The DIV-Net

Transat A.T.

2012-05-23T05:30:00.000-05:00

The idea that airlines make for lousy investments has been broached a number of times on this site. But what about a tour operator that trades for far less than its cash balance? Transat AT (TRZ) will be of interest to many value investors, thanks to its $190 million market cap versus its cash balance of $640 million. In addition, the company has more than $75 million (after write-downs) in ABCP! Furthermore, the company is generally profitable and free cash flow positive (though last year was an exception).

Transat calls itself a tour operator instead of an airline because it has vertically integrated beyond being a pure airline. It offers packages (hotels, activities etc.) to tourists, handles logistics (e.g. baggage) for many other airlines at a number of airports and operates a number of travel agencies. And yet I'm not sure it can escape the fundamental risks that make airlines such poor investments.

First of all, when a particular vacation route is profitable, nothing stops a competitor from expanding capacity and driving down the returns of the incumbent. And when a route is unprofitable, price wars for marginal revenue can be devastating.

Second, to a large extent the company's costs are out of its control. On revenues of $3.5 billion, Transat paid a lofty $450 million last year just for fuel. Furthermore, the company has almost $800 million worth of operating leases due over the next few years; if these are capitalized and considered debt (which they should be), the company's net cash position cited above all but disappears.

Occasionally, pre-paying customers have been left in the lurch when airlines have gone bankrupt. As a result, regulations require that companies keep a certain amount of deferred revenue in trust accounts. So even though the company has $640 million in cash on the balance sheet, $425 million of that is reserved and held in trust! As an investor, don't expect this cash to ever be released unless the airline is willing to shrink. On a related note, good luck finding an airline operator that isn't obsessed with growth! Transat continues to add cities and routes to its network this year.

Finally, the way Transat's tour operations provide value to customers in the form of cheaper vacation prices is by buying hotel rooms and airline seats (if it needs those of another airline) in bulk and at a discount in advance. As such, they have to anticipate market conditions and make commitments some 6 to 9 months before the vacation season begins. Note only does this require somewhat accurate demand forecasting which can obviously go wrong, but it also exposes the company to the risk that an event (e.g. a recession or terrorist attack or flu scare) will destroy demand. Since costs are fixed to such a large extent, such an event could cause a liquidity crisis, or even bankruptcy. Obviously, these types of events won't happen often, but the investor must recognize that he bears this risk.

Nevertheless, Transat still trades for substantially lower than the replacement value of its net assets. I'd even go so far as to say that an investor would probably do quite well purchasing Transat at its current price. The problem, however, is that downside risk is not adequately protected for black swan or even mildly-gray swan type events, thanks to the long lead times, fixed costs, and exposure to costs that are out of its control. Despite the risks, however, some value investors may be interested. What do you think?

Disclosure: No position

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.

Stock Analysis: Intel Corporation (INTC)

2012-05-21T05:30:00.000-05:00

Linked here is a detailed quantitative analysis of Intel Corporation (INTC). Below are some highlights from the above linked analysis:

Company Description: Intel Corporation is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

INTC is trading at a premium to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $28.30. INTC 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:

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

INTC 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 1992 and has increased its dividend payments for 9 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) or Treasury bond? 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.
2. Years to > MMA

INTC earned a Star in this section for its NPV MMA Diff. of the $3,107. This amount is in excess of the $2,600 target I look for in a stock that has increased dividends as long as INTC has. The stock's current yield of 3.15% exceeds the 3.1% estimated 20-year average MMA rate.

Memberships and Peers: INTC is a member of the S&P 500. The company's peer group includes: Advanced Micro Devices, Inc. (AMD) with a 0.0% yield, Texas Instruments Inc. (TXN) with a 2.2% yield and STMicroelectronics NV (STM) with a 6.5% yield.

Conclusion: INTC earned one Star 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 four Stars. This quantitatively ranks INTC as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $29.71 before INTC's NPV MMA Differential decreased to the $2,600 minimum that I look for in a stock with 9 years of consecutive dividend increases. At that price the stock would yield 2.9%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 10.6%. This dividend growth rate is lower than the 11.3% used in this analysis, thus providing a margin of safety. INTC has a risk rating of 1.50 which classifies it as a Low risk stock.

INTC’s results are tied to the cyclical nature of the semiconductor industry and demand trends for personal computers. PC growth in 2012 is expected to slow, but this will be offset to some extent by the introduction of new products in the marketplace (servers, ultra books, mobile and 22nm). Some observers have speculated that INTC will have trouble competing against the design firm ARM ARMH.

However, the company is in the best competitive position within the the semiconductor industry and its large size provides scale advantage over smaller rivals. INTC has a strong balance sheet including low debt levels compared to peers and generates substantial free cash flow. I will continue share accumulation when INTC is trading below my calculated fair value of $28.30 and as my allocation allows.

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 INTC (3.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

Related Articles:
- Meredith Corp. (MDP) Dividend Stock Analysis
- Coca-Cola Company (KO) Dividend Stock Analysis
- Becton, Dickinson and Co. (BDX) Dividend Stock Analysis
- Wal-Mart Stores, Inc. (WMT) Dividend Stock Analysis
- More Stock Analysis

Weekend Reading Links - May 20, 2012

2012-05-20T05:30:00.000-05:00

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

Dividends4Life presented Warning Signs of an Imminent Dividend Cut
Dividend Growth Investor presented Replacing appreciated investments with higher yielding stocks
Barel Karsan presented Xerox Has Long-Term Value
The Dividend Guy presented What I Would Do With $10,000
Disciplined Approach to Investing presented Significant Drop In Investor Bullish Sentiment
Triaging Investing presented Dividend Portfolio – Design & Diversification
Dividend Money presented What I Sold To Pay Off My Mortgage
40percent 20years presented Alliance Oil - Really so cheap?
Dividend Monk presented Five of the Strongest Companies Raising Dividends
Wax Inc presented Bob Looses a Tooth
Sigma Swan presented Is Trip Advisor’s Growth Story Just Beginning?
Dividend Mantra presented Early Retirement Isn't For Everyone

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

Stock Analysis of Emerson Electric

2012-05-18T03:15:00.000-05:00

Emerson Electric Co. (EMR) operates as a diversified technology company worldwide. It engages in designing and supplying products and technology, and delivering engineering services and solutions to industrial, commercial, and consumer markets. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1947 and increased payments to common shareholders every for 55 consecutive years. There are only twelve companies which have managed to raise distributions for over 50 years in a row.

