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Wal-Mart (WMT) Dividend Stock Analysis

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has consistently increased dividends every year for 35 years. The company announced a 15% dividend raise in March 2009, plus a $15 billion stock buyback initiative last month.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an average total return of 1.10% annually. The stock is trading below the levels it was changing hands a decade ago.

The company has managed to deliver an 11.60% average annual increase in its EPS between 1999 and 2008. Next year Wal-Mart is expected to earn $3.55 share, followed by $3.90/share in FY 2011. With growth slowing down, the price/earnings multiple could contract even lower. This being said I believe Wal-Mart is an excellent business, as it always investing in innovation that helps control inventory and focus on certain types of merchandise that offsets weaker demand in recessions. Despite the expected slow down in consumer spending, Wal Mart is well positioned with its diverse product mix of consumer staples and foods that it is offering on its shelves. It has lower prices in comparison to its competitors, which could drive more traffic for the retailer.
Just like Walgreen (WAG), Wal-Mart Stores expects to slow down on the rate of opening new stores and instead would try to focus on developing the profitability of existing locations, without cannibalizing sales in its existing outlets.
A potential growth area for the company are its international joint ventures in China, Brazil, India and Chile.

The Return on Equity has ranged over the past decade between a low of 20% and a high of 22%, with the exception of 1999. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 18.90 % annually since 1999, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the billions of dollars the Bentonville, AR based retailer has spend on stock buybacks.
A 19 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1976, Wal-Mart has actually managed to double its dividend payment every three years on average.
The slowdown in capital spending could free up more cash for dividend increases and share buybacks. Thus, despite expectations for EPS growth of 7% over the next few years, Wal-Mart could still manage to deliver low double-digit dividend growth.

The dividend payout ratio has been on the rise, although it is still much lower than my 50% threshold. 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 Wal-Mart Stores is trading at 14.20 times earnings, yields 2.20% and has an adequately covered dividend payment. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. Most analysts are bullish on the stock, but this could be a recency bias due to the strong performance of the stock in 2008. Although I really like the company, I don’t want to pay top dollar for it. Thus I would consider adding to my position there on dips below $40.

Full Disclosure: Long WMT

Relevant Articles:

- Dividends versus Share Buybacks/Stock repurchases
- Dividends and Stock Buybacks in the news
- Seven Solid Dividend Increases bucking the trend of dividend cuts
- Walgreen Co (WAG) Dividend Stock Analysis
- Zecco Online Discount Stock Brokerage Review

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


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What is your preference - Aristocrats or Achievers?

In general, for any dividend growth investor, the list of dividend aristocrats is favorite hunting ground. This list includes companies from S&P500 index that have been raising dividends consecutively for last 25 years. These are mature companies that have time and again shown they can perform in all economic cycles. Their management’s have consistently shown that they care about common shareholders dividends and believe in increasing at least to little more than inflation.

  • I view dividend aristocrats as the grand old daddy’s of the dividend companies. As they age, it becomes harder to sustain with their dividend growth momentum. The likelihood of their ability to grow dividend will continue to diminish.
  • We need to put past dividend growth in the context of US economy. The growth for majority of the existing dividend aristocrats came along with the growth in US economy. As the US economy flattered for whatever reason, the sustainability of the dividends became harder.

It is difficult to completely ignore above two issues in the backdrop of continued shrinking of the aristocrat’s list.

Before you get up in arms, by no means I am attempting to say the list has lost its meaning. In short term, the shrinking is obvious observation due to economic issues which could be short term effect (only time will tell). Contrarily, it is good that dividend cutters and suspenders are booted off the list.

On a longer term, the dividend aristocrat’s list will keep churning. The existing ones are continuing to raise the bar for themselves and provide returns to their shareholders. There will be additions and there will be deletions. It is part of the economic cycle.

Investors like you and me keep using examples like had we invested in so and so company in 198x or 199x, we would have had so much return. The key question here is; are we willing to invest in companies that have still not completed 25 years of dividend growth? All dividend aristocrats were at that stage at some point in time.

It is for this reason I view dividend achiever as potential opportunities. Dividend achievers are list of companies that have consecutively raised dividends for last ten years. (1) At some point in future, it is highly likely that some these dividend achievers will get into aristocrat list; and (2) These dividend achievers have shown their ability of grow dividends in recent times when US economy is on roller coaster ride. Investors can expect companies on this list to provide dividends for relatively longer term.

