Weekend Reading Links - February 28, 2010

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 over the past week:

Articles From DIV-Net Members

• Dividends Value presented The 2010 Dividend Stock Ideas List
  
• The Dividend Guy presented The Hidden Advantages of Dividend Investing
• Dividend Growth Investor presented Seven dividend aristocrats that Buffett owns
• Barel Karsan presented Developing An Investment Philosophy: Chapter 2
• Buy Value presented Three Key Ratios For Investors
• moneygardener presented dropping the weight of consumer debt
• Stock Market Prognosticator presented Berman Is Back
• Disciplined Approach to Investing presented 2010 Dogs Of The Dow Performance Update
• Living Off Dividends & Passive Income presented How To Avoid Foreclose: Humor
• Old School Value presented 5 Tips to Maximize Research and Investing Time
• Triaging My Way To Financial Success presented 2010 QuickTax Review & Giveaway
• Dividend Money presented How Much Can I Borrow For A Mortgage?
• BuyLikeBuffett.com presented 3 Small Cap Dividend Stocks That Pay
• 40percent 20years presented Two articles for better investment!
• EPIC INVESTOR presented Current Short Interest
• Value Walk presented Stock Market Valuations- February 25 2010 Farily Valued

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

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Anticipating a Dividend Increase

I am a big fan of companies that make it a regular habit of dialing up a dividend. This is why I have been such a proponent of the dividend aristocrat group. Nothing perturbs me more though than to buy into a 2% dividend stock that I believe will crank up its rate only to be forced to wait multiple years before seeing that increase. To counteract this here is a simple parachute that can increase your confidence that a rate will increase.

CFO Turnover

In order to be confident that our investigations will be worthwhile it is important to see how long key people stay with the company. If the CFO, CEO and others are spinning through the company like a revolving door then your company has changed or is changing- investigation into it’s past may not indicate likely actions in the future. If however you find that current key positions have been with the company for some time then we can proceed with our investigation.

Investigate previous payout ratios

A payout ratio shows you what percentage of the net income is being paid out to shareholders. These rates can be anywhere from 10% -110% depending on the dividend paying company’s industry and financial condition. Having a low rate doesn’t necessitate a dividend increase, or conversely having what appears to be a higher rate doesn’t mean that an increase won’t happen. The task is to see what that payout ratio was the last few times an increase was done. This information can be found by understanding how the dividend payout ratio is calculated (Dividends / Net Income) and then retrieving the information from previous year's financial statements on morningstar or the company's own investor page.

Bring it together

People are creatures of habit. I have found that if you have the same CFO, CEO and the same payout ratio as the last time a dividend rate was increased you are very likely to see the same again. Conversely if these factors are not present you are very likely to end up disappointed despite what you might think is a fair current payout ratio. Simple but true.

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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Kimberly-Clark Corporation (KMB) Stock Analysis

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. Every day, 1.3 billion people - nearly a quarter of the world's population - trust K-C brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in more than 80 countries. This dividend aristocrat has boosted distributions for 38 years in a row. The most recent increase was in February 2010, when the company boosted distributions by 10% to 66 cents/share.

This dividend stock has delivered an average annual total return of 2.80% over the past decade.

Earnings per share have grown at an average pace of 3.40% annually. The company has also has repurchased 3% of its outstanding stock annually on average since 2001. For FY 2010, analysts expect the company to earn $4.95/share, which is higher than 2009’s EPS of $4.52. For FY 2011 analysts expect Kimberly-Clark to earn $5.36/share. As with other consumer products companies, the growth is likely to come from developing and emerging markets, rather than developed markets. Developed markets could benefit from cost cutting and efficiency profits, which would decrease the total price of doing business. Commodity prices could be detrimental to total costs at the company, as is the competitive nature of developed markets in which Kimberly-Clark does business.


The annual dividend payment per share has increased by an average of 9.30% annually, which is much higher than the growth in earnings. A 9% growth in dividends translates into the payment doubling every almost eight years. Kimberly-Clark has managed to double its distributions almost every eight years on average since 1986.

The return on equity has fluctuated between a low of 25.70% in 2006 and a high of 39.4% in 2009. Over the past few years it has remained above 30%, which is impressive.

