The DIV-Net

Investing And Uncertainty

2010-03-17T05:30:00.001-05:00

Humans don't like ambiguity. This is demonstrated in the experiment Hersh Shefrin discusses where subjects are offered either a guaranteed $1000, or a 50/50 chance at $2000. Consistently, fewer than 50% of respondents prefer the gamble for $2000, even though the expected values (i.e. the average value of the result if it were conducted many times) of both offers are the same.

What if the 50/50 odds in the above experiment were instead unknown? This adds even further uncertainty to the situation, and results in even fewer people willing to gamble on the $2000.

Shefrin calls this phenomenon "aversion to ambiguity", and on Wall Street it results in downward pressure on the prices of securities with uncertain outlooks. In order to avoid uncertainty/ambiguity, humans will stay away, even if the odds are favourable (i.e. downside risk is low, upside potential is high).

In his book, Shefrin argues that this ambiguity aversion is the reason for government intervention, even when it is not needed. What would have happened had the government not bailed out the banks? Nobody really knows, but the fact that the outlook was uncertain made the government want to intervene, even at a high cost, in order to avoid the uncertain situation.

As Mohnish Pabrai notes in his book, risk is not the same as uncertainty. Uncertainty can drive down the prices of assets/securities, even if downside risk is low. By capitalizing on situations where uncertainty is high, but risk is low, the investor can put himself in a position to earn above-average returns.

Disclosure: Author would roll the dice on the $2000 as long as the odds were 50%+

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

Stock Analysis: Leggett & Platt Inc. (LEG)

2010-03-15T05:30:00.001-05:00

Linked here is a detailed quantitative analysis of Leggett & Platt Inc. (LEG). Below are some highlights from the above linked analysis:

Company Description: Leggett & Platt Inc makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets.

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

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

LEG is trading at a discount to only 3.) above. Since LEG's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 62.8% premium to its calculated fair value of $13.08. LEG 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:

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

LEG 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%. LEG 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 1939 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)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

NPV MMA Diff.
Years to > MMA

LEG earned a Star in this section for its NPV MMA Diff. of the $563. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LEG has. The stock's current yield of 4.88% exceeds the 3.98% estimated 20-year average MMA rate.

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

Conclusion: LEG 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 LEG as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $21.97 before LEG'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 4.73%.

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 1.6%. This dividend growth rate is less than the 2.0% used in this analysis, thus providing a margin of safety. LEG has a risk rating of 1.50 which classifies it as a low risk stock.

A sign of a well managed company is the ability to increase cash flow in the face of falling sales and earnings. LEG's sales and earnings peaked in 2006. However, free cash flow per share has doubled since that time. 2010 should not be any different with S&P forcasting LEG's customer markets recovering late this year and moving to positive sales growth. Earlier this month I initiated position in LEG in spite of the fact it was trading well in excess of my $17.94 fair value price. Since then, LEG has appreciated an additional 5%. 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 LEG (1.2% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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

Weekend Reading Links - March 14, 2010

2010-03-14T05:30:00.001-05:00

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

Dividends Value presented Increasing Dividend Yield Part II: REITs
The Dividend Guy presented Essential Tips For the Struggling Investor – Making Decisions
Dividend Growth Investor presented Seven Dividend Increases in the news
Barel Karsan presented When The Company Values Itself
Buy Value presented Anticipating Dividend Increases
Disciplined Approach to Investing presented Bullish Investor Sentiment Rises, But...
Old School Value presented EPS Affected by Tax Rate Changes
Triaging My Way To Financial Success presented The Ultimate Wrap Mutual Fund
BuyLikeBuffett.com presented The First Million Is The Hardest To Make
40percent 20years presented Time to combine with Dividends Value Investing
EPIC INVESTOR presented Invest in ethics
Value Walk presented My Reporting From The Columbia Investment Management Conference

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

Abbott Laboratories (ABT) Stock Analysis

2010-03-12T03:00:00.001-06:00

Abbott Laboratories engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. The company is a component of the S&P 500 and the dividend aristocrat indexes. Abbott Laboratories has increased dividends for 38 years in a row. Most recently Abbott raised its quarterly dividend payment by 10% to $0.44/share. Dividend author Dave Van Knapp has included the company in his most recent book "The Top 40 Dividend Stocks for 2010".

For the past decade this dividend stock has delivered a total return of 7.3% annually.