The company’s last dividend increase was in November 2011 when the Board of Directors approved a 15.90% increase to 40 cents/share. Emerson Electric ‘s largest competitors include Roper Industries (ROP), Cooper Industries (CBE) and Ametek (AME).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.

The company has managed to deliver 11.10% in annual EPS growth since 2002. Analysts expect Emerson Electric to earn $3.49 per share in 2012 and $3.98 per share in 2013. In comparison Emerson Electric earned $3.24/share in 2011.

The company has managed to maintain a consistently high return on equity over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 6.60% per year over the past decade, which is lower than to the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling almost every six ten years. If we look at historical data, going as far back as 1983 we see that Emerson Electric has managed to double its dividend every nine years on average.

Over the past decade, the dividend payout ratio has been on the decline, falling from a high of 65% in 2003 to 42.60% in 2011. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Emerson Electric is attractively valued at 16.60 times earnings, has a sustainable dividend payout and yields 3.10%. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long EMR

Relevant Articles:

- Eleven Dividend Kings, Raising dividends for 50+ years

- Dividend Aristocrats List for 2012

- My Entry Criteria for Dividend Stocks

- Ten Income Stocks Providing an Inflation Adjusted Stream of Income

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Harbinger, Spectrum Back In Spotlight

2012-05-16T05:30:00.000-05:00

In late 2010, Harbinger Group was discussed on this site as a potential value play because its holdings in Spectrum Brands exceeded its market cap! The discount did converge somewhat in late 2011, but it has now widened to even higher levels; since that article in November of 2010, Spectrum's stock is up almost 20% while Harbinger has been practically flat.

What should offer investors confidence in Spectrum's valuation is that it is not some sky-high P/E, overvalued stock with little to no earnings. (In other words, it is not a "cloud play", in every sense of the term.) Spectrum owns a number of consumer brands (including Rayovac and Remington) which have demonstrated steady revenue and operating income growth over the last several years.

In addition to an above-market value holding of Spectrum, investors in Harbinger get to own Harbinger's insurance business (which it had not yet purchased at the time of the 2010 article) for free!

For an excellent look at a sum-of-the-parts valuation of Harbinger that demonstrates how undervalued it may be, check out this article at The Brooklyn Investor.

Disclosure: No position

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.

Stock Analysis: Pepsico, Inc. (PEP)

2012-05-14T05:30:00.000-05:00

Linked here is a detailed quantitative analysis of Pepsico, Inc. (PEP). Below are some highlights from the above linked analysis:

Company Description: PepsiCo, Inc. is a major international producer of branded beverage and snack food products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

PEP is trading at a discount to only 3.) above. Since PEP's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a slight premium to its calculated fair value of $62.86. PEP 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:

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

PEP earned one Star in this section for 3.) above 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 1952 and has increased its dividend payments for 40 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) or Treasury bond? 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.
2. Years to > MMA

PEP earned a Star in this section for its NPV MMA Diff. of the $628. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PEP has. The stock's current yield of 3.23% exceeds the 3.1% estimated 20-year average MMA rate.

Memberships and Peers: PEP is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Coca-Cola Company (KO) with a 2.6% yield, Dr Pepper Snapple Group, Inc. (DPS) with a 3.3% yield and Fomento Econ (FMX) with a 1.7% yield.

Conclusion: PEP did not earn any Stars 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 two Stars. This quantitatively ranks PEP as a 2-Star Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $70.90 before PEP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 40 years of consecutive dividend increases. At that price the stock would yield 3.0%.

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 4.3%. This dividend growth rate is below the 5.1% used in this analysis, thus providing a margin of safety. PEP has a risk rating of 1.25 which classifies it as a Low risk stock.

PEP enjoys stable end markets, predictible cash flows and leading global market positions. With soft drink consumption declining is the U.S., PEP has turned to international markets. The company's diverse portfolio can mitigate the impact of poor conditions in any one of its markets. PEP's direct store delivery system allows it to leverage its impressive portfolio of brands.

My concerns are PEP's debt as a percent of total capital and its free cash flow payout. Both have grown since I last reviewed PEP. Debt as a percent of total capital grew from 53% in September 2011 to its current 55%, while free cash flow payout grew from 65% to 71% over the same periods. Each of these are outside of my acceptable level. In addition, PEP is trading above my calculated fair value of $62.86, so I will not add to my position bit will continue to monitor the stock.

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 PEP (1.7% of my Dividend Growth Portfolio) and long in KO. See a list of all my dividend growth holdings here.

Related Articles:
- Becton, Dickinson and Co. (BDX) Dividend Stock Analysis
- Wal-Mart Stores, Inc. (WMT) Dividend Stock Analysis
- Teco Energy, Inc.(TE) Dividend Stock Analysis
- Genuine Parts Company (GPC) Dividend Stock Analysis
- More Stock Analysis

This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - May 13, 2012

2012-05-13T05:30:00.000-05:00

Dividends4Life presented Dividend Income Progress Update - April 2012
Dividend Growth Investor presented Variability in Dividend Growth Rates
The Dividend Guy presented AFL Aflac Dividend Stock Analysis
Disciplined Approach to Investing presented Dividend Payers Outperform In April
Triaging Investing presented The Costco Craze – Investor Insider
Dividend Money presented Why I Hate Buying Cars – And You Should Too!
40percent 20years presented New Market Data and Återköpseffekts strength
EPIC INVESTOR presented Berkshire Hathaway's Shareholders Meeting
Sigma Swan presented Is Trip Advisor’s Growth Story Just Beginning?
Dividend Mantra presented Recent Buy

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

Stock Analysis: Clorox

2012-05-11T03:00:00.001-05:00

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend champion has paid uninterrupted dividends on its common stock since 1968 and increased payments to common shareholders every for 34 consecutive years.

