This article originally appeared on The DIV-Net May 18, 2009.
Company Description: Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
AFL is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, AFL is trading at a 10.2% discount. AFL earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
AFL earned three Stars in this section for 1.), 2.) and 3.) above. 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%. AFL has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 27 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:
AFL earned both of the available Stars in this section. The NPV MMA Diff. of the $45,186 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 16.7% per year, it will take 2 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.64%. AFL earned a Star since its Years to >MMA of 2 is less than 5 years.
Other: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. AFL has a solid balance sheet with debt to total capital of 24% in the most recent interim reporting period. In addition, the company generates significant free cash flows with a free cash flow dividend payout of only 11%. It has a strong market position and proven management with a consistent track record for share repurchases and dividend increases. AFL mainly invests in high-quality corporate debt and has no subprime holdings. Risks include investment losses, unfavorable movements in the yen/dollar exchange rate, lower premium growth and difficulties recruiting agents.
Conclusion: AFL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of six Stars. Since my scale tops out at five, this quantitatively ranks AFL as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $85.38 before AFL's NPV MMA Differential fell to the $3,000 that I like to see for a stock with 27 consecutive years of dividend increases. At that price the stock would yield 1.31%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is well below the below the 16.7% used in this analysis, thus providing a significant margin of safety. AFL has a risk rating of 2.00 which classifies it as a medium risk stock.
AFL is an interesting stock. Quantitatively it has everything an income investor looks for in a company: low debt, strong cash flows, low dividend payout ratio and a long history of increasing its dividend. However, it is a financial company and has a large exposure to other financial services companies, particularly European banks via hybrid bonds. I see this more as a limiting factor of near-term share price appreciation, not its ability to continue growing its dividend. I will continue to add to my position when the stock is trading below its $38.42 buy price and 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 AFL (2.0% of my Income Portfolio).
What are your thoughts on AFL?
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This article originally appeared on The DIV-Net November 23, 2009. Full Disclosure: At the time of this writing, I was long in AFL (1.7% of my Income Portfolio). What are your thoughts on AFL?
Company Description: Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
AFL is trading at a discount to 1.) and 3.) above. The stock is trading at a 10.2% premium to its calculated fair value of $40.01. AFL 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:
AFL 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. AFL earned a Star as a result of its most recent Debt to Total Capital being less than 45% and it 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 1973 and has increased its dividend payments for 27 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:
AFL earned a Star in this section for its NPV MMA Diff. of the $7,384. This amount is in excess of the $800 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 16.7% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. AFL earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Other: AFL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: AFL 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 AFL as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $97.73 before AFL's NPV MMA Differential decreased to the $800 minimum that I look for in a stock with 27 years of consecutive dividend increases. At that price the stock would yield 1.15%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $800 NPV MMA Differential, the calculated rate is 9.5%. This dividend growth rate is significantly less than the 16.7% used in this analysis, thus providing a margin of safety. AFL has a risk rating of 1.25 which classifies it as a low risk stock.
Operating in the the U.S. and Japan, two largest insurance markets in the world, AFL has built a tremendous low-cost distribution system. AFL has long been one of my favorite financial stocks. Its debt and cash flow positions are excellent. With revenues, cash flow and dividends rising, AFL is an attractive company. However, it is currently trading at a 10% to my buy price of $40.01. Before adding to my position, I will wait for its price to drop closer to my buy price. 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.
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Linked here is a PDF copy of my detailed analysis of AFLAC Inc. (AFL) (alt.1, alt.2). Below are some highlights from the above linked analysis:
Company Description: Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. AFL is trading at a discount to 1.) and 2.) above. If I exclude the high and low valuation, and average the remaining two valuations, AFL is trading at a 0.1% premium. AFL earns a Star for trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. AFL earned a Star in 1.), 2.) and 3.) above. With a 20% average dividend increase, AFL will more than double its dividend every 5 years. It's 2008 dividend increase was 24%.
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: 1.) NPV MMA Diff. and 2.) Years to >MMA. AFL did not earn any Stars in this section. At its current yield of 1.50% it would take 11 years for it to earn in excess of a 4.61% MMA. AFL's NPV MMA Diff. of $9,599 is slightly below the $10,000 I like to see.
Other: AFL is a S&P 500 Dividend Aristocrat and is a member of The Broad Dividend Achievers™ Index. It has increased its quarterly cash dividend payments for 26 consecutive years.