At the same time the company has managed to increase earnings per share by 8.40% on average since the year 2000. For fiscal years 2010 and 2011, analysts expect EPS to increase to $4.24 and $4.77. This would be a nice increase from the $3.69 in earnings per share that the company booked for FY 2009. Analysts also expect an over 7% increase in sales for FY 2010 to 33 billion dollars, excluding the recently completed acquisition of Belgium based Solvay’s pharmaceuticals unit. This deal would add $0.10/share in FY 2010 and $0.20/share in FY 2011. I like the strong product pipeline of Abbott, as well as the potential for new launches. There could be some generic competition for some of Abbott’s products but overall the forecast for future revenue increases is quite rosy. Last year’s acquisition of Advanced Medical Optics exposes the company in the rapidly growing market for LASIK and Cataract procedures.
The company also delivers a little over half of its sales from international markets. Almost 18% of its sales come from the drug Humira, which treats rheumatoid arthritis and psoriatic arthritis. This drug is expected to continue delivering strong sales growth in the next few years for Abbott Labs. In June 2009, a federal jury has returned a verdict of $1.67 billion against Abbott Laboratories in a patent infringement suit. The other party to the suit was Johnson & Johnson (JNJ). Abbott Labs (ABT) is currently appealing the verdict.

The ROE has largely remained between 12% and 28% after falling from its 2000 highs over 34%.

The company has managed to increase its annual dividend by 8.60% on average over the past decade. A 9% increase in dividends translates into the dividend payment doubling every 8 years. Since 1986 Abbott Laboratories has managed to double its dividend every 6 years on average.

The dividend payout ratio has largely remained above 50% over the past decade, with spikes in 2001 and 2006 caused by lower earnings. 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 the dividend payout ratio is below 50%.

Overall Abbott Laboratories (ABT) is attractively valued currently, trading at a P/E of 15, dividend yield of 3.20% and an adequately covered dividend. While I don't expect to earn as much as this early Abbott Labs (ABT) investor, I still believe that there is room for substantial total returns in this position. I would consider be adding to this position.

Full Disclosure: Long ABT

Relevant Articles:

- Four notable dividend increases
- Dividend Growth beats Dividend Yield in the long run
- Dividends Stocks versus Fixed Income
- Not all dividend stocks are overvalued

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

Calibration

2010-03-10T05:30:00.001-06:00

In a previous post, we saw how humans have an overconfidence bias, and how that can play havoc on financial forecast estimations. What is not immediately clear, however, is the increasing role overconfidence plays the more knowledge one acquires. That is, as expertise rises, so does overconfidence, resulting in the fact that the people with the most knowledge are likely to be the most miscalibrated, which can result in detrimental effects.

But knowledge alone does not doom someone into being overconfident. James Montier argues that it's a lack of feedback that pushes people to be overconfident. To demonstrate this, Montier cites a study performed by Scott Plous that compares the calibration of weathermen against that of doctors. Weathermen were asked to predict the weather, while doctors were asked to diagnose patients (based on case notes). Both were asked to provide confidence intervals, so that their calibrations could be measured.

Interestingly, weatherman were well calibrated, while doctors were very poorly calibrated. Montier argues that this is because weather forecasters benefit from the fact that they receive immediate evidence of their abilities as forecasters, while doctors do not.

While one may be inclined to believe that financial analysts should be like weathermen in that they can see whether their forecasts came true, similar calibration tests appear to show that analysts are calibrated to a similar extent as doctors! As a result, the industry is glowing with overconfidence. Further testing confirmed the opening hypothesis: experts in finance are more overconfident than lay people, as they apply too narrow a band around their estimates as compared to the general public.

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

Stock Analysis: Meridian Bioscience Inc. (VIVO)

2010-03-08T05:30:00.001-06:00

Linked here is a detailed quantitative analysis of Meridian Bioscience Inc. (VIVO). Below are some highlights from the above linked analysis:

Company Description: Meridian Bioscience Inc. develops, makes and sells disposable diagnostic test kits and related products used for the rapid diagnosis of infectious diseases.

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

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

VIVO is trading at a discount to only 3.) above. The stock is trading at a 28.8% premium to its calculated fair value of $17.94. VIVO 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:

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

VIVO earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. VIVO 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 (2000-2003, 2001-2004, 2002-2005, 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 1990 and has increased its dividend payments for 19 consecutive years.

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

NPV MMA Diff.
Years to > MMA

VIVO earned a Star in this section for its NPV MMA Diff. of the $6,457. This amount is in excess of the $1,600 target I look for in a stock that has increased dividends as long as VIVO. If VIVO grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.98%. VIVO earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

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

Conclusion: VIVO did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks VIVO as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $38.46 before VIVO's NPV MMA Differential decreased to the $1,600 minimum that I look for in a stock with 19 years of consecutive dividend increases. At that price the stock would yield 1.77%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,600 NPV MMA Differential, the calculated rate is 10.4%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing a margin of safety. VIVO has a risk rating of 2.00 which classifies it as a medium risk stock.

