Recently, at the bottom of unrelated Baron's article was a short discussion of 3 high-yield telecom companies. Since I own one of the companies, follow another in my D4L-Dashboard and had looked at the third one in the past, the article piqued my interest. Below is the relevant text from the article:The outsized excitement for corporate debt over equities is by now familiar. Eleven dollars in net inflows have gone to bond mutual funds for every net dollar into equity funds over the past three months, says Strategas Group.
The securities of telecom companies AT&T (T), Verizon (VZ) and CenturyTel (CTL) illustrate this: Their stock-dividend yields are between 6.4% and 8.3% -- higher than their bond yields by one to three percentage points. Morgan Stanley strategists suggest that the stocks are a better deal, given the dividend sustainability (itself implied by the skimpy bond yields).
CenturyLink (CTL) (formerly CenturyTel) has been one of my high-risk success stories. The company provides a range of telephone services in 25 states, with operations concentrated in Alabama, Arkansas, Louisiana, Missouri and Wisconsin. In June 2008, CTL announced plans to increase its annual dividend to $2.80, from $0.27 beginning in July and to accelerate its share repurchase plans. I was attracted to CTL's relatively strong balance sheet and strong cash flows driven by the less-competitive nature of the mostly rural markets it serves. I purchased my first block of CTL in November 2008, with two additional blocks in early 2009. Though the company has not raised its dividend since the June 2008 increase, I am content with my nearly 10% yield on cost. During the time I've held the stock, the shares have increased 19%. Here is the Analysis I performed prior to the original purchase. I am currently over-allocated in the stock, so I am no longer buying. Even when I freeze the dividend at $0.70/share, my calculations show CTL is trading at a 2% discount.
AT&T Inc. (T) (formerly SBC Communications) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006. I have tracked this stock for some time drawn by its 6%+ yield. Its Debt To Total Capital of 44% and Free Cash Flow Payout of 49% are both excellent. Unfortunately, its dividend fundamentals have not been good enough to entice me to purchase it. By my calculations it is trading at a 29% premium.
Verizon Communications Inc. (VZ) offers wireline, wireless, and broadband services. This is a company that I have looked at several times, but its financials and the limited number of consecutive years it has increased its dividend has kept me from adding it to my watch list. By my calculations, VZ is trading at a 29% premium.
Based on the three company's dividend fundamentals and valuations, CTL would be continue to be my first choice. As investors we should always remember that there is always a reason when a company sports a higher than average dividend. Care should be exercised to understand the reasons before investing.
Full Disclosure: Long CTL. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net October 19, 2009.
Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
ABT is trading at a discount to 1.) and 3.) above. The stock is trading at a 21.9% premium to its calculated fair value of $42.18. ABT did not earn any Stars in this section.
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:
ABT 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 1926 and has increased its dividend payments for 37 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:
ABT earned a Star in this section for its NPV MMA Diff. of the $1,066. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. If ABT grows its dividend at 8.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. ABT earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: ABT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: ABT did not earn any Stars 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 four Stars. This quantitatively ranks ABT as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $64.54 before ABT's NPV MMA Differential decreased to the $500 minimum that I like to see for a stock with 37 years of consecutive dividend increases. At that price the stock would yield 2.48%.
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 6.2%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a slight margin of safety. ABT has a risk rating of 1.50 which classifies it as a low risk stock.
I consider ABT as one of the best pharmaceutical companies. The company has a relatively strong product pipeline, with potentially significant launches in both the medical device and pharmaceutical areas pending. The stock is trading at a 20%+ premium to its buy price of $42.18, so I will patiently wait for market pullbacks 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 ABT (1.3% of my Income Portfolio). What are your thoughts on ABT?
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What separates income investors from dividend investors is 
Recently, the following companies announced increased cash dividends:
PPG Industries (PPG) is a global supplier of protective and decorative coatings. October 16th the company increased its dividend 2% to $0.54/share. The dividend is payable on Dec. 11 to shareholders of record Nov. 10. The ex-dividend date is November 6. PPG is a Dividend Aristocrat and has increased its dividend for 38 consecutive years. The yield based on the new payout is 3.62%.
