Get Both Dividends And Growth

8/8/2011


The S&P 500 Index returned at least 21% each year from 1995 through 1999, for a five-year total return of 251%. That five-year performance was the index's best since at least 1950.

Not surprisingly, dividends fell out of favor in the late 1990s. Who needs yield when the S&P 500 jumps nearly 30% a year? Those returns caused many investors to equate payouts with stuffy, old companies. And thus was spawned the truism that growth stocks don't pay dividends, and the resulting stigma that prevented many high-growth companies from sharing their cash with stockholders.

It all sounded logical, but the truism had one problem — it wasn't true.

One study of U.S. stock returns from 1950 through 2001 found that companies that paid out a relatively high percentage of earnings in dividends generated higher 10-year earnings growth than companies with low payout ratios. Other studies of long-term returns both in the U.S. and overseas reached similar conclusions, showing that dividend-paying stocks tend to generate stronger profit growth. And over time, profit growth tends to drive capital gains.

Change in attitude

Dividends' low-growth stigma appears to be wearing off. In recent years, growth stocks that long resisted paying dividends have established a payout — notably Cisco Systems ($15; CSCO) this year, Starbucks ($39; SBUX) in 2010, and Oracle ($30; ORCL) in 2009.

In the first seven months of 2011, 16 S&P 500 companies initiated dividends. During all of 2008 and 2009 combined, only 11 index members started paying a dividend. While some of the new payouts represent restarts by companies that stopped paying dividends in 2008 and 2009, nearly half of this year's initiators had never paid a dividend.

At the end of June, nearly 78% of S&P 500 Index stocks paid a dividend, up from 72% at the end of 2009. That percentage fell in the late 1990s, finally dipping below 70% in the early 2000s before rebounding. Even today's higher participation lags that of 20 years ago. Back in the early 1990s, the proportion of S&P 500 stocks paying dividends topped 86%. While a return to such heights seems unlikely, dividends have certainly gained in popularity in recent months, and we are likely to see more initiations over the next year or two.

While the Forecasts' does not recommend chasing yield — yield is often a proxy for risk, leading income-oriented investors to build far more perilous portfolios than is wise — we are big fans of companies that pay sustainable dividends. The table on page 5 lists 17 A-rated stocks that yield at least 0.7% and have grown earnings at annualized rates of at least 10% over the last one and five years. All also seem capable of double-digit annual profit growth over the next five years. Four of those companies are reviewed below.

BlackRock ($174; BLK) is the world's largest money manager. The value of its managed assets tend to move with the markets, which can influence the share price.

BlackRock raised its quarterly dividend 38% earlier this year, following a 28% increase in 2010. Over the last five years, the company has delivered annualized dividend growth of 27%. Assets under management surged nearly sevenfold to $3.66 trillion during that five-year period, reflecting aggressive acquisitions, augmented by market gains and new accounts. Sales rose at an annualized rate of 45% and per-share earnings rose at a 22% clip over the last five years.

More growth should lie ahead, with the consensus calling for 17% higher per-share profits in 2011 on 12% revenue growth. BlackRock's earnings are projected to show 16% annualized growth over the next five years. BlackRock, yielding 3.2%, is a Buy and a Long-Term Buy.


Intel's ($22; INTC) quarterly dividend, initiated in 1992 and now $0.18 per share, has jumped more than 80% over the last five years. The semiconductor titan's 3.9% yield is generous by industry standards, yet the company pays out less than one-third of its earnings in dividends, suggesting Intel can keep boosting the distribution without sacrificing investment in growth initiatives. Moreover, stock repurchases trimmed Intel's share count by 3% in the June quarter to its lowest level in at least 20 years.

In July, Intel said that growth in emerging markets remains hearty, offsetting weak personal-computer demand in developed markets. Although some analysts question Intel's optimism regarding the personal-computer market, the 2011 consensus calls for both per-share profits (projected to rise 16% this year) and sales (24%) to surpass Intel's five-year annualized growth rates (14% for earnings per share and 6% for revenue). Intel's long-term prospects appear healthy, with Wall Street projecting annual profit growth of 11%. Intel is a Buy and a Long-Term Buy.