VIVO is an integrated life science company that manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and related products. These products provide for early diagnosis of common medical conditions, such as gastrointestinal, viral, urinary and respiratory infections. VIVO's diagnostic products are used outside of the human body and require little or no special equipment. The company has strong market positions in the areas of gastrointestinal and upper respiratory infections, serology, parasitology and fungal disease diagnosis. VIVO markets its products to hospitals, reference laboratories, research centers, veterinary testing centers, physician offices and diagnostics manufacturers in more than 60 countries around the world. Although the stock is currently trading above my $17.94 fair value price, I view it as a company with a lot of potential; thus I have added it to my watch list. For additional information, including the stock's dividend history, please refer to its data page.

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

Full Disclosure: At the time of this writing, I held no position in VIVO (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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

Weekend Reading Links - March 7, 2010

2010-03-07T05:30:00.001-06:00

Dividends Value presented Increasing Dividend Yield Part I: Utilities
The Dividend Guy presented Added 3 New Canadian Dividend Stocks to My Portfolio
Dividend Growth Investor presented The ten year dividend growth requirement
Barel Karsan presented Paving The Way To Success
Buy Value presented Buffett Gets a Bullseye
The Div Guy presented February Dividend Income Update
Disciplined Approach to Investing presented Dividends Will Be A Company's Renewed Focus?
Old School Value presented ROE ROIC and CROIC
BuyLikeBuffett.com presented Secret Millionaire Donates Her Fortune
40percent 20years presented Ask Warren Buffett - Last Long Interview
EPIC INVESTOR presented Beat Warren Buffett
Value Walk presented Jacob Wolinsky Interviews Famous Value Investor Whitney Tilson

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

Is now the time to start looking at US ETF REITs?

2010-03-06T01:54:00.001-06:00

Every industry faces periods of rise and periods of decay. The last few years have, not surprisingly, been a period of decay in the REIT Area. But like nuclear stocks after 3 mile island, or banks after the savings and loan scandle, or bonds after the junk bond era, after a sector has been desimated what is often left are the high quality well managed companies that will rise to dominate the sector in the future. Is now the time for REITs?

For those not familiar with REITs they are otherwise known as Real estate invest trusts. The basic rule that governs their operations is that they give 90% of all revenues from a period back to shareholders in the form of a dividend. There are three key classes:

Equity REITS: Invest in property and gain revenues from collecting rent.
Mortgage REITS: Loan money for mortgages or buy and sell mortgage backed securities.
Hybrid REITS: You guessed it, they do both.

I am not a big fan of Mortgage REITs, in my opinion they partake in the buying and selling of paper. Paper that is difficult if not impossible to assess its true value. For those more in the know these types of investments may make sense. I follow Buffett's advise when it comes to these matters, if you can't understand it then don't buy it.

So that leaves us with Equity REITs. These REITs employee people who specialize in real estate industry they understand the simple formula (rent - upkeep) > mortgage. With housing prices depressed all across the US those companies that are still alive in this sector are starting to gather steam and acquire great properties. Regardless of what happens over the next few years people will still need properties to rent. Unless you believe that housing prices have a significant way to fall yet this is certainly an interesting sector to examine.

To further diversify there are several ETFs that deal with REITS if we look at each of these compared with the S&P over a two year and five year periods the industry is quite depressed from its highs.

To be clear I am not advising you date the REIT sector, but if you are looking to diversify your portfolio and hold a stock or ETF for 10 years it might be a good time to look at this sector.

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

Procter & Gamble Company Stock Analysis

2010-03-05T03:24:00.001-06:00

The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has raised distributions for 53 consecutive years.

This dividend stock has delivered an average annual total return of 3.30% over the past decade.

Earnings per share have grown at an average pace of 12.50% per annum. For FY 2010, analysts expect the company to earn $4.15/share, which is higher than 2009’s EPS of $3.58. For FY 2011 analysts expect Procter & Gamble to earn $4.10/share. The company has focused on cost cutting, improving efficiencies and streamlining its product portfolio over the past few years. It sold its Folgers Unit and exited its pharmaceuticals operations. As consumer spending picks up, the company’s recognizable brand products could get a nice boost in sales, especially if it increases advertising. Emerging and developing markets, product innovation, focusing on high margin products as well as strategic acquisitions could deliver strong earnings growth over the next decade. The demand for the company’s line of consumer products is generally stable and not much affected by overall economic conditions. The company continues to benefit from its acquisition of Gillette, through cost synergies and sales growth opportunities from its diverse sales channels.

The annual dividend per share has increased by an average of 11% annually, which is below the growth in earnings. An 11% growth in dividends translates into the payment doubling every almost every six and a half years. Procter & Gamble has managed to double its distributions every seven years on average since 1973.