The dividend payout ratio has been on the rise over the past decade, increasing from a low of 32.30% in 2000 to a high of 60% in 2006. Currently it is at 53%. The increase is mostly due to the faster rate of increase in dividends, whereas earnings growth has been somewhat sluggish. 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 Kimberly-Clark (KMB) is attractively valued at 13.30 times earnings, has an adequately covered dividend payment and yields 4%. Despite the fact that the company has grown slowly over the past decade, it could easily catch up over the next few years, which would make it a worthwhile investment. Add in the consistency of dividend increases and the stock buybacks, and you have a shareholder friendly management which is something hard to find these days.

Full Disclosure: Long KMB

Relevant Articles:

- Unilever (UL) Dividend Stock Analysis
- Diageo (DEO) Dividend Stock Analysis
- McGraw-Hill (MHP) Dividend Stock Analysis
- Brown-Forman Corporation (BF-B) 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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Common Comes Last

Endwave (ENWV) has cash of $66 million and total liabilities of just $5 million, yet the stock trades for just $24 million. The company does show losses; however, in recent quarters these losses have been small in comparison with what appears to be a gigantic margin of safety. But despite the large cash balance, investors who dig deeper into the company's financial statements would find that the margin of safety is not what it appears to be!

Many of Endwave's financial updates use a single line to represent shareholder's equity, but that can be misleading. This is because Endwave is financed by a large block of preferred stock which has a larger aggregate value than the company's common stock! Once this preferred stock is subtracted from the company's cash balance (since preferred stockholders are higher in the pecking order than common stockholders), the margin of safety reduces to a paltry sum. The company's quarterly losses now become a material issue, and if they continue, they can play a large role in further reducing the value of the common stock.

Stock screens and financial statement summaries such as those found on Yahoo! and Google can be useful in identifying companies trading at discounts to their intrinsic values. However, investors cannot buy on this basis alone. A careful reading of the company's audited financial statements, and notes to its financial statements, including the composition of the company's share capital, is imperative. Securities that rank ahead of common shareholders, not just liabilities, must be identified and accounted for before an accurate valuation of the common stock is possible.

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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Week 3 of the video series

Week 3 of the video series covering common investment and dividend topics. These videos were prepared by The Market Capitalist. This week Dominico is going to tell us the difference between stock price and stock value.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

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Stock Analysis: Walgreen Co. (WAG)

Linked here is a detailed quantitative analysis of Walgreen Co. (WAG). Below are some highlights from the above linked analysis:

Company Description: Walgreen Co is the largest U.S. retail drug chain in terms of revenues. It sells prescription and non-prescription drugs, beauty care, personal care, household items, candy, photofinishing, greeting cards, seasonal items and convenience foods.

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
   

WAG is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $33.49. WAG did not earn any Stars in this section.

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%
   

WAG earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WAG earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 35 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
   

WAG earned a Star in this section for its NPV MMA Diff. of the $1,477. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WAG has. If WAG grows its dividend at 15.7% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

Other: WAG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: WAG did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks WAG as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $48.65 before WAG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.13%.

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 12.7%. This dividend growth rate is less than the 15.7% used in this analysis, thus providing only a margin of safety. WAG has a risk rating of 1.00 which classifies it as a low risk stock.

With over 7,000 drugstores, WAG offers unmatched convenience with one of the the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry. However, pressures from non-traditional competitors and potential adverse legislation could quickly weaken WAG's advantages. Although the stock is trading slightly above my $33.49 fair value price, the sub-2.% dividend yield will prevent any near--term purchases. 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 WAG (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

• Stock Analysis: RLI Corp. [RLI]
  
• Stock Analysis: Cardinal Health Inc. [CAH]
  
• Stock Analysis: Becton, Dickinson and Co. [BDX]
  
• Stock Analysis: United Technologies Corp. [UTX]
• More Stock Analyses

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

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Weekend Reading Links - February 21, 2010

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 over the past week:

Articles From DIV-Net Members

• Dividends Value presented 38 Dividend Securities For A Well-Rounded Asset Allocation
  
• The Dividend Guy presented Three Essential Dividend Portfolio Question Every Investor Must Ask Now
  
• Dividend Growth Investor presented Ten Dividend Kings raising dividends for over 50 years
  
• Barel Karsan presented Catching Up With Innovation
  
• Dividend Tree presented ADM – Priced for Dividend Growth Portfolio
  
• Buy Value presented Dell- a Dud
  
• The Div Guy presented Solid Foreign Dividend Stocks
  
• Disciplined Approach to Investing presented The Value Is In Quality
  
• Living Off Dividends & Passive Income presented Taleb: Everyone Should Short US Treasuries
  
• Old School Value presented How to Invest: Research and Valuation Process
  
• Triaging My Way To Financial Success presented A Need for Stricter Mortgage Lending?
  