The company’s last dividend increase was in February 2011 when the Board of Directors approved a 9.10% increase to 60 cents/share. Clorox ‘s largest competitors include Procter & Gamble (PG), Colgate Palmolive (CL) and Kimberly-Clark (KMB).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.

The company has managed to deliver 4.70% in annual EPS growth since 2002. Analysts expect Clorox to earn $4.08 per share in 2012 and $4.41 per share in 2013. In comparison Clorox earned $2.07/share in 2011. The low earnings in 2011 were caused by a $1.85/share one-time non- cash Goodwill Impairment charge related to Burt’s Bee’s business. The EPS growth comes out to 12.40% per year if the effects of this goodwill impairment are excluded.

The company has managed to maintain a consistently high return on assets except for 2002 and 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.30% per year over the past decade, which is lower than to the growth in EPS.

An 11% growth in distributions translates into the dividend payment doubling almost every six and a half years. If we look at historical data, going as far back as 1983 we see that Clorox has managed to double its dividend every seven years on average.

Over the past decade, the dividend payout ratio has remained below 50%, with the exception of 2002 and 2011. Excluding the goodwill impairment, the payout ratio for 2011 would have been 56%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Clorox is attractively valued at 16.60 times earnings, has a sustainable dividend payout and yields 3.50%. I would consider adding to my position subject to availability of funds.

Full Disclosure: Long CLX, CL, KMB, PG

Relevant Articles:

- Procter & Gamble (PG)- A dividend stock to hold forever

- Kimberly-Clark Corporation (KMB) Dividend Stock Analysis

- 17 Cheap Dividend Aristocrats on Sale

- Top Dividend Stocks to own in 2012

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Stock Analysis: Johnson & Johnson (JNJ)

2012-05-07T05:31:00.000-05:00

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

Company Description: Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

JNJ is trading at a discount to only 1.) above. The stock is trading at a 12.8% premium to its calculated fair value of $57.5. JNJ 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:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. 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%. JNJ 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 50 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) or Treasury bond? 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.
2. Years to > MMA

JNJ earned a Star in this section for its NPV MMA Diff. of the $1,389. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. The stock's current yield of 3.7% exceeds the 3.1% estimated 20-year average MMA rate.

Memberships and Peers: JNJ is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The Abbott Laboratories (ABT) with a 3.3% yield, Eli Lilly & Co. (LLY) with a 4.8% yield and Bristol-Myers Squibb Company (BMY) with a 4.0% yield.

Conclusion: JNJ 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 JNJ as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $93.86 before JNJ's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 50 years of consecutive dividend increases. At that price the stock would yield 2.6%.

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 2.9%. This dividend growth rate is below the 6.7% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.25 which classifies it as a Low risk stock.

JNJ enjoys a diverse revenue base, an excellent research pipeline, a pristine balance sheet and exceptional free cash-flows to cover its dividend. The company's many advantages include: products that are largely immune from economic cycles, minimal reliance on any single product category, substantial financial resources and a significant global business scale.

Its pharma segment should benefit from a number of new products such as Edurant, Xarelto and Zytiga. In addition, the proposed acquisition of Synthes should provide significant synergies. I will continue to add to my position as my allocation allows and when JNJ is trading near or below my calculated fair value price of $57.50.

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 (3.7% of my Dividend Growth Portfolio) and long in ABT. See a list of all my dividend growth holdings here.

Related Articles:
- Teco Energy, Inc.(TE) Dividend Stock Analysis
- Genuine Parts Company (GPC) Dividend Stock Analysis
- Microsoft Corporation (MSFT) Dividend Stock Analysis
- Norfolk Southern Corp. (NSC) Dividend Stock Analysis
- More Stock Analysis

This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - May 6, 2012

2012-05-06T05:30:00.000-05:00

Dividends4Life presented 2 High-Yield Investments To Increase Income While Waiting On Dividend Growth

Dividend Growth Investor presented Build your own Berkshire with dividend paying stocks

The Dividend Guy presented Using Dividend ETF’s In A Dividend Portfolio

The Div Guy presented April Dividend Income Update

Disciplined Approach to Investing presented Why Economic Growth Has Been So Low

Dividend Money presented Why I Paid Off My Mortgage Early

Dividend Monk presented Consolidated Edison Appears Overvalued

Wax Inc presented Performance - Week Ending 05/04/2012

Dividend Mantra presented Dividend Income Update - April 2012

Compounding Returns presented Small Business Debt Solutions and the CARD Act

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

T. Rowe Price Group, Inc. Stock Analysis

2012-05-04T03:00:00.000-05:00

T. Rowe Price Group, Inc. (TROW) is a publicly owned asset management holding company. The firm primarily provides its services to individual and institutional investors, retirement plans, and financial intermediaries. This dividend champion has paid uninterrupted dividends on its common stock since 1986 and increased payments to common shareholders every for 25consecutive years.

The company’s last dividend increase was in February 2012 when the Board of Directors approved a 9.70% increase to 34 cents/share. T. Rowe Price ‘s largest competitors include Blackrock (BLK), Franklin Resources (BEN) and Eaton Vance (EV).

Over the past decade this dividend growth stock has delivered an annualized total return of 14.70% to its shareholders.

The company has managed to deliver 16.10% in annual EPS growth since 2002. Analysts expect T. Rowe Price to earn $3.19 per share in 2012 and $3.64 per share in 2013. In comparison T. Rowe Price earned $2.92/share in 2011.