Mergent’s US Broad Dividend Achievers Index provides list of companies that have been raising dividends for last ten years. These are US companies that are traded on any of three US stock exchanges. In addition, these companies stock’s average daily cash volume exceeds $500,000 per day in November and December prior to reconstitution.

The chart below shows US Broad Dividend Achievers index performance relative to S&P500 (using baseline investment of $10,000). Over the past 10 years, the dividend achievers index outperforms S&P500 by approximately 17%. This index consists of 282 companies with dividend yield of 3.27%. The last five year average dividend growth has been 12.34%.


For enterprising dividend growth investors, this index not only provides increased number of companies, but also more potential opportunities. Since this index is for dividend growers, does it make sense to invest in ETF (e.g. PFM) that is based on this index? If yes, then should we expect increased dividends year over year? What are you think?

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



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It Trades For Less Than It Owns

Retail Ventures (RVI) is a holding company that owns 63% of another public company, DSW Inc (DSW). While RVI does have certain liabilities (related to its divestitures of other businesses) and its own corporate costs, its ownership in DSW is now the dominant determinant of RVI'svalue as a company.


DSW trades on the NYSE for almost $600 million, meaning RVI's ownership share is currently being valued by the market at $368 million. But RVI trades for only $169 million, less than half of its stake in DSW!

Buying RVI stock, however, is not guaranteed to return 100% even if these stocks converge over the next few years. This is due to the fact that it's entirely possible the market is overvaluingDSW and that it's price will eventually come down.

But by simultaneously buying RVI stock and shorting DSW, however, the investor is protecting himself from a decline in the value of DSW. As long as the values in these companies eventually converge, which will happen if RVI starts liquidating its shares or sells its stake in DSW, the investor will make money.

This trade, however, is not without short-term risks. Who knows how long it will take for the prices to eventually converge? In the meantime, the prices of these stocks may diverge even further, testing the mettle of the investor. Furthermore, the investor should understand the complex nature of RVI's other liabilities and expenses, to ensure they are manageable and don't represent a good reason for the price difference.

Investors appear well aware of this opportunity already. The short interest in DSW is 27% of its float, while the comparable number is just 1.5% for RVI. Nevertheless, the price divergence has persisted for many months. How much longer will it last?

We saw another arbitrage opportunity a few weeks ago. Here's how it ended.

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.


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Top Asset Allocation Tips

As investors who invest in individual dividend stocks, it is even more important that we ensure that our portfolios are structured in a way to ensure that we take on no more risk than possible. The primary way to do this is to build our portfolio a solid and well-defined asset allocation. I did some digging around the web today and came up with a number of asset allocation tips that any investor can use. If you have more, please use the comments section and let us all know.


1. The most important asset allocation decision is your split between equities and fixed income. A good rule of thumb is to hold a percentage equal to your age in fixed income assets.

2. Asset allocation is not a short term strategy. For asset allocation to do its job right you need to let asset allocation do its job. This can take years, but over time the balance between risk and reward should work in your favor (assuming you have a solid asset allocation defined).

3. An asset allocation can be as simple or as complex as you want it to be. You can achieve a solid asset allocation with as few as three asset types (domestic equities, International equities, fixed income) or get more complex by adding in assets such as REITs, emerging markets, or even commodities.

4. Ensure you count the value of your stock holdings from employee share purchase plans and do not let them get too high. All assets should be included in your overall asset allocation.

5. The appropriate asset allocation for you will change over time. Things that can trigger the need to adjust your asset allocation include getting older, a windfall, and your investment goals. Revisit your asset allocation regularily to ensure that it is still relevant for you.

6. Your asset allocation needs to be balanced periodically. Asset classes that are below target need to be brought up and assets that are above target need to be brought down. This can often be achieved by adding more money to your portfolio and allocating as required, as opposed to selling anything.

7. Diversification is not the same as asset allocation. Diversification is about not having all your eggs in one basket. Asset allocation is ensuring you have the right eggs.

That is what I came up with. What other ones do you have?

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.


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Stock Analysis: Becton Dickinson & Co. (BDX)

Linked here is a detailed quantitative analysis of Becton Dickinson & Co. (BDX). Below are some highlights from the above linked analysis:

Company Description: Becton, Dickinson and Co provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs, and other settings.

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

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
BDX is trading at a discount to 1.), 2.) and 3.) above. BDX is trading at a 21.0% discount to its calculated fair value of $90.76. BDX earned a Star in this section since it is trading at a fair value.