• BuyLikeBuffett.com presented Reaping Big Rewards From Trash
  
• 40percent 20years presented Walter Schloss - I do not like losing money
  
• Value Walk presented Why Did Berkshire Hathaway Signifcantly Reduce its Stake in Exxon Mobil?
  
• Think Dividends presented The Mall REIT

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

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Only 4 Ratios

if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I'll take my shot at it, what would you pick?

1) Current Ratio

Current Assets / Current Liabilities

Why?

This ratio keeps track of the company's ability to pay its short term debt. If a company doesn't have safety money to deal with debt then they might not be in business tomorrow and I don't need any of that.

2) Dividend Yield

Annual Dividend Per Share / Price Per Share

Why?

As a buy and hold investor I like to get paid to hold the investments. A nice yield makes for a little reward for patience.

3) Dividend Payout Ratio

Dividends/Net Income

Why?

Getting a great yield now is perfect, but how can you be sure that this dividend won't get canceled as soon as you buy the stock- you don't. One way of keeping an eye on this is to look at the payout ratio. If too much of the income is being eaten up with a dividend then beware that dividend might get cut or at least it sure isn't going to increase in the near future.

4) Dividend Growth Rate

Why?

If a company increases its dividend on a regular basis the returns over the long term can be jaw dropping. The future of a dividend can be more important than the present.

So how about you, if you only had four ratios what would you use?

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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Colgate-Palmolive (CL) Analysis

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. It operates in two segments, Oral, Personal, and Home Care; and Pet Nutrition. The company recently increased its quarterly dividend by 20.40% to 53 cents/share. This is the forty-seventh consecutive dividend increase for Colgate-Palmolive, which is a dividend champion.

Over the past decade this dividend stock has returned 4.30% per annum.

Earnings per share have increased by 11.10% on average since 2000. Since 2000 the number of shares outstanding has decreased from 625 million to 525 million, or an average decrease of 1.90% annually. Analysts estimate that EPS would grow by 9.80% to $4.80 in FY 2010. FY 2011 EPS are expected to increase by 11.40% from there to $5.35.

Sales outside North America accounted for two-thirds of the company’srevenues. The company’s strong competitive advantages in the oral healthcare field plus the low capital requirements have enabled it to generate high returns on capital.

Returns on Equity have been truly phenomenal, having never fallen below 80% since 2000.

Annual dividends have increased by 11.80% on average over the past decade, which is slightly higher than the growth in earnings.

A 12 % growth in dividends translates into the dividend payment doubling every six years on average. If we look at historical data, going as far back as 1976, Colgate Palmolive has actually managed to double its dividend payment every eight and a half years on average.

The dividend payout ratio has consistently remained below 50%, with the exception of a brief spike to 50.80% in 2006. 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 company trades at a P/E of 18.80 times earnings and has an adequately covered dividend payment. The current yield of 2.60% is below my 3% entry threshold. If we look at the yield from the past decade however, CL has yielded more than 3% only during the lows in early 2009. Because of this I initiated a position in Colgate recently. I would look forward to add to this position on dips below $71, which would be my ideal entry price.

Full Disclosure: Long CL

Relevant Articles:

- Twenty Dividend Increases in the news

- Where are the original Dividend Aristocrats now?

- Best Dividends Stocks for the Long Run

- Unilever (UL) 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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Dividend Investing and Businesses with Moat

We all have read many times in investing literature about investing in companies that have wide moat. We all also know that this term was made famous by Warren Buffett. What is this wide moat? In simple terms, it is some type of competitive advantage in its business. Competitive advantage in business can come from many different types, viz., brand, high switching cost, patents/IP/rights, ease of scalability, low cost producers, etc.

There are many companies that have many years building moats around their businesses. This moat makes it difficult for competitors to encroach upon their market share. Suffice to say, business with moat have sustainable competitive advantage. In general, companies with moats in their business are very good dividend growth providers. However, the opposite may not be true. Following are few examples of companies with moat that are also dividend growers.