The return on equity has decreased since the acquisition of Gillette in 2006.

The dividend payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that Procter & Gamble is attractively valued with its low price/earnings multiple of 15, a not too high DPR. However the current dividend yield is below the 3% minimum threshold that I have set. Two of PG’s competitors, Colgate-Palmolive (CL) and Kimberly-Clark (KMB) trade at P/E multiples of 19 and 13 times earnings respectively. Colgate-Palmolive currently spots a 2.60% dividend yield, while Kimberly-Clark has a 4.00% yield. I would consider adding to my Procter & Gamble holdings on dips below $59.

Full Disclosure: Long PG

Relevant Articles:

- Unilever (UL) Dividend Stock Analysis

- Clorox (CLX) Dividend Stock Analysis

- Colgate-Palmolive (CL) Dividend Stock Analysis
- Diageo (DEO) Dividend Stock Analysis

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

An Uphill Battle

2010-03-03T05:30:00.000-06:00

As previously discussed, value investors can benefit from investing along with other value investors. But the presence of another value investor as a major shareholder does not guarantee that a company will be run in a shareholder-friendly way. Sometimes, management and board practices can make life difficult for even the most active of value investors.

As an example, consider ITEX Corporation (ITEX), which offers a marketplace for businesses to exchange goods and services. ITEX boasts two major value shareholders, including Sardar Biglari and The Polonitza Group, who own a combined 21% of the company. Unfortunately, the company is not currently structured to succeed, with an extremely poor governance structure that tilts the balance of the company's power towards management at the expense of shareholders.

First of all, there are only three board members, one of which is the CEO. Neither of the remaining two board members can reasonably be considered independent, having received compensation from the company in return for consultatory services. Furthermore, there has been no turnover at the director position in almost 8 years! When one of the aforementioned shareholder groups suggested a change at director due to a lack of independence, it appears the company responded that "they are not very close friends and maintain independent thoughts and ideas" and that "they do not frequent each other’s houses or family events". Unfortunately, this hardly assuages shareholder fears, as the issue is not how buddy-buddy these guys are, but how the board's incentives (due to the fact that they provide executive and consulting services to the company) are not aligned with those of shareholders.

As a result, the CEO sits on the audit committee! The other two directors, who receive or have received payment for consulting services from the company, sit on the compensation committee! For all we know, the board is doing a terrific job, but the structure reeks of conflict of interest. But is there any evidence that this might be hurting shareholders?

Well, as these value investors began buying up shares, it appears the board/management went into defensive mode. In 2009, the company protected the CEO from a buyout by guaranteeing some payments to him of a few hundred thousand in the event of a change of control. Furthermore, they recently amended company by-laws that restrict the rights of outside shareholders.

Finally, the company appears rather generous in handing out shares to management, which dilutes existing ownership. The company only has 18 million shares outstanding, but consider the following handouts:

In 2001, Mr. White received 250,000 shares for services rendered to ITEX as an independent consultant.
For services as a director of ITEX from 2003 through 2007, Mr. White was compensated by an annual grant of 40,000 shares of common stock.
For services as a director of ITEX in 2008 and 2009, Mr. White was compensated by an annual grant of 30,000 shares of common stock.
On May 3, 2004, and again on July 6, 2006, Mr. White was awarded 300,000 shares of common stock for services rendered ITEX as Chief Executive Officer.
On December 13, 2005, Mr. White was awarded 50,000 shares of common stock as consideration for his collateralized personal guarantee of ITEX obligations incurred in order to fund a corporate acquisition.
On October 8, 2009, Mr. White was awarded 195,000 shares of restricted common stock for services rendered ITEX as Chief Executive Officer.

Even though value investors may be major shareholders of a corporation, they may still face an uphill battle. Before jumping on board, potential shareholders would be wise to investigate whether management is playing nice, or entrenching themselves.

Disclosure: None

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

Dividend Advice and Strategy

2010-03-02T05:00:00.005-06:00

This is the final week for our video series on common investment topics. The Market Capitalist has a series of videos that we have been linking to here. This week is all about dividends and a dividend strategy.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

Stock Analysis: The Coca-Cola Company (KO)

2010-03-01T05:30:00.001-06:00

Linked here is a detailed quantitative analysis of The 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. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide.

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

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

KO is trading at a discount to only 3.) above. Since KO's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 18.3% premium to its calculated fair value of $44.55. KO 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:

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

KO earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. KO 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 48 consecutive years.

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

NPV MMA Diff.
Years to > MMA

KO earned a Star in this section for its NPV MMA Diff. of the $903. 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 7.3% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.98%

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

Conclusion: KO did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks KO as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $62.48 before KO's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.82%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.6%. This dividend growth rate is less than the 7.3% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.50 which classifies it as a low risk stock.

