The DIV-Net

When to break your rules

2009-11-20T03:27:00.001-06:00

As a dividend growth investor, my strategy is picking the right stocks that provide a decent balance between dividend yield and distribution growth. Thus I have maintained a rigid requirement for a 3% initial yield before investing in a dividend growth company’s securities.
Most dividend investors look for yield when purchasing income securities. Most dividend growth investors purchase securities so that they could enjoy a rising stream of dividend payments over time. Thus, maintaining a proper balance could be a challenge that could make or break your portfolio.

I realize that using a strict yield criteria I could miss out on potential dividend growth stories such as Wal-Mart (WMT) for example. Wal-Mart has never yielded 3% since it went public in the 1970s. The 29.1% annual dividend growth since 1975 has been truly spectacular however. This means that Wal-Mart’s dividend has doubled every 2.5 years for 34 consecutive years. Wal-Mart has delivered a 23.40% dividend growth since 1985 and a 20.20% dividend growth since 1995. Check my analysis of Wal-Mart.

My rationale behind selecting a minimum yield is to provide me with an adequate margin of safety should the stock stop raising dividends and should the stock price fall or remain flat for a large period of time. In the case of Wal-Mart, the stock has been trading in a range over the past decade. Back in 1999 the stock fluctuated between $70.25 and $38.68 and closed at $69.12. The stock wasn’t yielding much back then – about 0.30%. Even if the dividend were doubling every 2.5 years, it would take a retiree almost 13 years in order to reach a yield on cost of 10%. At the current dividend rate, the stock is actually yielding 1.60% on cost, assuming that you purchased it on the last day of 1999. The actual dividend growth over the past decade comes down to 20.80% per annum, which translates into the dividend payment actually doubling every three and a half years.

Now the down side to my having a strict initial yield requirement for entry is that I would miss out on some huge gains, which could lead to early financial freedom. If one had purchased Wal-Mart stock at the end of 1984, the tenth year in a row in which it increased its dividends, their entry price would have been $1.18 (adjusted for five stock splits) and their initial yield would have been only 0.55% at the time. Fast-forward 25 years and the yield on cost comes out to almost 100%.

Many dividend growth investors tend to project past dividend growth rates into infinity, which seems unsustainable to me. If a company with $1 billion in profits enjoyed a 15% annual growth forever, it would double its net income almost every five years. In reality, as the companies grow larger they would find less opportunities that could sustainably earn them higher incremental returns on investment. For example, with a company like McDonald’s (MCD) people could only eat so much burgers and fries. After a company hits a plateau, EPS growth could largely be sustained by increasing efficiencies, raising prices, repurchasing shares or buying other competitors.

This analysis is not meant to be used as a weapon against Wal-Mart or McDonald’s, which are fine companies. It just goes to show that once shouldn’t solely rely on past data in their investment decisions. Furthermore, projecting past data into the future, without adding a what if analysis of your common sense could prove costly in the long run. In addition, purchasing stocks solely for the dividend growth is as dangerous as chasing high yielding stocks blindly.

As far as my strategy is concerned, I am considering lowering the entry yield criteria to 2% for stocks, which appear to have a sustainable above average dividend growth ahead of them. My target allocation for such stocks would be half of what I would normally allocate to such dividend growth champions such as Johnson & Johnson (JNJ) or Procter & Gamble (PG) however.

Full Disclosure: Long JNJ, MCD, PG and WMT

Relevant Articles:

- The Dividend Edge
- 12 Dividend Stocks to own in this market

- Wal-Mart (WMT) Dividend Stock Analysis

- 10 by 10: A New Way to Look at Yield and Dividend Growth

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Case of Dividend Growth in Emerging Economies

2009-11-19T05:30:00.004-06:00

The list of dividend aristocrats, dividend achievers, or dividend champion is favorite hunting ground most of the dividend focused investors. This list includes companies from S&P500 index or S&P1500 index that have been continuously raising dividends last 25 years or 10 years or more. In general, these are companies that are listed on US markets. The list of companies (and dividend opportunities) will keep churning. It is really difficult to predict which ones will continue to survive for another 10 years or more. As they age, it will be harder for them to sustain their dividend growth momentum. The likelihood of their ability to grow dividend will continue to diminish.

We need to understand dividend growth in the context of growth in US economy. Dividend growth is only possible on the back of growth in corporate earnings. Keeping with the growth of US economy, many of these companies also continued to grow and hence dividends kept increasing. However, investors cannot ignore the current US economy vis-à-vis emerging market economies.

The chart below shows earnings trends (published on Business Week) for US companies from 1948 to mid 2009. Over the last sixty years, the percentage of profits from foreign operations keeps increasing. In year 2009, these earnings have reached up to 25% of the total profits.

For now, this 25% of total profits may appear as not a significant level, but it is the trend (or growth) that we need to keep in our focus. In addition, there are quite a few US multinationals that are doing well and positioned to continue their growth in developed economies and emerging economies. While the chart above shows overall profits of US companies, following are few dividend companies that generate revenues (and hence earnings) from emerging markets. Majority these companies have paid growing dividends in last five years as measured in their native currency.