1. Johnson and Johnson (JNJ): brand, and patents/IPs
2. Sysco (SYS): distribution network, high switching cost
3. AT&T (T) and Verizon (VZ): high switching costs, high entry barrier
4. Intel (INTC): brand, patents/IPs, scalability, high entry barriers
5. IBM: brand, patents/IPs, worldwide reach
6. Walmart (WMT): distribution network, low cost retailer
7. Procter & Gamble (PG), Clorox (CLX), Colgate Palmolive (CL), Unilever (UL): brand, distribution network, worldwide reach,
8. Becton, Dickinson and Company (BDX): brand, high entry barrier
9. Archer Daniels Midlands (ADM): expansive network, sourcing, one of few in organized agri business sector.
10. McDonald's (MCD): brand, franchise network, global reach, low cost fast food producer

For us, individual do-it-yourself investors, I am always intrigued by the process of determining moat. How do we really know what the moat is for any company that we invest in? We all read literature, listen to business honchos, and talking heads. Based on what we read we create a collage of this information and somewhere we find which company has wide moat. If were that easy, then there would be many more Buffetts, isn’t it?

To me, ability to determine wide moat and what price to buy are related. More importantly, these are closely tied to circle of competence. How can we individuals have circle of competency in all businesses or market areas? We have to depend upon literature to determine it.

On the same lines, how do we know that the company continues to enjoy the moat? After all, many of the companies that we thought had moat (and were dividend growers) got hit badly in last two years.

It is my belief that moat in a business is not permanent. It is management that ensures that their companies continue to enjoy the moat in market place. As mentioned earlier, you will find a quite a bit of literature on existing moat or past moat a company enjoys. The most difficult part is; how to monitor, or how to know whether the company continues to maintain its competitive advantage? It would be folly to think one will be able to identify it and sell at right time! Focusing on timing the market is never a good process and seldom successful.

In my viewpoint, the optimum approach is to manage this by minimizing the downside risk. This can be done by limiting the exposure (allocation) or limiting losses (event based selling).

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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Making Sense Of The Business

Occasionally, companies will appear to have terrific business models, but for some reason the profits just aren't forthcoming. On the other hand, a company's business model may seem downright silly, but it may continue to show profits. Venture capitalists may take interest in the former, while speculators may be interested in the latter. On the other hand, long-term investors should limit themselves to situations where the business model makes sense and the company shows profits.

As an example, consider Money4Gold (MFGD), a company based out of Florida. With the run-up in the price of gold over the last several years, many companies have popped up looking to profit from this trend, from mining companies looking to re-open shutdown mines to new gold and precious metals funds looking for a larger share of the investor's dollar. One company taking an interesting approach to profiting from the high gold price is Money4Gold.

Money4Gold has taken out a substantial marketing campaign to convince individuals to mail-in their unwanted gold in return for cash back based on what was mailed in. No details are given to the mailers as to how the amount of cash they receive will be determined, and so it appears unlikely at first glance that anyone of sound mind would willingly mail away their valuables in this way.

Nevertheless, the company exists and shows a market cap of over $50 million! Is this bewildering business model actually profitable? The financials suggest that it may very well be profitable in the near future. The company's income statement is improving, and in the last quarter the company actually managed to turn a profit in its Canadian operations!

However, a company that shows profits without a business model that makes sense may trade at a valuation that appears attractive, but could turn out to be a value trap. It is for this reason that it is of the utmost importance that investors understand the business, so that there are no negative surprises. While Money4Gold might continue to improve its profitability in the near-term, it seems unlikely that it can continue to do this over the long haul. The company appears to pay its "suppliers" less than 30% of the market value of their gold, which hardly seems sustainable! Long-term investors should beware of such situations and only invest in companies with easy-to-understand, time-tested, profitable business models.

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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Earnings Per Share & Dividend Yield Video

This is the second post in a series of video blogs by Dominico Johnston over at The Market Capitalist. Last week I kicked off this series of video posts from that site that I found interesting and especially relevant for us dividend investors.

This second video covers the basics of earnings per share and dividend yield. It gets a bit basic, but at the end of the day it is earnings that move the market and we need to be aware of them constantly.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

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Stock Analysis: RLI Corp. (RLI)

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

Company Description: RLI Corp, based in Peoria, IL, provides selected property, casualty and surety insurance.