Coca-Cola is the world's most recognizable brand. KO's extensive direct distribution network enables the company to deliver its products to almost all corners of the globe with unmatched efficiency. With its relatively stable end markets, dominant market positions and strong financials, KO is type of stock dividend growth investors are looking for. The stock is currently trading slightly above my $44.55 fair value price, but the quality of the company is such that I would be willing to pay a small premium for. Definitely a buy on dips. 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 KO (2.6% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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

Weekend Reading Links - February 28, 2010

2010-02-28T05:30:00.002-06:00

Dividends Value presented The 2010 Dividend Stock Ideas List
The Dividend Guy presented The Hidden Advantages of Dividend Investing
Dividend Growth Investor presented Seven dividend aristocrats that Buffett owns
Barel Karsan presented Developing An Investment Philosophy: Chapter 2
Buy Value presented Three Key Ratios For Investors
moneygardener presented dropping the weight of consumer debt
Stock Market Prognosticator presented Berman Is Back
Disciplined Approach to Investing presented 2010 Dogs Of The Dow Performance Update
Living Off Dividends & Passive Income presented How To Avoid Foreclose: Humor
Old School Value presented 5 Tips to Maximize Research and Investing Time
Triaging My Way To Financial Success presented 2010 QuickTax Review & Giveaway
Dividend Money presented How Much Can I Borrow For A Mortgage?
BuyLikeBuffett.com presented 3 Small Cap Dividend Stocks That Pay
40percent 20years presented Two articles for better investment!
EPIC INVESTOR presented Current Short Interest
Value Walk presented Stock Market Valuations- February 25 2010 Farily Valued

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

Anticipating a Dividend Increase

2010-02-27T01:05:00.000-06:00

I am a big fan of companies that make it a regular habit of dialing up a dividend. This is why I have been such a proponent of the dividend aristocrat group. Nothing perturbs me more though than to buy into a 2% dividend stock that I believe will crank up its rate only to be forced to wait multiple years before seeing that increase. To counteract this here is a simple parachute that can increase your confidence that a rate will increase.

CFO Turnover

In order to be confident that our investigations will be worthwhile it is important to see how long key people stay with the company. If the CFO, CEO and others are spinning through the company like a revolving door then your company has changed or is changing- investigation into it’s past may not indicate likely actions in the future. If however you find that current key positions have been with the company for some time then we can proceed with our investigation.

Investigate previous payout ratios

A payout ratio shows you what percentage of the net income is being paid out to shareholders. These rates can be anywhere from 10% -110% depending on the dividend paying company’s industry and financial condition. Having a low rate doesn’t necessitate a dividend increase, or conversely having what appears to be a higher rate doesn’t mean that an increase won’t happen. The task is to see what that payout ratio was the last few times an increase was done. This information can be found by understanding how the dividend payout ratio is calculated (Dividends / Net Income) and then retrieving the information from previous year's financial statements on morningstar or the company's own investor page.

Bring it together

People are creatures of habit. I have found that if you have the same CFO, CEO and the same payout ratio as the last time a dividend rate was increased you are very likely to see the same again. Conversely if these factors are not present you are very likely to end up disappointed despite what you might think is a fair current payout ratio. Simple but true.

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

Kimberly-Clark Corporation (KMB) Stock Analysis

2010-02-26T04:15:00.002-06:00

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. Every day, 1.3 billion people - nearly a quarter of the world's population - trust K-C brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than 80 countries. This dividend aristocrat has boosted distributions for 38 years in a row. The most recent increase was in February 2010, when the company boosted distributions by 10% to 66 cents/share.

This dividend stock has delivered an average annual total return of 2.80% over the past decade.

Earnings per share have grown at an average pace of 3.40% annually. The company has also has repurchased 3% of its outstanding stock annually on average since 2001. For FY 2010, analysts expect the company to earn $4.95/share, which is higher than 2009’s EPS of $4.52. For FY 2011 analysts expect Kimberly-Clark to earn $5.36/share. 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. Commodity prices could be detrimental to total costs at the company, as is the competitive nature of developed markets in which Kimberly-Clark does business.

The annual dividend payment per share has increased by an average of 9.30% annually, which is much higher than the growth in earnings. A 9% growth in dividends translates into the payment doubling every almost eight years. Kimberly-Clark has managed to double its distributions almost every eight years on average since 1986.

The return on equity has fluctuated between a low of 25.70% in 2006 and a high of 39.4% in 2009. Over the past few years it has remained above 30%, which is impressive.