El Paso Pipeline Partners L.P. (EPB) owns and operates natural gas transportation pipelines, storage and other midstream assets. October 19th the company raised its quarterly cash distribution 6% to $0.35/unit. The distribution will be paid November 13, 2009 on all unitholders of record as of the close of business on October 30, 2009. The ex-dividend date is October 28. The yield based on the new payout is 6.15%
Plains All American Pipeline (PAA) engages in interstate and intrastate crude oil transportation, terminalling and storage, as well as crude oil gathering and marketing. October 19th the company boosted its quarterly distribution 2% to $0.92/unit. The distribution is payable on November 13, 2009, to unitholders of record at the close of business on November 3, 2009. The yield based on the new payout is 7.38%
Universal Forest Products (UFPI) engineers, manufactures, treats, distributes and installs lumber, composite, plastic and other building products. October 19th the company bumped its quarterly dividend to to $0.20/share. The dividend is payable on December 15, 2009, to shareholders of record on December 1, 2009. The ex-dividend is November 27, 2009. The yield based on the new payout is 1.03%.
Stepan Co. (SCL) produces specialty and intermediate chemicals. October 20th the company increased its quarterly dividend 9.1% to $0.24/share. This dividend is payable December 15, 2009, to shareholders of record on November 30, 2009. The ex-dividend date is November 26, 2009. SCL is a Dividend Achiever and has increased its dividend for 42 consecutive years. The yield based on the new payout is 1.49%.
Shenandoah Telecom (SHEN) is a diversified telecommunications holding company. October 20th the company raised is dividend to $0.32/share. The dividend will be payable December 1, 2009, to shareholders of record on November 10, 2009. The ex-dividend date is November 6, 2009. SHEN is a Dividend Achiever. The yield based on the new payout is 1.89%.
Ecology and Environment (EEI) is an environmental consulting and testing firm. October 20th the company bumped to $0.21/share. The dividend is payable on or before December 30, 2009, to shareholders of record as of December 8, 2009. The ex-dividend is December 4, 2009. The yield based on the new payout is 2.66%.
Hanover Insurance Group (THG) is an insurance and financial services company. October 20th the company increased its annual dividend 67% to $0.75/share. The dividend is payable December 9, 2009, to shareholders of record at the close of business on November 25, 2009. The board also authorized a change in the company's dividend payment schedule from a single annual cash dividend to quarterly dividend payments beginning in fiscal year 2010. The yield based on the new payout is 0.71%.
Artesian Resources (ARTNA) distributes and sells water, including water for public and private fire protection. October 20th the company increased its quarterly dividend 5% to $0.1873/share. The dividend is payable November 20, 2009 to shareholders of record at the close of business on November 10, 2009. The yield based on the new payout is 4.52%.
Visa (V) operates a retail electronic payments network. October 21st the company bumped its quarterly dividend by 19% to $0.125/share. The dividend is payable on December 1, 2009 to shareholders of record as of November 16, 2009. The ex-dividend date is November 12. The yield based on the new payout is 0.66%.
Brown & Brown (BRO) is a diversified insurance agency, wholesale brokerage, insurance programs and service organization. October 21st the company increased its quarterly dividend by 3.3% to $0.0775/share. The dividend is payable on November 18, 2009, to shareholders of record on November 4, 2009. The ex-dividend date is November 2. BRO is a Dividend Achiever and has increased its dividend for 17 consecutive years. The yield based on the new payout is 1.66%.
Eaton Vance (EV) is engaged in managing investment funds and providing investment management and counseling services to high-net-worth individuals and institutions. October 21st the company raised its quarterly dividend 3% to $0.16/share. The dividend is payable on November 13, 2009 to shareholders of record on October 30, 2009. The ex-dividend date is November 11. EV is a Dividend Achiever and has increased its dividend for 29 consecutive years. The yield based on the new payout is 1.66%.
Peabody Energy (BTU) is a coal company. October 22nd the company bumped its quarterly dividend 17% to $0.07/share. The dividend is payable on Nov. 27, 2009, to shareholders of record on Nov. 5, 2009. The ex-dividend date is November 3. The yield based on the new payout is 0.64%.
Holly Energy (HEP) operates a system of refined product and crude oil pipelines, storage tanks and distribution terminals. October 22nd the company bumped its quarterly 1.3% to $0.795/unit. The distribution will be paid November 13, 2009, to unitholders of record November 2, 2009. The ex-dividend date is October 29. The yield based on the new payout is 7.93%.
Matthews Int'l (MATW) is a designer, manufacturer and marketer principally of memorialization products and brand solutions. October 22nd the company increased its quarterly dividend 7.7% to $0.07/share. The dividend payable November 16, 2009 to stockholders of record November 2, 2009. The ex-dividend date is October 29. The yield based on the new payout is 7.07%.