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
   

RLI is trading at a discount to only 1.) above. The stock is trading at a 17.6% premium to its calculated fair value of $44.52. RLI did not earn any Stars in this section.

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%
   

RLI 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%. RLI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 35 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
   

RLI earned a Star in this section for its NPV MMA Diff. of the $2,319. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as RLI has. If RLI grows its dividend at 15.0% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

Other: RLI is a member of the Broad Dividend Achievers™ Index.

Conclusion: RLI did not earn any Stars 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 four Stars. This quantitatively ranks RLI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $86.12 before RLI's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 1.23%.

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 10.5%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing only a margin of safety. RLI has a risk rating of 1.25 which classifies it as a low risk stock.

RLI has a history of strong dividend growth. However, as we have seen over the last several years, the Financial Services sector has been quite volatile. With that in mind, I prefer a higher current yield than RLI's 2.03% at the expense of a lower dividend growth rate. Also considering the stock is trading well above my $44.52 fair value price, I will pas on any near-term purchases of RLI. 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 RLI (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

• Stock Analysis: Cardinal Health Inc. [CAH]
  
• Stock Analysis: Becton, Dickinson and Co. [BDX]
  
• Stock Analysis: United Technologies Corp. [UTX]
  
• Stock Analysis: Raven Industries Inc. [RAVN]
• More Stock Analyses

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

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Weekend Reading Links - February 14, 2010

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 over the past week:

Articles From DIV-Net Members

• Dividends Value presented Five High-Yield Positive Return Investments
  
• The Dividend Guy presented All Dividend Stocks Have Their Limitations – Do You Know What They Are?
  
• Dividend Growth Investor presented Dividend Growth beats Dividend Yield in the long run
  
• Barel Karsan presented Figure Out Who's With You
  
• Dividend Tree presented ADM – Priced for Dividend Growth Portfolio
  
• moneygardener presented first trades of 2010 - chips & heavy oil
  
• Disciplined Approach to Investing presented Conflicting Investor Sentiment Data
  
• Old School Value presented Benjamin Graham’s Net Current Asset Value
  
• BuyLikeBuffett.com presented The Lowest Rated Bank
  
• 40percent 20years presented E. ON - Stable company near 6% dividend yield
  
• EPIC INVESTOR presented Bracing for Inflation
  
• Value Walk presented Warren Buffett and John Paulson video Interview from Omaha.com

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

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Microsoft Pirates

I had a fellow investor tell me one day that they would never buy shares in Microsoft as their software is so widely pirated. I'm not a big fan of Microsoft stock but I've heard that reason given before and it is just silly- let me tell you how it works.

Microsoft widely subsidizes licensing for high schools, universities and colleges. They also provide university bookstores with deeply discounted licenses for their products to sell to students. This puts the product front and center and forces students to learn it or face failing their courses. After four or more years working with the product students in all ranges of study become proficient users. This indoctrinates users into Windows' users. The cost of retraining these people would be tremendous, so the net effect is that it forces future employers to buy Microsoft products.

If you somehow manage to elude Microsoft products through your education then you may end up pirating their software for your home use. Microsoft has a well known anti-piracy group but the reality is that they really don't care as much about single user license violations (they care, just not as much). The focus on piracy is aimed steadily at the big perpetrators of piracy, people who are profiting by selling pirated Microsoft products, or corporations that have multiple license violations. Microsoft doesn't care that much about your 13yr old son with a pirated copy of Microsoft Visio for the same reason that many tool companies give away free tools to recent trade school grads. Once you get use to our tools, why would you want to throw all of them out and relearn a whole new set when it comes time to upgrade or amend your set?

There is another reason why piracy actually fits into the profit model of a business. Buzz. It is well known that retailers often provide products to celebrities. Other companies such as Nike have admitting allowing the theft of their products in sample markets. This is an extremely inexpensive marketing and focus group activity. By getting the product out in front of customers, even if you have to give it away, they are very likely to rejoin the paying fold in the future or encourage others to.

Indoctrination isn't free, but it sure does pay in the long run. If you want to dislike Microsoft stock that is ok, but dislike it for the right reasons.

