Looking For Tomorrow's Dividends

11/14/2011


In good times or bad, dividend increases make a difference. A history of dividend increases suggests a company possesses financial fortitude and a commitment to sharing the wealth with stockholders. Over the long haul, dividends can contribute significantly to total return — and help mitigate losses during tumultuous markets. 

Aggressive cost-cutting in recent years, combined with healthy increases in sales and earnings, allowed many companies to build up huge piles of cash. Dividend hikes are a crowd-pleasing way for companies to deploy this cash. And deploy they have. As of Oct. 31, 265 companies in the S&P 500 index had raised their dividend so far this year — a 39% increase from the same period a year earlier.

Admittedly, dividend growers are not difficult to find. But it can be a challenge to unearth income plays positioned for steady profit growth, and that also boast solid Quadrix® scores and tend to maintain a modest payout ratio (implying the potential for more dividend hikes).

We listed 13 such standouts in the table below. For each stock, we calculated three years of estimated per-share dividends based on recent dividend payments, trailing 12-month dividend payout ratios, and projected per-share earnings. All 13 have shown steady dividend increases, with three-year annualized growth rates of at least 9%. All 13 are also expected to grow per-share earnings this year and in each of the next two years. We review four of these standouts in the following paragraphs.

Abbott Laboratories ($54; ABT) has increased its quarterly dividend in 39 consecutive years. In the past three years, the dividend has grown at an annualized rate of 10%, topping the other big U.S. drug companies. The stock, up 12% this year, offers a 3.5% yield, exceeding its five-year average of 3.0%.

The dividend, however, will undergo a shift from its present form next year when Abbott splits its pharmaceutical unit ($18 billion in sales) from the rest of its businesses ($20 billion). Both companies will pay a dividend, and taken together, their distributions should equal Abbott's dividend at the time of the separation. Backstopped by strong balance sheets, both new companies should also receive investment-grade credit ratings, Abbott says. Some speculate that the new pharmaceutical company could receive a heftier portion of debt and cash, since the medical-devices business will likely be better equipped to generate free cash flow. Abbott Labs is a Long-Term Buy.


Dover ($56; DOV), an industrial conglomerate, makes everything from hydraulic lifts to refrigeration systems to hearing-aid components. Order activity remained strong in the opening weeks of the December quarter, management says, building on the 20% increase in bookings during the September quarter. Dover anticipates revenue will climb 20% in 2011, bolstered by at least 8% organic growth in all four segments. Free cash flow is on pace to represent 10% to 11% of revenue for the year. That implies a record $856 million to $941 million in free cash flow, marking the strongest growth since 2003.

That cash will likely fund Dover's steady stream of dividend hikes and acquisitions. Dover announced a 15% dividend increase in August, marking its 56th consecutive year of dividend growth. Dover has also purchased at least eight companies so far this year, spending more than $1.37 billion. In its latest deal, completed in November, Dover acquired Advansor A/S of Denmark to expand its presence in the refrigeration-equipment market. Dover is a Long-Term Buy.


IBM ($187; IBM) uses a two-pronged approach for sharing profits with stockholders. The dividend has grown for 16 straight years, including a 15% hike in May. The tech giant has raised its payout at an annualized rate of 26% over the last five years, well above its growth rate for per-share profits (17%) and operating cash flow (5%). IBM also has a seemingly insatiable appetite for its own stock, buying back enough to lower the share count 5% over the last year and 21% over the last five years.

Looking ahead, IBM seems capable of returning even more cash to shareholders. Despite the steady dividend growth, IBM's payout ratio is a modest 23% of trailing earnings. Management expects $100 billion in free cash flow over the next five years, translating to 12% growth from the previous five years. Roughly 70% of that cash should return to shareholders through dividends and buybacks. IBM is a Buy and a Long-Term Buy.


Microsoft ($27; MSFT) raised its dividend 25% in September, nearly double its five-year annual growth rate. The dividend hike pushed Microsoft's yield to 2.9%, well above the 2.0% average for dividend-paying technology stocks in the S&P 500 Index. The company has $11.2 billion remaining from a $40 billion share-repurchase program launched in 2008. That balance is enough to buy back about 5% of outstanding shares at current prices. In the past year, Microsoft has spent $5.4 billion in dividends and $8.5 billion on repurchases.

Yet Microsoft's massive cash hoard still gives it plenty of flexibility. The software giant generated $19.66 billion in free cash flow in the 12 months ended September. It now holds $57.40 billion in cash and short-term investments — though roughly 90% is offshore — versus long-term debt of $11.92 billion. Net cash equals $5.36 per share, roughly 20% of the stock price. Microsoft is a Buy and a Long-Term Buy.

DEPENDABLE DIVIDEND GROWERS
The 13 A-rated stocks below should continue their dividend-growth trend. We calculated three years of estimated dividends using recent dividend payout ratios and expected earnings. By our estimates, all 13 could increase dividends at least 9% annually over the next three years. Stocks recommended for purchase are listed in bold.
Est. Fiscal-Yr. Dividend
Annualized
Div. Growth
Company (Price; Ticker)
Annual
Dividend
($)
Div.
Yield
(%)
Div.
Payout
Ratio
(%)
Div.,
Last
Fiscal Yr.
($)
Curr.
Year
($)
Next
Year
($)
Following
Year
($)
Next
3 Yrs.
(%)
Last
3 Yrs.
(%)
Quadrix
Overall
Score
Abbott Labs ($54; ABT)
1.92
3.5
42.6
1.72
1.88
2.15
2.33
11
11
92
Aflac ($46; AFL)
1.32
2.8
21.4
1.14
1.23
1.42
1.52
10
13
95
AmerisourceBergen ($40; ABC)
0.46
1.2
17.6
0.43
0.49
0.56
0.63
13
42
82
BlackRock ($163; BLK)
5.50
3.4
45.0
4.00
5.50
5.84
6.90
20
14
80
Dover ($56; DOV)
1.26
2.2
29.6
1.07
1.18
1.43
1.57
14
12
79
General Dynamics ($65; GD)
1.88
2.9
26.1
1.64
1.83
2.00
2.11
9
14
84
IBM ($187; IBM)
3.00
1.6
23.1
2.50
2.90
3.43
3.79
15
19
83
Intel ($25; INTC)
0.84
3.4
34.1
0.63
0.78
0.88
0.93
14
12
100
Microsoft ($27; MSFT)
0.80
2.9
29.1
0.61
0.80
0.90
0.98
17
12
90
Qualcomm ($57; QCOM)
0.86
1.5
26.8
0.81
0.84
0.96
1.06
9
11
82
Target ($53; TGT)
1.20
2.3
29.4
0.84
1.10
1.27
1.48
21
17
93
Walgreen ($33; WAG)
0.90
2.7
34.1
0.75
0.97
1.06
1.22
18
24
77
Wal-Mart Stores ($59; WMT)
1.46
2.5
33.6
1.21
1.46
1.65
1.85
15
11
88
Note: Quadrix scores are percentile ranks, with 100 the best.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com