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:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
BDX 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%. BDX 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 1926 and has increased its dividend payments for 36 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:
  1. NPV MMA Diff.
  2. Years to > MMA
BDX earned a Star in this section for its NPV MMA Diff. of the $2,384. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as BDX has. If BDX grows its dividend at 15.8% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.82%.

Other: BDX is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. In spite of the competitive landscape in the medical equipment market and reduced spending from both hospital and life science customers, BDX's product line has more favorable demand and pricing characteristics than the industry in general. BDX should continue to benefit from end-user demand in the life sciences industry, along with momentum in the diagnostics and diabetes management areas. Risks include slower recovery in key life science markets, adverse patent litigation, failed new product introductions and unfavorable foreign currency fluctuations.

Conclusion: BDX earned one Star 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 five Stars. This quantitatively ranks BDX as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $120.78 before BDX's NPV MMA Differential fell to the $500 that I like to see for a stock with 36 consecutive years of dividend increases. At that price the stock would yield 1.09%.

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 11.1%. This dividend growth rate is well below the 15.8% used in this analysis, thus providing a margin of safety. BDX has a risk rating of 2.00 which classifies it as a low risk stock.

BDX is a good company with a strong balance sheet. It possesses nearly every attribute that I look for when making an investment in a dividend company, except one. The company's current yield at 1.84% is well below the 3% minimun I look for. To earn the minimum return I expect, BDX would have to grow its dividend at 11.2% per year for the next 20 years. That would be a tough task to accomplish. Even though BDX is trading below its buy price of $90.76, I will wait and continue to watch the stock for a more favorable entry point. 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 BDX (0.0% of my Income Portfolio).

What are your thoughts on BDX?

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.


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Weekend Reading Links - July 26, 2009

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 (DIV-Net) over the past week:

Articles From DIV-Net Members

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

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Fannie Mae?

Benjamin Graham often wrote of distinguishing the difference between investing and speculating. Fannie Mae, in its current state, sits in the speculating bucket. Investing has to fun though, sometimes it is interesting to window shop, so lets have a look.

Evaluation based on Buffet's Criteria

When looking at a business I often ask myself what other investors would think? So lets apply Buffett's criteria and see if we can't look at it through his eyes.

Understandable First Class Business

The business is fairly simple, it buys mortgages from banks, bundles them and sells them off as larger financial components. This allows banks to clear debt off their books, and allows FNM to profit with relatively little investment. They are essentially an understandable business- if they are first class is a question that can be left to the reader to decide based on their perceptions of responsibility for the housing crash.

Sustainable Competitive Advantage

Their is a huge moat around this business, the only competition with Fannie Mae is Freddie Mac a smaller and similarly structured GSE business. With the credit crisis, and the amount of capital required to enter into this market it is unlikely new competition would emerge overnight.

Able and Trustworthy Managers

Not going to score any big points here. The majority of those that were directly responsible for the FNM's role in the housing crash are gone, or are on the way out. This leaves a rag tag crew lead by Michael J. Williams a man who's previous posts included managing technology and enterprise operations, ethics (nice work there Michael), and Corporate facilities and security (was he the guy checking id badges at the front door?). An investor has good reason to pause and question Michael's ability to manage this new role.

Bargain Price

FNM is trading at well under a dollar, given its history this is a price that winds the stock back over 20 years.
Price alone doesn't indicate a bargain. For something to be a bargain it has to be valued cheaper than its actual worth- and FNM isn't actually worth much. There simply aren't earnings at the current point nor is there any indication that there will be any time soon. FNM has accumulated a massive amount of debt since its September flop, and the the US government in bailing them out has been clear that it intends to be repaid for its investment, plus interest.

It is unlikely also that FNM will be able to continue to do business in the same way as it once did. Prior to government intervention it was highly leveraged, they had a debt to equity ratio of between 70 and 90 to 1 prior to the government placing FNM under conserveratorship. This is well in excess of the 50 to 1 ratio that several banks were so sternly chastized for having.

What would Buffet Think?

I think this is a stock that Buffett would push off his desk. Their is a chance Fannie Mae will survive and prosper due to its moat. Their is also a chance that the government will fold up the business and build a new structure in its place. what do you think?


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


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Supervalu (SVU) Dividend Stock Analysis

SUPERVALU INC. operates as a grocery retailer in the United States. The company is member of the S&P 500 and the S&P Dividend Aristocrats indexes.
SUPERVALU INC. has paid dividends for more than 70 years and consistently increased payments to common shareholders every year for 35 years. The company announced a 1.5% dividend raise in May 2009, plus a $70 million stock buyback initiative.