Conclusion: AFL earned one Star in the Fair Value section, three Stars in the Dividend Analytical Data section and no Stars in the Dividend Income vs. MMA section for a total of four Stars, which rates it as a 4 Star-Buy.
AFL is your traditional dividend investment with a low current yield (1.5%) and high dividend growth (20%). Management's ability to execute its business plan and provide a steady dividend increases makes this one of my favorite long-term stocks. I will continue to increase my position in AFL as my allocation allows until circumstances dictate a change.
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 own shares of AFL (3.4% of my Income Portfolio).
What are your thoughts on AFL?
Recent Stock Analyses:
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Linked here is a PDF copy of my detailed analysis of AFLAC Inc. (AFL). Below are some highlights from the above linked analysis:
Company Description: Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. AFL doesn't do very well in this section. It is trading at a discount to only one of the four valuations listed above. If I exclude the high and low valuation, and average the remaining two valuations, AFL is trading at a 8.4% premium. AFL has a Star deducted for trading at a premium in excess of 5%.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. AFL earned Stars in all four categories [5.) is a deduct only, if failed]. AFL topped out in this section.
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: 1.) NPV MMA Diff. and 2.) Years to >MMA. As well as AFL performed in the previous section, it failed dismally in this section earning no Stars.
Other: The AFLAC duck is probably one of the most recognized icons currently used in advertising. My kids (12 and 10) absolutely love their commercials.
Conclusion: AFL lost one Star in the Fair Value section, added four Stars in the Dividend Analytical Data section and added no Stars in the Dividend Income vs. MMA section for a total of Three Stars which rates it as a 3-Star Hold. AFL is a great company and has all the dividend analytical attributes that I am looking for, but at its current price and dividend yield, I do not see it as a good value. I will wait for a better buying opportunity before adding to my current position.
Disclaimer: As always this is only my opinion and you should not rely on it. 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 own shares of AFL.
What are your thoughts on AFL? Do your kids like the duck?
Recent Stock Analyses:
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Linked here is a detailed quantitative analysis of AFLAC Incorporated (AFL). Below are some highlights from the above linked analysis: Company Description: Aflac Incorporated provides supplemental health and life insurance in Japan and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
Operating in the two largest insurance markets in the world (U.S. and Japan), AFL has built a tremendous low-cost distribution system. Focusing on supplemental insurance products, AFL consistently generates excess returns for shareholders. Consistent earnings has allowed the company to increase its dividend and repurchase shares. Conclusion: AFL did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks AFL as a...
Source: Dividend Growth Stocks
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Since the beginning of 2008, when Aflac (AFL) was worth about $65 per share, the stock has fallen to $43.50, a 33% drop. Cash flows from operations on the other hand have risen from about $5 billion to an estimated $12 billion in 2012 (based on quarterly cash flow of over $3 billion). Cash flows have risen 140% over this time.
Perhaps the market is worried about AFL's large JGB position, and its low yields. New money yields in Japan don't even average 3%, but AFL is investing a bit more in its US portfolio in highly rated corporates that result in new money flows closer to 6%. There is nothing unexpected here: the market has priced in massive investment losses or shareholder dilution. Buying AFL shares today at a total yield of almost 16% is an excellent opportunity if you don't think the world is about to fall apart; simple as that.
Source: Seeking Alpha
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Procter & Gamble Co. (PG) in April 2009 raised its dividend 10% to $0.44/share from $0.40/share. PG has increased its dividend for 53 consecutive years and I expect them to do so again next year. 2010's increase may not be as strong since 2009's free cash flow was down 8.5% from 2008. However, it is still strong and the trailing 12-months is above the 2008 level. Also, PG's 2009 share count is down in and its cash balance is up. Given this, I project a 2010 increase of 6-8%. The stock is currently yielding 2.9%. [Analysis]
Colgate-Palmolive Co. (CL) in April 2009 also raised its dividend 10% to $0.44/share from $0.40/share. CL has increased its dividend for 46 consecutive years and I expect them to do so again next year. The 2010 increase should be higher then 2009's since the company's 12-month trailing free cash flow is up over 41% compared to 2008. The company's most recet cash balance is up 52% and shares outstanding are down. I project a 2010 increase of 10-12%. The stock is currently yielding 2.1%.