The company has managed to maintain a high return on equity in the high teens to low twenties. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 15.80% per year over the past decade, which is higher than to the growth in EPS.

An 15.80% growth in distributions translates into the dividend payment doubling almost every four and a half years. If we look at historical data, going as far back as 1990 we see that T. Rowe Price has managed to double its dividend every four and a half years on average.

The dividend payout ratio has remained below 45% , with the exception of 2008 - 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently T. Rowe Price is overvalued at 22.20 times earnings, has a sustainable dividend payout and yields 2.10%. I would consider initiating position in the stock on dips below $55.

Full Disclosure: Long EV

Relevant Articles:

- Seventeen Consistent Dividend Raisers in the News

- Eaton Vance (EV) Dividend Stock Analysis 2011

- Dividend Macro trends: The Baby Boomer Retirement Investment

- When can you retire on dividends?

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Stock Analysis: Coca-Cola Company (KO)

2012-04-30T06:03:00.000-05:00

Linked here is a detailed quantitative analysis of Coca-Cola Company (KO). Below are some highlights from the above linked analysis:

Company Description: The Coca-Cola Company is the world's largest soft drink company, and it also has a sizable fruit juice business.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

KO is trading at a premium to all four valuations above. The stock is trading at a 7.5% discount to its calculated fair value of $80.11. KO 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:

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

KO 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. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 50 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) or Treasury bond? 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.
2. Years to > MMA

KO earned a Star in this section for its NPV MMA Diff. of the $813. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 7.5% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. KO earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Dr. Pepper Snapple Group (DPS) with a 3.4% yield, Pepsico, Inc (PEP) with a 3.1% yield and Fomento Economico ADR (FMX) with a 1.8% yield.

Conclusion: KO 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 KO as a 3-Star Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $87.25 before KO's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 50 years of consecutive dividend increases. At that price the stock would yield 2.3%.

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 5.9%. This dividend growth rate is slightly lower than the 7.5% used in this analysis, thus providing a slight margin of safety. KO has a risk rating of 1.25 which classifies it as a Low risk stock.

Coca-Cola is one of the most recognizable names in the world. KO is able to deliver products to nearly all points on the globe through an extensive direct distribution network that has few peers. Its world presence will be relied on to compensated for declining consumption of carbonated beverages in the North American market. The company's free cash flow payout is above the 60% I look for and it debt to total capital if slightly above my 45% upper limit. However, KO remains a desirable stock and I will continue to give it consideration when it is trading below my fair value price of $80.11.

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 KO (2.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

Related Articles:
- Microsoft Corporation (MSFT) Dividend Stock Analysis
- Norfolk Southern Corp. (NSC) Dividend Stock Analysis
- Erie Indemnity Co. (ERIE) Dividend Stock Analysis
- Walgreen Co. (WAG) Dividend Stock Analysis
- More Stock Analysis

This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - April 29, 2012

2012-04-29T06:13:00.000-05:00

Dividends4Life presented 2012-Q1 Performance Review
Dividend Growth Investor presented Should income investors worry about higher dividend taxes?
The Dividend Guy presented MCD McDonald’s Dividend Stock Analysis
Disciplined Approach to Investing presented Better Investing's Most Active Stocks For The Period Ending April 28, 2012
Dividend Monk presented Seven Partnerships with Appealing Incentive Distribution Rights to Consider
Dividend Mantra presented Three Solid Stocks To Purchase On Weakness
Sigma Swan presented Is The Digital Wallet Going Analog?
Planned Freedom presented Why selectivity is key to your success.

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

Stock Analysis of Four Income Companies

2012-04-27T09:09:00.000-05:00

Dividend growth investing is an investing strategy, where investors buy stock in companies which consistently raise distributions. This leads to higher dividend payouts overtime, and also leads to capital gains, as the market adjusts stock prices to reflect the higher income generated by the stock. Dividend growth does not just miraculously appear out of a thin air however. In order to get dividend hikes every year, the company has to generate earnings growth over time.

For example, back in 2001, Chevron Corporation (CVX) earned $1.85/share, paid a dividend of $1.325/share and traded at $44.81/share. Ten years later, in 2011 the company is earning $13.44/share, the dividend is $3.09/share. The stock is trading around very comfortable $100/share. The company is expected to distribute at least $3.24/share in 2012. Investors who purchased the stock a decade ago are sitting at handsome capital gains, and are earning 7.20% yield on cost.

In order to generate high returns from dividends and capital gains, investors need to focus on companies which will be able to earn higher amounts in the future. Corporations that have designated roadmaps to generate higher earnings per share, increase investors odds of receiving higher distributions and enjoying capital gains in the process. Below, you could find a list of four companies which have outlined their corporate strategies of achieving high earnings per share for the next several years:

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend king has raised distributions for 50 years in a row.
Coca-Cola's 2020 Vision Strategy strives for a high single digit annual EPS growth throughout this decade, driven through 5%-6% annual increases in revenues as the company expects 3%-4% yearly increase in sales volumes. The company is focusing more of its attention to still beverages like waters and juices, which stand the chance of delivering strong growth over time. In addition, growth could come from emerging markets such as China and India, where the average number of servings per capita is much lower than that of the US. The company is pursuing differing strategies to capture the imaginations (and dollars) of consumers in emerging, developing and developed markets. While the company might be focusing on growth through innovation and productivity initiatives in the developed markets, it might generate growth in emerging markets by heavy investing and maximizing volumes. In addition, the company is playing on strong long-term demographic trends of continued rise in the global population, increased urbanization as well as the expected rise of the middle class worldwide. Yield: (analysis)