Proctor and Gamble (35%)
Unilever (30%)
Johnson and Johnson (60%)
Qualcomm Inc. (60%)
Intel Corporation (50%)
International Business Machines (45%)
Microsoft Corporation (33%)
ABB (27%)
The Coca Cola Company (60%)
Pepsico Inc. (50%)
Cadbury PLC (24%)
Nestle (26%)
Siemens AG (23%)
Vodaphone PLC (20%)
Exxon Mobil Corporation (60%)

It is for this reason I view these multinational companies are potential opportunities for divined growth, hedge against dollar fluctuations, and proxy for emerging markets. Investors can expect companies on this list to provide dividends for relatively longer term.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

The Preferred Treatment

2009-11-18T05:30:00.000-06:00

When lending standards toughen, companies work to improve their liquidity positions. One of the easiest ways to improve liquidity is by cutting dividend payments: unlike cutting marketing or research expenses, a company doesn't hurt its operations by saving money by way of stopping its dividend.

However, preferred stock dividends are often cumulative, meaning if payments are put on hold, they must eventually be paid out before common stockholders receive a dime. As such, it is important for investors of common stock to take into consideration the value of cumulative dividends owed. These will not show up as liabilities on the balance sheet, but for common stockholders they most certainly are liabilities! Therefore, they must be manually subtracted from an investor's valuation of a company, along with the value of the preferred shares themselves.

On the flip side, this represents an opportunity for investors willing to foray into the preferred stock space. As discussed in this chapter of Security Analysis, some healthy companies act conservatively and do not pay out preferred dividends for years at a time. As such, they have cumulative dividends owing. When the company is ready to pay common stockholders, these cumulative dividends in arrears have to be paid out first, to the current holders of the preferred shares. Therefore, purchasing preferred shares where large cumulative dividends are owed can represent great upside if the company's financials are sound.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Investment Fee Creep

2009-11-17T05:00:00.000-06:00

I used to own a mutual fund that kept performing worse and worse as time went on. This was in the early days when I investing in high fee mutual funds because I did not know any better. Today I know better. One thing that I saw with a couple of funds I owned was something I called "fee creep".

Fee creep is a real simple concept. In essence, it is when a mutual fund slowly and quietly increases its management expense ratios over time. For example, assume that a mutual fund started with an MER when you bought it of 1.50%. Shoot forward three years and you notice that the MER on that same fund is 1.52%. That may not seem like much - it is an extra $2 on a $10,000 investment. However, when you compound that over a period of 25 years it can become very substantial.

The solution? Simple. The first thing you can do is keep your fees low to start with and then you will not need to worry about it too much. The second thing is to review your fund's MER from time to time to see what is happening with them. If they have gone up, then ensure that your returns have also been going up. If your returns are down in that fund and the fees are still higher then move your money elsewhere. These days, there is enough competition that mutual fund fees should be going down. Do not settle for rising fees if performance does not improve.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Community Trust Bank Corp. (CTBI)

2009-11-16T05:30:00.001-06:00

Linked here is a detailed quantitative analysis of Community Trust Bank Corp. (CTBI). Below are some highlights from the above linked analysis:

Company Description: Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

CTBI is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 6.2% discount to its calculated fair value of $24.99. CTBI earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

CTBI earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years, and another Star was earned as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1950 and has increased its dividend payments for 29 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

CTBI earned a Star in this section for its NPV MMA Diff. of the $830. This amount is in excess of the $600 target I look for in a stock that has increased dividends as long as CTBI has. The stock's current yield of 5.12% exceeds the 3.9% estimated 20-year average MMA rate.

Other: CTBI is a member of the Broad Dividend Achievers™ Index.

Conclusion: CTBI earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CTBI as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $25.85 before CTBI's NPV MMA Differential decreased to the $600 that I like to see for a stock with 29 years of consecutive dividend increases. At that price the stock would yield 4.64%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $600 NPV MMA Differential, the calculated rate is 1.5%. This dividend growth rate is less than the 2.6% used in this analysis, thus providing a margin of safety. CTBI has a risk rating of 1.25 which classifies it as a low risk stock.

CTBI is an interesting stock. Its debt position and cash flow are excellent. Though revenue and earnings were down in 2008, free cash flow was up. On a trailing twelve month basis most metrics have improved since 2008. Although the stock is trading below my buy price of $24.99, I will wait for CTBI's next dividend increase (scheduled for December) before deciding to buy or not. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CTBI (0.0% of my Income Portfolio). What are your thoughts on CTBI?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - November 15, 2009

2009-11-15T05:30:00.001-06:00

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

Articles From DIV-Net Members

Dividends Value presented 7 Dividend Stocks To Slay The Wall Street Giants
The Dividend Guy presented Why I Allocate Part of My Portfolio to Small-Caps
Dividend Growth Investor presented Where are the original Dividend Aristocrats now?
Barel Karsan presented Earnings Revert To The Mean
Dividend Tree presented Waste Management Inc – Stock Analysis for Dividend Growth Portfolio
Buy Value presented Book Review: Corporate Financial Analysis
moneygardener presented ADP dividend up 3%
Stock Market Prognosticator presented How To Destroy Value
Disciplined Approach to Investing presented Money Market Cash: Fuel For The Fire
Living Off Dividends & Passive Income presented Gold breaks $1,100: Does It Matter?
Old School Value presented 2009 Forbes Best Small Companies Part 1
Triaging My Way To Financial Success presented Dividend Income Milestone I
Everyday Finance presented New Gold Miners "Juniors" ETF Launches: As Volatile as it Gets
BuyLikeBuffett.com presented Solid Buys
40percent 20years presented Weekly Tips #14
Value Investing Pro presented The 1929 Stock Market Crash
EPIC INVESTOR presented A Place for the Shiny Metal in a Value Investor's Portfolio

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

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Housing as the Great Investment

2009-11-14T15:14:00.004-06:00

I am always surprised to see the enthusiasm people exhibit when they hear that housing prices are rising, to me this is 100% bad news.
I hear remarks all the time like,

Housing prices are up 12% over last year, I am going to make a killing on this house when I sell in a year or two!