The dividend payout ratio has been on the rise over the past decade, increasing from a low of 32.30% in 2000 to a high of 60% in 2006. Currently it is at 53%. The increase is mostly due to the faster rate of increase in dividends, whereas earnings growth has been somewhat sluggish. 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 Kimberly-Clark (KMB) is attractively valued at 13.30 times earnings, has an adequately covered dividend payment and yields 4%. Despite the fact that the company has grown slowly over the past decade, it could easily catch up over the next few years, which would make it a worthwhile investment. Add in the consistency of dividend increases and the stock buybacks, and you have a shareholder friendly management which is something hard to find these days.

Full Disclosure: Long KMB

Relevant Articles:

- Unilever (UL) Dividend Stock Analysis
- Diageo (DEO) Dividend Stock Analysis
- McGraw-Hill (MHP) Dividend Stock Analysis
- Brown-Forman Corporation (BF-B) Dividend Stock Analysis

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

Common Comes Last

2010-02-24T05:30:00.001-06:00

Endwave (ENWV) has cash of $66 million and total liabilities of just $5 million, yet the stock trades for just $24 million. The company does show losses; however, in recent quarters these losses have been small in comparison with what appears to be a gigantic margin of safety. But despite the large cash balance, investors who dig deeper into the company's financial statements would find that the margin of safety is not what it appears to be!

Many of Endwave's financial updates use a single line to represent shareholder's equity, but that can be misleading. This is because Endwave is financed by a large block of preferred stock which has a larger aggregate value than the company's common stock! Once this preferred stock is subtracted from the company's cash balance (since preferred stockholders are higher in the pecking order than common stockholders), the margin of safety reduces to a paltry sum. The company's quarterly losses now become a material issue, and if they continue, they can play a large role in further reducing the value of the common stock.

Stock screens and financial statement summaries such as those found on Yahoo! and Google can be useful in identifying companies trading at discounts to their intrinsic values. However, investors cannot buy on this basis alone. A careful reading of the company's audited financial statements, and notes to its financial statements, including the composition of the company's share capital, is imperative. Securities that rank ahead of common shareholders, not just liabilities, must be identified and accounted for before an accurate valuation of the common stock is possible.

Disclosure: None

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

Week 3 of the video series

2010-02-23T05:00:00.003-06:00

Week 3 of the video series covering common investment and dividend topics. These videos were prepared by The Market Capitalist. This week Dominico is going to tell us the difference between stock price and stock value.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

Stock Analysis: Walgreen Co. (WAG)

2010-02-22T05:30:00.002-06:00

Linked here is a detailed quantitative analysis of Walgreen Co. (WAG). Below are some highlights from the above linked analysis:

Company Description: 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.

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

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

WAG is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $33.49. WAG 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:

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

WAG earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WAG 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 (2000-2003, 2001-2004, 2002-2005, 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 1933 and has increased its dividend payments for 35 consecutive years.

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

NPV MMA Diff.
Years to > MMA

WAG earned a Star in this section for its NPV MMA Diff. of the $1,477. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WAG has. If WAG grows its dividend at 15.7% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

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

Conclusion: WAG did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks WAG as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $48.65 before WAG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.13%.

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 12.7%. This dividend growth rate is less than the 15.7% used in this analysis, thus providing only a margin of safety. WAG has a risk rating of 1.00 which classifies it as a low risk stock.

With over 7,000 drugstores, WAG offers unmatched convenience with one of the the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry. However, pressures from non-traditional competitors and potential adverse legislation could quickly weaken WAG's advantages. Although the stock is trading slightly above my $33.49 fair value price, the sub-2.% dividend yield will prevent any near--term purchases. For additional information, including the stock's dividend history, please refer to its data page.

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

Full Disclosure: At the time of this writing, I held no position in WAG (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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

Weekend Reading Links - February 21, 2010

2010-02-21T05:30:00.002-06:00

Dividends Value presented 38 Dividend Securities For A Well-Rounded Asset Allocation
The Dividend Guy presented Three Essential Dividend Portfolio Question Every Investor Must Ask Now
Dividend Growth Investor presented Ten Dividend Kings raising dividends for over 50 years
Barel Karsan presented Catching Up With Innovation
Dividend Tree presented ADM – Priced for Dividend Growth Portfolio
Buy Value presented Dell- a Dud
The Div Guy presented Solid Foreign Dividend Stocks
Disciplined Approach to Investing presented The Value Is In Quality
Living Off Dividends & Passive Income presented Taleb: Everyone Should Short US Treasuries
Old School Value presented How to Invest: Research and Valuation Process
Triaging My Way To Financial Success presented A Need for Stricter Mortgage Lending?
BuyLikeBuffett.com presented Reaping Big Rewards From Trash
40percent 20years presented Walter Schloss - I do not like losing money
Value Walk presented Why Did Berkshire Hathaway Signifcantly Reduce its Stake in Exxon Mobil?
Think Dividends presented The Mall REIT

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

Only 4 Ratios

2010-02-20T01:00:00.001-06:00

if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I'll take my shot at it, what would you pick?

