Tuesday, August 31, 2010

A Solid Yield For A Soft Drink Company

PepsiCo Inc. (PEP) is more than just soda. While PepsiCo is primarily known for its Pepsi cola, the food conglomerate also makes carbonated, non-carbonated drinks, and snack foods. If you have ever eaten snack foods then you have probably eaten a PepsiCo product. Have you ever had Doritos, Cap’n Crunch, or Tostitos? That’s all PepsiCo. Pepsi is responsible for the 7 Up, Frito Lay, Quaker Oats, Lays, Ruffles, Lipton Tropicana, and Aquafina brands as well.

The company has been around forever. Pepsi was founded back in 1890 by Caleb Bradham. Pepsi operates in the highly competitive soft drink market. The company’s chief competitor is Coca Cola which is the largest soft drink company in the world. PepsiCo has managed to differentiate itself from competitors with its large number of offerings in the food and beverage industry. Today, Pepsi generates over $60 billion dollars in sales selling hundreds of brands around the world.

PepsiCo has grown into the behemoth that it is today by making a number of shrewd moves. The first move was merging with Frito Lay allowing the company to enter the snack foods market. Next, the company added Tropicana and Quaker Oaks over the past 13 years. PepsiCo recently agreed to purchase its bottling company, The Pepsi Bottling Group. The merger will lower production costs and save Pepsi millions of dollars on bottling and distribution.

Pepsi is a financially strong company and the management team has done an outstanding job of managing company assets. PepsiCo has a 36.81% return on equity and a 10.28% return on assets. Operating margins and profit margins are impressive coming in at 17.3% and 12.7% respectively. The only issue for Pepsi is its large debt load of $24 billion dollars. This shouldn’t be a problem since the company creates huge amounts of free cash. Pepsi has earned $7.75 billion dollars year to date and has $4.75 billion dollars in cash on the balance sheet.

Shares of PepsiCo currently trade for $63 a share. The stock currently trades at 16 times earnings which is cheaper than competitors Coke and Dr. Pepper. Pepsi should be able to easily maintain its 7% growth rate over the next few years. The stock currently trades at two times book value and 1.7 times earnings growth.

PepsiCo investors are also getting a rock solid dividend. The food and beverage maker has increased its dividend for 38 consecutive years. Shares of Pepsi are currently yielding 3% which is right in line with the trailing dividend yield of 2.9%. The historical yield has been 2.3%. The payout is very reasonable with only 47% of earnings redistributed back to shareholders.

Pepsi is a reasonably attractive stock at its current price. The stock would be an absolute steal at $57.


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Monday, August 30, 2010

Stock Analysis: Coca-Cola Company (KO)

Linked here is a detailed quantitative analysis of Coca-Cola Company (KO). Below are some highlights from the above linked analysis:

Company Description: The Coca-Cola Company is the world's largest soft drink company. It engages in the manufacture, distribution, and marketing of nonalcoholic beverage concentrates, fruit juices and syrups worldwide.

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

KO is trading at a discount to only 3.) above. The stock is trading at a slight discount to its calculated fair value of $57.92. KO 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%

KO 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%. KO 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 1893 and has increased its dividend payments for 48 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

KO earned a Star in this section for its NPV MMA Diff. of the $840. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as KO has. If KO grows its dividend at 7.3% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. KO earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Memberships and Competitors: KO is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. KO's peer group includes: Dr. Pepper Snapple Group (DPS) with a 2.7% yield, Fomento Economico ADR (FMX) with a 1.3% yield and Pepsico, Inc (PEP) with a 3.0% yield.

Conclusion: KO 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 KO as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $65.57 before KO's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.68%.

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 5.8%. This dividend growth rate is well below the 7.3% used in this analysis, thus providing a margin of safety. KO has a risk rating of 1.00 which classifies it as a low risk stock.