Real dividend growth investors are not looking for a flash in the pan, but instead for stocks that can deliver consistent dividend growth. For a list of stocks with a long string of consecutive dividend increases, see this list.
Full Disclosure: No position in the aforementioned stocks. See a list of all my income holdings here.
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Brand Recognition/Low Price
During an economic downturn consumers may flee many popular brands if their cost is high and generic alternatives are substantially cheaper. Procter & Gamble Co. (PG) [Analysis] has seen this occur in some of their premium brands like Pampers and Tide. However, most people aren't willing to save a few pennies on a generic soda of unknown quality when a Coca Cola Co. (KO) [Analysis] or Pepsico Inc. (PEP) [Analysis] is available.Value-Priced Convenience
In addition to Brand Recognition/Low Price some companies also provide convenience. If you have been out shopping all day and are tired, you are likely to stop on the way home and pick up something that is quick and inexpensive. There seems to be a McDonald's (MCD) [Analysis] on every corner. A stop there provides the guest with a known commodity - clean restrooms, quick service and an inexpensive meal.A Superior Operating Model
How do you compete with a company like Wal-Mart (WMT) [Analysis]? As most of their competitors have learned, you can't beat WMT at providing brand name, quality merchandise at rock bottom prices. During the good times, some people don't mind paying premium prices at an upscale store, but there are plenty of us value conscious people that keeps WMT humming. Where WMT really shines is during an economic downturn. When losing your job is a real option, $120 sneakers just don't quite seem as important as they once were.A Pseudo Monopoly
If you are the only company in the world that is allowed to sell a product that people's lives depend on, you will likely have a robust profit margin. This is the world that pharmaceutical companies operate in. Granted companies like Abbott Laboratories (ABT) [Analysis] and Eli Lilly and Co. (LLY) [Analysis] have to keep coming up with new products as old patents expire, and have to deal with government regulation, but the good ones not only survive, they thrive.Sell What People Want and Need
Sounds simple, but so few companies have mastered it. Consumer staples seem to be the best at it. When you consider the longevity of Johnson & Johnson's (JNJ) [Analysis] products such as Band-Aid, Johnson Baby Products, Listerine, Rolaids, Tylenol, Motrin, Benadryl and many others, it is easy to conclude that the company has identified what people want/need and are providing it at a reasonable cost. Although some of Procter & Gamble Co.'s (PG) premium products are struggling, management has taken action to focus on the company's bargain-priced alternatives and those are seeing some success.They Got a Name for the Winners in the World
Just as in life, companies that are winners separate themselves from the others. They won't settle for second best, instead they continue to look for advantages that will them keep a few steps ahead of the competition. Warren Buffet would describe many of the above advantages as wide moats. If you want to buy and hold a stock forever, make sure it has a competitive advantage that is not easily duplicated.
Full Disclosure: Long ABT, JNJ, KO, LLY, MCD, PEP, PG, WMT. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net October 12, 2009.
Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
WMT is trading at a discount to 1.) and 3.) above. The stock is trading at a 7.9% premium to its calculated fair value of $46.31. WMT did not earn any Stars in this section.
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:
WMT earned two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 35 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:
WMT earned a Star in this section for its NPV MMA Diff. of the $922. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.3% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.
Other: WMT is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: WMT did not earn any Stars in the Fair Value section, earned two Stars 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 WMT as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $59.68 before WMT's NPV MMA Differential increased to the $500 that I like to see for a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.83%.
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 9.6%. This dividend growth rate is less than the 11.3% used in this analysis, thus providing a slight margin of safety. WMT has a risk rating of 1.00 which classifies it as a low risk stock.
WMT is a quality company with a sound strategic plan. At 2.18%, WMT's dividend is lower than I prefer. However, given the quality of the company, I try to purchase some shares each year during a pullback. Its currently trading at a 8% premium to its buy price of $46.31. 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 WMT (2.4% of my Income Portfolio). What are your thoughts on WMT?
