $1.06/share in 2008 to an adjusted $3.12/share in 2018. Oracle is expected to generate $3.41/share in 2019.
Right now, the stock looks attractively valued at 15.50 times forward earnings and offers a dividend yield of 1.80%. I should probably add it to my list for further research.
W.P.Carey (WPC) is a real estate investment trust, which invests in high-quality single-tenant industrial, warehouse, office and retail properties subject to long-term leases with built-in rent escalators. Its portfolio is located primarily in the U.S. and Northern and Western Europe.
Last week, the REIT boosted its quarterly dividend to $1.032/share, which was a 0.2 cents/share increase over the previous quarterly payment. The new dividend will be 2.20% higher than the distributions paid this time last year. At this rate, the forward dividend growth will be 1%/year, which is very slow. The compensating factor is the higher yield. The recent run-up in the share price however means that the current yield is lower at 5.35%. It pays to be opportunistic in acquiring slower growth companies – for example in December W.P. Carey was yielding close to 6.50% at one point. An extra percentage of return could sure help in the long run. Of course, an extra percentage of growth would be helpful as well to existing holders.
Between 2008 and 2018, W.P. Carey has managed to boost AFFO/share from $3.09 to $5.39/share. W.P. Carey expects to generate AFFO in the range of $4.95 to $5.15 per diluted share in 2019. This guidance for a reduction in AFFO/share is a possible reason for the really slow dividend increase, especially when the AFFO payout ratio is at 83% at the low end of the range. The REIT is selling for 15.60 times forward AFFO and yields 5.35%.
The stock price has really shot up this year, but this is probably because it simplified the business to be more of a REIT and less of a REIT investment manager, which is pushing FFO multiples to be more in line with the likes of Realty Income and National Retail Propertoes. But REITs have been on fire, as the FED has indicated that future interest rate hikes will be more difficult to come by. Check my analysis of W.P. Carey for more information about the REIT.
Relevant Articles:
- How to read my weekly dividend increase reports
- How to value dividend stocks
- What is Dividend Growth Investing?
- Three Characteristics of Successful Dividend Investors
- Five Things to Look For in a Real Estate Investment Trust
This process is in addition to my screening process. The monitoring, idea generation and investment processes are part mechanical, part qualitative. I do not believe that successful investment can be summarized neatly to a simple formula, because investing is part art, part science. Anyone who claims to follow “the science of investing” is probably an expensive advisor who will charge you thousands of dollars to set up a portfolio of high fee funds for you, and then charge you high management fees forever. Astute dividend investors know to keep costs low by avoiding expensive middlemen in their investment activities. This lets you keep more money working hard for you. But I am getting sidelined from my main point here.
Over the past week, there were three companies that raised dividends to shareholders. The companies have a ten year track record of increasing annual dividends. The companies include:
Colgate-Palmolive Company (CL) manufactures and sells consumer products worldwide. The company operates through two segments, Oral, Personal and Home Care; and Pet Nutrition.
Colgate increased its quarterly dividend by 2.40% to 43 cents/share. This increase marked the 56th consecutive year of annual dividend increases for this dividend king. The latest increase is slower than the ten year average of 7.80%. The slowdown in dividend growth is not a surprise to observant analysts however.
Colgate Palmolive has been unable to materially grow earnings per share since at least 2012. Between 2008 and 2018, earnings per share went from $1.83 to $2.75. A big help came from the repurchase of almost 20% of shares outstanding since 2007. The company is expected to generate $2.83/share in 2019.
Right now the stock is overvalued at 23.70 times forward earnings and yields 2.55%. Due to the high valuation, and the lack of earnings growth for over 6 years, I view the stock as a hold. The dividend is adequately covered for now at a forward payout ratio of 60.80%, but without growth in earnings, future dividend increases will be nominal until they hit a wall.
Oracle Corporation (ORCL) develops, manufactures, markets, sells, hosts, and supports application, platform, and infrastructure solutions for information technology (IT) environments worldwide. The company provides services in three primary layers of the cloud: Software as a Service, Platform as a Service, and Infrastructure as a Service.
Oracle raised its quarterly dividend by 26.30% to 24 cents/share. 2019 is the tenth year of rising annual dividends for Oracle, despite the fact that the Board of Directors doesn’t raise the dividend every single year. Since initiating dividends in 2009 at 5 cents/share, dividend growth has been phenomenal to the new quarterly distribution of 24 cents/share. Earnings per share increased from $1.06/share in 2008 to an adjusted $3.12/share in 2018. Oracle is expected to generate $3.41/share in 2019.
Right now, the stock looks attractively valued at 15.50 times forward earnings and offers a dividend yield of 1.80%. I should probably add it to my list for further research.
W.P.Carey (WPC) is a real estate investment trust, which invests in high-quality single-tenant industrial, warehouse, office and retail properties subject to long-term leases with built-in rent escalators. Its portfolio is located primarily in the U.S. and Northern and Western Europe.
Last week, the REIT boosted its quarterly dividend to $1.032/share, which was a 0.2 cents/share increase over the previous quarterly payment. The new dividend will be 2.20% higher than the distributions paid this time last year. At this rate, the forward dividend growth will be 1%/year, which is very slow. The compensating factor is the higher yield. The recent run-up in the share price however means that the current yield is lower at 5.35%. It pays to be opportunistic in acquiring slower growth companies – for example in December W.P. Carey was yielding close to 6.50% at one point. An extra percentage of return could sure help in the long run. Of course, an extra percentage of growth would be helpful as well to existing holders.
Between 2008 and 2018, W.P. Carey has managed to boost AFFO/share from $3.09 to $5.39/share. W.P. Carey expects to generate AFFO in the range of $4.95 to $5.15 per diluted share in 2019. This guidance for a reduction in AFFO/share is a possible reason for the really slow dividend increase, especially when the AFFO payout ratio is at 83% at the low end of the range. The REIT is selling for 15.60 times forward AFFO and yields 5.35%.
The stock price has really shot up this year, but this is probably because it simplified the business to be more of a REIT and less of a REIT investment manager, which is pushing FFO multiples to be more in line with the likes of Realty Income and National Retail Propertoes. But REITs have been on fire, as the FED has indicated that future interest rate hikes will be more difficult to come by. Check my analysis of W.P. Carey for more information about the REIT.
Relevant Articles:
- How to read my weekly dividend increase reports
- How to value dividend stocks
- What is Dividend Growth Investing?
- Three Characteristics of Successful Dividend Investors
- Five Things to Look For in a Real Estate Investment Trust
Thursday, March 14, 2019
S&P Global Inc. (SPGI) Dividend Stock Analysis
S&P Global Inc. (SPGI) provides independent ratings, benchmarks, analytics, and data to the capital and commodity markets worldwide. It operates through three segments: Ratings, Market and Commodities Intelligence, and S&P Dow Jones Indices. This dividend aristocrat has increased its dividend annually for the last 46 years. The last dividend increase occurred in January 2019, when S&P Global raised its quarterly dividend by 14% to 57 cents/share.