Coca-Cola is one of the most recognizable names in the world. KO is able to deliver products to nearly all points on the globe through an extensive direct distribution network that has few peers. Its world presence will be relied on to compensated for declining consumption of carbonated beverages in the North American market. The company's pristine balance sheet and strong free cash flow will keep me buying when the stock trades below my fair value price of $57.92, 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 KO (3.6% of my Income Portfolio). See a list of all my income holdings here.


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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Sunday, August 29, 2010

Weekend Reading Links - August 29, 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

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


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Friday, August 27, 2010

Stock Analysis: Medtronic (MDT)

Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. This dividend champion has raised distributions for 33 years in a row.

Over the past decade this dividend stock has produced a negative total return of 2.20% per year. The company was grossly overvalued in 2000, ending the year at a P/E of 68 which explains the poor returns over the past decade.


Earnings per share have increased by 14.10% per year since 2001. For FY 2011 analysts expect earnings to grow by 25.40% to $3.50, followed by an 8.60 % increase to $3.80 in FY 2012.


The annual dividend payment has increased by 17% per year since 2000, which was higher than the growth in earnings. The company has managed to achieve that by paying a higher portion of earnings to shareholders in the form of dividends. A 17% dividend growth translates in dividend payment doubling almost every 4 years on average. If we look at the company’s dividend history since 1977, the company has indeed managed to double quarterly dividend every 4 years on average.


The dividend payout ratio has increased from 24% in 2001 to 29% in 2010. Between 2002 and 2007 the company raised dividends at the pace of earnings growth, as evidenced by a stagnant payout ratio during the period. Since then however the company has started to raise dividends at a much higher rate, which indicates that there are high chances that investors could realize a high yield on cost in the future.


Returns on equity have remained above 19 for the majority of the past decade. Overall the ROE increased steadily over the past decade.

Overall Medtronic looks attractively valued at a P/E of 12.80, an adequately covered dividend and a yield of 2.50%. In comparison rival CR Bard (BCR) has a P/E of 16.50 and yields 0.90%, while rival Becton Dickinson (BDX) yields 2.10% and trades at a P/E of 14.10. While the stock has gone nowhere for one decade, the company has managed to more than triple earnings per share, which makes it a bargain at current prices. Many companies like Medtronic (MDT), Johnson & Johnson (JNJ) and Becton Dickinson (BDX) were overvalued in 2000, which explains why buy and hold dividend investing didn’t work as well over the past decade. If Medtronic’s earnings growth managed to be half as good as it were over the past decade, the stock could do well over the next decade.

Full Disclosure: Long JNJ and MDT

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This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Wednesday, August 25, 2010

Managing Earnings or Managing The Business

Value investors are generally agreed that managements of going concerns should make their decisions based on long-term cash flow implications. Unfortunately, the pressures on managements to perform on a short-term earnings basis can push them to make decisions that are not in the best interests of shareholders.


Consider Sterling Construction (STRL), a company that builds and repairs roads, highways and water infrastructure. Due to the recession, the amount of work available for the company has declined, leaving it operating at a lower capacity. Idled equipment generates no revenue, but accrues charges for depreciation. This charge shows up on the income statement, but note that no actual cash charges occur (apart from any maintenance that is required).

However, if the company did sell this equipment, those depreciation charges would disappear, making the company's income statement look better! Considering the company is not hurting for cash, it would seem that Sterling is better off with the extra capacity, since the actual cash costs (as opposed to earnings costs) are minimal. The extra capacity could come in handy if competitors go under or if the government passes infrastructure stimulus bills.

Usually, minority public investors don't get to know what goes through a manager's mind when it makes a decision to reduce capacity. Sterling, however, illustrated on its last conference call how short-term earnings (as opposed to long-term cash flow) can influence decision-making. Here were management's comments on the topic of selling idled equipment that it believes it will eventually require:

"We're struggling with that issue. So far we are absorbing that extra cost...I have some on our management team that would prefer that we [sell idled equipment], mostly to enhance currently reported financial results. Most of us are of the opinion that that's shortsighted."