W.W. Grainger Inc. (GWW) in May 2009 raised its dividend 15% to $0.46/share from $0.40/share. GWW has increased its dividend for 38 consecutive years and I expect them to do so again next year. The 2010 increase could be higher since the company's 12-month trailing free cash flow is up over 62% compared to 2008 and its most recent cash balance is up nearly 70%. I project a 2010 increase of 15-17%. The stock is currently yielding 1.8%. [Analysis]
Abbott Laboratories (ABT) in April 2009 raised its dividend 11% to $0.40/share from $0.36/share. ABT has increased its dividend for 37 consecutive years and I expect them to do so again next year. The 2010 increase should be similar to the 2009 increase since the company's 12-month trailing free cash flow is down slightly (2%) compared to 2008, but it is currently sitting on 18% more cash. I project a 2010 increase of 10%. The stock is currently yielding 2.9%. [Analysis]
Wal-Mart Stores Inc. (WMT) in March 2009 raised its dividend 15% to $0.2725/share from $0.2375/share. WMT has increased its dividend for 35 consecutive years and I expect them to do so again next year. This cash generating machine continues to hum with a 10% increase (12-month trailing) in free cash flow compared to 2008. The more impressive statistic is the 12-month trailing cash flow is 2.4 time higher than the 2008 amount. I project a 2010 increase of 10%. The stock is currently yielding 2.0%. [Analysis]
Walgreen Company (WAG) in August 2009 raised its dividend 22% to $0.1375/share from $0.1125/share. WAG has increased its dividend for 34 consecutive years and I expect them to do so again next year. This is another cash generating machine that saw a 2009 free cash flow increase of 168% compared to 2008 and the 2009 ending cash balance is 4.7 time higher than 2008's. I project a 2010 increase of 15-20%. The stock is currently yielding 1.5%. [Analysis]
AFLAC Inc. (AFL) in February 2009 raised its dividend 17% to $0.28/share from $0.24/share. AFL has increased its dividend for 27 consecutive years and I expect them to do so again next year. In spite of all the negative publicity aimed at the financial sector, AFL's free cash flow has grew approximately 15% the last 12 months compared to 2008 and its most recent cash balance has nearly doubled from the 2008 level. I project a 2010 increase of 10%. The stock is currently yielding 2.4%. [Analysis]
Obviously, the above increases are pure speculation on my part. But in a world where cash is king, somehow great companies always find a way to increase their dividends each year.
Full Disclosure: Long ABT, AFL, PG, WMT. See a list of all my income holdings here.(Photo Credit)
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If It Walks Like a Duck, Quacks Like a Duck, Then It Must Be an AFLAC (AFL) Dividend Increase and Others
When I first started dividend investing, I erroneously focused on current dividend yield. I was fortunate enough to accidentally buy some good dividend stocks and hold them long enough to figure out the "secret" of dividend investing. Dividend investing is about future yield, not current yield. It is not necessarily starting with a high-yield investment, but ending up with a high-yield investment. This usually occurs by buying investments with a moderate yield, a history of growing dividends and letting time do its job.
Here is a flock of companies that are building future yield for their shareholders by raising their cash dividends:
After running these companies through my D4L-PreScreen.xls model, EV with a NPV of MMA Differential of $87,621 justifies an more complete evaluation. MCHP has a large NPV of MMA Differential, which usually begs the question can it sustain its dividend. AFL is a stock that I own and am currently accumulating. BRO ($2,027) had a positive NPV of MMA Differential, but fell short of the $3,000 I look for from a company that is a Dividend Aristocrat. None of the others achieved the necessary NPV of MMA Differential to justify a full evaluation.
Disclosure: Long AFL.
(Photo: Steve Woods)
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In 2015, AFL shares have outperformed the market, appreciating 1.7%; while a dividend contributed another 0.6%. Last year, the AFL stock lagged the averages. Post recession, and similar to other Insurance industry stocks, Aflac shares have struggled. Most of the big-name insurers have failed to participate fully in the 2009-2014 rally. Over the 6-year period, AFL logged a 6.9% total return (dividends reinvested) versus 15.6% for the S&P 500.
On balance, I believe Aflac represents a sound investment choice within the depressed valuations in the Financial sector/Insurance industry. Excellent returns, equity growth, and dividends underpin the best management team in the business. Senior leadership is making the necessary adjustments to well position the franchise both in Japan and the United States. Share price appreciation should follow.