Investing in Standard & Poor's ( the company) has been a better investment than Standard & Poor's 500 (the index) over the past quarter of a century ( when the SPY ETF started trading).
S&P Global has managed to grow dividends at an annualized rate of 8.60%/year over the past decade.
The growth in dividends was supported by earnings growth as well. S&P Global has managed to almost double its earnings per share from $2.94 in 2007 to $7.73 in 2018. The growth didn’t occur linearly of course – for the first six years S&P Global earned less than it did in 2007 as it was feeling the aftershocks of the financial crisis, and was in restructuring mode. The company is expecting to earn between $9.06/share in 2019.
S&P Global is a leader in the market for credit ratings. Anyone who wants to sell debt, will have to pay for a credit evaluation from one of those two industry leaders ( with Fitch being third largest). Moody’s & Standard & Poors are essentially a duopoly, which charges a toll for anyone who wants to access credit markets. Both companies have a strong competitive position. The company also earns fees for evaluating and monitoring credit ratings for customers, providing research and delivering ratings on a fee based model. As a result, close to half of revenues are dependent on the growth of credit issuance worldwide. In the long run, credit will likely increase over time. However, there is also the risk that low interest rates have caused a peak in credit issuance. Revenues could go down if interest rates increase and the pace of credit issuance slows down as a result.
I like that S&P Global has a strong line-up of widely followed indices, which can generate a lot of fees in the future, especially as everyone around seems to be becoming an index investor. Those fees are also generated on derivatives on those widely popular indices as well. This segment accounts for roughly 20% of profits.
A third segment accounting for 15% of profits is the Market Intelligence one. It offers data feeds ,research, risk management, data management solutions etc. This is a highly competitive market with a lot of entrants. However, the S&P Global name does have a cache.
The last segment is Platts, which provides information for commodity and energy markets. Revenue is generated from subscriptions and licensing for derivative trading. When I was involved in the energy sector, a subscription to plats was considered to be the gold standard for data and analytics, because of its comprehensive coverage across commodity markets. It is difficult to substitute a vendor for specialized commodity information for example, especially in a professional setting such as within an oil company or a refinery.
S&P Global has also managed to repurchase a substantial portion of shares outstanding by doing regular share buybacks. The company had almost 345 million shares outstanding in 2007 and managed to bring this figure down to 253 million in 2018.
The dividend payout ratio increased between 2007 and 2011, from 28% to 50%. This was due to dividend streak continuing amidst a decline in earnings per share following the financial crisis. Since 2011 the dividend payout ratio has been on the decline and falling back to 26% in 2018. A lower payout ratio is a plus, because it provides an adequate margin of safety to reduce the risk of dividend cuts during the next recession.
Currently, the stock is overpriced at 22 times forward earnings and yields 1.15%. I would be interested in adding to S&P Global if it dips below 20 times earnings. S&P Global was very close to hitting this entry price in late December, but unfortunately it bounced back quickly by the time I got enough funds and did my research to add to my position. I would continue to monitor it, and take advantage of any weakness.
Relevant Articles:
- 26 Dividend Champions For Further Research
- Twelve Companies Rewarding Shareholders With a Raise
- Best Dividend Stocks For The Long Run – 10 years later
- Two Wide Moat Dividend Stocks to Consider on Dips
Investing in Standard & Poor's ( the company) has been a better investment than Standard & Poor's 500 (the index) over the past quarter of a century ( when the SPY ETF started trading).
S&P Global has managed to grow dividends at an annualized rate of 8.60%/year over the past decade.
The growth in dividends was supported by earnings growth as well. S&P Global has managed to almost double its earnings per share from $2.94 in 2007 to $7.73 in 2018. The growth didn’t occur linearly of course – for the first six years S&P Global earned less than it did in 2007 as it was feeling the aftershocks of the financial crisis, and was in restructuring mode. The company is expecting to earn between $9.06/share in 2019.
S&P Global is a leader in the market for credit ratings. Anyone who wants to sell debt, will have to pay for a credit evaluation from one of those two industry leaders ( with Fitch being third largest). Moody’s & Standard & Poors are essentially a duopoly, which charges a toll for anyone who wants to access credit markets. Both companies have a strong competitive position. The company also earns fees for evaluating and monitoring credit ratings for customers, providing research and delivering ratings on a fee based model. As a result, close to half of revenues are dependent on the growth of credit issuance worldwide. In the long run, credit will likely increase over time. However, there is also the risk that low interest rates have caused a peak in credit issuance. Revenues could go down if interest rates increase and the pace of credit issuance slows down as a result.
I like that S&P Global has a strong line-up of widely followed indices, which can generate a lot of fees in the future, especially as everyone around seems to be becoming an index investor. Those fees are also generated on derivatives on those widely popular indices as well. This segment accounts for roughly 20% of profits.
A third segment accounting for 15% of profits is the Market Intelligence one. It offers data feeds ,research, risk management, data management solutions etc. This is a highly competitive market with a lot of entrants. However, the S&P Global name does have a cache.
The last segment is Platts, which provides information for commodity and energy markets. Revenue is generated from subscriptions and licensing for derivative trading. When I was involved in the energy sector, a subscription to plats was considered to be the gold standard for data and analytics, because of its comprehensive coverage across commodity markets. It is difficult to substitute a vendor for specialized commodity information for example, especially in a professional setting such as within an oil company or a refinery.
S&P Global has also managed to repurchase a substantial portion of shares outstanding by doing regular share buybacks. The company had almost 345 million shares outstanding in 2007 and managed to bring this figure down to 253 million in 2018.
The dividend payout ratio increased between 2007 and 2011, from 28% to 50%. This was due to dividend streak continuing amidst a decline in earnings per share following the financial crisis. Since 2011 the dividend payout ratio has been on the decline and falling back to 26% in 2018. A lower payout ratio is a plus, because it provides an adequate margin of safety to reduce the risk of dividend cuts during the next recession.
Currently, the stock is overpriced at 22 times forward earnings and yields 1.15%. I would be interested in adding to S&P Global if it dips below 20 times earnings. S&P Global was very close to hitting this entry price in late December, but unfortunately it bounced back quickly by the time I got enough funds and did my research to add to my position. I would continue to monitor it, and take advantage of any weakness.
