The quarterly dividend on S&P 500 index of the largest corporations in the US hit a record $14.24, which is a record in the second quarter of 2019 (the last date for which data is available). The earnings per share on the largest US corporations is also hitting records. US stock prices are not surprisingly close to all-time-highs. According to the Dividend Growth Model, which I have been discussing since 2008, when you get rising earnings, which lead to rising dividends, you are likely to get higher share prices as well ( assuming you didn't overpay at the time of the investment).
Paying dividends is a tax-advantaged way to reward shareholders. It's a signal of managements confidence in your ability to produce earnings above that dividend, because companies don't pay dividends above a threshold where they have confidence that they can maintain those dividend payouts. Nobody wants to cut a dividend.
It also has a subtle but very important effect in reining in mindless empire building. There's an arrogance to the notion that a company's best internal reinvestment opportunity is better than its shareholders' best reinvestment opportunity in the entire world of investing. And that's what tacitly being said by hanging on to all of the earnings. Funding empire building is a disservice to investors, because often it winds up being used to fund dumb projects.
Companies can also return excess profits in the form of share buybacks. I think of share buybacks as a special stealth dividend. But they're not reliable. Companies announce share buybacks and often pursue them and often don't. Companies announce share buybacks linked to management stock-option redemption, so if they award stock to the management team, they instantly sell it. That's the usual practice. Companies then institute a buyback of a like number of shares. This not a buyback - that's facilitation of management compensation, and it should be viewed as such.
If buybacks could be as reliable as dividends, I would like them, but there's far more talk about buybacks than a reality of buybacks. Buybacks have been an off-again, on-again part of the landscape. So I don't trust buybacks. I like them, but I don't trust them.
During the past week, there were several companies which decided to reward shareholders, by increasing their dividends. That's a good sign. I reviewed the ones with the longest streaks of dividend increases for your pleasure below:
Texas Instruments Incorporated (TXN) designs, manufactures, and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments, Analog and Embedded Processing.
Texas Instruments Incorporated raised its quarterly cash dividend by 17%, from $0.77 per share to $0.90. The announcement marks 16th consecutive year of dividend increases for this dividend achiever. The company has reduced its outstanding shares by 46% through its consistent share repurchases since the end of 2004.
Between 2008 and 2018, the company managed to grow earnings from $1.45 to $5.59/share. The company is expected to earn $5.32/share in 2019.
The stock looks overvalued at 23.80 times forward earnings. Texas Instruments yields 2.80%. It may be worth a second look on dips below $106/share.
Realty Income (O) The Monthly Dividend Company, is an S&P 500 company dedicated to providing stockholders with dependable monthly income. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,900 real estate properties owned under long-term lease agreements with commercial tenants.
Realty Income hiked its monthly dividend to 22.70 cents/share. The new monthly dividend is 2.90% higher than the monthly dividend paid during the same time last year. Realty Income will become a dividend champion at the end of 2019, after raising dividends for 25 years in a row.
Over the past decade, Realty Income has managed to boost distributions at an annualized rate of 4.50%.
Between 2008 and 2018, Realty Income has managed to grow FFO from $1.84/share to $3.12/share. Realty Income expects FFO/share in the range of $3.26 - $3.31 for 2020.
The stock is overvalued at 23.30 times forward FFO. Realty Income yields 3.60% today. Investors have bid up the Monthly Dividend Company, because it has dependable rent streams, which increase over time. In addition, Realty Income is also growing its FFO/share over time. I would like to see this quality REIT sell at a more reasonable valuation, before adding to my position there. Check my analysis of Realty Income for more information about the company.
Ingredion Incorporated (INGR) produces and sells starches and sweeteners for various industries. The company operates through four segments: North America, South America, Asia Pacific and Europe, and Middle East and Africa.
Ingredion raised its quarterly dividend slightly by 0.80% to 63 cents/share. Ingredion has managed to reward shareholders with a raise for 9 years in a row. The dividend increase is a far cry from the 16.90% annualized dividend growth over the past decade.
Between 2008 and 2018, Ingredion's earnings grew from $3.52/share to $6.15/share. The company is expected to generate $6.65/share in 2019. Earnings per share are decreasing since hitting a high of $7.06/share in 2017. If we take this into account along with the soft increase in dividends last week, I think that management is not expecting a lot of good things happening in the near term. For that reason, I view Ingredion as a hold, despite the low P/E of 12.30 and the well covered dividend yield of 3.10%.
Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide.
Microsoft raised tis quarterly dividend by 10.90% to 51 cents/share. That’s the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to boost dividends at an annualized 14.10%.
Between 2009 and 2019, Microsoft's earnings have leaped from $1.62/share to $5.06/share. Microsoft is expected to generate $5.24/share in 2019.
The stock is overvalued today at 26.60 times forward earnings and offers a dividend yield of 1.45%. I would find Microsoft to be a better value worth looking at on dips below $105/share.
W. P. Carey (WPC) ranks among the largest net lease REITs with an enterprise value of approximately $20 billion and a diversified portfolio of operationally-critical commercial real estate that includes 1,198 net lease properties covering approximately 137 million square feet.
W.P. Carey raised its quarterly dividend to $1.036/share. The new dividend is 1.10% higher than the distribution paid during the same period last year. The rate of dividend increases has been steadily decelerating in recent quarters. For reference, the ten year annualized dividend growth is 7.70%. W.P. Carey is a dividend achiever with a 21 year track record of annual dividend increases.
W.P. Carey has managed to boost AFFO from $3.09/share in 2008 to $5.39/share in 2018.
W.P. Carey expects AFFO/share to be in the range of $4.95 - $5.05/share in 2019.
I find the REIT to be fully valued today at 18.20 times forward AFFO. The REIT offers a very slow distribution growth, but yields a respectable and relatively safe 4.60%. It is cheaper than the likes of Realty Income and National Retail Properties but offers slower dividend growth too. If Interest rates were to rise however, all REITs will see lower prices, higher yields and higher costs of capital. Check my analysis of W.P. Carey for more information about the REIT.
International Bancshares Corporation (IBOC) hiked its semi-annual dividend by 10% to 55 cents/share. This marked the tenth consecutive annual dividend increase for this newly minted dividend achiever.
The company has a ten year annualized dividend growth of 1.30%, due to cutting dividends in 2009.
The company grew earnings from $1.90/share in 2008 to $3.24/share in 2018.
Right now, the stock is attractively valued at 12.20 times earnings. International Bancshare Corporation yields 2.75%.
McDonald's Corporation (MCD) operates and franchises McDonald's restaurants in the United States and internationally.
McDonald’s raised its quarterly dividend by 8% to $1.25/share. McDonald's is a dividend aristocrat which has raised its dividend for 43 consecutive years. The ten year annualized dividend growth is at 9.90%.
Between 2008 and 2018, McDonald's managed to boost earnings from $3.77/share to $7.54/share. The company is expected to generate $8.02/share in 2019.
Right now I find McDonald's to be overvalued at 26.10 times forward earnings. The stock yields 2.40%. McDonald's may be worth a second look on dips below $160/share.
Relevant Articles:
- What drives future investment returns?
- Rising Earnings – The Source of Future Dividend Growth
- How to read my weekly dividend increase reports
- Dividend income is more stable than capital gains