Warren Buffett has stated time again that managements must concentrate on long-term returns over short-term earnings management. He notes, "If a management makes bad decisions in order to hit short-term earnings targets...no amount of subsequent brilliance will overcome the damage that has been inflicted." All sorts of companies are busy trying to make earnings look better than they are; investors would be well served to find and stick with managements doing right by shareholders over the long term.

Disclosure: None

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to my feed.


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Tuesday, August 24, 2010

A Small Cap REIT With A Nice Dividend Yield

Let’s take a look at a small cap stock that you have probably never heard of. This company operates in the real estate industry and makes it money leasing space to tenants. As investors already know REIT’s pay some of the best dividends in the stock market. This is because REIT’s are required to distribute 90% of their earnings back to shareholders.

Saul Centers (BFS) is a tiny retail real estate investment trust. The mall operator manages a real estate portfolio of 52 shopping centers and office properties. The majority of the company’s properties are located in the metropolitan Washington, DC/Baltimore area. Eighty percent of the company’s revenues are derived from this region.

Saul Centers has a $750 million dollar market cap and has earnings of $160 million dollars annually. The company has done surprisingly well surviving a difficult economic environment for mall owners. Many REIT’s such as General Growth Properties were driven to the verge of bankruptcy by huge debt loads and declining mall rents. Saul Centers has been able to lease out 92.9% of its existing property space. There are other encouraging trends at Saul Centers.

The company saw a 1.4% increase in net income and a 0.8% increase in same property revenues. This is very encouraging in a sector in which many mall operators are struggling to lease out space especially anchor stores. Saul Centers took advantage of the low interest rate environment and recently refinanced nearly $100 million dollars worth of debt set to mature in two years. The refinancing lowered the company’s debt maturing to below $70 million.

Company management has been buying stock personally. It’s always encouraging when the CEO is buying shares of his own company. It shows that the CEO believes in the direction of the company. CEO B Francis Saul II recently bought $3.6 million dollars of the company’s stock. This is a significant amount of compensation for a CEO that only makes $180,000 in salary.

At $40 a share, the stock currently sells for 17 times this year’s earnings. Saul Centers is attractive because of its 3.5% dividend yield. This is actually lower than the historical dividend yield of 4.1%. The company is currently paying out $1.44 per share to shareholders. The company should be able to sustain its dividend. The current payout rate is 62% and the refinancing has lowered the company’s debt servicing costs. The company has increased its cash position from $20 million to $28 million dollars and has been able to generate $68 million dollars in free cash flow.

An improving cash position and better debt outlook makes Saul Centers Inc. a nice dividend play.

This article was written by [Buy Like Buffett]. If you enjoyed this article, please consider subscribing to my feed at [RSS].


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Monday, August 23, 2010

Stock Analysis: Weyco Group, Inc. (WEYS)

Linked here is a detailed quantitative analysis of Weyco Group, Inc. (WEYS). Below are some highlights from the above linked analysis:

Company Description: Weyco Group, Inc. distributes, wholesale & retail, men's branded footwear in the U.S., Canada, Europe; offers casual footwear, dress shoes and accessories under Florsheim, other brands.

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

WEYS is trading at a discount to only 1.) above. The stock is trading at a 7.8% discount to its calculated fair value of $24.88. WEYS 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%

WEYS 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%. WEYS 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 1973 and has increased its dividend payments for 29 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

WEYS earned a Star in this section for its NPV MMA Diff. of the $5,378. This amount is in excess of the $600 target I look for in a stock that has increased dividends as long as WEYS has. If WEYS grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. WEYS earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Other: WEYS is a Dividend Champion.

Conclusion: WEYS 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 WEYS as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $50.40 before WEYS's NPV MMA Differential decreased to the $600 minimum that I look for in a stock with 29 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 $600 NPV MMA Differential, the calculated rate is 7.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a significant margin of safety. WEYS has a risk rating of 1.00 which classifies it as a medium risk stock.