Oracle ($30; ORCL) initiated its dividend in 2009 and raised the distribution by 20% earlier this year. Continued growth appears likely, for at least three reasons. First, Oracle's balance sheet is loaded with $12.9 billion in net cash. Second, the company has a prodigious ability to generate cash, with free cash flow growing in five consecutive quarters and rising 30% in the 12 months ended May to $9.70 billion. Third, at least in the short term, Oracle seems less likely to spend its cash to purchase other companies.

Citing rich valuations in the technology sector, CEO Larry Ellison said in June that Oracle will ease up on its traditionally aggressive acquisition strategy. The stock scores above 70 in five of six Quadrix categories and earns an Overall rank of 97. Oracle also earns ranks above 80 in both of our sector-specific scores. Oracle, yielding 0.8%, is a Focus List Buy and a Long-Term Buy.


Volkswagen ($35; VLKAY) formed in the late 1930s, but not until 2002 did the company start paying an annual dividend. The German automaker's distribution has grown at an annualized rate of 18% over the last five years, including a 40% boost earlier this year.

The stock has its share of warts. A hefty debt burden weighs down the balance sheet, with net debt of $48 per share higher than the automaker's stock price. Volkswagen earns a Quadrix Financial Strength score of 34. Operating cash flow, $14.45 billion in the 12 months ended March, has fallen in four of the last six quarters. So while Volkswagen earns the maximum Quadrix Overall score of 100, we do not recommend the stock for purchase. It is rated A (above average).

DIVIDENDS AND GROWTH
All the A-rated stocks below managed double-digit growth in per-share earnings over the last one and five years and are expected to grow profits at double-digit rates annually over the next five years. All have a history of dividend growth or have initiated a dividend recently. Stocks recommended for purchase are presented in bold.
1-Year Growth
5-Year Growth (Annual.)
Est. EPS Growth
Company (Price; Ticker)
Indicated
Dividend
($)
Yield
(%)
Sales
(%)
EPS
(%)
Dividends
(%)
Sales
(%)
EPS
(%)
Dividends
(%)
Curr.
Year
(%)
Next
Year
(%)
Next
5 Yrs.
(Annual.)
Accenture ($58; ACN)
0.90
1.6
14
20
20
7
14
25
27
12
13
AmerisourceBergen
($38; ABC)
0.46
1.2
3
18
44
6
20
55
17
11
13
BlackRock ($174; BLK)
5.50
3.2
37
34
38
45
27
17
17
15
16
CSX ($23; CSX)
0.48
2.0
16
41
50
4
19
36
29
18
15
IBM ($178; IBM)
3.00
1.7
7
20
15
3
17
25
16
11
12
Intel ($22; INTC)
0.84
3.9
18
23
15
6
14
13
16
6
11
McDonald's ($85; MCD)
2.44
2.9
8
14
11
4
19
29
13
10
10
McKesson ($78; MCK)
0.80
1.0
5
18
11
5
17
25
24
12
11
Microsoft ($27; MSFT)
0.64
2.4
12
27
23
10
16
12
7
11
11
Oracle ($30; ORCL)
0.24
0.8
33
34
20
20
21
NC
9
10
14
Qualcomm ($53; QCOM)
0.86
1.6
25
27
13
14
13
15
29
11
15
St. Jude Medical
($44; STJ)
0.84
1.9
10
13
NC
11
15
NC
10
11
13
Stryker ($52; SYK)
0.72
1.4
11
13
20
10
14
43
11
11
11
Union Pacific ($98; UNP)
1.90
1.9
17
31
44
4
21
19
19
20
17
Visa ($84; V)
0.60
0.7
14
31
20
27
55
NC
27
15
19
Volkswagen
($35; VLKAY) e
0.61
1.7
16
575
40
10
50
18
19
15
49
Walgreen ($38; WAG)
0.90
2.4
7
18
64
9
10
22
13
14
15
NC Not Calculable because company didn't pay a dividend in the historical period.     e Dividend and yield estimated.

 


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