Let's say you buy a house as a primary residence at $300K and are fortunate enough to see a 12% compound increase in the price of the house for 3 years in a row. So that makes the value of your house now an impressive $421K- wow $121K nice return, well worth celebration.

But wait, are you going to live in a paper box now? The average North American's needs/desires grow instead of shrinking, very few will voluntarily downsize in the purchase of their next home. So at the end of the three years shopping for a bigger home is the next logical step.

Most consumers have bought the $300K house not because they believe it will always meet their needs, but more because they couldn't raise that extra $100K to afford that $400K house. So what happened to that $400K dream house over this same period? Well now that $400K house has risen at the same impressive 12% and is up for sale for $562K. Unfortunately this leads to a rather undesirable circumstance; while you were $100K off of your dream home three years ago, you are now $140K off today- and this doesn't take into account the 3% or more you will end up paying a real estate agent and the monies required to pay the government and lawyers offices.
Now for the few out there that are multi home owners, or who plan to downsize this isn't a problem, sell a home, bank the difference, and invest in another small home. For the majority of people though housing price increases are just bad news. The only one that really wins at the end of the day is the bank; as you will now require a larger loan to finance your $562K dream house.

I have painted a very specific circumstance here, but I feel that it is one that represents the average North American. They live in a house that is their primary residence, and they are not currently living in the house of their dreams. For this individual an increase in housing prices is hardly worth celebrating.

I would recommend instead hoping that prices get frozen, it benefits everyone except those at the top of the chain and those with multiple homes. It makes home entry points fixed and allows a house to function as an advanced saving mechanism. But that is just what I think, what do you think?

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Consolidated Edison (ED) Stock Analysis

2009-11-13T04:30:00.003-06:00

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. It provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County, as well as provides steam service to office buildings, apartment houses, and hospitals in parts of Manhattan.

Consolidated Edison is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. For the past decade this dividend stock has delivered an annual average total return of 6.30 % to its shareholders.

At the same time the company has managed to deliver a 0.80% average annual increase in its EPS since 1999. For the next two years analysts expect EPS to increase to $3.11 and $3.30 respectively. The main problem for utility companies is that they are very capital intensive and are highly regulated. In order for utilities companies to increase rates, they have to seek regulatory approval. In addition to that investing in such projects such as the smart grid is subsidized through federal programs, although companies like Con Ed typically put in at least a portion of the needed amount.

The return on equity has declined slightly over the past decade, although it is at 10% currently.
Annual dividend payments have increased by an average of 1.00% annually over the past 10 years, which is higher than the growth in EPS. The company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Despite the slow dividend growth, the company might be a good pick for investors who are seeking current retirement income.

A 1% growth in dividends translates into the dividend payment doubling almost every 72 years. If we look at historical data, going as far back as 1975, we would see that Con Edison has actually managed to double its dividend payment every eleven years on average. The current dividend payment is double what it was in 1985 however.

Over the past decade the dividend payout ratio has ranged between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.6%. While this would be high for a company like McDonald’s (MCD) or Procter & Gamble (PG), a payout ratio of 70% is not uncommon for utilities. Utilities typically pay out a large portion of their earnings as dividends, which explains their slow dividend growth and high dividend yields. Most utilities operate as natural monopolies, which guarantee almost no competition in their specific geographic areas. It would be very costly to run two separate electrical grids, and such investment could take many decades to pay off. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what.

I believe that Consolidated Edison is attractively valued with its low price/earnings multiple of 14, as well as an above average dividend yield at 5.60%. The high dividend payout should not be a concern because of the industry the company is in. Because of the slow dividend growth of the stock however, I would only invest in it for current income within the next decade. I do own ED mainly for diversification within the utility industry and for a current yield boost to my dividend income.

Disclosure: Long ED

Relevant Articles:

- Where are the original Dividend Aristocrats now?

- Six Dividend Stocks for current income

- Best Dividend Picks for 2009, 3Q update

- Utility dividends for current income

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

The Right P/E For The S&P 500

2009-11-11T05:30:00.002-06:00

As the market has continued to soar while corporate profits have continued to plummet, many market observers have noted that the P/E level of the S&P 500 has risen to such an extent that an overvalued market is now upon us. Indeed, Standard and Poor's reports a P/E for the S&P 500 of 122, which is clearly above the index's historical range. Does this constitute a clear signal to value investors to stay away? Not on its own.

The problem with this measure of the market's valuation is that, at times, earnings may be temporarily depressed. During recessions, unanticipated drops in revenue occur which catch companies off-guard. Companies cut their costs in reaction to these revenue shocks, but there is a lag. To demonstrate this, consider the following chart depicting the profit margin level of the S&P 500 in the aggregate:

In every recession, profit margins temporarily shrink. Therefore, to justify what appears to be a ridiculously high P/E, we do not presume incredible growth in sales or returns on capital as was the norm in the late 90s. Instead, we consider what the earnings would look like when the write-downs and impairments are complete, and companies have returned to a more normal operating environment.

(As an aside, notice how strong profit margins were in particular during the expansion that preceeded this recession. This could be due to the growth that occurred in the financial industry, where margins tend to be higher as we saw here.)

Based on the above chart, the average margin for the S&P 500 appears to be around 5-6%. Using this number to determine the normalized earnings level of the index gives the S&P 500 a P/E of around 20.