Relevant Articles:
- 26 Dividend Champions For Further Research
- Twelve Companies Rewarding Shareholders With a Raise
- Best Dividend Stocks For The Long Run – 10 years later
- Two Wide Moat Dividend Stocks to Consider on Dips
Monday, March 11, 2019
Five Dividend Stocks Rewarding Patient Shareholders With A Raise
As a dividend growth investor, I look for solid companies to invest my hard earned money in. I look for companies that can grow earnings, and afford to raise dividends regularly. A long dividend streak is the indicator of quality, that places companies on my list for further research. A long dividend streak is not an accident, but the result of a long period of a solid company generating excess cashflows. A byproduct of this solid competitive advantage ultimately results in companies showering their investors with more cash dividends every single year. In my research I look at trends in earnings per share, dividends per share, dividend payout ratios and valuation. I try to evaluate qualitative as well as quantitative factors at play as well.
This is why I review the list of dividend increases every single week. This is a helpful monitoring tool for the companies I own, and for the companies I am interested in owning.
In the past week, there were several companies that raised dividends to shareholders. These companies have at least a ten year streak of annual dividend increases. The companies include:
General Dynamics Corporation (GD) operates as an aerospace and defense company worldwide. It operates in five segments: Aerospace, Combat Systems, Information Technology, Mission Systems, and Marine Systems.
The company raised the quarterly dividend by 9.70% to $1.02/share. This marked the 28th year of consecutive annual dividend increases for this dividend champion. General Dynamics has managed to boost the dividend at an annualized rate of 10.50%/year over the past decade.
Between 2008 and 2018 the company managed to boost its earnings from $6.18/share to $11.18/share. General Dynamics is expected to earn $11.71/share in 2019.
The stock is attractively valued at 14.20 times forward earnings and yields 2.45%.
Horace Mann Educators Corporation (HMN) operates as a multiline insurance company in the United States. The Company operates through four segments: Property and Casualty, Retirement, Life, and Corporate and Other. The company’s quarterly dividend was increased by 1% to 28.75 cents/share. This marked the tenth consecutive year of annual dividend increases for this newly minted dividend achiever. The ten-year dividend growth is 12%/year. The company has been unable to grow earnings per share by much over the past decade, and most of the dividend growth was achieved through expanding the dividend payout ratio.
Between 2008 and 2018 the company’s earnings went from $1.81/share to $0.44/share. The earnings for 2018 are lower due to high catastrophe losses. Horace Mann Educators Corporation is expected to earn $2.32/share in 2019.
The stock seems fairly valued at 16.20 times forward earnings and spots a dividend yield of 3.10%. Given the slow rate of earnings growth over the past decade, the recent slow dividend hike, I am not interested in the stock at this time.
Ross Stores, Inc. (ROST) operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brands in the United States. It primarily offers apparel, accessories, footwear, and home fashions.
The board of directors for Ross Stores hiked its quarterly dividend by 13.30% to 25.50 cents/share. This marked the twenty-fifth consecutive annual dividend increase for this newly minted dividend champion. The recent dividend hike is slower than the ten year average of 25.20%/year.
Between 2009 and 2019, Ross Stores managed to boost its earnings from $0.58/share to $4.26/share. Ross Stores is expected to generate $4.52/share in fiscal year 2020. This is a 6% growth in earnings from 2019’s numbers, which is slow for a growth company with lofty expectations baked into the price. I find it richly valued at 19.70 times forward earnings and a dividend yield of 1.15%. Ross Stores may be worth another look on dips below $85/share.
Northrim BanCorp, Inc. (NRIM) operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses and professionals in Alaska. The company operates in two segments, Community Banking and Home Mortgage Lending. The board of directors raised the quarterly dividend by 11.10% to 30 cents/share.
This was the tenth consecutive year of increasing dividend payments for Northrim BanCorp. The company has a ten year dividend growth rate of 4.40%/year.
The bank earned $2.86/share in 2018, which was higher than the peak earnings of $1.81 per share achieved in 2007. The company expects to earn $2.83/share in 2019. The stock seems cheap at 13 times forward earnings and offers a dividend yield of 3.20%.
Taubman Centers, Inc. (TCO) operates as a real estate investment trust. Its engaged in the ownership, leasing, acquisition, disposition, development, expansion, and management of regional shopping centers.
Last week, this REIT hiked its quarterly dividends by 3.10% to 65.75 cents/share. This marked the tenth year of consecutive annual dividend increases for this newly minted dividend achiever. Taubman Centers has a ten year dividend growth rate of 4.70%/year.
Taubman Centers managed to grow FFO/share between 2008 and 2018, from $1.51 to $3.71. This REIT seems fairly valued at 13.80 times FFO and offers a dividend yield of 5.10%.
Relevant Articles:
- How to select winning retail stocks
- 2019 Dividend Champions List
- An Investment Plan Helps You Stay The Course
- Dividend Investors: Stay The Course
This is why I review the list of dividend increases every single week. This is a helpful monitoring tool for the companies I own, and for the companies I am interested in owning.
In the past week, there were several companies that raised dividends to shareholders. These companies have at least a ten year streak of annual dividend increases. The companies include:
General Dynamics Corporation (GD) operates as an aerospace and defense company worldwide. It operates in five segments: Aerospace, Combat Systems, Information Technology, Mission Systems, and Marine Systems.
The company raised the quarterly dividend by 9.70% to $1.02/share. This marked the 28th year of consecutive annual dividend increases for this dividend champion. General Dynamics has managed to boost the dividend at an annualized rate of 10.50%/year over the past decade.
Between 2008 and 2018 the company managed to boost its earnings from $6.18/share to $11.18/share. General Dynamics is expected to earn $11.71/share in 2019.
The stock is attractively valued at 14.20 times forward earnings and yields 2.45%.
Horace Mann Educators Corporation (HMN) operates as a multiline insurance company in the United States. The Company operates through four segments: Property and Casualty, Retirement, Life, and Corporate and Other. The company’s quarterly dividend was increased by 1% to 28.75 cents/share. This marked the tenth consecutive year of annual dividend increases for this newly minted dividend achiever. The ten-year dividend growth is 12%/year. The company has been unable to grow earnings per share by much over the past decade, and most of the dividend growth was achieved through expanding the dividend payout ratio.
Between 2008 and 2018 the company’s earnings went from $1.81/share to $0.44/share. The earnings for 2018 are lower due to high catastrophe losses. Horace Mann Educators Corporation is expected to earn $2.32/share in 2019.
The stock seems fairly valued at 16.20 times forward earnings and spots a dividend yield of 3.10%. Given the slow rate of earnings growth over the past decade, the recent slow dividend hike, I am not interested in the stock at this time.
Ross Stores, Inc. (ROST) operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brands in the United States. It primarily offers apparel, accessories, footwear, and home fashions.
The board of directors for Ross Stores hiked its quarterly dividend by 13.30% to 25.50 cents/share. This marked the twenty-fifth consecutive annual dividend increase for this newly minted dividend champion. The recent dividend hike is slower than the ten year average of 25.20%/year.
