Thursday, August 6, 2009

John Wiley & Sons – Stock Analysis for Dividend Growth Portfolio

John Wiley & Sons, Inc. publishes print and electronic products that provide content and digital solutions. It operates in three segments, viz., (1) Scientific, Technical, Medical, and Scholarly; (2) Professional/Trade; and (3) Higher Education. Segment 1 products include journals, encyclopedias, books, databases, and laboratory manuals in various publishing areas. Segment 2 products includes books, subscription content, and information services in subject such as business, technology, architecture, professional culinary, psychology, education, travel, health, religion, consumer reference, pets, and general interest. Segment 3 products focus on courses in business and accounting, sciences, engineering, computer science, math, social sciences, and other academic course material. John Wiley & Sons, Inc. was founded in 1807 and is based in Hoboken, New Jersey.

JW.A is a dividend achiever and has been raising dividends for last 16 years. The most recent dividend increase was in July 2009. My objective here is to analyze if JW.A still continues to be a good dividend growth stock and how does it rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

  • Revenue: In general, a growing trend since 2000. The average revenue growth for last 10 years has been approximately 12%. Year 2009 shows the short dip which could be attributed to recessionary economy.
  • Cash Flows: Overall, an increasing trend of free cash flow and operating cash flow. It is good indicator that FCF is always greater than income.
  • EPS from continuing operation: In general, it has an increasing trend.
  • Dividends per share: Very slow but increasing trend.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.86. This is a medium risk category as per my 3-point risk scale. The increased financial leverage and reduction in EPS (relative to its historical average) makes it a medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

  • Dividend growth rate: The average dividend growth of 15.3% (stdev. 6%) is similar to average EPS growth rate of 15.8% (stdev. 23%). Dividends are growing with the growth in earnings per share.
  • Duration of dividend growth: 16 years.
  • 4 year rolling dividend growth rate for past ten years: 10% or more
  • Payout factor: In the past 10 years, it has been range bound from 18% to 20%. It has sufficient room to grow.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 1.8%; and (b) MMA yield is 3.4%. Last 10 years average dividend growth rate has been 15%, however, my projected dividend growth rate is 9%. With my projected dividend growth of 9%, the dividend cash flow is 1.4 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $13.10 (i.e. yield 4.27%)

Fair Value Calculation
This section determines what price I should pay to buy a given stock

  • Net present value (NPV) price based on 15 year DCF: $20.1
  • Average high yield price calculated based on past 10 years: $44.2
  • Pricing based on past 10 year relative price-to-earnings ratio: $43.7
  • Pricing based on price-to-earnings ratio of 12: $25.4
  • Graham number: $20.5

The range of fair value is calculated as $24.7 to $30.8. I determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

Qualitative Analysis
John Wiley & Sons, Inc. was founded in 1807 and is based in New Jersey. That is more than 100 year old corporation. It has survived all the significant ups and downs of modern global economics. This demonstrates that it keeps adapting to changes in the market place.

  • JW.A revenue is pretty diversified in product sectors and geographical region. 45% of its revenue comes from outside of North America. It’s three product lines have share of 58%, 28%, and 14% respectively.
  • It continues to have stable gross and operating margins, generating operating cash flow and free cash flows. Being in publishing industry that is good sign.
  • One significant concern that I have is; the general trend of continued decrease in profitability of published industry. That is something that it is exposed to and I believe to be a qualitative risk for this company.
  • I difference that JW.A is pure play publisher (unlike MHP which includes security ratings and index business). It remains focused on its core competency of publishing business.

I like JW.A diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It has been raising dividends for last 16 years. The stock’s current risk-to-dividend rating is 1.86 (medium risk). The current pricing of $31 and change is very close to my buy range. I would be open to initiating or adding to my position as per my allocation levels.

Full Disclosure: No position at the time of writing.

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