Though this is a more useful calculation of the market's P/E from the perspective of a long-term investor, this still does not suggest the market is cheap. Earnings are determined by multiplying profit margins with sales; with high unemployment and tighter lending standards, the sales level of the index may shrink further from this level, reducing earnings further.

Furthermore, within the index itself, some companies will fare better than others. Many companies will be unable to handle the depressed earnings environment (due to debt or other fixed obligations) and will therefore fail. But companies with flexible cost structures will be able to return to profit margin levels commensurate with their histories, and investors who identify such companies could find themselves with returns that outperform the index.

* Source: Thanks to William Hester of Hussman Funds for the profit margin chart.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Keeping Investing Through Thick and Thin

2009-11-10T05:00:00.000-06:00

Ok, perhaps this video is a little late as the "financial crisis" at its worst from a stock market perspective is almost a year behind us. However, this video from John C. Bogle provides lessons for all of us no matter what is happening in the markets. The key message is stay the course and do not let your emotions get in your way!

As always, good advice from Mr. Bogle

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: McDonald's Corporation (MCD)

2009-11-09T05:30:00.002-06:00

Linked here is a detailed quantitative analysis of McDonald's Corporation (MCD). Below are some highlights from the above linked analysis:

Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

MCD is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 13.2% discount to its calculated fair value of $71.11. MCD earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

MCD earned one Star in this section for 3.) above. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 33 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

MCD earned a Star in this section for its NPV MMA Diff. of the $18,427. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MCD has. If MCD grows its dividend at 16.9% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. MCD earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Other: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: MCD earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MCD as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $209.72 before CRRC's NPV MMA Differential decreased to the $500 that I like to see for a stock with 33 years of consecutive dividend increases. At that price the stock would yield 0.98%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.5%. This dividend growth rate is significantly less than the 16.9% used in this analysis, thus providing a margin of safety. MCD has a risk rating of 1.50 which classifies it as a low risk stock.

MCD is a stock that I have liked for many years. It has shown strong dividend growth over the last 10 years. However, its debt level and free cash flow payout have crept up to levels above what I am comfortable with. Although the stock is trading well below my buy price of $71.11, I will wait for MCD's dividend fundamentals to improve before adding to my position. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in MCD (2.8% of my Income Portfolio). What are your thoughts on MCD?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - November 8, 2009

2009-11-08T05:30:00.002-06:00

Dividends Value presented Dividend Stocks: A Disciplined Approach
The Dividend Guy presented Dividend Stock and ETF Holdings
Dividend Growth Investor presented The Dividend Investment Journey
Barel Karsan presented Don't Be Fooled By High P/E Values
Dividend Tree presented Kelloggs Company– Stock Analysis for Dividend Portfolio
the moneygardener presented Telus fails to raise dividend
The Div Guy presented Top 20 Stock Holdings
Disciplined Approach to Investing presented Dividend Aristocrats Performance Update
Old School Value presented Warren Buffett’s BNI Intrinsic Value Calculation
Triaging My Way To Financial Success presented Mail Bag: CML Healthcare (CLC.UN)
Everyday Finance presented Why do Pharmas Call Themselves Biotechs? You May be Surprised
40percent 20years presented The main disadvantage of Dividend Investing
Value Investing Pro presented 4 Warren Buffett Quotes On Burlington-Northern Acquisition
EPIC INVESTOR presented Dividend Discount Model in Action -- LLY Stock Analysis

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

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Book Review : Benjamin Graham on Investing

2009-11-07T01:00:00.000-06:00

Reading an author 's early writing allows us to see juvenile attempts at expressing a message more fully developed in that author's later works. Having read through the Intelligent Investor and Security Analysis a few times, reading Benjamin Graham on Investing was an interesting opportunity to do just this.

Rodney Klein has put together a collection of early writings from Benjamin Graham pulled from a selection of shorter magazine articles by Graham dating from the period 1917-1927. Chapters include such topics as: Valuation of Great Northern Oil Certificates, and Is United Drug Cheap at 53?

What we see in these early works is an author struggling to find the right words to express a concept so eloquently birthed later in the Intelligent Investor. The readings are interesting, less in their content, but more in the way the magazine format forces Graham to be conscience in his message. With Security Analysis filling some 600 pages and the Intelligent investor some 500 more these short articles force Graham to compress and deliver in a format more akin to a university term paper than any of his other literary works.

The book serves another purpose, it shows Graham's principals in action. While his later works speak more to the principals of value investing here were see examples of Graham getting down to brass tax and applying some of the valuation techniques he actual used on a daily basis. If Security Analysis and The Intelligent Investor are the theory of value investing then this book brings us face to face with some practical analysis.

This book is an adequate read appropriate for those who are anxious to learn more about Graham and his early works. If you are looking for a fresh perspective on the issue you won't find much that isn't covered in later works though. This book doesn't quite hit the mark for the beginning reader as some of the context of the words are lost if the reader doesn't understand Graham's overall goals. All in all though a good weekend read if you want to see the father of value investing in action.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Grouping Dividends for Current Income

2009-11-06T03:49:00.000-06:00

Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could only be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.

Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.

In my experience as a dividend investor I have always implemented a minimum yield criterion of between 2% to 3% when screening for dividend growth stocks. I implemented this control in order to protect myself in the event that the company I am heavily invested in stops raising distributions. That way I could at least receive some return on my investment until I try to unload my position above my breakeven price.

Looking back at the best dividend growth stories of Wal-Mart (WMT) and McDonald’s (MCD) however, my minimum criteria would have prevented me from getting aboard on these success stories. Other investors who are currently seeking high current income might also have missed out on these plays, which are delivering double-digit yields on cost for anyone who purchased Wal-Mart of McDonald’s in the 1980s.