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. The company operates in four segments: Cleaning, Lifestyle, Household, and International. This dividend champion has consistently raised distributions for 34 years in a row.
In 2007 the company introduced its Centennial Strategy where the company is focused on achieving double-digit annual growth in economic profit. A key driver of the strategy is to accelerate sales by growing existing brands, including expanding into adjacent categories, entering new sales channels and increasing penetration within existing countries. The company also anticipates using its strong cash flow to pursue growth opportunities and increase shareholder returns. For an update on the results from the strategy, check this press release.
Basically the company will try to deliver further growth through an ongoing focus on consumer megatrends. In addition to that the company will be targeting a 2% sales growth through product innovation. The company projects sales growth of 3-5 percent, excluding acquisitions and expansion into new geographies through 2013. Last but not least Clorox will target margin expansion and maximizing cash flow through implementation a continued robust cost-saving program and maintaining price increases the company has taken. Yield: (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional and Other, and Health Care. This dividend aristocrat has consistently raised dividends for 40 years in a row. As with other consumer products companies, the growth is likely to come from developing and emerging markets, rather than developed markets. Developed markets could benefit from cost cutting and efficiency profits, which would decrease the total price of doing business. Under the company’s global business plan, announced in 2003, it is looking for annual sales growth in the 3%-5% range, EPS growth in the mid to high single digits and dividend increases in line with earnings growth. For more on the global business plan, check this document. Yield: (analysis)

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. The company operates in five segments: Global Technology Services, Global Business Services, Software, Systems and Technology, and Global Financing. This dividend achiever has rasied distributions for 16 years in a row.
IBM has publicly announced its goal to hit $20 in earnings per share by 2015. The company is one of the most consistent repurchasers of stock, having reduced the total shares outstanding by 50% since 1995. The company expects that one third of the gains would come from revenue growth driven by organic growth and acquisitions. The company is relying on growth markets, its business analytics segment, its smarter planet initiative as well as its cloud and next generation data center businesses to deliver revenue growth. Almost one third of the growth would come from share buybacks as well. The remainder would come from increased productivity in its core segments, as well as continuing its focus on offering high value to its customers. Yield: (analysis)

Full Disclosure: Long CLX, KMB, KO, CVX

Relevant Articles:

- Three Companies expecting high dividend growth and returns
- MLP’s deliver consistent distribution increases
- Abbott Laboratories is Cheaper than you think
- Dividend Investing Misconceptions

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Stock Analysis: Wal-Mart Stores, Inc. (WMT)

2012-04-23T05:00:00.000-05:00

Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America, Wal-Mart operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

WMT is trading at a discount to only 1.) above. The stock is trading at a 13.0% discount to its calculated fair value of $68.69. WMT 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:

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

WMT 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%. WMT 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 1973 and has increased its dividend payments for 38 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) or Treasury bond? 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.
2. Years to > MMA

WMT earned a Star in this section for its NPV MMA Diff. of the $1,139. 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 the company grows its dividend at 9.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. It earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: WMT is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Costco Wholesale Corporation (COST) with a 1.1% yield, Target Corp. (TGT) with a 2.1% yield and PriceSmart Inc. (PSMT) with a 0.8% yield.

Conclusion: WMT 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 WMT as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $79.88 before WMT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 2.0%.

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 significantly lower than the 9.0% used in this analysis, thus providing a margin of safety. WMT has a risk rating of 1.25 which classifies it as a Low risk stock.

WMT enjoys dominant positions in most markets where it competes. The weak economic environment favors the company with price-conscience consumers looking for bargains when shopping for staples and basic discretionary items. Its strategic shift from a low-cost to value-proposition retailer has not been fully realized. The company's unmatched scale leads to favorable terms on everything from the products it sells to store leases and distribution agreements.

Recent allegations that the company engaged in systematic bribery in Mexico for several years and then covered it up, has resulted in a dramatic decline in share price. I plan to watch for a period of time hopefully be able to pick up some bargain shares well below my calculate fair value price of $68.69.

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 (4.5% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

Related Articles:
- Erie Indemnity Co. (ERIE) Dividend Stock Analysis
- Walgreen Co. (WAG) Dividend Stock Analysis
- Raytheon Company (RTN) Dividend Stock Analysis
- Harris Corporation (HRS) Dividend Stock Analysis
- More Stock Analysis

This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - April 22, 2012

2012-04-22T05:30:00.000-05:00

Dividends4Life presented 11 Low-Debt, Higher-Yielding Dividend Stocks
Dividend Growth Investor presented Dividend Investing Misconceptions
Barel Karsan presented Is It Risky or Uncertain?
The Dividend Guy presented Dividend Yield Should Not Matter For Dividend Investors
Disciplined Approach to Investing presented Procter & Gamble Increases Dividend 7% And Payout Ratio Continues To Increase
Triaging Investing presented Dividend Income is EPIC Reliability
40percent 20years presented Long-term return - but the dividends, then?
Dividend Monk presented Canadian National Railway: $65/Share is Fair Value
Dividend Mantra presented Five Awesome Things You Can Do When You're Financially Independent
Sigma Swan presented Why Netflix Needs You to Quit Searching its Catalog
Compounding Returns presented Personal Finance Tips

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

Dividend Stock Analysis: Enterprise Product Partners

2012-04-20T03:30:00.001-05:00

Enterprise Products Partners L.P (EPD). provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States, Canada, and Gulf of Mexico. Enterprise Products Partners is the largest pipeline master limited partnership in the US. This dividend achiever has managed to boost distributions to unitholders for 15 years in a row.

The largest competitors include Kinder Morgan Partners (KMP), Enbridge Energy Partners (EEP) and ONEOK Partners (OKE).

Since it went public in 1998, the partnership has had the following objectives in mind:

1) Invest in growth opportunities to build or acquire energy infrastructure that will generate returns on investment grate than longterm cash cost of capital
2) Provide partners with periodic increases in cash distributions and an attractive total return on investment
3) Preserve financial flexibility and maintain an investment grade balance

Few companies have specifically set the goal to increase distributions to their owners. The partnership has done a great job in accomplishing these goals.