Between 2009 and 2019, Ross Stores managed to boost its earnings from $0.58/share to $4.26/share. Ross Stores is expected to generate $4.52/share in fiscal year 2020. This is a 6% growth in earnings from 2019’s numbers, which is slow for a growth company with lofty expectations baked into the price. I find it richly valued at 19.70 times forward earnings and a dividend yield of 1.15%. Ross Stores may be worth another look on dips below $85/share.
Northrim BanCorp, Inc. (NRIM) operates as the bank holding company for Northrim Bank that provides commercial banking products and services to businesses and professionals in Alaska. The company operates in two segments, Community Banking and Home Mortgage Lending. The board of directors raised the quarterly dividend by 11.10% to 30 cents/share.
This was the tenth consecutive year of increasing dividend payments for Northrim BanCorp. The company has a ten year dividend growth rate of 4.40%/year.
The bank earned $2.86/share in 2018, which was higher than the peak earnings of $1.81 per share achieved in 2007. The company expects to earn $2.83/share in 2019. The stock seems cheap at 13 times forward earnings and offers a dividend yield of 3.20%.
Taubman Centers, Inc. (TCO) operates as a real estate investment trust. Its engaged in the ownership, leasing, acquisition, disposition, development, expansion, and management of regional shopping centers.
Last week, this REIT hiked its quarterly dividends by 3.10% to 65.75 cents/share. This marked the tenth year of consecutive annual dividend increases for this newly minted dividend achiever. Taubman Centers has a ten year dividend growth rate of 4.70%/year.
Taubman Centers managed to grow FFO/share between 2008 and 2018, from $1.51 to $3.71. This REIT seems fairly valued at 13.80 times FFO and offers a dividend yield of 5.10%.
Relevant Articles:
- How to select winning retail stocks
- 2019 Dividend Champions List
- An Investment Plan Helps You Stay The Course
- Dividend Investors: Stay The Course
Thursday, March 7, 2019
Can Share Buybacks Benefit Major Shareholders Disproportionately?
Last month, we had Wal-Mart (WMT) announcing its quarterly results. The results were fine, and it does seem like the company is becoming a formidable competitor to Amazon.
Unfortunately Wal-Mart has been unable to grow earnings per share over the past five years. As a result, the company has kept raising dividends at a very slow pace. Given the low yield, the high P/E ratio, I do not believe that Wal-Mart is a good value today. I expect a slow dividend growth from the likes of AT&T and Verizon, which at least have an above average yield. I do not expect a slow rate of dividend growth from a low yielder with a high P/E ratio like Wal-Mart.
While management does not control the dividend yield, they do control where the money gets allocated. Management is investing heavily in the ecommerce, and integrating the online and offline shopping experience into a seemingly integrated experience. It is quite possible that Wal-Mart a decade from now will earn more money, and be more valuable.
As part of their capital allocation decisions however, management has continued with buying back shares. In general, companies buy shares when they have too much extra cash on hand, but do not want to commit to paying a higher dividend. Shareholders typically expect that dividend payments are kept and gradually increased. If a dividend is increased, and then cut, it makes the company’s situation seem dire. It also makes management look like they are doing a poor job.
If management wants to distribute those excess profits to shareholders, but wants to keep flexibility in the distribution, they can either do a share buyback or a special dividend. Corporations these days tend to prefer share buybacks. Most commentary in the media seems very biased in favor of buybacks, and somewhat opposed to dividends. As a result, the common message sold to ordinary shareholders is that dividends and share buybacks are the same thing, when in reality they offer vastly different outcomes.
The problems with buybacks are that:
1) Management teams seldom do any analysis on whether they are getting a good value for their money when buying back stock
2) Management teams can announce a buyback, but never execute it
3) Buybacks may mask the dilutive effects of stock options on shares outstanding ( executive compensation in stock)
4) More often than not, companies have excess cashflows when their shares are overvalued, hence they tend to destroy value. Companies tend to halt buybacks when we have economic uncertainty, but share prices are low.
5) A dividend treats all shareholders fairly, while share buybacks do not treat all shareholders fairly
After reviewing Wal-Mart’s proxy statements, against the trend in shares outstanding, I came up with another problem with buybacks.
I found that the Walton family, either directly or through trusts, owns more than 50% of the company stock. Just a few short years ago, their ownership percentage was lower.
As a result of share buybacks, Wal-Mart is essentially using your shareholder money to increase the percentage ownerships of the Walton family.
The risk that I am seeing is that management runs Wal-Mart for the benefit of the Waltons. Buybacks have disproportionately helped the Walton family increase its ownerships from 40% to 50%. This is a risk that many investors rarely think about in general, when thinking about buybacks versus dividends.
Back in 2007, the Walton clan owned roughly 41% of shares outstanding:
Source: Wal-Mart's 2007 proxy statement
Fast forward to 2018, when the Walton family owns a little over 50% of the outstanding shares:
Source: Wal-Mart's 2018 proxy statement
However, once the family has asserted control over Wal-Mart, they have followed management in selling their shares. However, they have kept their ownership firmly above 50%. If the family chose to stop selling shares, and management kept repurchasing shares, it is very likely that they will ultimately end up spending shareholder resources to take the company private for the Waltons. In other words, the money that could have been used to benefit all shareholders through a dividend, ended up being used for share buybacks that help the Waltons increase their ownership of Wal-Mart, at the expense of ordinary shareholders.
Some may say that the buyback also increases the value for remaining shareholders. This is great in theory, but in reality this doesn’t really matter much for smaller shareholders like you and me. If I hold 200 shares of Wal-Mart, and the company repurchases 50% of its shares outstanding, my ownership in the company increases. But I am still a minority holder, despite the fact that shares outstanding decreased from 3 billion to 1.50 billion. (or from 6 billion to 3 billion, as has been the case over the past 20 years)
However, if I held 1.5 billion shares initially, and the company reduced the number of shares outstanding from 6 billion to 3 billion, my ownership stake rises from 25% to 50%. In other words, I end up being in control of the corporation, without spending a dime. When you are in control of a corporation, you can do a lot to benefit yourself, rather than individual shareholders. I am unhappy about the fact that excess shareholder money is essentially increasing the stake of the Walton family, and giving them a disproportionate benefit. If a dividend had been paid, rather than a buyback, each shareholder would have been treated more fairly.
If a major shareholder controls a corporation, they can use their power at the expense of ordinary shareholders. Wal-Mart could become a controlled company. Wal-Mart has stated the following in its filing with the SEC:
although the Walton family holds approximately 51% of our company’s Shares, we have not and do not plan to rely on any of the exemptions from certain board independence requirements available to controlled companies under the NYSE Listed Company Rules. Our Board is committed to maintaining a majority independent Board and believes that this independence ensures robust oversight, independent viewpoints, and promotes the Board’s overall effectiveness
I also wanted to highlight he following passage I found about controlled companies (Source: Harvard Law):
Unlike many global markets, the U.S. — at the state, stock market and federal levels—provides limited protection to minority shareholders. The major U.S. stock exchanges, for example, relax their basic governance listing requirements for “controlled companies.” As a result, governance provisions which provide safeguards for external shareholders, such as a majority of independent directors on their boards or independent nominating panels do not apply to controlled companies. At least partially as a result of this reduced level of accountability to external company shareholders, controlled companies attract disproportionate attention when questionable practices arise.