Between June of 1999 up until June 2009 this dividend growth stock has delivered a negative average total return of 4.00% annually. The stock is trading below the levels it was changing hands a decade ago.

The company has managed to deliver a 4.80% average annual increase in its EPS between 1999 and 2008. Not reflected in 2008 earnings per share is a $15.71/share non-cash impairment charge, required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” to goodwill at certain Retail food reporting units and indefinite-lived trademarks and tradenames related to the Acquired Trademarks. You could read more about it here and here. For 2010 analysts are expecting a decline in EPS to $2.10, followed by rebound to $2.40 in FY 2011.
Future EPS growth would come from synergies related to the acquisition of 1124 Albertson’s stores in 2006 and new store openings. The latter are expected to slow down in FY 2010. Despite flat same store sales, the company generates sufficient cash to distribute back to shareholders in the form of dividends or stock buybacks.

The Return on Equity has ranged over the past decade between a low of 4.50% in 2000 and a high of 16.30% in 2004. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 2.80 % annually since 1999, which is lower than the growth in EPS. It is also slightly lower than the rate of inflation as well.
A 3 % growth in dividends translates into the dividend payment doubling every twenty-four years. If we look at historical data, going as far back as 1985, Supervalu has actually managed to double its dividend payment every twelve years on average.

The dividend payout ratio has largely remained below 50%, with the exception of a brief spike in 2000. 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 Supervalu is trading at 6.20 times FY 2010 earnings and yields 5.10%. Despite its slow dividend growth, I like the above average dividend yield that the stock is offering, relative to other food retailers such as Safeway (SWY) and Kroger (KR). I also like the low price/earnings multiple. I would consider initiating a small starter position in Supervalu (SVU) on dips.

Full Disclosure: None


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


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Portfolio Risk Management – Is Asset Allocation Enough?

Every investor knows that asset allocation is one of the basic fundamental tenets of portfolio management. Financial publications, peer-reviewed literature, and books have observed that asset allocation is the significant contributor to the total return. This contribution factor varies anywhere from 50% to 95% depending upon how the data is analyzed with reference to timescale, markets and asset coverage, dividends, inflation, and what not parameters.

What intrigues me is following two issues:

  • Look at any successful and well known investors such Buffet, Lynch, Ross, Pickens, etc., and we can observe that none of them followed asset allocation principles. In fact they were highly concentrated in few businesses or companies. E.g. Buffett’s portfolio shows 10 companies represent 85% of the portfolio.
  • If asset allocation is supposed to reduce risk, in general, why portfolio managers cannot manage it with low risk and incur drastic negative performance during downturns? Shouldn’t asset allocation provide that downside safety net?
As the saying goes, at hindsight everything makes sense. Similarly analyzing the risk data backwards and using those risk models to project forward is a good start. The biggest risk in those models is that they do not consider the macro economic scenario and its relationship to the total returns. As the macro economic environment changes, those assumptions, models, relationship, returns all change. They are no longer valid.

According to me, asset allocation as a standalone factor does not have any meaning. It will not have any impact on managing investor’s portfolio risk. I can be properly allocated in different assets but if my “quality of investments” in each asset class is crappy, it is of no help. I believe that “asset allocation” along with the “quality of investments” is what matters the most.

As an example, the number of companies in dividend aristocrats is reducing. At hindsight, the group of companies in dividend aristocrats has had an excellent run with the growth in US economy. The companies which are still able to keep their aristocrat hat (or new ones that are being added) are the ones which are continuously evolving. They are continuously on the lookout for new opportunities (new products, new markets, emerging markets?). Those are the ones that are of good quality. As a dividend investor, in addition to asset allocation, we also need to continuously monitor the quality of these companies.

Investors should build dividend growth portfolio by investing in four to five good quality companies in each industry segment or asset class. In addition, investors also need to continuously monitor how the quality of company is evolving. Among others, the quality of a company can be monitored by using its ability to generate cash from operating activities and/or its ability to generate free cash flow.

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


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Volatility Offering Opportunities

In March of 2009, panic in the market led to an enormous number of value opportunities. Believers in market efficiency would be hard-pressed to justify some of the depressed valuations prevalent in the market at that time. Some companies have already posted tremendous gains in the four months that have passed. One such example is Spartan Motors (SPAR), designer and manufacturer of heavy-duty vehicle chassis.