The MLP has managed to grow organically, as well as through strategic acquisitions. In 2009, it acquired Teppco Partners, which provided geographic and business diversity to its operations. In 2011, Enterprise Products also completed the acquisition of Duncan Energy Partners. The 2010 merger with Enterprise GP Holdings, essentially eliminated incentive distribution rights, which typically cap distribution growth in mature MLPs. It has managed to balance distributions growth with the retention of distributable cash flows. As a result of the elimination of incentive distribution rights in 2010, the partnership’s cost of capital has been substantially decreased. This is good news for unitholders, because it means that there will be less of a need for raising capital exclusively through stock unit issuance.

Besides through acquisitions, Enterprise Products Partners is going to grow its portfolio of fee generating assets through its massive capital expansion program. The partnership expects to invest $6.50 billion in capital projects between 2012 and 2014, half of which will be related to Eagle Ford shale projects. These projects include over 300 miles of natural gas pipelines, a 600 million cubic feet per day cryogenic natural gas processing plant, 127 miles of NGL pipelines and 140 miles of crude oil pipelines. In the fourth quarter of 2011, the partnership completed the $1.50 billion dollar Haynesville Extension of its Acadian natural gas pipeline system. This 270-mile natural gas pipeline will have the capacity to transport up to 1.8 Bcfd of production from the Haynesville/Bossier Shale to industrial and utility markets in South Louisiana and, through connections with other pipelines, to markets in the northeastern and southeastern United States.

The ten year annual distribution growth has been 7.60%/year. At this rate, distributions would double every decade. The partnership is not a taxable entity, which means that income, gains, losses and any deductions or credits flow through on the individual unitholders’ tax returns. In addition, a large portion of MLP distributions are tax deferred. For example, I held EPD units for about 7 months in 2011, and almost all of my distribution income was tax deferred. It decreased my basis in the partnership, which means that when I sell, I will have to pay higher taxes. In addition, once my basis falls to zero, all the business income would be taxable as an ordinary income. Capital gains or losses will be treated as capital income, not ordinary. Investors in Master Limited Partnerships typically receive a Schedule K-1 ( Form 1065), instead of a 1099-DIV. Although this has scared most new investors in MLP, most tax software and even enterprising do it your self investors can handle MLP taxes easily.

Since the partnership distributes a large portion of its cash flows to unitholders, dividend payout ratio is not a good metric for evaluating distribution sustainability. Instead, the Distributable Cash Flow (DCF) is a metric that is commonly used when evaluating distributions. Essentially DCF is calculated by adding certain non-cash items such as depreciation to net income, in addition to a few cash related items. The partnership has one of the best distribution coverages in comparison to other MLPs. In 2011 it had a distributable cash flow of $3.737 billion, and distributed $2.027 billion. Granted, this DCF included $1 billion in cash proceeds from sales of assets, but it still shows how the company more than comfortably can afford to pay and even increase its distributions to unitholders.

I have accumulated the majority of my position in the partnership in the low to mid $40’s/unit. At the current distribution rate, a 5% entry yield corresponds to a price of $50.20/unit, while a 6% entry yield translates into an entry price of $41.83/unit. I would be more inclined to add to my position on dips below $42 - $44/unit.

Full disclosure: Long EPD, OKS, EEQ, KMR

Relevant Articles:

- Master Limited Partnerships (MLPs) – an island of opportunity for dividend investors

- General vs Limited Partners in MLP's

- MLPs for tax-deferred accounts

- Kinder Morgan Energy Partners (KMP) Dividend Stock Analysis

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

The Numbers Don't Add Up

2012-04-18T05:30:00.001-05:00

As if investors don't have enough to do with respect to interpreting financial statements, it would seem in some cases they have to verify them as well. Small-cap company GLG Corp (GLE) recently released results that don't add up...literally!

Great catch by Bristlemouth, who noted that the items in the company's cash flow statement do not add up to what the company claimed. The individual cash flow line items suggested an operating cash outflow on the order of $40 million, while the company's statement claimed positive operating cash inflow of $12 million!

Might be a simple mistake, but certainly a reminder for shareholders to stay on their toes!

Disclosure: No position

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.

Stock Analysis: Genuine Parts Company (GPC)

2012-04-16T05:30:00.000-05:00

Linked here is a detailed quantitative analysis of Genuine Parts Company (GPC). Below are some highlights from the above linked analysis:

Company Description: Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

GPC is trading at a premium to all four valuations above. The stock is trading at a 28.1% premium to its calculated fair value of $49.45. 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:

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

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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. GPC 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 56 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) or Treasury bond? 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.
2. Years to > MMA

GPC earned a Star in this section for its NPV MMA Diff. of the $657. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as GPC has. The stock's current yield of 3.13% exceeds the 3.1% estimated 20-year average MMA rate.

Memberships and Peers: GPC is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Advance Auto Parts Inc. (AAP) with a 0.3% yield, AutoZone Inc. (AZO) with a 0.0% yield and W.W. Grainger, Inc. (GWW) with a 1.2% yield.

Conclusion: GPC 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 GPC as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $69.22 before GPC's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 56 years of consecutive dividend increases. At that price the stock would yield 2.9%.

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 4.7%. This dividend growth rate is below the 5.5% used in this analysis, thus providing a margin of safety. GPC has a risk rating of 1.50 which classifies it as a Low risk stock.

GPC’s long string of dividend increases are supported by its strong underlying fundamentals of sales, earnings and free cash flow. The company exhibits excellent financial leadership as evidenced perseverance through the financial crisis. From an operating standpoint, GPC has an extensive distribution network and it has built a loyal customer following over the years.

The company is one of my largest holdings, with much of it coming through capital appreciation. The stock price has nearly doubled since I started buying it back in 2009. As an investment, it has generated a compound annual return of over 30% since I first purchased it.