At other controlled firms, however, the adage about the corrupting qualities of absolute power rings true. At these companies, self-dealing, poor strategic planning, and other risky behaviors destroy value.
I am hopeful that the Walton family preserves the integriry of the board, and treats minority shareholders fairly. I also hope that they do not simply decide to hold on to their stock, until Walmart further increases their controlling stake in the company through share buybacks. They have done this so far, and I am hopeful that they will continue the legacy of Sam Walton. The article was not aimed at the Walton family, but rather to raise a new concern around share buybacks which is not discussed. It is possible that a lot of shareholders do not give much thought to the risk I discussed today.
To summarize, a company can disproportionately benefit a major shareholder by prioritizing buybacks over divide ds. As a result, company slowly takes itself private through share buybacks. This further increase ownership and control of the major shareholder, using resources that could have benefitted all owners through dividends.
Relevant Articles:
- Share Buybacks and Dividends Are Not The Same Thing
- Dividends versus Share Buybacks/Stock repurchases
- Dividends versus Homemade Dividends
- Dividends Unlock Value For Shareholders
Unfortunately Wal-Mart has been unable to grow earnings per share over the past five years. As a result, the company has kept raising dividends at a very slow pace. Given the low yield, the high P/E ratio, I do not believe that Wal-Mart is a good value today. I expect a slow dividend growth from the likes of AT&T and Verizon, which at least have an above average yield. I do not expect a slow rate of dividend growth from a low yielder with a high P/E ratio like Wal-Mart.
While management does not control the dividend yield, they do control where the money gets allocated. Management is investing heavily in the ecommerce, and integrating the online and offline shopping experience into a seemingly integrated experience. It is quite possible that Wal-Mart a decade from now will earn more money, and be more valuable.
As part of their capital allocation decisions however, management has continued with buying back shares. In general, companies buy shares when they have too much extra cash on hand, but do not want to commit to paying a higher dividend. Shareholders typically expect that dividend payments are kept and gradually increased. If a dividend is increased, and then cut, it makes the company’s situation seem dire. It also makes management look like they are doing a poor job.
If management wants to distribute those excess profits to shareholders, but wants to keep flexibility in the distribution, they can either do a share buyback or a special dividend. Corporations these days tend to prefer share buybacks. Most commentary in the media seems very biased in favor of buybacks, and somewhat opposed to dividends. As a result, the common message sold to ordinary shareholders is that dividends and share buybacks are the same thing, when in reality they offer vastly different outcomes.
The problems with buybacks are that:
1) Management teams seldom do any analysis on whether they are getting a good value for their money when buying back stock
2) Management teams can announce a buyback, but never execute it
3) Buybacks may mask the dilutive effects of stock options on shares outstanding ( executive compensation in stock)
4) More often than not, companies have excess cashflows when their shares are overvalued, hence they tend to destroy value. Companies tend to halt buybacks when we have economic uncertainty, but share prices are low.
5) A dividend treats all shareholders fairly, while share buybacks do not treat all shareholders fairly
After reviewing Wal-Mart’s proxy statements, against the trend in shares outstanding, I came up with another problem with buybacks.
I found that the Walton family, either directly or through trusts, owns more than 50% of the company stock. Just a few short years ago, their ownership percentage was lower.
As a result of share buybacks, Wal-Mart is essentially using your shareholder money to increase the percentage ownerships of the Walton family.
The risk that I am seeing is that management runs Wal-Mart for the benefit of the Waltons. Buybacks have disproportionately helped the Walton family increase its ownerships from 40% to 50%. This is a risk that many investors rarely think about in general, when thinking about buybacks versus dividends.
Back in 2007, the Walton clan owned roughly 41% of shares outstanding:
Fast forward to 2018, when the Walton family owns a little over 50% of the outstanding shares:
Source: Wal-Mart's 2018 proxy statement
However, once the family has asserted control over Wal-Mart, they have followed management in selling their shares. However, they have kept their ownership firmly above 50%. If the family chose to stop selling shares, and management kept repurchasing shares, it is very likely that they will ultimately end up spending shareholder resources to take the company private for the Waltons. In other words, the money that could have been used to benefit all shareholders through a dividend, ended up being used for share buybacks that help the Waltons increase their ownership of Wal-Mart, at the expense of ordinary shareholders.
Some may say that the buyback also increases the value for remaining shareholders. This is great in theory, but in reality this doesn’t really matter much for smaller shareholders like you and me. If I hold 200 shares of Wal-Mart, and the company repurchases 50% of its shares outstanding, my ownership in the company increases. But I am still a minority holder, despite the fact that shares outstanding decreased from 3 billion to 1.50 billion. (or from 6 billion to 3 billion, as has been the case over the past 20 years)
However, if I held 1.5 billion shares initially, and the company reduced the number of shares outstanding from 6 billion to 3 billion, my ownership stake rises from 25% to 50%. In other words, I end up being in control of the corporation, without spending a dime. When you are in control of a corporation, you can do a lot to benefit yourself, rather than individual shareholders. I am unhappy about the fact that excess shareholder money is essentially increasing the stake of the Walton family, and giving them a disproportionate benefit. If a dividend had been paid, rather than a buyback, each shareholder would have been treated more fairly.
If a major shareholder controls a corporation, they can use their power at the expense of ordinary shareholders. Wal-Mart could become a controlled company. Wal-Mart has stated the following in its filing with the SEC:
although the Walton family holds approximately 51% of our company’s Shares, we have not and do not plan to rely on any of the exemptions from certain board independence requirements available to controlled companies under the NYSE Listed Company Rules. Our Board is committed to maintaining a majority independent Board and believes that this independence ensures robust oversight, independent viewpoints, and promotes the Board’s overall effectiveness
I also wanted to highlight he following passage I found about controlled companies (Source: Harvard Law):
Unlike many global markets, the U.S. — at the state, stock market and federal levels—provides limited protection to minority shareholders. The major U.S. stock exchanges, for example, relax their basic governance listing requirements for “controlled companies.” As a result, governance provisions which provide safeguards for external shareholders, such as a majority of independent directors on their boards or independent nominating panels do not apply to controlled companies. At least partially as a result of this reduced level of accountability to external company shareholders, controlled companies attract disproportionate attention when questionable practices arise.