Source: Seeking Alpha
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Insurance companies make money using a very simple formula: They collect premiums from customers, then invest the premiums while waiting for the claims to come in. Hopefully, the claims will be less than the investment value, thus providing a profit for the company. This industry relies heavily on actuaries. These are people who compute premium rates based on probabilities using statistical records based giving consideration to risks and other factors. A bad assumption here could lead to a premium that is too low resulting in an ultimate loss.
If you have ever filed a claim with an insurance company, you know what an onerous task it is to get money out of them. Looking at the claims portion of the equation, it is easy to under why they want to minimize claims paid. Each dollar they don't pay you and each additional day they hold unto dollars they do pay you, is additional investment income for the company.
During an extended bull market, it is easy to take for granted that the investment portion of the formula will be positive. However, a lesson the insurance industry recently had to relearn was that the stock market does not always go up. The collapse of American International Group, Inc. (AIG) in September from ill-chosen investments was a dramatic event for those invested in the industry.
Manulife Financial Corp. (MFC), North America's largest insurance company, also has struggled as a result of the declining equity markets. The Company has reported huge losses in excess of one billion Canadian dollars in the fourth quarter of 2008 and the first quarter of 2009. Much of which can be attributed to increasing reserves to cover long-term segregated fund and annuity guarantees. Segregated funds are popular investments similar to mutual funds but contain insurance contracts that limit risk for the investors.
Recently the sharp market rebound has provided relief to insurers such as MFC who had to set aside cash for guarantees on performance-based products. The increase in the market will also give the insurers a chance to rebuild capital and shuffle reserves.
Below are some insurers you may want to keep an eye on in the upcoming weeks, along with some company specific risks:AFLAC Inc. (AFL) - Yield: 3.04% - Analysis
Consider the risks before investing, but also keep in mind the best values come when a company is distressed.
AFL may be overexposed to the financial service sector as a result of its holdings of European bank hybrid bonds. However, the company should not suffer significant losses from its hybrid portfolio.
Manulife Financial Corp. (MFC) - Yield: 3.73%
On Friday June 19th after the market closed, it was reported that MFC received an enforcement notice from the Ontario Securities Commission (OSC) relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The preliminary conclusion of OSC staff is that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products.
MetLife, Inc. (MET) - Yield: 2.17%
MET's risks are more of the general nature. They include a further decline in the equity markets coupled with need for additional capital and asbestos-related liability claims.
Prudential Financial, Inc. (PRU) - Yield: 1.33%
PRU's risks include currency conversion, new guaranteed minimum benefits, acquisition integration and a further sharp decline in the equity markets.
Sun Life Financial Inc. (SLF) - Yield: 3.66%
A large portion of SLF's fixed income portfolio is concentrated in the financial sector and rated BBB or below carries a higher risk of investment loss. As with the others, SLF also is susceptible a further decline in the equity markets.
Full Disclosure: Long AFL, MFC. See a list of all my income holdings here.
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When investors purchase their initial position in a stock, it is usually after their most rigorous research. Once a stock is in their portfolio, some investors relax on the research for subsequent purchases. Each and every time you purchase a stock, you should run it through the same process as if you were buying it for the first time.
Case in point, my income portfolio currently consist of 8 ETFs and 27 individual stocks. Of the 27 individual stocks, only 7 of them would I consider purchasing today based on their valuation. They are listed below along with their buy below price and other information as of 9/12/2008:
AFLAC Inc (AFL) - Yield: 1.65%
Buy Below: $66.75
9/12 Close: $58.60
NPV MMA Diff: $13,075
Concern: The above data assumes a very aggressive dividend growth rate of 20%. With a low yield of 1.65%, AFL needs the high growth rate to be viable. From 1998-2007 the dividend growth rate averaged 22.3% with a low of 11.8% in 2001 to a high of 45.5% in 2007. Another concern is AFL's currency exposure in Japan, where roughly 75% of the company's earnings are derived.
BB&T Corporation (BBT) - Yield: 5.72%
Buy Below: $35.79
9/12 Close: $34.05
NPV MMA Diff: $10,573
Concern: BBT's exposure to the banking industry's current issues with funding and credit quality.
BP Plc (BP) - Yield: 6.29%
Buy Below: $83.28
9/12 Close: $54.79
NPV MMA Diff: $34,463
Concern: Failure to come to an understanding with Russia over its operations in the region (TNK-BP), inability to diversify away from Russia and terrorism could adversely affect BP's future performance.