GPC has strong financials stable earnings and an above-average dividend yield for its industry. In spite of the stock trading above my calculated fair value of $49.45, I will continue to look for opportunities to moderately add to my position, as my allocation allows.

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 (4.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

Related Articles:
- Raytheon Company (RTN) Dividend Stock Analysis
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- Nucor Corporation (NUE) Dividend Stock Analysis
- General Dynamics (GD) Dividend Stock Analysis
- More Stock Analysis

This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - April 15, 2012

2012-04-15T05:30:00.000-05:00

Dividends4Life presented 7 Small-Cap, High-Yield Dividend Stocks
Dividend Growth Investor presented Dividend Stocks for Inflation Adjusted Income Stream
Barel Karsan presented The Winners Lose
The Dividend Guy presented The Reason Why Governments Put You in the Hole Financially
Disciplined Approach to Investing presented Dividend Payers Experience Multiple Expansion At Low Nominal Interest Rates
The Market Capitalist presented The April Edition of Market Capitalist Newsletter is Here!
Dividend Monk presented Becton Dickinson: Reasonable Value
Sigma Swan presented Ross Stores (ROST) Stock Analysis
Compounding Returns presented Perpetual: A Wealth Management Solution
Dividend Mantra presented Dividend Income Update - March 2012
Planned Freedom presented Did you work for your personal freedom today?

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

Stock Analysis of Three Dividend Stocks

2012-04-13T03:00:00.001-05:00

Dividend growth stocks provide investors with a rising stream of passive income, which grows over time. The consistent nature of dividend increases protects the dividend income against inflation. However, many dividend growth stocks actually tend to deliver dividend growth which typically exceeds the rate of inflation. Historically, US stocks have managed to boost dividends above the rate of inflation by 2% – 3%.

There is typically a trade-off between dividend yield and dividend growth, that investors have to put up with. Generally, companies with the highest current yields tend to distribute most of their cash flows to shareholders, which leaves little room for investment in the business. This leads to low earnings growth, that trickles down into low dividend growth. Companies with low and medium sized yields however tend to disitrbute a low portion of their earnings to shareholders, with the rest reinvested in the business, thus providing fuel for future dividend increases.

There are a few companies which meet both criteria, when purchased at the right times:

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company expects to generate 10%- 12% annual growth in earnings through its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably. Phillip Morris International will be able to keep increasing dividends at the high single digit percentage points in the foreseeable future, while paying an above average yield of 3.50% today. (analysis)

ONEOK, Inc. (OKE), a diversified energy company, engages in the gathering, processing, storage, and transportation of natural gas in the United States. The company operates through three segments: ONEOK Partners, Natural Gas Distribution, and Energy Services. The company enjoys strong performance in its ONEOK Partners (OKS) segment, which has resulted in increased distributions to ONEOK from the partnership. In addition, the company has been able to generate strong cash flow from its natural gas distribution segment. ONEOK indicated in September 2011 that it expects to increase its dividend 50 percent by 2014 and affirmed a long-term dividend payout target of 60 percent to 70 percent of recurring earnings, subject to board of directors' approval. ONEOK announced today it is considering increasing its July 2012 dividend above the 4-cent-increase it provided in September 2011. (analysis)

Kinder Morgan, Inc. (KMI) owns and operates energy transportation and storage assets in the United States and Canada. The company operates in six segments: Products Pipelines-KMP, Natural Gas Pipelines—KMP, CO2—KMP, Terminals—KMP, Kinder Morgan Canada—KMP, and NGPL PipeCo LLC. The company expects its acquisition of El Paso to be completed by May 2012. This combination will lead to synergies and cost savings of approximately $350 million/year. As a result of this transaction and KMI’s normal expected annual growth, KMI still expects its dividend per share to grow at an average annual rate of around 12.5 percent through 2015 from its budgeted 2011 dividend per share of $1.16. The growth of KMI is being driven by Kinder Morgan Partners (KMP), which expects to declare cash distributions of $4.98 per unit for 2012, an 8 percent increase over the $4.61 per unit it will distribute for 2011. (analysis)

Full Disclosure: Long PM, OKS, KMR and KMI

Relevant Articles:

- Dividend Growth Stocks – The best kept secret on Wall Street

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

- Kinder Morgan Partners – One Company three ways to invest in it

- Two High Yield Dividend Growth Stocks I am buying

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Incestuous Companies

2012-04-11T05:30:00.003-05:00

Previously, stocks have been discussed on this site where it appeared that the founder's descendant was destroying the value of the company's remarkable collection of assets. Unfortunately, this type of occurrence is all too common among firms where management succession is chosen based on blood rather than merit.

It's not just anecdotal data, as empirical research has been done on the subject as well. For example, this paper found that professional, non-family CEOs generate better returns on assets than descendants of the founder. Therefore, when a family controls a business (either through majority ownership or through share classes with special rights), be aware of this issue.

But families no longer dominate corporate America as they once did, so this issue only affects a handful of American companies. However, one developed country in particular where families continue to play a large role in the management of companies is Japan. Due to the fall of equity prices in that region as a result of the recent disaster, many value investors are currently exploring securities in Japan, making this a front-burner issue.

But surprisingly, Japanese family firms are actually rather well-run as compared to their peers. While this might make the investor complacent to this issue when considering Japanese stocks, they should still be wary. A recent paper argues that the strong performance of Japanese family-run companies is due to adoption!

But not the adoption of just anybody! Many Japanese families that run firms actually adopt adults that are fit to run the company! From the paper:

"These findings are consistent with adult adoptees displacing blood heirs in the left tail of the talent distribution, with the “adopted son” job motivating star managers, and with the threat of displacement inducing blood heirs to invest in human capital, mitigating the so called “Carnegie conjecture” that inherited wealth deadens talent"

So investors in family firms (even in Japan) beware! Look for signs that the company has indeed looked outside the founding family for management talent, even if they ended up adopting such talent!