During the first half of 2010, WEYS generated $7.9 million in cash from operating activities this was down from the $20.8 million in the same period one year ago. Cash from operations in 2010 was used mainly to pay dividends and to fund the $2.5 million Umi acquisition, a children’s footwear company, that closed on April 28, 2010. With no debt and a free cash flow payout of 22%, the company is well-positioned to weather the current downturn. WEYS is currently trading below my fair value price of $24.88. 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 WEYS (0.0% of my Income Portfolio). See a list of all my income holdings here.


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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Sunday, August 22, 2010

Weekend Reading Links - August 22, 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

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


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Friday, August 20, 2010

Stock analysis: Aflac Incorporated (AFL)

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus (Aflac), provides supplemental health and life insurance. The company offers cancer plans, general medical indemnity plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans, and annuities in Japan. This dividend aristocrat has raised dividends for 46 years in a row. The company most recently announced a 9.70% dividend increase to 34 cents/share.

Over the past decade, this dividend stock has delivered an annual total return of 8.10%.

At the same time the company has managed to increase earnings per share by 10.90% per year. In 2009, earnings per share increased by 21.70% to $3.19. Analysts are estimating FY 2010 and FY 2011 EPS to increase to $5.46 and $5.99 respectively.

Return on Equity has increased from 16% in 2000 to 20% in 2009. In addition to that this indicator has remained between 16 and 20 since 2004.

The annual dividend per share has increased by 23.30% annually over the past decade. A 23% increase in dividends translates into the dividend payment doubling every 3 years on average. Sicne 1984 the company has managed to double dividends every four years on average.

The dividend payout ratio has almost tripled over the past decade, from 13.50% in 2000 to 35% in 2009. This is a direct result of the fact that dividends have been increasing much faster than earnings over the past decade.

Currently Aflac trades at a P/E of 12.60, yields 2.40% and has an adequately covered dividend payment. I would be adding to my position on dips below $48.

Full Disclosure: Long AFL

Relevant Articles:

- Dividend Investing Works in All Markets
- A dividend portfolio for the long-term
- Three Dividend Strategies to pick from
- Financial Stocks for Dividend Investors

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].




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Thursday, August 19, 2010

Quality Dividend Stocks with Low Yields

When it comes to current dividend yields, in general, the cut off used by dividend investors vary such as 2% absolute dividend yield, 3% absolute dividend yield, or dividend yield higher than S&P500 index yield. I have observed that there are quite a few good quality dividend paying companies that have dividends yield of around 2%. There is a school of thought that low dividend yields will take more than 10, 12, or even 15 years to be equivalent to any high yielding CDs or money market accounts. In addition, when low yield dividend stocks are compared to high yield dividend stocks, considering conservative dividend growth rates, low yielding stocks will often lag by significant amount. Mathematically, it does make sense and hence, it is difficult to argue on this thought. Purely based on dividends alone, it is always good to go for relatively higher yield dividends stocks.

In general, I have always made relative comparison with S&P500 index yield. But I have not had a minimum dividend yield floor value, below which I have not invested. Current low yield may be a reflection of company being of good quality. Following are three examples of low yielding dividend stocks that I believe are of good quality.

  • Lowe’s Companies (LOW) is a home improvement retailer which focuses on retail do-it-yourself (DIY) customers and do-it-for-me (DIFM) customers who utilize LOW’s installation services, and commercial business customers. Its product lines include products and services for home decorating, maintenance, repair, remodeling, and the maintenance of commercial buildings. It continues to have very stable gross and operating margins. It continues to generate operating cash flows. One would expect that with housing market crash, LOW’s earnings would also crash. However, it was not the case, and it indicates the strength of its business model. Even though the housing market is grim, I believe the repair and maintenance segment will continue to generate revenue and income for LOW. Current yield is 2.2%.
  • John Wiley & Sons (JW.A) is in publishing industry where there is a general concern about industry’s continued decrease in profitability. Contrary to this trend, JW.A continues to have stable gross and operating margins, generates stable operating and free cash flows. Its core competency is digital publishing that focuses on the subscriber based products. It does not have to depend upon advertising revenue alone. Notwithstanding the low payout and low dividend yields, the company will last longer than 10 years. Therefore, I believe low dividends yield alone should not be a show stopper. Current yield is 1.7%.
  • Becton, Dickinson and Company (BDX) is another example of low dividend yield stock. The company does not have excessively high debt levels (or leverage) and hence, was not affected by financial turmoil. It does not depend upon the credit markets. BDX generated more than half of its sales from outside of US which have different growth rates than US economy. It does have challenges such as regulatory driven change in spending patterns, health care reforms, or recession driven slow down. But these issues will affect the whole industry and not BDX alone. Contrary to general belief, BDK operates in an industry with high barriers to entry. The quality and reliability requirements for end products in this industry are among the stringent ones. It has build business around its core competency which makes me think and believe that it will last for more than 10 years. Current yield is 2.1%.