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McGraw-Hill Companies (MHP) Stock Analysis

The McGraw-Hill Companies, Inc. provides information services and products to the financial services, education, and business information markets worldwide. The company operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. Just a few weeks ago this dividend aristocrat increased its quarterly dividend by 4.40% to 23.50 cents per share, which was the 37th consecutive annual dividend increase for the company.

The stock has delivered an average annual total return of 10.20% over the past decade.

Earnings per share have grown at an average pace of 7.60% per annum. The company has also has repurchased 2.80% of its outstanding stock annually on average since 2001. For FY 2010, analysts expect the company to earn $2.63/share, which is higher than 2008’s EPS of $2.33. For FY 2011 analysts expect McGraw-Hill to earn $2.95/share. A reduction in the amount of debt being offered could affect the company’s Financial Services segment, which accounts for almost three quarters of its operating profit. Changing regulations and competitive environment could also affect this major segment, which includes the Standard & Poors brand. The remaining 16% and 7% of operating profits are achieved from the company’s education and media segments.


Annual dividends per share have increase by an average of 7.50% annually, which is in line with the growth in earnings. A 7.50% growth in dividends translates into the payment doubling every almost ten years. McGraw-Hill has managed to double its distributions every eleven years on average since 1988.

The return on equity has fluctuated between a low of 12.80% in 2006 and a high of 55.30% in 2008. Over the past few years it has remained above 30%, which is impressive.


The dividend payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

McGraw-Hill currently trades at 14.50 times earnings, has an adequately covered dividend, and yields 2.60. I would consider adding to my position in McGraw-Hill on dips below $31.30.

Full Disclosure: Long MHP


Relevant Articles:


- Dividend Aristocrats List for 2010
- Stanley Works (SWK) Dividend Stock Analysis
- Busy week for dividend increases
- 29 stocks with sustainable dividends

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Qualcomm – Stock Analysis for Dividend Growth Portfolio

Qualcomm manufactures and markets digital wireless telecommunications products and services based on its code division multiple access (CDMA) technology and other wireless communication technologies. QCOM is neither a dividend aristocrat nor a dividend achiever. QCOM has started showing some dividend growth trends in last five years. The latest dividend increase was in January 2010. My objective here is to understand if QCOM has any potential to be a dividend investment and fair value pricing for buy.

Trend Analysis
This section looks at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts is shown in image below.

• Revenue: In general, after 2001, QCOM has stable and consistent growth in revenue. The average revenue growth for last 10 years is 12.3% (with 15% standard deviation).
• Cash Flows: Relatively increasing trend for operating cash flow and free cash flow. In the last ten years, the company’s operating cash flows are consistently higher than net income. The concern I have is the free cash flow is more or less similar to net income. There is very little room for flexibility in allocating cash for dividends.
• EPS from continuing operation: In general, the EPS also has an increasing trend since year 2001 with average growth rate as 60%. Most of that growth is coming in 2003 and 2004. Since 2005, the EPS growth rate has been approximately 15%. The earnings dropped in 2009.
• Dividends per share: Dividends per share are consistently growing for the last 5 years.

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 1.71. This is a medium risk category as per my 3-point risk scale. The reduced EPS and reduced operating margins in 2009 makes it 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 16% is more than average EPS (13.4%) growth rate. However, when we look at last three years alone, the dividend growth and EPS growth are very similar (closer to 21% for both).
• Duration of dividend growth: Dividends have continuously grown for the last 6 years.
• 4 year rolling dividend growth rate for past ten years: No
• Payout factor: In the past 5 years, it has been consistently less than 35%. But 2009 payout factor was 70%.
• 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 2.2%. Considering the last 3 year average dividend growth rate of 16.3%, the stocks dividend cash flow at the end of 10 years is 2.5 times MMA income.

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: $54.17
• Average high yield price calculated based on past 10 years: $32.5
• Pricing based on past 10 year relative price-to-earnings ratio. $56.0
• Pricing based on price-to-earnings ratio of 12: $18.7
• Graham number: $18.2 The range of fair value is calculated as $27.4 to $37.8.

Qualitative Analysis
The strength of QCOM’s business is its ownership of CDMA technology, royalty-based cash flow of more than USD 1 billion dollars, most of the competitors are struggling, and a strong technology-driven roadmap. QCOM is on path to become Google of wireless communication chipset. Contrarily, the concerns I have with QCOM is it operates in a cyclic industry and never ending legal battles.