I recently came out with a way to tweak my entry criteria of 3% minimum initial yield by grouping higher yielding and lower yielding investments with my purchase. At the end of the date, one could easily create a dividend portfolio which consists both of high yielders with slow to no dividend growth and low dividend yielders, which have the potential for strong dividend growth. If one manages to allocate the varying dividend components in their portfolio carefully, they would be able to achieve a target initial yield on cost for their stock holdings as a whole.
For example I recently added to my position in Wal-Mart Stores (WMT), which I consider of the best run companies in USA, with a strong position in the retail market and good opportunities for growth. The low current yield of 2.20% however was too low in comparison to the 3% entry criteria I apply for new and existing investments. I do believe however that the strong dividend growth would more than compensate for the low current yield, and I see the yield on cost on an investment in Wal-Mart today doubling to 4.5%-5% by the end of the next decade. That’s why I added the high dividend stock AT&T (T) to my portfolio. For every two shares of Wal-Mart (WMT) stock, I bought one share of AT&T (T). At the current prices this mix yields 3% right now.

I view AT&T (T) as a slow grower, which might end up cutting distributions sometime in the future due to its high payout and stagnant earnings in the highly competitive telecom market. The strong dividend growth at Wal-Mart (WMT) however should more than compensate for any potential dividend cuts at AT&T (T). If AT&T (T) cuts its dividends by 50% to 82cents/share, but Wal-Mart (WMT) managed to raise its distributions by 36%, my total dividend income would be unchanged. I believe that Wal-Mart (WMT) would be able to raise distributions by 36% over the next 3-4 years, assuming that it follows the most recent path of dividend growth.

Other stocks that I could use in dividend grouping for income could be high yielding triple net lease real estate investment trust Realty Income (O) or pipeline operator Kinder Morgan (KMP).

Full Disclosure: Long T, KMR, MCD, O and WMT

- Six Dividend Stocks for current income
- Best Dividend Picks for 2009, 3Q update
- Emotionless Dividend Investing
- Dividends Stocks versus Fixed Income

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Kimberly-Clark : Stock Analysis for Dividend Portfolio

2009-11-05T05:30:00.001-06:00

Kimberly-Clark is a global health and hygiene company with operations in 37 countries. It’s products are sold in more than 150 countries. It has a well-known family care and personal care brands such as Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Poise, and Depend.

KMB is a dividend aristocrat and member of Mergent’s Broad Dividend Achievers index. I last reviewed KMB in February 2009 (without its 2008 results). At that point in time, it was high risk to dividend stocks. I have made an observation that its dividends would be under pressure. This 2009 dividend growth rate was only 3.4%, which is lower than its historical average of 9.4%. I am reviewing this again for risk to dividends.

Trend Analysis
This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The chart below shows these trends.

Revenue: Increasing trend in revenue with average growth of 4.6% (4% std. dev.)
Cash Flow from operations: The trend is relatively flat for last few years. The free cash flow is also flat for last few years.
EPS from continuing operation: The EPS also has a ‘relatively flat trend’ with average growth rate as 3.5% (10.84%). It has had negative EPS growth for three years out of past four years.
Dividend per share: Dividends per share are consistently growing for the last 10 years.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.43. This is in high risk category as per my risk scale. Reducing gross and operating margin, negative EPS growth rate, and increasing payout factor makes it a high risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

Dividend growth rate: The average dividend growth (9.4%) is higher than average EPS (3.5%). In addition, the EPS is less consistent compared dividends per share.
Duration of dividend growth: There is continuously growing trends in dividends per share. The 10 year average growth rate is 9.4% (4.6%). The latest dividend growth rate was only 3.4%.
4 year rolling dividend growth rate for past ten years: It is less than 10%.
Payout factor: Historically it has been less than 50%. However, since 2005 the payout factor has been above 50%.
Dividend cash flow vs. income from MMA: Here, I am analyzing how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.83% (b) MMA yield is 2.9%. Considering historical average growth rate of 9.4%, the stocks dividend cash flow at the end of 10 years is 2.2 times MMA income. If we consider my expected growth rate of 4.1%, then the dividend cash flow is 1.47 times MMA income.

Fair Value Calculation
This sections determine the what price should I pay to buy a given stock

Net present value (NPV) price based on 15 year DCF: $34.9
Average high yield price calculated based on past 10 years: $60.8
Pricing based on past 10 year relative price-to-earnings ratio. $48.9
Pricing based on price-to-earnings ratio of 12: $45.6
Graham number: $14.5

The range of fair value is calculated as $32.2 to $40.9.

Qualitative Analysis
The strength of KMB is that it has a diversified product portfolio with each business segment contributing 10% to 20% of the revenue. The flat revenue, EPS, and cash flow trends are the reflection of the fact that demand for its products (personal care, household items, etc.) are stable, albeit not growing. Putting this in context of business environment, KMB’s growth and profitability is under pressure from locally branding products.

Conclusion
In near term, the flexibility in payout factor and stability (or slow growth) in revenue/EPS provides room for maintaining the consistency is dividend. However, assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividends will be under pressure. The dividend growth rate will slow down. The stocks risk-to-dividend number is 2.43, which is high risk to dividends. In addition, the current pricing for KMB is significantly above my fair value that I would be willing to pay to buy this stock. I will not be initiating any new position. I will continue to watch KBM for changes in its fundamentals.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Earnings Revert To The Mean

2009-11-04T05:30:00.001-06:00

When calculating a company's P/E or projecting a company's earnings power, rather than using a company's current earnings, value investors prefer to use average earnings from several years past. Ben Graham has written about this idea, and we've also discussed how writedowns, asset sales, and other infrequent items can affect current earnings; but when using an average over several periods, one gets a much better idea of a company's earnings power.