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to the feed.

Stock Analysis: Norfolk Southern Corp. (NSC)

2012-04-09T05:30:00.000-05:00

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

Company Description: Norfolk Southern Corp. operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
4. Graham Number

NSC is trading at a discount to only 3.) above. The stock is trading at a 8.3% discount to its calculated fair value of $72.37. NSC 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:

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

NSC 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%. NSC 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 (2001-2004, 2002-2005, 2003-2006, 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 1901 and has increased its dividend payments for 11 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) or Treasury bond? 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.
2. Years to > MMA

NSC earned a Star in this section for its NPV MMA Diff. of the $6,970. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as NSC has. If NSC grows its dividend at 15.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. NSC earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.

Memberships and Peers: NSC is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: CSX Corp. (CSX) with a 2.2% yield, Canadian National Railway Company (CNI) with a 1.9% yield and Union Pacific Corporation (UNP) with a 2.2% yield.

Conclusion: NSC 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 NSC as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $100.80 before NSC's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 1.8%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 11.3%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. NSC has a risk rating of 1.50 which classifies it as a Low risk stock.

As a cyclical stock, NSC is exposed to the ups and downs of economic cycles. In addition, the company has to deal with regulations, labor unions and significant capital requirements. However, NSC is one of the best-run railroads in North America generating one of the top operating ratios in the industry.

Management continues to invest in its network by improving capacity on heavily trafficked routes. As the economy recovers and truck capacity diminishes, NSC is well-positioned to to pick up the excess demand.

With only moderate debt and strong free cash flows (6 of the last 7 years FCF was over $1 billion), the company should continue to grow its dividend for many years to come. I recently initiated a position in NSC and will look to add to it while the stock is trading below my calculated fair value price of $72.37, and as my allocation allows.

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 NSC (0.9% of my Dividend Growth Portfolio), and long in CNI. See a list of all my dividend growth holdings here.

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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].

Weekend Reading Links - April 8, 2012

2012-04-08T05:30:00.000-05:00

Dividends4Life presented 10 High-Energy, High-Yield Dividend Stocks
Dividend Growth Investor presented 2012’s Best Dividend Stocks, Q1 Update
Barel Karsan presented Cundill's Picks
The Dividend Guy presented TSX 60 Dividend Yield and Ex-Dividend Date
40percent 20years presented H & M - ketchup effect & Mad Gunnar!
The Market Capitalist presented Tax Deductions for Charitable Contributions & Donations
Dividend Monk presented 5 Dividend Payers with Very Strong Balance Sheets
Sigma Swan presented 3 Reasons Google’s Dominance Over Search Won’t Last
Compounding Returns presented Does Gold Have a Future?
Dividend Mantra presented Freedom Fund Update - April 2012
Planned Freedom presented How to sail through a storm

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

Stock Analysis of Abbott Laboratories (ABT)

2012-04-06T03:15:00.001-05:00

In a previous article, I discussed how dividend investors should analyze the earnings of each company they own in detail, in order to obtain an understanding behind the real valuation behind the business. I discussed how AT&T (T) and Coca-Cola (KO) appeared cheaper than usual. Today, I will discuss another example of a situation, where I had to dig deeper, before obtaining the full picture behind Abbott Lab’s valuation.

I have been a shareholder of Abbott Labs (ABT) for many years. Just like many other investors, I am cheerful about the announced split in two separate publicly traded companies, which will unlock shareholder value. I am also optimistic about the prospects of each of the separate divisions to continue increasing shareholder wealth by continuing the culture of boosting dividends. Abbott Labs is a dividend aristocrat, and has managed to boost distributions every year for 40 years in a row.

As I discussed earlier, I initiate or add to my positions in two or three dividend stocks every month. As part of my process of screening for attractively valued stocks each month, I noticed that a few good companies were not part of my buy listing. I was expecting to add to my existing position in Abbott within a few months. This inconsistency startled me, since in my recent analysis of the stock, I had concluded that it was still a great buy. I glanced at the company’s profile in Yahoo Finance and Google Finance, only to see that it was trading at 20 times earnings. Yahoo and Google Finance sites are currently showing $3 in earnings per share for the company. Given the current dividend payout of $2.04/share, this makes the payout ratio to be a very high at 68%. This is consistent with a public utility, but not with a dividend growth company such as Abbott Laboratories.

This made me further investigate the trends in quarterly earnings per share over the past year. I noticed that over the past five quarters, the trend in EPS looks something like this:

From the company’s press release:

Diluted earnings per share, excluding specified items, were $1.18, at the high end of Abbott's previous guidance range, reflecting 12.4 percent growth. Diluted earnings per share under Generally Accepted Accounting Principles (GAAP) were $0.19, net of specified items, including a $1.5 billion pre-tax reserve related to previously disclosed litigation.

2011 Net Earnings Excluding Specified Items excludes after-tax charges of $1.4 billion, or $0.92 per share, related to litigation reserves (see Footnote 3 above), $75 million, or $0.05 per share, associated with the acquisition of Solvay Pharmaceuticals and $78 million, or $0.05 per share, for previously announced cost reduction initiatives and other. These items were partially offset by a favorable adjustment to tax expense of $51 million, or $0.03 per share, as a result of the resolution of various prior years' international and U.S. tax positions.

In my analysis of earnings and dividend payout ratios, I tend to focus on income from continuing operations. I exclude one-time events, in order to focus on recurring profits and normalize earnings per share. After reading this news release, investors would notice that these one time non cash charges accounted for 99 cents/share. By adding them to EPS from continuing operations of 19 cents/share, we come up with $1.18/share in actual earnings. This brings the total earnings per share for the past four quarters to $3.99/share. As a result of this adjustment, the price earnings multiple decreases from 20 to 15.

Full Disclosure: Long ABT

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This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].