1) Current Ratio

Current Assets / Current Liabilities

Why?

This ratio keeps track of the company's ability to pay its short term debt. If a company doesn't have safety money to deal with debt then they might not be in business tomorrow and I don't need any of that.

2) Dividend Yield

Annual Dividend Per Share / Price Per Share

Why?

As a buy and hold investor I like to get paid to hold the investments. A nice yield makes for a little reward for patience.

3) Dividend Payout Ratio

Dividends/Net Income

Why?

Getting a great yield now is perfect, but how can you be sure that this dividend won't get canceled as soon as you buy the stock- you don't. One way of keeping an eye on this is to look at the payout ratio. If too much of the income is being eaten up with a dividend then beware that dividend might get cut or at least it sure isn't going to increase in the near future.

4) Dividend Growth Rate

Why?

If a company increases its dividend on a regular basis the returns over the long term can be jaw dropping. The future of a dividend can be more important than the present.

So how about you, if you only had four ratios what would you use?

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

Colgate-Palmolive (CL) Analysis

2010-02-19T03:58:00.000-06:00

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company recently increased its quarterly dividend by 20.40% to 53 cents/share. This is the forty-seventh consecutive dividend increase for Colgate-Palmolive, which is a dividend champion.

Over the past decade this dividend stock has returned 4.30% per annum.

Earnings per share have increased by 11.10% on average since 2000. Since 2000 the number of shares outstanding has decreased from 625 million to 525 million, or an average decrease of 1.90% annually. Analysts estimate that EPS would grow by 9.80% to $4.80 in FY 2010. FY 2011 EPS are expected to increase by 11.40% from there to $5.35.

Sales outside North America accounted for two-thirds of the company’srevenues. The company’s strong competitive advantages in the oral healthcare field plus the low capital requirements have enabled it to generate high returns on capital.

Returns on Equity have been truly phenomenal, having never fallen below 80% since 2000.

Annual dividends have increased by 11.80% on average over the past decade, which is slightly higher than the growth in earnings.

A 12 % growth in dividends translates into the dividend payment doubling every six years on average. If we look at historical data, going as far back as 1976, Colgate Palmolive has actually managed to double its dividend payment every eight and a half years on average.

The dividend payout ratio has consistently remained below 50%, with the exception of a brief spike to 50.80% in 2006. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The company trades at a P/E of 18.80 times earnings and has an adequately covered dividend payment. The current yield of 2.60% is below my 3% entry threshold. If we look at the yield from the past decade however, CL has yielded more than 3% only during the lows in early 2009. Because of this I initiated a position in Colgate recently. I would look forward to add to this position on dips below $71, which would be my ideal entry price.

Full Disclosure: Long CL

Relevant Articles:

- Twenty Dividend Increases in the news

- Where are the original Dividend Aristocrats now?

- Best Dividends Stocks for the Long Run

- Unilever (UL) Dividend Stock Analysis

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

Dividend Investing and Businesses with Moat

2010-02-18T05:30:00.010-06:00

We all have read many times in investing literature about investing in companies that have wide moat. We all also know that this term was made famous by Warren Buffett. What is this wide moat? In simple terms, it is some type of competitive advantage in its business. Competitive advantage in business can come from many different types, viz., brand, high switching cost, patents/IP/rights, ease of scalability, low cost producers, etc.

There are many companies that have many years building moats around their businesses. This moat makes it difficult for competitors to encroach upon their market share. Suffice to say, business with moat have sustainable competitive advantage. In general, companies with moats in their business are very good dividend growth providers. However, the opposite may not be true. Following are few examples of companies with moat that are also dividend growers.

Johnson and Johnson (JNJ): brand, and patents/IPs
Sysco (SYS): distribution network, high switching cost
AT&T (T) and Verizon (VZ): high switching costs, high entry barrier
Intel (INTC): brand, patents/IPs, scalability, high entry barriers
IBM: brand, patents/IPs, worldwide reach
Walmart (WMT): distribution network, low cost retailer
Procter & Gamble (PG), Clorox (CLX), Colgate Palmolive (CL), Unilever (UL): brand, distribution network, worldwide reach,
Becton, Dickinson and Company (BDX): brand, high entry barrier
Archer Daniels Midlands (ADM): expansive network, sourcing, one of few in organized agri business sector.
McDonald's (MCD): brand, franchise network, global reach, low cost fast food producer

For us, individual do-it-yourself investors, I am always intrigued by the process of determining moat. How do we really know what the moat is for any company that we invest in? We all read literature, listen to business honchos, and talking heads. Based on what we read we create a collage of this information and somewhere we find which company has wide moat. If were that easy, then there would be many more Buffetts, isn’t it?