But there's another more subtle reason why "average earnings" is far more useful than current (or forward) earnings: in a free market, companies with undifferentiated products will tend to see their earnings naturally revert to the mean. This occurs because when profits are high, new competitors enter the market, old competitors ramp up production and customers seek out substitutes, until profits are driven to normal levels. When profits are low or negative, the weakest competitors are forced to close their doors and no new competitors enter the market, improving conditions for the companies that stick around.

Depending on the industry, this process will vary in the amount of time that passes between peaks (we discussed this process for the oil industry here). But Wall Street's obsession with current earnings (as discussed here by Ben Graham and David Dodd) provides opportunities to value investors when earnings are simply at the lower end of the cycle.

An important caveat is that one must be sure that earnings are low due to a cyclical effect, not a secular effect (the newspaper industry is often cited as an example of an industry in secular decline, thanks to the world wide web and other forms of media). Furthermore, one must only purchase the companies with little to no debt and low cost levels, as these are the companies that will survive the downturn. Adjustments must also be made for companies that have increased their book values substantially (either by retaining earnings, or issuing new shares); the earning power of such companies should be higher than they have been in the past, though this is not always the case.

The bottom line is, average earnings are a much more useful gauge of a company's earnings power than current or oft-cited expected future earnings, which are based on only one period and could be affected by infrequent items or the industry's current position in its business cycle.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Broker Options for Canadian Investors

2009-11-03T05:00:00.003-06:00

Compared to the mid-90's when I first started investing, the number of online stock brokers available to Canadian investors has gone up dramatically. Most importantly, the costs to invest online have gone down dramatically. I remember when I had to pay $29.95 per trade!! No there are a number of options available for the Canadian investor that can dramatically reduce costs.

The sad thing still is that many of the bank run brokerages still believe that it is ok to continue charging $29.95 per trade. Banks like Royal Bank and Bank of Montreal have special deals where you can get trades down to $9.95 but often there are a number of rules to get to this level. For example RBC Action Direct requires a portfolio value of $100,000 to get these lower commissions. So people with less money have to pay more and those with more less. Nice thinking RBC. Even with a portfolio that could get me the lower fees I don't out of principle.

So before you head out and select your broker, be sure to focus on costs. Most discount brokers offer exactly the same features and benefits and in my experience the same level of service. There is absolutely no reason to pay more for your trades!

Here are three low cost options for you as an dividend investor in Canada:

1. Questrade (disclosure: my broker)

Cheap $4.95 trades. Some people love Questrade, some hate them. I have never had any service complaints or issues with my account (knock on wood).

2. TradeFreedom

I have never used TradeFreedom but have heard good things. Lower commissions than the banks!

3. Interactive Brokers

Most complex broker and really intended for traders. No hand holding with these guys but probably the cheapest available (Max 0.5% of Trade Value plus exchange fees).

I know there are more out there - let me know the cheap ones in the comments section.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Johnson & Johnson (JNJ)

2009-11-02T05:30:00.001-06:00

Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). Below are some highlights from the above linked analysis:

Company Description: Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

JNJ is trading at a discount to 1.) and 3.) above. The stock is trading at a 5.3% discount to its calculated fair value of $62.33. JNJ earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

JNJ earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% and earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 47 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

JNJ earned a Star in this section for its NPV MMA Diff. of the $935. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If the stock grows its dividend at 7.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. JNJ earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: JNJ earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks JNJ as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $70.95 before JNJ's NPV MMA Differential fell to the $500 that I like to see for a stock with 47 years of consecutive dividend increases. At that price the stock would yield 2.72%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.7%. This dividend growth rate is less than the 7.5% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.00 which classifies it as a low risk stock.

As noted in the "10 Best U.S. Dividend Stocks", JNJ has a history of making good decisions and executing on them. The stock is currently trading below my buy price of $62.33 and it is one that I will continue to accumulate as my allocation allows. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in JNJ (4.4% of my Income Portfolio). What are your thoughts on JNJ?

Recent Stock Analyses:

This article was written by Dividends4Life. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Weekend Reading Links - November 1, 2009

2009-11-01T05:30:00.002-06:00

Dividends Value presented 3 High-Yield Telecom Dividend Stocks
The Dividend Guy presented A Dividend Yield Screen with High Growth
Dividend Growth Investor presented Five Dividend Stocks for long-term dividend growth
Barel Karsan presented How Efficient Is Management?
Dividend Tree presented Indian Economy – A Better Destination in Emerging Markets
moneygardener presented Rogers results look good
Stock Market Prognosticator presented Interesting Article
Disciplined Approach to Investing presented Bullish Sentiment At Lowest Level Since July 16th
Everyday Finance presented ETFs on the Move - Week Ended 25-Oct-2009
40percent 20years presented New Top List: Dividends Aristocrat!
Value Investing Pro presented Walter Schloss Collection
EPIC INVESTOR presented Professional Opinion-Givers Always Have Opinions
Jonathan Goldberg presented BKS, Plus Some News

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

If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Book Review: Corporate Financial Analysis

2009-10-30T20:24:00.014-05:00

I wish I had found this book years ago. Fundamental Analysis when done right requires a thorough understanding of every line item in every financial statement- what is it, what ratios use it, and most importantly, what does it tell you about the business you are trying to analyze.