At other controlled firms, however, the adage about the corrupting qualities of absolute power rings true. At these companies, self-dealing, poor strategic planning, and other risky behaviors destroy value.
I am hopeful that the Walton family preserves the integriry of the board, and treats minority shareholders fairly. I also hope that they do not simply decide to hold on to their stock, until Walmart further increases their controlling stake in the company through share buybacks. They have done this so far, and I am hopeful that they will continue the legacy of Sam Walton. The article was not aimed at the Walton family, but rather to raise a new concern around share buybacks which is not discussed. It is possible that a lot of shareholders do not give much thought to the risk I discussed today.
To summarize, a company can disproportionately benefit a major shareholder by prioritizing buybacks over divide ds. As a result, company slowly takes itself private through share buybacks. This further increase ownership and control of the major shareholder, using resources that could have benefitted all owners through dividends.
Relevant Articles:
- Share Buybacks and Dividends Are Not The Same Thing
- Dividends versus Share Buybacks/Stock repurchases
- Dividends versus Homemade Dividends
- Dividends Unlock Value For Shareholders
Monday, March 4, 2019
Busy Week For Dividend Increases
As part of my monitoring process, I review the list of dividend increases every single week. I narrow the list down by focusing on the companies with at least a ten year history of annual dividend increases. I then try to review the trends in earnings, and dividends, in order to determine the likelihood of future dividend growth. The next step is to look at valuation, and take into consideration the growth profile of the enterprise, before coming up with a conclusion on the price.
The past week was busy for dividend investors, given the high number of dividend increases to sift through. After narrowing the list down, I came up with the following thirteen companies that raised dividend last week. The companies include:
The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International.
TJX plans to increase the regular quarterly dividend on its common stock to be declared in April 2019 and payable in June 2019 to $0.23 per share. This represents an 18% increase in the current per share dividend and marks the 23rd consecutive year that the Company has raised the dividend. Over the past decade, the Company’s dividend has grown at a compound annual rate of 21.60%.
The Company also announced today its plan to repurchase approximately $1.75 to $2.25 billion of TJX stock during the fiscal year ending February 1, 2020. Between 2009 and 2019, TJX Companies managed to grow earnings from $0.50/share to $2.43/share.
The company is expected to earn $2.61/share in 2019. The stock is close to fully valued at 19.90 times forward earnings. TJX Companies yields 1.80% today. Check my analysis of TJX Companies for more information about the enterprise.
British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide. It manufactures vapour and tobacco heating products; oral tobacco and nicotine products, such as snus and moist snuff; cigars; and e-cigarettes.
British American Tobacco raised its dividend per share by 4.0% to 203.0p, payable in four quarterly dividend payments of 50.75p per share. The company is an international dividend achiever, which has managed to reward shareholders with a dividend increase every year since 1997.
I found the following statement to be illuminating, from the press release:
We recognize that the proposed potential regulatory changes in the US have created some investor uncertainty. We have a long experience of managing regulatory developments, a track record of delivering strong growth while investing for the future and an established multi-category approach. I am confident that my successor, Jack Bowles, will continue to deliver a similar level of sustainable long-term returns as we accelerate our Transforming Tobacco agenda. Looking into 2019 we are confident of another year of high single figure adjusted constant currency earnings growth and this confidence is reflected in our Board’s proposal to increase the dividend by 4%
Earnings per share increased from 1.23 pounds/share in 2009 to 2.63 pounds/share in 2018. The company is expected to earn 3.14 pounds/share in 2019.
I recently initiated a position in the stock. I find BTI to be attractively valued at 9.10 times forward earnings. The stock yields 7.10%. You can check my analysis of British American Tobacco here.
Best Buy Co., Inc. (BBY) operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico. The company operates in two segments, Domestic and International. The company raised its quarterly dividend by 11.10% to 50 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever . Over the past decade, the company has managed to grow the dividend at an annual rate of 13%. Between 2008 and 2019, the company managed to grow earnings from $3.12/share to $5.20/share. This was achieved by share buybacks, as the number of shares was reduced from 452 million in 2008 to 281 million in 2019.
The company is expecting to earn between $5.45 - $5.65/share in 2020. The stock looks cheap at 12.40 times forward earnings. Best Buy yields 2.90%. It is funny how everyone was expecting the obliteration of Best Buy in 2012 – 2013 by the likes of Amazon. However, someone who invested at the time of maximum pessimism would have done pretty well for themselves. This just goes to show that conventional wisdom is not always right, and should always be questioned.
Silgan Holdings Inc. (SLGN), manufactures and sells rigid packaging for consumer goods products worldwide. It operates through three segments: Metal Containers, Closures, and Plastic Containers. The company raised its quarterly dividend by 10% to 11 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 8.90%. Between 2009 and 2018, Silgan Holdings managed to boost earnings per share from $1.03 to $2.01.The company is expected to earn $2.16/share in 2019. The stock looks attractively valued at 13.20 times forward earnings and offers a dividend yield of 1.50%.
Albemarle Corporation (ALB) develops, manufactures, and markets engineered specialty chemicals worldwide. The company raised its quarterly dividend by 9.70% to 36.75 cents/share. This marked the 25th consecutive annual dividend increase for this newly minted dividend champion . Over the past decade, the company has managed to grow its dividend at an annual rate of 10.70%. Between 2008 and 2018, Albermarle has managed to boost its earnings from $2.09/share to $6.34/share.
The company is expected to earn $6.22/share in 2019. The stock yields 1.60% and seems attractively valued at 14.60 times forward earnings.
Home Depot, Inc. (HD) is a home improvement retailer, which engages in the sale of building materials and home improvement products. The company raised its quarterly dividend by a massive 32% to cents/share. This marked the tenth year of dividend increases for this newly minted dividend achiever. Previously, Home Depot had a 20 year track record of annual dividend increases, before it kept dividends unchanged in 2008. Over the past decade, the company has managed to grow the dividend at an annual rate of 16.40%. This strong dividend growth was supported by rapid growth in earnings per share. Home Depot managed to boost earnings from $1.34/share in 2009 to $9.73/share in 2019. The company is expected to earn $10.22/share in 2019. Home Depot is selling for 18.30 times forward earnings and yields 2.90%. In comparison, Lowe’s (LOW) sells for 17.20 times forward earnings, but yields 1.85%. Both companies may turn out to be decent additions to a dividend growth portfolio going forward, particularly if we get another decline in share prices in 2019. Both companies are touted as Amazon proof today, which would be interesting to see playing forward over the next decade. I do want to be a little cautious, as we are looking at earnings per share after a 10 year expansion. Earnings will be challenged during the next recession.