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Dividend payout is expressed as a percentage and is calculated by dividing annual dividend per share by annual earnings per share (EPS). This tells the investor what percentage of earning the company is paying out as a dividend. At first blush this may seem to make a lot of sense, but it suffers from the following potential problems:I. Earnings Does Not Equal Cash
As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what's behind the numbers. Accounting pronouncements such as SFAS No. 143 "Accounting for Asset Retirement Obligations" (ARO) requires a company to recognize expenses today for cash payments that may not occur for decades or even centuries. Applying "fair value" principles allowed under GAAP financial institutions (and others) can mark to market debt on their books and create non-cash income or expense, depending on the direction of interest rates. Many point to mark to market accounting as one of the major contributors to the 2008 financial melt-down.II. Quality of Earnings
Would you rather the company you are invested in to increase its earnings by 1.) increasing sales and holding cost down or 2.) sell a fully depreciated plant. Obviously, you would rather have the former since it has the possibility of being duplicated over and over. You can only sell a specific asset once. In addition to cash and non-cash earnings, a statement of earnings also contains operating and non-operating earnings.A Better Dividend Payout Calculation
A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. As you can see from the above discussion, a payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business.
What the investor is really wanting to know is what percentage of cash is the company paying as a percentage of cash generated from running the business. The irony here is that operating cash is readily available on the Statement Of Cash Flows in the Operating section. This section focuses on the cash generated by running the business. It excludes cash generated by selling pieces of the business - these are shown in the investing section. It also excludes cash generated from selling stock or issuing debt - these are shown in the financing section.
In calculating a payout ratio, I prefer Free Cash Flow over Operating Cash Flow. Free Cash Flow is simply Operating Cash Flow less normal capital expenditures (normally the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out.
The formula for Free Cash Flow Payout is simply Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there. So how do the two ratios compare?
Needless to say, the variances are all over the place. In many companies I looked at the traditional dividend payout ratio was within 10 percentage points higher than a free cash flow payout. This means the GAAP earnings was lower than the calculated Free Cash Flow. Here are some example of this situation:
Sometime the gap is much larger. This could have resulted from significant non-cash charges on the income statement. Companies with large gaps include:
Sometimes the gap is not only large, but goes the other way. This is potentially the most dangerous since focusing on the traditional dividend payout may lead you to believe the dividend is covered better than it actually is. Examples of this situation would include:
Although Free Cash Flow Payout is a better payout ratio than the traditional dividend ratio, the investor should look at both and understand the differences. Taking an expense for impairing goodwill is much different than recognizing an expense for losing a lawsuit. The former will not directly involve cash out the door, but the latter will if the company loses on appeal.
Full Disclosure: Long CLX, EMR, MMM, SYY, UTX, AFL, CTL, ITW, NUE, BP. See a list of all my income holdings here.
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As a result globalization, many large U.S. companies now realize a significant percentage of their revenue from foreign markets. Companies that are diversified across several economies offer a real diversification benefit to their investors. They often can reallocate resources from slowing national economies to areas in the world that are enjoying more robust growth.
Below are five U.S. companies that have more than 50% of their sales revenue generated outside the U.S. base on their latest 10K:
Colgate-Palmolive Co. (CL) - 77% Non-U.S. Revenues
CL is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products.
Chevron Corporation (CVX) - 56% Non-U.S. Revenues
CVX is a global integrated oil company that has interests in exploration, production, refining and marketing, and petrochemicals.
McDonald's Corporation (MCD) - 66% Non-U.S. Revenues - Analysis
MCD 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.
The Coca-Cola Company (KO) - 75% Non-U.S. Revenues - Analysis
KO is the world's largest soft drink company. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide.
3M Co. (MMM) - 64% Non-U.S. Revenues - Analysis
MMM is a diversified technology company with a presence in various businesses, including industrial & transportation, healthcare, display & graphics, consumer & office, safety, security & protection services, and electro and communications.
As always, with rewards comes risks. Doing business in countries with different economic and social values can sometimes lead to undesirable results. In the past, U.S. companies have lost facilities to hostile foreign countries when the politics turned against the U.S. When the dollar is weakening currency exchange works for the company, but it works against the company when the dollar is strengthening. As always, you must weigh the risks vrs. rewards prior to investing.
Full Disclosure: Long CL, CVX, MCD, KO, MMM. See a list of all my income holdings here.
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This article originally appeared on The DIV-Net September 28, 2009.
Company Description: Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
GPC is trading at a discount to 1.) and 3.) above. The stock is trading at a 7.2% premium to its calculated fair value of $34.38. GPC did not earn any Stars in this section.