The auto industry is clearly going through a tremendous slump, but investors went overboard in punishing the valuations of many of these stocks. Since hitting its low in March, the stock has already quadrupled. But how was an investor to know that SPAR was undervalued?

The company traded for just $75 million in March, but had cash of $14 million, receivables of $76 million, and inventory of $87 million, for a total of $177 million. Meanwhile, the company had total liabilites of just $90 million, for a difference of $87 million. In other words, the company could be purchased for its inventory, with its fixed assets, R&D, and customer relationships thrown in for free. For a company that has remained profitable throughout this downturn (including 2008 operating income of $69 million), this represented a tremendous bargain.

While most companies have recovered from their lows in March, many have not. Fifty-two week low lists continue to show investors which stocks are out of favour. Of course, not all out-of-favour stocks offer value, but the current environment still offers plenty of upside to those willing to make the effort to uncover the diamonds in the rough.

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.


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Fidelity's Seven Ways to Boost Investment Income

Over at Fidelity.com, which I have to admit I do check out from time to time as they can provide some pretty good investment advice. If you ignore the funds and pitches for their high-priced mutual funds then it is ok! Anyway, one of their most recent front-page articles concerns investment income and ways an investor can work to boost it. I got excited at first because I thought it might have to do with dividend investing. As the tag-line for the article states, "With interest rates low worldwide, here are seven strategies to amplify the yield on your investments — with the risks and rewards of each". However, it was not to be as the article really covers a number of fixed income alternatives that investors can consider.


The seven yield producing alternatives are presented in the image below. As you can see, these are of a primarily fixed-income variety. Other than the REITs and preferred shares most are bond funds of various types.



Personally, when I use fixed income investments in my own portfolio I look to them for safety and not necessarily additional yield. Fixed income investments should be safe and have very low risk. I am not saying you should not use these other yield producing assets, but they should fit in with the riskier portions of your overall asset allocation. You should still ensure that your real fixed income investments are as safe as possible, such as in short-term bonds and TIPS. That is my opinion - what do you think?

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.


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Stock Analysis: Procter & Gamble Co. (PG)

Linked here is a detailed quantitative analysis of Procter & Gamble Co. (PG). Below are some highlights from the above linked analysis:

Company Description: The Procter & Gamble Company (PG) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.

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

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
PG is trading at a discount to 1.), 2.) and 3.) above. Since PG's tangible book value is not meaningful, a Graham number can not be calculated. PG is trading at a 15.2% discount to its calculated fair value of $65.98. PG earned a Star in this section since it is trading at a fair value.

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:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
PG 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 company earned a Star as a result of its most recent Debt to Total Capital being less than 45%. It also earned a Star for having an acceptable score in at least two of the four Key Metrics measured. PG has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 53 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:
  1. NPV MMA Diff.
  2. Years to > MMA
PG earned a Star in this section for its NPV MMA Diff. of the $1,964. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. If the company grows its dividend at 10.9% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.82%. PG earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Other: PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Product demand for household and personal care products is generally stable and not affected by changes in the economy or geopolitical factors. PG has historically delivered consistent sales and earnings growth near the high end of its peer group, and I see no reason for this to change over the next several years. The company continues to benefit from the Gillette acquisition and from growth prospects in new markets and categories. It is well positioned to benefit from growth of household and personal care products in developing countries. Risks include heightened competition, unfavorable currency translation, higher commodity costs, higher promotional spending and low consumer acceptance of new products.

Conclusion: PG earned one Star 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 five Stars. This quantitatively ranks PG as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $87.72 before PG's NPV MMA Differential fell to the $500 that I like to see for a stock with 53 consecutive years of dividend increases. At that price the stock would yield 1.87%.

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 6.6%. This dividend growth rate is well below the 10.9% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.25 which classifies it as a low risk stock.

When it comes to dividend stocks, PG is one of the very few elite companies. It is a well-managed company with a very strong balance sheet. PG has weathered the economic downturn quite well and continues to raise its dividend at a rate close to its 10-year average. I will continue to add to my position when PG is trading below its buy price of $65.98 and as my allocation allows. 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 PG (3.6% of my Income Portfolio).

What are your thoughts on PG?