General Electric (GE) - Yield: 4.40%
Buy Below: $32.69
9/12 Close: $26.75
NPV MMA Diff: $8,103
Concern: Slower-than-expected global economic growth, as well as manufacturing and regulatory problems and the potential for higher delinquency rates in GE's financial services segment.
Paychex Inc (PAYX) - Yield: 3.65%
Buy Below: $49.88
9/12 Close: $34.01
NPV MMA Diff: $149,426
Concern: The highly competitive nature of the outsourcing industry as well as the threat of new entrants into the human resources segment could pose problems for PAYX in the future.
Pfizer Inc. (PFE) - Yield: 6.96%
Buy Below: $27.72
9/12 Close: $18.62
NPV MMA Diff: $56,099
Concern: Patent expirations and pipeline uncertainties could cause PFE significant problems in the future if left unresolved.
Royal Bank of Canada (RY) - Yield: 3.99%
Buy Below: $49.08
9/12 Close: $46.46
NPV MMA Diff: $250,334
Concern: A further weakening of the Canadian economy, which grew at only 0.3% in the June quarter, a prolonged housing-related downturn in the United States economy, and unexpected sharp currency fluctuations.
The buy below price is the minimum of the Mid-2 (as described in Fair Value Data) and price needed to generate the minimum NPV MMA Diff. (as described in Measure What's Important). As always, you will need to do your own research and reach your on conclusion as to appropriateness of adding any of these securities to your portfolio.
Disclosure: Long in all the aforementioned securities.
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In an utopian world, the perfect dividend stock would be one that is both high-yield and provide a high dividend growth rate. Its share price would appreciate ratable with its increasing dividend. All of this would be driven by increasing earnings and cash flow. Ok, so much for my fantasies, the perfect dividend stock just may be a balanced compromise. Consider the following:
High Yield/Low Dividend Growth: When investors first consider dividend investing, High Yield is where they usually go first. I guess it is human nature to want it now and want a lot of it. Unfortunately, high yield stocks often carry higher than average risk - there is usually a reason that the stock yield is higher than average. It could be because the company is in a limited growth industry, is in a volatile industry, experienced recent financial problems and its share price has fallen, or shareholders perceive future financial problems. I have set aside a small portion of my portfolio to invest in these types of stocks. Examples of these stocks would include:
Low Yield/High Dividend Growth: After being burned on an over-allocation of high yield stocks, would be dividend investors normally start reading-up on the subject. The first thing that they learn is that Dividend Growth is more important than Dividend Yield. While Dividend Yield will stroke you today, Dividend Growth is much more important to long-term wealth creation. Companies in this category tend to be well established, dominate in their market and in industries less affected by cyclical geopolitical factors. However, it is important to note that these stocks carry a different kind of risk. Since your long-term return is dependent on the companies increasing their dividends over many years in the future, there is a real risk of something occurring that would prevent them from executing their strategy. Examples of these stocks would include:
Moderate Yield/Moderate Dividend Growth: This is a category that is not often discussed since most dividend investors focus on the other two categories above. I would classify stocks in this category with yields from 3.5% to 8.0% and a dividend growth rate between 5% and 15%. For some this defines the perfect dividend stock - good current payment with good future opportunity for growth. These companies' stories are varied. For some, they would normally reside in one of the other two categories, but hit a bump in the road. For others they normally reside here due to their growth and risk profile. Examples of these stocks would include:
As with all investments, risk can never be eliminated. However, to minimize risk I employ an asset allocation model. In addition, I limit my investments in each of the above categories.
The dividend growth rates quoted above are the average annual rates from 1998-2007.
Full Disclosure: At the time of this writing I was long in FR, ED, AFL, CNI, GE and USB.
(Photo: sanja gjenero)
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It is the first Saturday of the month, so it is time for a goals/progress update. My goals were defined in this December 1, 2007 Investing Goals post. Below is an updated version of the table found in the original post.