• This quantitative analysis shows that, in last 5 years QCOM has had significant growth in revenue. It continues to maintain 60%+ gross margins. Generally, its operating margins at higher than 30%, but it dropped to 21% in 2009. Its EPS has high volatility.
• Notwithstanding the higher operating cash flow, the recession driven slow down has affected its EPS.
• Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, the low payout factor will allow the corporation to continue to maintain (if not raise) the dividends.

Conclusion
The stocks current risk-to-dividend number is 1.71 (medium risk category). In addition, the dividend cash flow is 2.5 times the MMA income based on average dividend growth rate of 16%. Moving forward, I expect dividend growth rate to slow down (10% to 12% range). In that case, the price will have to drop down to $25.80 for dividend income to be twice MMA income. This pricing of $25.80 is also very close to my low range of my fair value. I like QCOM’s technologically-driven dominant market position and its medium risk-to-dividends. However, for a potentially good dividend investment, I would wait for its price to get closer to my low end (i.e. $27) of the fair value range.

Full Disclosure: No position at the time of this writing.

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Setting The Linktone

Linktone (LTON) is a Ben Graham net-net, with current assets of $125 million, total liabilities of just $11 million, and a market cap of $70 million. Most of the current assets are in the form of cash, which is the result of a share offering at a significantly higher price. The stock price has shown itself to be quite volatile, which is a good thing for value investors (and keeps other investors away). The company's market cap has ranged from $45 million last year to over $100 million a few short months ago. While it is not losing money hand-over-fist as many other net-nets are, there are some risks of which investors should be aware.

Linktone not only operates in a very competitive arena, offering value-added applications to mobile phone users in China, but is also subject to severe market pressure from its customers, the three state-run Chinese telecom operators. These large players dominate the market and use their market power to extract high and escalating fees on Linktone and it's competitors. Furthermore, these companies have been making progress in vertically integrating, offering popular applications to their user-base, thereby taking away Linktone's share of the market.

Linktone is extremely dependent on one of these operators in particular, with 70% of its revenue coming from China Mobile. While there are contracts in place to secure Linktone's position temporarily, these contracts are short-term in nature and as discussed in the previous paragraph, all the power lies with the customer. Finally, the company is controlled by a single shareholder, which makes it more difficult for shareholders to encourage activities that may result in price and value convergence (a very different situation than the one we saw with Acorn a couple of months ago).

The earnings situation for this company may be grim due to the weak market position in which Linktone sits. However, from a liquid asset and cash perspective this company is very attractive. The question investors will have to watch for going forward is whether the new management team is able to mitigate the risks (mentioned above) facing this company so that they may conserve the company's strong balance sheet position.

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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Common Investment Misunderstandings

I constantly scour the internet for interesting videos people have done explaining investment topics of interest. Recently I was searching over at Vimeo and came across a series of videos by Dominico Johnston from The Market Capitalist. I went through a few of them and thought that they were worth talking about here.

Over the next couple of weeks on this blog, I am going to put a few of Dominico's videos. Not all of them, but the ones that I think are especially important to dividend investors like us. The first video is covers some common investment misunderstandings.

This article was written by The Dividend Guy. To learn more about dividend investing, please follow my RSS feed or Twitter account.

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Stock Analysis: Cardinal Health Inc. (CAH)

Linked here is a detailed quantitative analysis of Cardinal Health Inc. (CAH). Below are some highlights from the above linked analysis:

Company Description: Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.

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
   

CAH is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $32.22. CAH did not earn any Stars in this section.

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%
   

CAH 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%. CAH earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 14 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
   

CAH earned a Star in this section for its NPV MMA Diff. of the $6,254. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 17.6% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

Other: CAH is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

Conclusion: CAH did not earn any Stars 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 four Stars. This quantitatively ranks CAH as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $48.44 before CAH's NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.44%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 14.1%. This dividend growth rate is less than the 17.6% used in this analysis, thus providing only a margin of safety. CAH has a risk rating of 1.50 which classifies it as a low risk stock.