I am still in my early investing years and have a long way to go before I stop investing. So if I think the company has some core competency, competitive advantage, low risk to dividends, and will survive beyond a decade, then I am open to invest in such low yield dividend stocks. I believe the slow steady earnings will provide capital gains and help me moderate out total returns. Such companies provide stability in your portfolio.

Disclosure: Long on LOW, JW.A, and BDX


This article was written by Dividend Tree. If you enjoyed this article, please consider subscribing to my feed at [feed link].


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Wednesday, August 18, 2010

Double-Counting Operating Leases

A prevailing theme on this site has been the idea that operating leases must be capitalized when valuing a company. But investors must be careful not to capitalize operating leases twice, which could soon become an easy mistake to make.

When a company acquires control of an asset, it can choose to buy it or lease it. If it buys the asset, but uses debt to finance the purchase, it is essentially the same thing as leasing it. Therefore, to make these two transactions identical on financial statements (since they are essentially the same thing), accounting rules require that longer leases be capitalized, so that the asset purchased and the lease payments owed are capitalized on the balance sheet, as if the asset was purchased using debt.


But some companies attempt to avoid capitalizing leases (and therefore don't have to show the future lease payments as obligations on their balance sheets) by structuring them as short-term leases, called operating leases. For this reason, many articles on this site advocate capitalizing operating leases. (To see how, see this presentation.)

But recognizing that the capitalization of operating leases leads to more transparent financial statements, the accounting regulatory bodies are moving towards the capitalization of all leases, whether short or long. As such, investors will soon have to be careful not to capitalize operating leases when they have already been capitalized! This would lead to overstating the company's debt situation and understating the company's return on capital.

To determine whether a company already is capitalizing its operating leases, the investor will have to read the company's notes to its financial statements to determine the company's current policy (companies with different fiscal year end dates will likely have to adopt the capitalization requirements at different times).

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to my feed.


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Tuesday, August 17, 2010

A Steel Stock With A High Dividend Yield

The steel industry has seen its ups and downs over the past few years. Steel stocks surged to highs during the construction booms of the 2000’s. These stocks came crashing down during the market depression of 2008. Many of these companies still have not recovered and are still trading at discounted prices.

Let’s take a look at a popular steel stock, Nucor Corporation. You may have heard of Nucor before. The stock is a favorite of CNBC’s Jim Cramer. He likes the company’s integrated supply chain and management team.

Nucor is one of the largest steel companies in the United States. The company has grown in recent years through strategic acquisitions. Nucor has a number of competitors in the industry such as US Steel, Mittal Steel, and AK Steel. The steel industry is incredibly competitive and companies pricing power is based on spot prices and global demand. Steel stocks thrive during robust economic cycles and struggle during economic lulls.

Nucor Corporation (NUE) has fallen into high yielding territory. It’s rare that a steel company ever becomes an attractive investment based on its yield. Nucor Corporation is currently yielding 3.8%. Compare that with the 0.40% yield of US Steel and the 1.5% yield of AK Steel. Even Mittal Steel which has a decent yield is only paying out 2.1%.

Nucor generated $11.2 billion dollars in revenue last year and earned $293 million in net income. The past few years have been a nightmare for Nucor with steel demand falling off the map. Nucor’s earnings have plummeted 30% over the past few years as the construction sector has grounded to a halt. Nucor saw its free cash flow turn negative and its earnings plummet. The company is currently paying out more via distributions ($1.44) than the company’s current earnings per share ($1.13).