To me, ability to determine wide moat and what price to buy are related. More importantly, these are closely tied to circle of competence. How can we individuals have circle of competency in all businesses or market areas? We have to depend upon literature to determine it.

On the same lines, how do we know that the company continues to enjoy the moat? After all, many of the companies that we thought had moat (and were dividend growers) got hit badly in last two years.

It is my belief that moat in a business is not permanent. It is management that ensures that their companies continue to enjoy the moat in market place. As mentioned earlier, you will find a quite a bit of literature on existing moat or past moat a company enjoys. The most difficult part is; how to monitor, or how to know whether the company continues to maintain its competitive advantage? It would be folly to think one will be able to identify it and sell at right time! Focusing on timing the market is never a good process and seldom successful.

In my viewpoint, the optimum approach is to manage this by minimizing the downside risk. This can be done by limiting the exposure (allocation) or limiting losses (event based selling).

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

Making Sense Of The Business

2010-02-17T05:30:00.001-06:00

Occasionally, companies will appear to have terrific business models, but for some reason the profits just aren't forthcoming. On the other hand, a company's business model may seem downright silly, but it may continue to show profits. Venture capitalists may take interest in the former, while speculators may be interested in the latter. On the other hand, long-term investors should limit themselves to situations where the business model makes sense and the company shows profits.

As an example, consider Money4Gold (MFGD), a company based out of Florida. With the run-up in the price of gold over the last several years, many companies have popped up looking to profit from this trend, from mining companies looking to re-open shutdown mines to new gold and precious metals funds looking for a larger share of the investor's dollar. One company taking an interesting approach to profiting from the high gold price is Money4Gold.

Money4Gold has taken out a substantial marketing campaign to convince individuals to mail-in their unwanted gold in return for cash back based on what was mailed in. No details are given to the mailers as to how the amount of cash they receive will be determined, and so it appears unlikely at first glance that anyone of sound mind would willingly mail away their valuables in this way.

Nevertheless, the company exists and shows a market cap of over $50 million! Is this bewildering business model actually profitable? The financials suggest that it may very well be profitable in the near future. The company's income statement is improving, and in the last quarter the company actually managed to turn a profit in its Canadian operations!

However, a company that shows profits without a business model that makes sense may trade at a valuation that appears attractive, but could turn out to be a value trap. It is for this reason that it is of the utmost importance that investors understand the business, so that there are no negative surprises. While Money4Gold might continue to improve its profitability in the near-term, it seems unlikely that it can continue to do this over the long haul. The company appears to pay its "suppliers" less than 30% of the market value of their gold, which hardly seems sustainable! Long-term investors should beware of such situations and only invest in companies with easy-to-understand, time-tested, profitable business models.

Disclosure: None

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

Earnings Per Share & Dividend Yield Video

2010-02-16T05:00:00.001-06:00

This is the second post in a series of video blogs by Dominico Johnston over at The Market Capitalist. Last week I kicked off this series of video posts from that site that I found interesting and especially relevant for us dividend investors.

This second video covers the basics of earnings per share and dividend yield. It gets a bit basic, but at the end of the day it is earnings that move the market and we need to be aware of them constantly.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

Stock Analysis: RLI Corp. (RLI)

2010-02-15T05:30:00.003-06:00

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

Company Description: RLI Corp, based in Peoria, IL, provides selected property, casualty and surety insurance.

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

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

RLI is trading at a discount to only 1.) above. The stock is trading at a 17.6% premium to its calculated fair value of $44.52. RLI 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:

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

RLI 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%. RLI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 consecutive years.

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

NPV MMA Diff.
Years to > MMA

RLI earned a Star in this section for its NPV MMA Diff. of the $2,319. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RLI has. If RLI grows its dividend at 15.0% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

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

Conclusion: RLI 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 RLI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $86.12 before RLI's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.23%.

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 10.5%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing only a margin of safety. RLI has a risk rating of 1.25 which classifies it as a low risk stock.

RLI has a history of strong dividend growth. However, as we have seen over the last several years, the Financial Services sector has been quite volatile. With that in mind, I prefer a higher current yield than RLI's 2.03% at the expense of a lower dividend growth rate. Also considering the stock is trading well above my $44.52 fair value price, I will pas on any near-term purchases of RLI. For additional information, including the stock's dividend history, please refer to its data page.

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

Full Disclosure: At the time of this writing, I held no position in RLI (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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