CAH's customer relationships and established distribution infrastructure provide notable scale advantages. Its diversified line of products and services provide good growth prospects for its contract drugmaking and its drug dispensing systems. The company is making steady progress in its performance initiatives by reducing the number of its generic drug suppliers, expanding its retail business and focusing on cost control. The stock is trading near my fair value price of $32.22. However, I am hesitate to buy with its yield at 2.19%. 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 CAH (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

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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. [RSS] [Email] [Twitter]

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Weekend Reading Links - February 7, 2010

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 over the past week:

Articles From DIV-Net Members

• Dividends Value presented Dividend Stocks: Three Keys For Successful Investing
  
• The Dividend Guy presented 7 Warning Signs You Need to Repair Your Portfolio
  
• Dividend Growth Investor presented Dividend Investors are getting paid for waiting
  
• Barel Karsan presented The Focus Of Mutual Funds
  
• Dividend Tree presented Why Are We So Clueless about the Stock Market? – Book Review
  
• Buying Value presented The Effects of Layoffs on a Business
  
• moneygardener presented Colgate & UPS provide raises
  
• The Div Guy presented Blue Chips for the Long Run
  
• Disciplined Approach to Investing presented Dividend Payers Outperform Non Payers In January
  
• Old School Value presented PARL Net Net but Business Stinks
  
• Everyday Finance presented Innovative Ways to Hedge your Portfolio in This Market
  
• BuyLikeBuffett.com presented 4 Potential Value Plays
  
• 40percent 20years presented From Stock to Stinsen Warrants & Wall Street
  
• EPIC INVESTOR presented Be a Zen Investor
  
• Value Walk presented Warren Buffett Interview On CNBC

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

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dell dddd dumb

Before any investment in a company I try to do business as a consumer with that company. Balance sheets can only tell you so much about the "true" story of a business. When the option came up to buy a new laptop for my wife I thought, Dell stock has been interesting to me for some time, let's give them a go.

Let me tell you, it wasn't pretty. After going through far too many pages and a number of strange web errors on the dell site my order was lodged. Content to write off these bizarre website errors I went over to the track order page. To my surprise I discovered my estimated delivery date for an off the shelf, uncustomized, mass manufactured, laptop was over a month away. I couldn't believe it, I could walk 5 mins from my office to a local computer store and pay the same price for a laptop and walk out that day.

I set about to cancel my order right away. Sent an email, no response. Phoned, and finally after sitting on hold for more time than I would like to admit I was put through to a call center where I was able to cancel my order. I did a bit of reading around the web to see if I was the only one who had encountered this, nope.

I am left wondering, what is dell's sustainable competitive advantage?

• Easy order- nope.
• Great service- nope.
• Great selection- nope.
  
• Fast Delivery - nope.
• Great prices - nope.

Sorry Dell, not going to buy a laptop from you again, and not going to be buying your stock either.

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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Diageo Stock Analysis

Diageo plc (DEO) engages in producing, distilling, brewing, bottling, packaging, distributing, developing, and marketing spirits, beer, and wine. The company offers a range of premium brands comprising Smirnoff vodka, Johnnie Walker scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, J&B scotch whisky, Tanqueray gin, and Guinness stout. Diageo is an international dividend achiever, which has raised distributions for over a decade.

The company has delivered annualized total returns of 12.4% on average.

Earnings per share have increased by 10% on average since 2000. EPS growth has been aided by a decade of share buybacks, which shrank the number of outstanding stock by a quarter. Emerging markets account for one third of company’s revenues. This is where many brand name consumer companies are currently experiencing growth. In 2009 Diageo earned $4.14/share. Analysts expect the company to earn $4.62 and $5.04 per share in 2010 and 2011 respectively.

The annual dividend payment has been increased by 6.80% on average, which is lower than the growth in EPS.

Return on equity has increased from 22.30% at the beginning of the study period to a very impressive 42% in 2009.

The dividend payout ratio has been volatile, and largely remaining above 50% during our study period. Currently this indicator sits at 55%.

Diageo currently trades at a P/E of 16, yields 4.20% but has a dividend payout ratio of 55%, which is a little bit higher for my taste. Other than that I like the company, the strong brand names it owns and its ability to raise dividends through thick and thin. I never really pulled the trigger on Diageo (DEO) since I analyzed it in 2008. I would try to initiate a position in the company on dips as soon as I have funds available.

Full Disclosure: None

Relevant Articles:

- Diageo (DEO) Dividend analysis

- Attractively Valued International dividend stocks

- Best International Dividend Stocks

- Dividends versus Share Buybacks/Stock repurchases

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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