I have read more than a few books on this subject, most take the approach of showing each line item of each statement and then providing an explanation of the ratios that use it and then how these ratios work. This approach of explanation has all the excitement of reading the dictionary and as a result when reading these books I often find myself staring off into nowhere or deciding that now is the perfect time to go out and clean those pesky rain gutters.

If you, like myself, learn better by doing then simply by seeing then Dr. Clauss's book Corporate Financial Analysis with Microsoft Excel is well worth picking up. In his unconventional approach he takes you step by step from the line items that make up the balance sheet, and income and cash flow statements all the way up to the creation of forecast models off of these same sheets.

Reading the book alone will gain you nothing- other than frustration. To truly get the value of the book requires that you take the financial statements of your favorite business and work with each chapter of Clauss's book. You will learn to create totals, ratios, and models- how to perform a true dissection of the business of your choice.

With all this positive said I do have one complaint about the book. I wish Clauss had provided a CD containing his examples and had provided an excel macro that can download the financial statements of a selected business off of Morningstar so the reader has a starting point. I understand why the statements are not included but many readers will likely be discouraged by the lack of a tool to download their favorite company's financial statements. This problem can be quickly remedied with a bit of searching on the internet. An excel macro that achieves this is fairly easy to find, I chose to stay true to the theme of the book of DIY (Do it Yourself) and write my own little macro.

Overall a great book and one that I would definitely recommend to anyone who learns by doing.

This article was written by buyingvalue. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Forecasting Future Dividend Growth

2009-10-30T04:31:00.001-05:00

Estimating future dividend growth is difficult if not impossible. Companies which might have had a long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company’s dividend is sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won’t be cut several years down the road.

Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree’s alternative incomes into a tailspin.

While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.

First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.

Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under. If the company is already spotting an unsustainable dividend payout ratio out of earnings, chances are that dividends are due for a cut.

Third, while sometimes companies fall on hard times, management could keep raising distributions. This could be due to management’s vision that this setback in company’s fortunes is temporary. In such cases it might be unwise to sell your position, as long as the dividend is at least maintained. If management keeps borrowing money however for over 2 years in a row in order to finance the dividend, this is a warning sign.

And last but not least, while a company might look as a great promising addition for your dividend portfolio, remember to diversify across sectors, yield/growth characteristics and even countries, in order to reduce your portfolio’s systemic risk. Investors who were heavily invested in the financial sector in 2007 and 2008 suffered huge drops in income; investors who held a more balanced mixture of stocks from a variety of industries suffered lower drops in dividend income.

I recently added to my positions in the following stocks, which have recently raised distributions, trade at attractive valuations and have a long history of dividend growth.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company, which has rewarded shareholders with consistent dividend raises for 47 years, currently yields 3.20%. Using the ten year dividend growth rate for the company at 13.3%, yield on cost on an investment today would double almost every five and a half years on average. (analysis)

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has raised distributions for 53 years in a row, and currently yields 3.10%. Using the ten year dividend growth rate for the company at 10.7%, yield on cost on an investment today would double almost every seven years on average. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has raised dividends for 33 consecutive years and currently yields 3.90%. Using the ten year dividend growth rate for the company at 27.4%, yield on cost on an investment today would double every two and a half years on average. (analysis)

Emerson Electric Co. (EMR), is a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson, which currently yields 3.40%, has raised distributions for 52 years in a row. Using the ten year dividend growth rate for the company at 6.3%, yield on cost on an investment today would double every eleven and a half years on average. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. Pepsi has raised distributions for 37 years in a row, and currently yields 2.90%. I would consider adding to my position there on dips below $60. Using the ten year dividend growth rate for the company at 12.8%, yield on cost on an investment today would double every five and a half years on average. (analysis)

Full Disclosure: Long JNJ, PG, MCD, EMR and PEP

Relevant Articles:

- Should you sell after a dividend freeze?
- Yield on Cost Matters
- The Dividend Edge
- Dividend Investing vs Trading

This article was written by Dividend Growth Investor. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Waste Management - Stock Analysis for Dividend Growth

2009-10-29T05:30:00.005-05:00

Waste Management Inc. (WM) provides integrated waste management services in North America. The company is engaged in collection, transfer, recycling, disposal, and waste-to-energy services. WM is neither a dividend aristocrat nor a dividend achiever. In fact, WM has started showing some dividend growth trends in last five years. While I am presenting and showing data from last 10 years, I am only using last five years of dividend data. My objective here is to understand if WM has any potential to be a dividend achiever.

Trend Analysis
Since WM has recently started growing dividends, I am looking at trends for past 5 years of corporation’s revenue and profitability. The parameters should show consistently growth trends. The trend charts is shown in image below and for background reference I have plotted data for past 10 years.