| Description | Dividend Income Annualized | Yield on Cost |
|---|---|---|
| 2027 Goal | 110,000 | 20.00% |
| 2017 Goal | 30,000 | 10.00% |
| 2008 Goal | 4,000 | 4.90% |
| Dec/2007 | 3,054 | 5.00% |
| Purchases YTD | 1,029 | 0.12% |
| Div. Changes YTD | 55 | 0.08% |
| Sales YTD | (120) | 0.06% |
| Mar/2008 | 4,018 | 5.26% |
| Purchases | 460 | 0.13% |
| Div. Changes | 1 | 0.00% |
| Sales | 0 | 0.00% |
| Feb/2008 | 3,557 | 5.13% |
| Net Changes | 277 | 0.14% |
| Jan/2008 | 3,280 | 4.99% |
| Net Changes | 226 | -0.01% |
| Dec/2007 | 3,054 | 5.00% |
| Net Changes | 228 | 0.12% |
| Nov/2007 | 2,826 | 4.88% |
As of March 31st, I have already exceed my full-year goal, which tells me I didn't spend enough time coming up with the goal. The basis of my 2008 goal was investing $3,000/month in securities with a 2.5% yield (3000*12*.025=900). I will have a year's worth of data to consider when establishing the 2009 goal later this year and will hopefully develop a more challenging goal.
For the month, dividend income increased $461, and Yield on Cost (YOC) increased 0.13%. These changes were driven by new purchases and dividend changes (no sales in March). Let's examine each of the these categories:
Purchases: The $460 increase in annual dividend income and 0.13% increase in YOC related to the following purchases (yield at the time of purchase):
- $31 VIG (1.69%)
- $195 AOD (12.84%)
- $59 PGN (5.81%)
- $31 SYY (3.08%)
- $128 ACAS (12.03%)
- $16 AFL (1.54%)
Dividend Changes: The $1 increase in annual dividend income and 0.00% increase in YOC related to the following dividend changes (a=dividend stated in annual terms, q=quarterly, m=monthly):
- $3 AFL (0.205q>0.24q - 0.01%)
- $9 PFE (0.29q>0.32q - 0.01%)
- $2 STI (0.73q>0.77q - 0.00%)
- $2 CNI (0.21248q>0.2318q - 0.00%)
- $1 ED (0.58q>0.585q - 0.00%)
- (-$16) ETFs (-0.02 - see below)
Sales: I did not sell any investments in March.
The next monthly progress update will be on Saturday, May 3rd.
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Company Description: Aflac Incorporated provides supplemental health and life insurance in Japan (78% of pretax operating profits) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.
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Each month the Wealth, Money & Life Network chooses a topic for that month's theme. Since our members are a diverse group, the selected topic is usually broad, allowing each of us an opportunity to address it from our perspective. This month, Missed Opportunities was selected as our topic.
When most people hear the phrase "missed opportunities" they tend to reflect on past events and what could have been. By nature I am forward looking, so "missed opportunities" for me is the present and the future.
At some point in the future will we look back on our actions today and refer to them as our greatest missed opportunity? There is a lot of fear today. Fuel prices have soared driving up the prices of everything that is transported. The economy is slowing and some fear that they may lose their jobs. Many are posturing themselves in a defensive stance, moving money out of equities into cash and bonds. With that, consider the following stocks (data as of mid-day 8/27/08):
AFLAC Inc (AFL): Its average P/E and dividend yield between 1998 and 2007 was 18.8 and 0.95%, respectively. It is currently trading with a P/E of 14.8 and a dividend yield of 1.79%.
BB&T Corporation (BBT): Its average P/E and dividend yield between 1998 and 2007 was 15.8 and 3.30%, respectively. It is currently trading with a P/E of 9.1 and a dividend yield of 6.66%.
Consolidated Edison, Inc. (ED): Its average P/E and dividend yield between 1998 and 2007 was 14.5 and 5.47%, respectively. It is currently trading with a P/E of 10.0 and a dividend yield of 5.69%.
General Electric (GE): Its average P/E and dividend yield between 1998 and 2007 was 25.4 and 2.24%, respectively. It is currently trading with a P/E of 13.2 and a dividend yield of 4.39%.
Johnson & Johnson (JNJ): Its average P/E and dividend yield between 1998 and 2007 was 23.9 and 1.77%, respectively. It is currently trading with a P/E of 17.1 and a dividend yield of 2.60%.
Lowe's Companies, Inc. (LOW): Its average P/E and dividend yield between 1998 and 2007 was 22.0 and 0.37%, respectively. It is currently trading with a P/E of 14.0 and a dividend yield of 1.38%.
Sysco Corp (SYY): Its average P/E and dividend yield between 1998 and 2007 was 26.4 and 1.48%, respectively. It is currently trading with a P/E of 17.4 and a dividend yield of 2.79%.