McGrath RentCorp, (MGRC) is a business to business rental company, that rents and sells relocatable modular buildings, portable storage containers, electronic test equipment, and liquid and solid containment tanks and boxes in the United States and internationally. It operates through four segments: Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex. The company raised its quarterly dividend by 10.30% to 37.50 cents/share. This marked the 27th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to hike dividends at an annual rate of 5.10%. Between 2008 and 2018, earnings went from $1.72/share to $3.23/share. The company is expected to earn $3.25/share in 2019. The stock is selling at 18.40 times forward earnings and offers a dividend yield of 2.50%.
Southwest Gas Holdings, Inc. (SWX), purchases, distributes, and transports natural gas in Arizona, Nevada, and California. The company operates through Natural Gas Operations and Construction Services segments. The company raised its quarterly dividend by 4.80% to 54.50 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 8.70%.
Between 2008 and 2018, it managed to boost earnings from $1.39/share to $3.68/share in 2018. The company is expected to earn $3.97 /share in 2019. It is interesting to note that between 1989 and 2009 earnings per share largely went nowhere. The stock is selling for more than 20 times forward earnings, which is high. The yield is 2.60%, which seems low for a utility. It may be an interesting look below $72 - $74/share.
Texas Pacific Land Trust (TPL) holds title to tracts of land in the state of Texas. The company operates through two segments, Land and Resource Management, and Water Service and Operations. The company raised its annual dividend by 66.70% to $1.75/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 19.30%. Between 2008 and 2018, earnings per share skyrocketed from $1.06 to $26.92. The stock seems overvalued at 27.90 times earnings and yields 0.20%. TPL has done very well for its shareholders over the past decade. TPL has also done well for shareholders with a really long-term orientation in the past, due to its consistent share buybacks and dividends. While I do not know if the next decade will generate much in returns, it is possible that the next 40 years could be profitable. This is a stock where it has historically paid to buy a share, and forget about it.
Old Republic International Corporation (ORI) engages in the insurance underwriting and related services business primarily in the United States and Canada. The company operates through three segments: General Insurance Group, Title Insurance Group, and the Republic Financial Indemnity Group Run-off Business. The company raised its quarterly dividend by 2.60% to 20 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow the dividend at an annual rate of 1.50%. The slow growth is understandable, given the lack of earnings growth since the end of 2005. The company is expected to earn $1.87/share in 2019. While it looks cheap at 11.20 times forward earnings and has a dividend yield of 3.80%, I do not like the lack of EPS growth for such a long time.
Sempra Energy (SRE) invests in, develops, and operates energy infrastructure, as well as provides electric and gas services in the United States and internationally. The company raised its quarterly dividend by 8.10% to 96.75 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 10.20%. Between 2008 and 2018, earnings per share went from $4.44 to $3.41. The company is expected to earn $6/share in 2019. The stock is overvalued at 20.30 times forward earnings and offers a dividend yield of 3.20%.
Telephone and Data Systems, Inc. (TDS) provides wireless, cable and wireline broadband, TV, voice, and hosted and managed services in the United States. It operates through three segments: U.S. Cellular, Wireline, and Cable. The company raised its quarterly dividend by 3.10% to 16 cents/share. This marked the 46th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow the dividend at an annual rate of 4.50%. Between 2008 and 2018, the company managed to grow its earnings from 74 cents/share to $1.17/share.
The company is expected to earn $1.09/share in 2019. The stock is overvalued at 29.50 times forward earnings and yields 2%. Given the high valuation, slow dividend growth and lack of earnings growth, I am not interested in buying the stock today.
Relevant Articles:
- 2019 Dividend Champions List
- How to select winning retail stocks
- The most important metric for dividend investing
- Buying Quality Companies at a Reasonable Price is Very Important
The past week was busy for dividend investors, given the high number of dividend increases to sift through. After narrowing the list down, I came up with the following thirteen companies that raised dividend last week. The companies include:
The TJX Companies, Inc. (TJX) operates as an off-price apparel and home fashions retailer. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International.
TJX plans to increase the regular quarterly dividend on its common stock to be declared in April 2019 and payable in June 2019 to $0.23 per share. This represents an 18% increase in the current per share dividend and marks the 23rd consecutive year that the Company has raised the dividend. Over the past decade, the Company’s dividend has grown at a compound annual rate of 21.60%.
The Company also announced today its plan to repurchase approximately $1.75 to $2.25 billion of TJX stock during the fiscal year ending February 1, 2020. Between 2009 and 2019, TJX Companies managed to grow earnings from $0.50/share to $2.43/share.
The company is expected to earn $2.61/share in 2019. The stock is close to fully valued at 19.90 times forward earnings. TJX Companies yields 1.80% today. Check my analysis of TJX Companies for more information about the enterprise.
British American Tobacco p.l.c. (BTI) provides cigarettes and other tobacco products worldwide. It manufactures vapour and tobacco heating products; oral tobacco and nicotine products, such as snus and moist snuff; cigars; and e-cigarettes.
British American Tobacco raised its dividend per share by 4.0% to 203.0p, payable in four quarterly dividend payments of 50.75p per share. The company is an international dividend achiever, which has managed to reward shareholders with a dividend increase every year since 1997.
I found the following statement to be illuminating, from the press release:
We recognize that the proposed potential regulatory changes in the US have created some investor uncertainty. We have a long experience of managing regulatory developments, a track record of delivering strong growth while investing for the future and an established multi-category approach. I am confident that my successor, Jack Bowles, will continue to deliver a similar level of sustainable long-term returns as we accelerate our Transforming Tobacco agenda. Looking into 2019 we are confident of another year of high single figure adjusted constant currency earnings growth and this confidence is reflected in our Board’s proposal to increase the dividend by 4%
Earnings per share increased from 1.23 pounds/share in 2009 to 2.63 pounds/share in 2018. The company is expected to earn 3.14 pounds/share in 2019.
I recently initiated a position in the stock. I find BTI to be attractively valued at 9.10 times forward earnings. The stock yields 7.10%. You can check my analysis of British American Tobacco here.
Eaton Corporation plc (ETN) operates as a power management company worldwide. Eaton (ETN) declared $0.71/share quarterly dividend, 8% increase from prior dividend of $0.66. The Board of Directors declared a quarterly dividend of $0.71 per ordinary share, an increase of 8 percent over its last quarterly dividend. The company is expected to earn $5.87/share in 2019. The company raised its quarterly dividend by 8% to 71 cents/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend contender. Over the past decade, the company has managed to grow the dividend at an annual rate of 10.20%.
Between 2008 and 2018, Eaton managed to grow its earnings per share from $3.25 to $4.91.
Eaton expects earnings per share for 2019 to be between $5.70 and $6.00. The stock is attractively valued at 14.10 times forward earnings and offers a dividend yield of 3.50%.
Best Buy Co., Inc. (BBY) operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico. The company operates in two segments, Domestic and International. The company raised its quarterly dividend by 11.10% to 50 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever . Over the past decade, the company has managed to grow the dividend at an annual rate of 13%. Between 2008 and 2019, the company managed to grow earnings from $3.12/share to $5.20/share. This was achieved by share buybacks, as the number of shares was reduced from 452 million in 2008 to 281 million in 2019.