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


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Weekend Reading Links - July 19, 2009

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 (DIV-Net) over the past week:

Articles From DIV-Net Members

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

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Prebooked Sales

There are many things to look for when analyzing financial statements. Often times the most revealing of these can only be found as the result of looking beyond the numbers to how the numbers relate to one another. This may sound technical and difficult, but it certainly does not have to be.

Prebooking Sales

One of the most common ways to manipulate a company's books are to prebook sales. This often occurs when a company has weak sales throughout the year and needs to bump up its fourth quarter in order to meet shareholder and analyst expectations.
The practice of prebooking sales involves a business going out and contacting its regular customers and requesting that they purchase the inventory they are forecast to purchase in the next quarter now at a reduced rate.
An example: Company A always buys 500 widgets from our sample business every quarter at a fixed cost of $5 per widget. In order to show boosted sales in Q4 of the year Company A is convinced to purchase 1000 widgets at $4 today, accept deliver of the first 500 now, and the second set of 500 during the following quarter.
The net effect of this over the short term is that our company has doubled its sales- at least on paper. Over the long term though it has the opposite effect; unless Company A's needs suddenly increase dramatically they are going to cancel their order in the following quarter.

The danger of prebooked sales

Prebooked sales are dangerous. If not managed correctly it is a fire that can grow wildly out of control. If the company prebooks sales now and follows that with a bad year the following year they may need to prebook sales again in order to meet last year's expectations, and then try and prebook other customers in order to meet growth expectations from investors and analysts. And so the spiral continues until eventually the company either can't find enough customers to prebook, or has so deeply discounted their margins that there is little or no profit left for the business.

How to see prebooked sales in the books

There are ways to see when a company suddenly starts prebooking sales. Lets looks an example. Say that analysts had expected a business's sales to grow at 3% this year. Lets examine the following sales results by quarter.




























































2006 Q1 Q2 Q3 Q4 Total
$4,363,431.00 $4,799,774.10 $4,847,771.84 $5,574,937.62 $19,585,914.56
2007 Q1 Q2 Q3 Q4 Total
$4,494,333.93 $4,943,767.32 $4,993,205.00 $5,742,185.75 $20,173,491.99
2008 Q1 Q2 Q3 Q4 Total
$4,629,163.95 $5,092,080.34 $5,143,001.15 $5,914,451.32 $20,778,696.75
2009 Q1 Q2 Q3 Q4 Total
$4,768,038.87 $4,863,399.64 $4,912,033.64 $6,876,847.10 $21,420,319.25


As we can see the company did achieve the expected 3% growth in sales that analysts had expected. Numbers are hard to follow, a graphical representation of the change over the previous quarter may then be of some help.
We can see here that every year sales grow slowly throughout the year with Q2 and Q3 coming in very similar to one another. This last year though Q2 and Q3 come in weaker than expected and then suddenly Q4 jumps both off the trend from previous years and above what would be expected from the preceding two quarters. This looks suspiciously like prebooked sales.

Results of Pre-Booked Sales

One of three things is going to happen when a company prebooks sales:
  1. The company is going to have a great year next year and make up the losses smoothing over these two bad quarters.
  2. The company is going to a be honest and not do this again allowing next year's returns to fall lower.
  3. The company is going to repeat the maneuver, likely increasing the size of the problem.
Think about each of these alternatives and the likelihood of each occurring. The house is fairly heavily stacked against you. Investing is hard enough, don't make it any harder.

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


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Walgreen Stock Analysis

Walgreen Co is the nation's largest drugstore chain with fiscal 2008 sales of $59 billion. The company operates 6,902 drugstores in all 50 states, the District of Columbia and Puerto Rico. The company is member of the S&P 500 and was a recent addition to the S&P Dividend Aristocrats index.
Walgreen Co has paid dividends for more than 76 years and consistently increased payments to common shareholders every year for 34 years. The company recently announced a 22.2% raise in its quarterly dividends.

Between June of 1999 up until June 2009 this dividend growth stock has delivered an annual average total return of 0.70% to its shareholders. The stock is changing hands at the same levels it was trading a decade ago.

The company has managed to deliver a 14.90% average annual increase in its EPS between 1999 and 2008. Earnings per share are expected to decrease to $2 in FY 2009, before recovering to $2.30 by FY 2010. Sales are also expected to increase from $59 billion in 2008 to $68 billion in 2010. Unlike its competitors, Walgreen seems to focus on internal growth either through opening new stores or focusing on proper location of in store merchandise, growth of products offered and making its operations more efficient. The company plans to slow down on the growth rate of opening new stores from high single digits to low single digits by 2011.