By most measures, many blue-chip stocks are trading at a historical discount. Are you going to buy now or pay full-price or a premium price later? Unlike the perpetual going-out-of-business sale at the local furniture store, this sale will end suddenly and without warning.
Full Disclosure: Long in AFL, BBT, ED, GE, JNJ and SYY.
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To gauge how levered a company is, the metric I like to look at is debt to total capital. Debt includes both long-term and short-term debt and is readily available on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital a desirable rate is something less than 35%, but I will consider rates up to 50% on a short-term basis.
Many investors look at a return on equity (ROE) when evaluating a company. I have never liked this metric since it ignores debt portion of invested capital. From an ROE approach a highly levered company could show a good return but not be performing well. My preferred return calculation is Free Cash Flow as a percent of Total Capital Employed.
Below are five dividend stocks that with a Debt to Total Capital less than 35%:Microsoft Corporation (MSFT)- Debt to Capital: 12%- Analysis
As previously noted, I am currently reworking my dividend analysis worksheets to focus on what’s most important in selecting a dividend stock. A Debt to Total Capital less than 45% , will earn the company a star.
Microsoft is the world's largest software company. It develops PC software, including the Windows operating system and the Office application suite.
AFLAC Inc. (AFL)- Debt to Capital: 24%- Analysis
Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
Nucor Corp. (NUE) - Debt to Capital: 29%- Analysis
Nucor Corporation is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
Chevron Corporation (CVX) - Debt to Capital: 9%
Chevron Corporation (formerly ChevronTexaco) is a global integrated oil company that has interests in exploration, production, refining and marketing, and petrochemicals.
Johnson & Johnson (JNJ) - Debt to Capital: 22% - Analysis
Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.
Full Disclosure: Long AFL, NUE, CVX, JNJ. See a list of all my income holdings here.
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To identify these stingy companies, I used the following criteria on the companies I track:
Here are seven stocks out of the 100 that I track meeting the above criteria:
Aflac Incorporated (AFL) - 4-Stars - Analysis
Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
C.R. Bard Inc. (BCR) - 4-Stars
Bard (C.R.) Inc is a diversified producer of therapeutic and diagnostic medical devices has exposure to the vascular, urology, oncology, and specialty surgical markets.
Franklin Resources Inc. (BEN) - 2 Stars
Franklin Resources Inc. is one of the world's largest asset managers, serving retail, institutional and high-net-worth clients.
Donaldson Company (DCI) - 3 Stars - Analysis
Donaldson Company operates as a worldwide manufacturer of filtration systems and replacement parts.
General Dynamics (GD) - 2 Stars - Analysis
General Dynamics is the world's sixth largest military contractor and also one of the world's biggest makers of corporate jets.
Lancaster Colony (LANC) - 2 Stars
Lancaster Colony is a diversified Ohio-based company manufactures and markets consumer products; glassware and candles; and automotive accessories.
Walgreen Co. (WAG) - 3 Stars - Analysis
Walgreen Co is the largest U.S. retail drug chain in terms of revenues. It sells prescription and non-prescription drugs, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods.
You could view this from a positive perspective and say the above dividends should be very safe and the companies are in an excellent position to continue to raising them each year. In dividend investing, cash is king, but at some point management has to be willing to share it with the company's owners.
Full Disclosure: Long AFL. See a list of all my income holdings here.
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The main focus of dividend investing is finding and buying dividend stocks that will likely continue to raise their dividends in the future. In making this determination there are many factors to consider. One of the more important metrics to consider is the Dividend Payout Ratio.
Traditionally, this is calculated as Annual Dividend Per Share divided by Earnings Per Share (EPS). I don't particularly care for this calculation. Due to all the odd accounting rules EPS is not cash. Instead, I prefer to use a Free Cash Flow Payout Ratio.
Free Cash Flow has several different definitions, but the one I use is Operating Cash Flow less Capital Expenditures. Both of these amounts are found on the statement of cash flows. Operating cash flow starts with Net Earnings and adjusts out non-cash items, such as depreciation and amortization, and non-operating items such as land sales.
Since a business can't continue in the long-term without capital spending (machinery and equipment, etc.), capital expenditures are subtracted from operating cash flow in calculating free cash flow. It is important to note, that only "normal" capital expenditures are deducted, not acquisitions. The decision to make an acquisition is strategic, not operating.