The company is expecting to earn between $5.45 - $5.65/share in 2020. The stock looks cheap at 12.40 times forward earnings. Best Buy yields 2.90%. It is funny how everyone was expecting the obliteration of Best Buy in 2012 – 2013 by the likes of Amazon. However, someone who invested at the time of maximum pessimism would have done pretty well for themselves. This just goes to show that conventional wisdom is not always right, and should always be questioned.
Silgan Holdings Inc. (SLGN), manufactures and sells rigid packaging for consumer goods products worldwide. It operates through three segments: Metal Containers, Closures, and Plastic Containers. The company raised its quarterly dividend by 10% to 11 cents/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 8.90%. Between 2009 and 2018, Silgan Holdings managed to boost earnings per share from $1.03 to $2.01.The company is expected to earn $2.16/share in 2019. The stock looks attractively valued at 13.20 times forward earnings and offers a dividend yield of 1.50%.
Albemarle Corporation (ALB) develops, manufactures, and markets engineered specialty chemicals worldwide. The company raised its quarterly dividend by 9.70% to 36.75 cents/share. This marked the 25th consecutive annual dividend increase for this newly minted dividend champion . Over the past decade, the company has managed to grow its dividend at an annual rate of 10.70%. Between 2008 and 2018, Albermarle has managed to boost its earnings from $2.09/share to $6.34/share.
The company is expected to earn $6.22/share in 2019. The stock yields 1.60% and seems attractively valued at 14.60 times forward earnings.
Home Depot, Inc. (HD) is a home improvement retailer, which engages in the sale of building materials and home improvement products. The company raised its quarterly dividend by a massive 32% to cents/share. This marked the tenth year of dividend increases for this newly minted dividend achiever. Previously, Home Depot had a 20 year track record of annual dividend increases, before it kept dividends unchanged in 2008. Over the past decade, the company has managed to grow the dividend at an annual rate of 16.40%. This strong dividend growth was supported by rapid growth in earnings per share. Home Depot managed to boost earnings from $1.34/share in 2009 to $9.73/share in 2019. The company is expected to earn $10.22/share in 2019. Home Depot is selling for 18.30 times forward earnings and yields 2.90%. In comparison, Lowe’s (LOW) sells for 17.20 times forward earnings, but yields 1.85%. Both companies may turn out to be decent additions to a dividend growth portfolio going forward, particularly if we get another decline in share prices in 2019. Both companies are touted as Amazon proof today, which would be interesting to see playing forward over the next decade. I do want to be a little cautious, as we are looking at earnings per share after a 10 year expansion. Earnings will be challenged during the next recession.
McGrath RentCorp, (MGRC) is a business to business rental company, that rents and sells relocatable modular buildings, portable storage containers, electronic test equipment, and liquid and solid containment tanks and boxes in the United States and internationally. It operates through four segments: Mobile Modular, TRS-RenTelco, Adler Tanks, and Enviroplex. The company raised its quarterly dividend by 10.30% to 37.50 cents/share. This marked the 27th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to hike dividends at an annual rate of 5.10%. Between 2008 and 2018, earnings went from $1.72/share to $3.23/share. The company is expected to earn $3.25/share in 2019. The stock is selling at 18.40 times forward earnings and offers a dividend yield of 2.50%.
Southwest Gas Holdings, Inc. (SWX), purchases, distributes, and transports natural gas in Arizona, Nevada, and California. The company operates through Natural Gas Operations and Construction Services segments. The company raised its quarterly dividend by 4.80% to 54.50 cents/share. This marked the 13th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 8.70%.
Between 2008 and 2018, it managed to boost earnings from $1.39/share to $3.68/share in 2018. The company is expected to earn $3.97 /share in 2019. It is interesting to note that between 1989 and 2009 earnings per share largely went nowhere. The stock is selling for more than 20 times forward earnings, which is high. The yield is 2.60%, which seems low for a utility. It may be an interesting look below $72 - $74/share.
Texas Pacific Land Trust (TPL) holds title to tracts of land in the state of Texas. The company operates through two segments, Land and Resource Management, and Water Service and Operations. The company raised its annual dividend by 66.70% to $1.75/share. This marked the 16th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 19.30%. Between 2008 and 2018, earnings per share skyrocketed from $1.06 to $26.92. The stock seems overvalued at 27.90 times earnings and yields 0.20%. TPL has done very well for its shareholders over the past decade. TPL has also done well for shareholders with a really long-term orientation in the past, due to its consistent share buybacks and dividends. While I do not know if the next decade will generate much in returns, it is possible that the next 40 years could be profitable. This is a stock where it has historically paid to buy a share, and forget about it.
Old Republic International Corporation (ORI) engages in the insurance underwriting and related services business primarily in the United States and Canada. The company operates through three segments: General Insurance Group, Title Insurance Group, and the Republic Financial Indemnity Group Run-off Business. The company raised its quarterly dividend by 2.60% to 20 cents/share. This marked the 39th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow the dividend at an annual rate of 1.50%. The slow growth is understandable, given the lack of earnings growth since the end of 2005. The company is expected to earn $1.87/share in 2019. While it looks cheap at 11.20 times forward earnings and has a dividend yield of 3.80%, I do not like the lack of EPS growth for such a long time.
Sempra Energy (SRE) invests in, develops, and operates energy infrastructure, as well as provides electric and gas services in the United States and internationally. The company raised its quarterly dividend by 8.10% to 96.75 cents/share. This marked the 17th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow the dividend at an annual rate of 10.20%. Between 2008 and 2018, earnings per share went from $4.44 to $3.41. The company is expected to earn $6/share in 2019. The stock is overvalued at 20.30 times forward earnings and offers a dividend yield of 3.20%.
Telephone and Data Systems, Inc. (TDS) provides wireless, cable and wireline broadband, TV, voice, and hosted and managed services in the United States. It operates through three segments: U.S. Cellular, Wireline, and Cable. The company raised its quarterly dividend by 3.10% to 16 cents/share. This marked the 46th consecutive annual dividend increase for this dividend champion. Over the past decade, the company has managed to grow the dividend at an annual rate of 4.50%. Between 2008 and 2018, the company managed to grow its earnings from 74 cents/share to $1.17/share.
The company is expected to earn $1.09/share in 2019. The stock is overvalued at 29.50 times forward earnings and yields 2%. Given the high valuation, slow dividend growth and lack of earnings growth, I am not interested in buying the stock today.
Relevant Articles:
- 2019 Dividend Champions List
- How to select winning retail stocks
- The most important metric for dividend investing
- Buying Quality Companies at a Reasonable Price is Very Important
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