The Return on Equity has slightly decreased over the past decade from 19.70% in 1999 to 18% in 2008. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 13.40 % annually since 1999, which is lower than the growth in EPS.
A 13 % growth in dividends translates into the dividend payment doubling every five years. If we look at historical data, going as far back as 1976, Walgreen Co has actually managed to double its dividend payment every five and a half years on average.

The dividend payout ratio has ranged between 13.6% and 20.9%. 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 low payout has enabled Walgreen to spend more on growing its business. As its markets become saturated I expect the company to increase its payout over time.

Currently Walgreen Co is trading at 14.50 times earnings and yields 1.90%. While the price earnings multiple and the dividend payout are attractive, the dividend yield is below my 3% entry criteria. I would only consider initiating a position in Walgreen on dips below $18.50. If the stock drops to $25 and premiums increase I would consider selling longer dated covered puts at strikes $20 or $17.50.

Full Disclosure: None

Relevant Articles:

- An alternative strategy to covered calls
- Walgreen’s 22% Dividend Increase Analysis
- Bemis Co (BMS) Dividend Stock Analysis
- Emerson Electric (EMR) 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.


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CBY – Stock Analysis for Dividend Growth Portfolio

Cadbury Plc, a UK-based Company, is world’s leading confectionery company. In year 2008, it divested its beverage business into separate entity. Now Cadbury Plc is solely a confectionery company. It offers chocolate, gum/mints, and candy products under various brand names, including Bubbaloo, Cadbury Creme Egg, Cadbury Dairy Milk, Clorets, Dentyne, Eclairs, Flake, Green & Blacks, Halls, Hollywood, Stimorol. It operates in 60 countries.

CBY is an international dividend achiever has been raising its dividends for last 11 years. The most recent dividend increase was in February 2009. CDY can play a role of international equity in a dividend portfolio. It can also be viewed as a hedge for dollar and emerging markets (20% revenue from emerging markets). My objective here is to analyze if CDY 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 1999. The reduction in 2008 is due to divestiture of business unit. The average revenue growth for last 10 years has been approximately 9%.
  • Cash Flows: Operational and free cash flow has been more or less stable until 2005. Although year 2008 cash flow issues can be arrtibuted to divestiture of business unit, it is difficult to understand what happened in year 2006 and 2007. Not a good observation.
  • EPS from continuing operation: In general, it is range bound, but there is no consistency in earnings.
  • Dividends per share: Dividends in local currency (i.e. GBP) has been growing consistently since 1997. Minor differences or reductions are reflection of currency fluctuations.
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 2.00. This is a medium risk category as per my 3-point risk scale. The reduced operating margin and lower current yield (relative to 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 8.7% (stdev. 10%) is higher than average EPS growth rate of 6.8% (stdev. 29.1%). Dividends have grown faster than earnings per share.
  • Duration of dividend growth: 11 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10%
  • Payout factor: In the past 10 years, the average has been 75%. Presently it is at 63%. Historically, the company has maintained high payout ratio.
  • 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 2.9%; and (b) MMA yield is 3.4%. Last 10 years average dividend growth rate has been 8.7%, however, my projected dividend growth rate is 6.8%. With my projected dividend growth of 6.8%, the dividend cash flow is equal to MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $21.12 (i.e. yield 4.9%)


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: $19.3
  • Average high yield price calculated based on past 10 years: $24.1
  • Pricing based on past 10 year relative price-to-earnings ratio. $35.6
  • Pricing based on price-to-earnings ratio of 12: $20.4
  • Graham number: $20.3


The range of fair value is calculated as $21.9 to $23.6. This is 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
CBYs history can be traced back to 1824. It has survived all the significant ups and downs in the global. This demonstrates that it keeps adapting to changes in the market place.

  • CDY continues to maintain its leadership position in confectionery business, with its unparalleled reach across the global, multiple brands, and diversified revenue streams.
  • It is operates in a consumer staples industry, which historically does not get affected by recessions. However, history apart, CDY has shown signs of slowing growth.
  • Year 2007 and 2008 results may show erratic cash flow. However, I believe those are due most likely due to divestiture of business unit.
  • One significant concern that I have is the reduced operating margins and high payout factor. Both on these metric may affect the near future dividend growth. Management has acknowledged this as an issue and has been focusing on profitability. Most of which is centered around cost cutting.