Once calculated, Free Cash Flow is divided by diluted shares to put it on a per share basis. Finally, the annual dividend per share is divided by free cash flow per share to calculate the payout ratio. With the traditional EPS based payout ratio, many people consider 50% or below good. However, since a lot of the noise has been removed when using free cash flow, I consider a payout ratio of 60% or lower good.
The lower the payout ratio the more cash is available to increase the company's dividend. A low ratio is especially good during an economic downturn, when the amount of cash generated will likely be less.
Here are five stocks with a free cash flow payout ratio less than 30%:
1. AFLAC Inc (AFL)
Payout Ratio: 10.8% - Yield: 3.30% - Analysis
2. Nucor Corp (NUE)
Payout Ratio: 29.0% - Yield: 2.90% - Analysis
3. United Technologies Corp. (UTX)
Payout Ratio: 29.8% - Yield: 2.70% - Analysis
4. Lowe's Companies Inc. (LOW)
Payout Ratio: 23.4% - Yield: 1.80% - Analysis
5. Brady Corp. (BRC)
Payout Ratio: 26.8% - Yield: 2.70% - Analysis
I am currently reworking my dividend analysis worksheets to focus on what's most important in selecting a dividend stock. A Free Cash Flow dividend payout of less than 60%, will earn the company a star.
Full Disclosure: Long AFL, NUE, UTX. See a list of all my income holdings here.(Photo: Steve Woods)
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As for my portfolio, I consider asset allocation only when looking at my holdings in total. It would be much too difficult to maintain a good allocation within individual portfolios (income, growth, 401(k), Roth IRA, etc.), while trying to maintain my overall allocation. However, an investor could build a degree of allocation into a portfolio of dividend income securities. Consider the following:Business Services Sector
Yield: 3.33% | Style: Large Growth | Analysis
Yield: 1.86% | Style: Large Growth
Yield: 1.16% | Style: Mid GrowthConsumer Goods Sector
Yield: 3.23% | Style: Mid Core
Yield: 3.04% | Style: Large Growth | Analysis
Yield: 2.85% | Style: Large Core | AnalysisConsumer Services Sector
Yield: 4.19% | Style: Mid Value | Analysis
Yield: 3.56% | Style: Large Core | Analysis
Yield: 3.22% | Style: Large Core | AnalysisEnergy Sector
Yield: 6.15% | Style: Large Value
Yield: 3.75% | Style: Large Value
Yield: 2.56% | Style: Large ValueFinancial Services Sector
Yield: 3.90% | Style: Small Value | Analysis
Yield: 2.85% | Style: Large Value | Analysis
Yield: 2.38% | Style: Large Core | AnalysisHardware Sector
Yield: 3.67% | Style: Small Value
Yield: 3.23% | Style: Mid Core
Yield: 1.90% | Style: Small Growth | AnalysisHealth Care Sector
Yield: 3.27% | Style: Small Growth
Yield: 3.08% | Style: Large Core | Analysis
Yield: 2.10% | Style: Large Core | AnalysisIndustrial Materials Sector
Yield: 3.40% | Style: Large Core | Analysis
Yield: 2.90% | Style: Large Core | Analysis
Yield: 2.58% | Style: Large CoreMedia Sector
Yield: 2.63% | Style: Large CorePharmaceuticals Sector
Yield: 5.77% | Style: Large Value
Yield: 2.97% | Style: Large Growth | AnalysisReal Estate Sector
Yield: 5.14% | Style: Mid Core
Yield: 4.29% | Style: Mid Core
Yield: 4.06% | Style: Mid CoreTelecommunications Sector
Yield: 8.10% | Style: Large Value
Yield: 6.54% | Style: Large Value | AnalysisUtilities Sector
Yield: 6.61% | Style: Mid Value
Yield: 5.59% | Style: Large Value
Yield: 4.45% | Style: Small CoreBonds
Needless to say, the above will not provide a perfect allocation, but it goes a long way to provide diversity in a portfolio focused only on income securities. In my personal portfolio, I buy the best available dividend securities and use my other investments to balance my asset allocation.
Yield: 2.74% | Style: Short-Term Bond
Yield: 4.32% | Style: Intermediate-Term Bond
Yield: 5.16% | Style: Long-Term Bond
Full Disclosure: Long ABT, ADP, AFL, BIV, BLV, BP, CLX, CTL, CVX, ED, EMR, GPC, HGIC, JNJ, KO, LLY, MCD, MMM, NUE, PG, SYY, T, TEG. See a list of all my income holdings here.(Photo Credit)
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