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:
GPC 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. GPC 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 1948 and has increased its dividend payments for 53 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:
The NPV MMA Diff. of the $466 is below the $500 target I look for in a stock that has increased dividends as long as GPC has. The stock's current yield of 4.34% exceeds the 3.9% estimated 20-year average MMA rate.
Other: GPC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.
Conclusion: GPC did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks GPC as a 3 Star-Hold.
Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $36.21 before GPC's NPV MMA Differential increased to the $500 that I like to see for a stock with 53 years of consecutive dividend increases. At that price the stock would yield 4.42%.
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 2.8%. This dividend growth rate is virtually the same as the 2.6% used in this analysis, thus providing no margin of safety. GDP has a risk rating of 1.00 which classifies it as a low risk stock.
GPC is a stock that I have been actively accumulating until its recent run up. I still like the stock but will wait for a more favorable entry point around its buy prices of $34.38. 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 GPC (3.7% of my Income Portfolio).
What are your thoughts on GPC?
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This is an article that I started to write several times, but would always stop after getting mired in the details. My natural tendency is make every question an analytical exercise and solve it by modeling and crunching numbers.
This time, I will show some restraint and take a little different approach by relying more on my subjective instincts. To that end, here are my selections for the 10 best U.S. dividend stocks:
10. Automatic Data Processing Inc. (ADP) - Analysis
ADP is one of the world's largest independent computing services companies, provides a broad range of data processing services. The last slot was the most difficult to fill, due to the number of worthy companies. I considered all the Honorable Mentioned companies listed below and it came down to ADP and GPC. ADP gt the nod due its historic low debt levels and dividend payout.
9. Wal-Mart Stores (WMT) - Analysis
WMT Inc. is the largest retailer in North America. Great management, business plan and execution. It would have ranked higher, but WMT's dividend yield tends to be lower end of my acceptable range.
8. The Coca-Cola Company (KO) - Analysis
KO is the world's largest soft drink company. The Coca-Cola name is the world's most recognizable trademark. For those who see no value in intangibles, try selling carbonated sugar water under another name.
7. McDonald's Corporation (MCD) - Analysis
MCD is the largest fast-food restaurant company in the world. This company has grown its dividends at an incredible rate. Unfortunately, that is likely to slow, but MCD's international presence will benefit to its shareholders in the future.
6. Abbott Laboratories (ABT) - Analysis
Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products. Not the biggest or most well known drug company, but the one that arguably has one of the better track records.
5. Emerson Electric Co. (EMR) - Analysis
EMR primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors. Industrials are not supposed to do well in recessions. Someone forgot to tell EMR. It has endured some bumps in the road, but has held up quite well.
4. SYSCO Corporation (SYY) - Analysis
SYY through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily for foodservice industry in the United States and Canada. This is a company that continues to perform in the face of expert predictions that it won't.
3. 3M Co. (MMM) - Analysis
MMM is a diversified technology company with a presence in various businesses. This is a company I really like. Problem is so do a lot of other people and institutions. It is a stock you have to watch for the right entry point. I bought in March when the stock was trading in the high 40's, it is now trading in the low 70's.
2. The Procter & Gamble Company (PG) - Analysis
PG is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries. Good management capable of adjusting when necessary. Currently working to adjust to new market dynamics of the economic downturn.
1. Johnson & Johnson (JNJ) - Analysis
JNJ engages in the manufacture and sale of various products in the health care field worldwide. This was an easy selection for my top spot. Though not perfect the company has a history of making good decisions and executing on them.
The following companies earned an Honorable Mention:
That's my 10 best U.S. dividend stocks. These are based on what stocks I believe will perform well as income investments over-time. Most are not good buys today, but are ones that I am always watching. Obviously, there is a great deal of subjectivity in a list like this. I would love to see your 10 best dividend stocks (doesn't have to be U.S.)
Full Disclosure: Long ABT, WMT, KO, MCD, ADP, EMR, SYY, MMM, PG, JNJ, GPC, UTX, NUE, PEP. See a list of all my income holdings here.
(Photo Credit)
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The D4L-Premium Services have far exceeded my expectations. I continue to look at ways to improve them. This month I have added instant access to the services after a reader subscribes. Previously, access to the D4L-Premium Services was delayed until I could email a user name and password. Now the subscriber can get a temporary login, by clicking on the [Return To Merchant] button after completing the transaction. on PayPal's site
The D4L Premium Services are designed for the serious dividend investor. If you have not yet subscribed, please see the Overview and Subscribe page for more information on the benefits of these services, sample reports, pricing and subscription information. The premium section can always be accessed via the Premium menu option on the top-left of the menu bar above.
