Dividend Investors Have A Reason To Rejoice

4/9/2012


During the first three months of this year, 122 companies in the S&P 500 Index raised their dividends, the best start to a year since at least 2004. According to Standard & Poor's, 567 U.S.-traded stocks raised or resumed dividends from January through March, versus 31 cuts or omissions.

Over the last three years, the S&P 500's dividend rose at an annualized rate of 1.5%, slightly below the average of 2% for all dividend-payers in the index and well below the average three-year growth rate of 6.8% for S&P 500 stocks since 1990.

However, that modest recent growth rate doesn't tell the whole story. As the chart below, the index's dividend has been volatile. The number of companies cutting or omitting dividends jumped in late 2008 and 2009. Year-to-year dividend growth turned negative in June 2010 and didn't crack positive territory again until February.

S&P 500 Index companies paid a combined $248 billion in dividends in the 12 months ended March, up from $213 billion in the year-earlier period and $194 billion two years ago. Index components boosted their dividends by a record $24.2 billion in the March quarter. Payments over the last year were 2% below the record $252 billion paid in the 12 months ended September 2008. With the index paying out just 31% of its earnings in dividends, well below the average of 42% since 1988, companies can afford more dividend growth in the year ahead.

The economic recovery deserves some of the credit for the recent dividend growth, as S&P 500 profits surged 43% over the last three calendar years. Increased industrial activity and consumer spending give companies reason for optimism.

Corporate cash balances have risen to record levels. At the end of 2011, S&P 500 Index companies held more than $3.6 trillion in cash. As cash holdings have ballooned, so has pressure from investors to share some of the wealth. Even Apple ($629; AAPL), long unwilling to pay a dividend, changed its tune last month.

While a history of dividend growth is no guarantee of future hikes, companies that raise their payouts tend to continue doing so. In addition, shares of companies with strong three- or five-year dividend growth have outperformed the average stock consistently since 2010, suggesting a "show me the money" mentality still reigns on Wall Street. The table below presents 14 A-rated stocks that have doubled the payout over the last five years. Three are reviewed below.

KLA-Tencor ($54; KLAC) pays out less than one-third of its earnings in dividends yet yields 2.6%. After 12 quarters of flat dividend payments, the semiconductor-equipment supplier raised its dividend 67% in July 2010 and another 40% in July 2011. Free cash flow per share more than doubled to $4.01 last year, nearly triple the indicated dividend of $1.40, leaving flexibility for further boosts.

The consensus projects a per-share-profit decline of 15% this year, reflecting a pullback from massive equipment purchases by semiconductor makers last year. However, the estimate has jumped 18% over the last two months, and strong demand for memory chips could render even the higher target conservative. At 13 times the 2012 profit estimate, KLA-Tencor trades at a 25% discount to the median semiconductor-equipment company in the S&P 1500 Index. KLA-Tencor is a Buy.


Macy's ($41; M) has raised its dividend twice in the last year, doubling it in May and again in January. The department-store operator's indicated yield of 2.0% is near its high since March 2009, when it cut the dividend 62%. Is Macy's likely to double its dividend again in the next year? No. But with the payout equal to only 28% of trailing earnings, Macy's can easily afford to pay its new, higher dividend — and more, if it wishes.

Per-share profits rose 35% and operating cash flow 39% over the last 12 months. That growth is unsustainable, but the consensus projections of 16% profit growth this year and 13% next year seem manageable for Macy's. The retailer's higher-income customers are holding up better than lower-income shoppers. And while it's too early to declare a new trend, Macy's efforts to win over younger shoppers seem to be bearing fruit. Macy's is a Focus List Buy and a Long-Term Buy.


Wal-Mart Stores ($61; WMT) paid its first dividend in 1974 and raised the payout in each of the next 38 years, including a 9% increase last month. The dividend rose at an annualized rate of 18% over the last 10 years and 21% over the last 25 years.

Wal-Mart's Quadrix® Overall score has dipped to 72, among the lowest on our buy lists, reflecting mediocre operating momentum and weak earnings-estimate trends. However, Wal-Mart's modest valuation and history of resilience and dividend growth should appeal to patient, income-oriented investors. In the January quarter, same-store sales rose 2.1% excluding fuel, building on a 1.9% gain in the October quarter and notching the strongest growth since the May 2009 quarter.

The valuation does not yet reflect a rebound in growth. At 13.5 times trailing earnings, Wal-Mart trades at an 18% discount to the median general-merchandise retailer and 9% below its own five-year average P/E. The stock is rated Long-Term Buy.

DIVIDEND GROWERS WITH MORE IN STORE
All 14 of the A-rated stocks below have doubled their per-share dividends over the last five years. All have strong profit-growth potential and currently pay out less than 40% of their earnings on dividends, leaving room for further increases. Stocks recommended for purchase are presented in bold.
Dividend Growth
---------- (Annualized) ----------
-- Profit Growth --
Company (Price; Ticker)
Indicated
Dividend
($)
Div.
Yield
(%)
Payout
Ratio
(%)
3
Years
(%)
5
Years
(%)
10
Years
(%)
Last
5 Years
(%)
Next
5 Years
(Est.)
(%)
Quadrix
Overall
Score
Accenture ($65; ACN)
1.35
2.1
36
39
31
NM
16
12
83
Aetna ($50; AET)
0.70
1.4
14
160
77
46
12
11
98
CF Industries ($188; CF)
1.60
0.8
7
59
82
NM
106
16
100
CSX ($22; CSX)
0.48
2.2
29
18
27
13
18
13
70
Deere ($82; DE)
1.84
2.3
27
18
17
13
16
11
89
IBM ($210; IBM)
3.00
1.4
22
14
18
18
17
12
67
KLA-Tencor ($54; KLAC)
1.40
2.6
30
33
24
NM
13
10
98
Macy's ($41; M)
0.80
2.0
28
30
16
NM
16
12
90
MasterCard ($438; MA)
1.20
0.3
6
26
29
NM
40
18
81
Microsoft ($32; MSFT)
0.80
2.5
29
17
15
NM
17
9
92
Occidental Petro. ($96; OXY)
2.16
2.2
26
19
28
13
12
16
99
Union Pacific ($108; UNP)
2.40
2.2
36
33
38
16
18
16
86
UnitedHealth ($59; UNH)
0.65
1.1
14
179
85
55
10
11
86
Wal-Mart Stores ($61; WMT)
1.59
2.6
35
16
21
18
9
10
72
NM Not Meaningful because company didn't pay a dividend 10 years ago.     Note: Quadrix scores are percentile ranks, with 100 the best.

 


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