Conclusion
I like CBY’s global presence. Overall, it is a company that will provide international exposure, hedge against dollar fluctuation, and proxy for emerging markets. It has been raising dividends for last 11 years. The stock’s current risk-to-dividend rating is 2.00 (medium risk). However, the current pricing of $35.87 is much higher than my fair value range. I would buy a long position, when it falls into my buy price.

Full Disclosure: No position at the time of writing.

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


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Value Investing Arbitrage Pays!

A few weeks ago, we described an arbitrage situation involving two value stocks (both traded at discounts to net current assets, had minimal debt, and were generating earnings). One of these potential value stocks, TAT Technologies (TATTF), was buying the other, Limco-Piedmont (LIMC). But what reduced the risk of this transaction enormously was the fact that TATTF already owned 60% of LIMC, suggesting the deal would go through.


The transaction did close, with LIMC shareholders receiving half of one share of TATTF for every share they owned of LIMC. However, even one month before the scheduled close of this transaction, shares of LIMC were trading substantially below half the share value of TATTF ($2.90 vs $3.50), offering high returns relative to risk using the following transactions:

1) Short X number of TATTF shares for $7/share
2) Use the proceeds to buy 2X shares of LIMC at $2.90/share

The above transactions left the investor with $1.20 for every share transaction, despite the fact that the share positions in both 1 and 2 above were to be identical in just one month's time! No matter how the shares were to move in the interim, the above transactions would be profitable as long as the transaction closed.

When the transaction did close on July 2nd, shares of TATTF plummeted while shares of LIMC rose marginally, resulting in hefty returns for those who took advantage of the circumstances.

In an efficient market, one wouldn't expect opportunities like these to exist. But an opportunity this was, as the stocks had low enough spreads and high enough liquidity to make outsized returns, and the risk was muted due to the fact that the acquirer already owned 50%+ of the target. If you come across other value arbitrage plays of this nature, we would be happy to hear about them!

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.


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Dividend Reinvestment Over Time

If you are here at this site, or any of the other sites as part of the network, chances are you are interested in dividend investing in one form or another. With that in mind, then I would like to present one of my favorite charts with respect to dividend investing. It has to do with the concept of dividend reinvestment and the dramatic power it has over investment results in a portfolio. In essence, by ensuring an investor reinvests his/her dividends the improvement in a portfolio is profound. Here is the chart:




As you can see, since 1900 the equity returns for both the US and UK markets have been improved by approximately 5% by simply reinvesting those dividends. I think the chart speaks for itself. It is why I continue to reinvest my dividends.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.


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Stock Analysis: Dover Corp. (DOV)

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

Company Description: Dover Corp. manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.

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

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
DOV is trading at a discount to 1.), 2.) and 3.) above. Since DOV's tangible book value is not meaningful, a Graham number can not be calculated. DOV is trading at a 14.9% discount to its calculated fair value of $37.06. DOV earned a Star in this section since it is trading at a fair value.

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:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
DOV 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. DOV earned a Star as a result of its most recent Debt to Total Capital being less than 45%. DOV earned a Star for having an acceptable score in at least two of the four Key Metrics measured. DOV has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 54 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:
  1. NPV MMA Diff.
  2. Years to > MMA
DOV earned a Star in this section for its NPV MMA Diff. of the $934. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as DOV has. If DOV grows its dividend at 8.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. DOV earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Other: DOV is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. DOV enhanced its ability to generate strong free cash flows by discontinuing 20 low-margin, capital-intensive businesses over the past couple of years, and replacing them with 17 new high-margin/steady-growth operations. The company still has ample growth and cost opportunities. Risks include weaker global, industrial, energy and electronics markets; along with value-diminishing acquisitions.

Conclusion: DOV earned one Star 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 five Stars. This quantitatively ranks DOV as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $37.65 before DOV's NPV MMA Differential fell to the $500 that I like to see for a stock with 54 consecutive years of dividend increases. At that price the stock would yield 2.66%.

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 6.3%. This dividend growth rate is below the 8.0% used in this analysis, thus providing a margin of safety. DOV has a risk rating of 2.00 which classifies it as a medium risk stock.

DOV is a well-managed company with a strong balance sheet. Near-term the economic downturn will present challenges, but the company's management has done all the right things for long-term success. DOV should announce a dividend increase in August, I will likely wait until then before considering initiating a position. It is trading well below its buy price of $37.06. 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 DOV (0.0% of my Income Portfolio).

What are your thoughts on DOV?

Recent Stock Analyses:
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