Revenue: Overall stable and consistent revenue in last 5 years. The average revenue growth for last 5 years is 3.2% (with 3.1% std. dev). While it shows stability, it shows company facing growth challenges.
Cash Flows: Relatively increasing trend for operating cash flow. The corporation has a consistently higher operating cash flow, two times the net income or free cash flow.
EPS from continuing operation: In general, the EPS also has an increasing tread since year 2003 with average growth rate as 9.8% (17.5% std dev). Most of that growth is coming in 2004 and 2005. After that is more or less constant. With relatively flat revenues, the EPS growth is most likely coming from operational efficiencies and share buybacks.
Dividend per share: Dividends per share are consistently growing for the last 6 years, including the most recent 2009 dividend increase.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. The factors that are making it medium risk-to-dividends are increasing payout factor and high variability in EPS.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

Dividend growth rate: The average dividend growth (9.6%) is very much similar to average EPS (9.8%) growth rate. However, the EPS has a very high variability (sometimes negative growth).
Duration of dividend growth: Dividends have continuously grown for the last 5 years. Before 1998 in its pervious incarnation, before WM, the corporation has consistency paid dividends for more than 25 years. However, not a consistently growing dividends.
4 year rolling dividend growth rate for past ten years: No
Payout factor: In the recent past 5 years, it has been consistently less than 50%. This provides little flexibility and room to grow dividends.
Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.8%; and (b) MMA yield is 2.4%. Considering the average dividend growth rate of 9.6%, the stocks dividend cash flow at the end of 10 years is 2.9 times MMA income. If we assume my average expected growth rate of 3.2%, then the dividend cash flow is only 1.70 times MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

Net present value (NPV) price based on 15 year DCF: $15.35
Average high yield price calculated based on past 10 years: $39.8
Pricing based on past 10 year relative price-to-earnings ratio. $44.0
Pricing based on price-to-earnings ratio of 12: $26.1
Graham number: $9.9

The range of fair value is calculated as $19.1 to $26.7.

Qualitative Analysis
The strength of WM business is its well established distribution network and existing market share of approximately 30%. The closest competitor has half of that market share. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

This quantitative analysis shows that, in last 5 years WM has been able to bring in some level of stability in revenues, profitability, and operating margin. While the corporation is able to maintain consistent operating cash flow, it facing challenges in growing that cash flow. The EPS also has high volatility. Due to its low payout factor, corporation has been able to grow dividends for last 6 years.
Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its 5 year average.
The company expects to continue to maintain its cash flow.
The company plans to use its free cash flow for debt reduction, dividends, and share buyback.

Conclusion
WM raised its annual dividend for 2009 from $1.08 to $1.16 per share. This increase shows corporation’s confidence in its free cash flow. For 2009, I believe this increase is ably supported by its cash flow. The stocks risk-to-dividend number is 2.00 (medium risk category). The current pricing of $30 is very close to my fair value range. I would be open to adding WM in my portfolio as long as my asset allocation allows. I expect WM to provide long term value and sustainable current dividends (and slow dividend growth).

Full Disclosure: No position at the time of this writing.

This article was written by Dividend Tree. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Housing Cycles

2009-10-28T05:30:00.000-05:00

It's common to hear that the housing industry is in a depression, and that this type of collapse is unprecedented in American history. When one looks at house prices, which we did here, one can see why. There was a huge run-up in prices, and a huge collapse as a result. Those who bought in at the height of the market are suffering now. But for the housing industry itself, the construction pattern is actually very familiar. Here's a look at US housing completions since 1968 (note that 2009 is an estimate through September):

The boom and bust phenomenon in housing construction is common throughout history! But it just hasn't happened for a while, which may have fooled people into thinking this is not a highly cyclical industry. Notice that for whatever reason (e.g. cheap credit, low supply due to the fact that there was no preceding boom), there was no bust in the last recession in 2002. But current reductions in construction have caused panic levels to soar, allowing investors the option to purchase assets at great discounts.

While the current low levels of construction are taking a big bite out of GDP, this is necessary in order for existing inventories to be absorbed. Once supplies have been sufficiently reduced, this industry will be back. When that is, is anybody's guess, but when the market is fearful, one can find companies in unfavoured industries that trade at discounts to their assets, which is what value investors try to do.

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

Why Being Defensive is Important

2009-10-27T05:00:00.000-05:00

As you know by now, on the Div-Net is often refer readers to videos put up on YouTube by Sound Investing TV. I have found these videos to be both entertaining (ok - at least not boring!) and have learned something new every time I watch a new one. The most recent video is about the importance of being defensive when putting together your portfolio as well as during ongoing maintenance.

Once again, interesting and informative.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

Stock Analysis: Courier Corp. (CRRC)

2009-10-26T05:30:00.001-05:00

Linked here is a detailed quantitative analysis of Courier Corp. (CRRC). Below are some highlights from the above linked analysis:

Company Description: Courier Corporation publishes, prints and sells books. Founded in 1824, Courier has two lines of business: full-service book manufacturing and specialty publishing.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

CRRC is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 40.2% discount to its calculated fair value of $25.24. CRRC earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

Free Cash Flow Payout
Debt To Total Capital
Key Metrics
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%

CRRC earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years and it earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The stock earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1950 and has increased its dividend payments for 16 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

CRRC earned a Star in this section for its NPV MMA Diff. of the $56,158. This amount is in excess of the $1,900 target I look for in a stock that has increased dividends as long as CRRC has. The stock's current yield of 5.57% exceeds the 3.9% estimated 20-year average MMA rate.

Other: CRRC is a member of the Broad Dividend Achievers™ Index.

Conclusion: CRRC earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CRRC as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $45.05 before CRRC's NPV MMA Differential increased to the $1,900 that I like to see for a stock with 16 years of consecutive dividend increases. At that price the stock would yield 1.86%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,900 NPV MMA Differential, the calculated rate is 4.7%. This dividend growth rate is significantly less than the 15.0% used in this analysis, thus providing a margin of safety. CRRC has a risk rating of 1.50 which classifies it as a low risk stock.

In 2008, CRRC's EPS was a loss of $0.03/share. For the trailing twelve months the loss has expanded to $0.17/share. Although the stock is trading well below my buy price of $25.24, concerns about is current business prevents me buying. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CRRC (0.0% of my Income Portfolio). What are your thoughts on CRRC?

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