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High-yield investing often carries a greater degree of risk than I am willing to accept. Recently, a reader alerted me to an article describing a 20-year study by the Schwab Center for Financial Research demonstrates that investments with the highest yields don't necessarily provide the highest returns and offers a safer way to implement a high-yield approach. Here are some key excerpts from the article:
Since the article was very Schwab specific, I tried to generalize the above screen. If you have a Schwab, please refer to the article for more specific instructions.
So, what does all this mean? If you are an income investor that enjoys trading instead of buy and hold, then this may be something you want to explore further. However, the 11.5% earned with this strategy vrs. the 10.73% for dividend stocks not in the highest yielding group hardly seems worth the effort.
For me, I will continue to focus on high-quality dividend stocks at lower, but growing, yields. However, for those looking to bump their yield a little, below are several Dividend Aristocrats and Achievers that are currently yielding more than 5%:
CenturyLink Inc. (CTL) - Aristocrat - Yield: 8.6%
Lilly Eli & Co. (LLY) - Aristocrat - Analysis -Yield: 6.0%
Integrys Energy Group Inc. (TEG) - Aristocrat - Yield: 7.8%
Consolidated Edison Inc. (ED) - Aristocrat - Yield: 5.8%
Progress Energy Inc. (PGN) - Achiever - Analysis - Yield: 6.5%
Realty Income Corp (O) - Achiever - Yield: 7.1%
Health Care Property Investors, Inc. (HCP) - Achiever - Yield: 6.8%
Cincinnati Financial Corp. (CINF) - Aristocrat - Yield: 6.2%
Leggett & Platt Inc. (LEG) - Aristocrat - Analysis - Yield: 5.7%
Pitney Bowes Inc. (PBI) - Aristocrat - Yield: 6.0%
AT&T Inc. (T) - Achiever - Yield: 6.2%
Black Hills Corp. (BKH) - Achiever - Yield: 5.8%
Capital City Bank Group (CCBG) - Achiever - Yield: 5.6%
Universal Health Realty Income Trust (UHT) - Achiever - Yield: 7.5%
This by no means is an endorsement of the above stocks. If you are looking for high-yields, you might lower your risk some by looking at a pool of stocks that have a long history of increasing their dividends.
Full Disclosure: Long CTL, LLY, TEG, ED, PGN, O, HCP . See a list of all my income holdings here.
(Photo: Steve Woods)
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This article originally appeared on The DIV-Net September 28, 2009.
Company Description: Automatic Data Processing Inc. is one of the world's largest independent computing services companies, provides a broad range of data processing services.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
ADP is trading at a discount to 1.) and 3.) above. The stock is trading at a 10.5% discount to its calculated fair value of $43.47. ADP 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:
ADP 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. ADP earned a Star as a result of its most recent Debt to Total Capital being less than 45% and also 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 1974 and has increased its dividend payments for 34 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:
ADP earned a Star in this section for its NPV MMA Diff. of the $9,903. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 15.3% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. ADP earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Other: ADP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. ADP has a strong balance sheet and a steady cash flow stream. The company's free cash flow is more than double its dividend. ADP repurchased 33 million of its shares in FY 2008. As the economy continues to slow in the near-term, ADP will face slower employment growth. Long-term opportunities for earnings growth should come from small and medium-sized business market and overseas. Risks include intense competition, threat of new entrants, along with failure to further penetrate small and midsized domestic business and international markets.
Conclusion: ADP 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 ADP as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $108.65 before ADP's NPV MMA Differential dropped to the $500 that I like to see for a stock with 34 years of consecutive dividend increases. At that price the stock would yield 1.18%.
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 5.6%. This dividend growth rate is significantly lower than the the 15.3% used in this analysis, thus providing a margin of safety. ADP has a risk rating of 1.50 which classifies it as a medium risk stock.
ADP is the leader in its segment. Barriers to entry are high requiring a sizable infrastructure to serve a large number of employees. With its low debt and strong free cash flow ADP is an attractive buy at prices below $43.47. 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 ADP (1.1% of my Income Portfolio).
What are your thoughts on ADP?
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For your 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 (DIV-Net) over the past week:
Articles From DIV-Net Members
There are some really good articles here, please take time and read a few of them.
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