There are signs that things are slowly improving in the steel sector. Nucor is currently operating at a 75% level and revenue is on pace to come in over $16 billion dollars this year. Nucor is seeing sequential growth in the automobile sector especially. Demand in the energy sector has been below average. Residential and nonresidential construction demand for steel products is still tepid.

The stock is not cheap right now with shares trading at 33 times this year’s earnings. The current dividend payout is 304% which is unsustainable without a significant increase in EPS. The company is relying heavily on earnings returning to normal in order to fund the dividend. Unless the economy picks up in a major way, Nucor will be forced to cut its dividend. The company cannot keep depleting its current assets to fund its dividends.

Investors should take a pass on Nucor. At $38 per share, the stock is trading at more than two times the company’s projected growth rate for shares. The stock may be a Cramer favorite but there are much cheaper opportunities in the steel sector.

This article was written by [http://buylikebuffett.com]. If you enjoyed this article, please consider subscribing to my feed at [http://buylikebuffett.com/index.php/feed/].


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Monday, August 16, 2010

Stock Analysis: UGI Corporation (UGI)

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

Company Description: UGI Corp. operates propane distribution, gas and electric utility, energy marketing and related businesses through subsidiaries.

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

UGI is trading at a premium to all four valuations above. Since UGI's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 30.5% premium to its calculated fair value of $20.60. UGI 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%

UGI 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%. UGI 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 1885 and has increased its dividend payments for 23 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

The NPV MMA Diff. of the $614 is below the $1,200 target I look for in a stock that has increased dividends as long as UGI has. If UGI grows its dividend at 5.7% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. UGI earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

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

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

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $21.54 before UGI's NPV MMA Differential increased to the $1,200 minimum that I look for in a stock with 23 years of consecutive dividend increases. At that price the stock would yield 4.18%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,200 NPV MMA Differential, the calculated rate is 7.9%. This dividend growth rate is well above the 5.7% used in this analysis, thus not providing any margin of safety. UGI has a risk rating of 1.75 which classifies it as a medium risk stock.

UGI offers a unique business mix of low-risk regulated gas distribution business along with a more volatile unregulated propane marketing businesses. The gas utility serves about 1,000,000 customers and the electric utility serves about 62,000 customers. The utility owns two coal-fired stations that supply more than half of its electricity, with the remainder purchased on the open market. The non-utility portion of the business has certainty helped its financials. Its debt to total capital of 43% and free cash flow payout of 45% are low for a utility. Also, not having any negative free cash flows over the last 10 years is virtually unheard of for a utility. Unfortunately, this has been baked into the share price with the company trading at more than 30% above my buy price of $20.60. I will watch UGI and wait for a better 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 UGI (0.0% of my Income Portfolio). See a list of all my income holdings here.


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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Sunday, August 15, 2010

Weekend Reading Links - August 15, 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

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


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Friday, August 13, 2010

Stock Analysis: Illinois Tool Works (ITW)

Illinois Tool Works Inc. (ITW) manufactures a range of industrial products and equipment worldwide. This dividend champion has raised dividends for 46 years in a row. The company most recently announced a 9.70% dividend increase to 34 cents/share.

Over the past decade, this dividend stock has delivered an annual total return of 5.70%.



At the same time the company has managed to increase earnings per share by 2.30% per year. In 2009, earnings per share declined by 36% due to weak revenues caused by the global recession. Analysts are estimating FY 2010 and FY 2011 EPS to increase to $3.05 and $3.60 respectively.

Return on Equity has decreased from 19% in 2000 to 12% in 2009.

Dividends per share have increased by 14% annually over the past decade. A 14% increase in dividends translates into the dividend payment doubling every 5 years on average. Since 1989 the company has indeed managed to raise dividends every 5 years on average.

The dividend payout ratio has more than doubled over the past decade, from 24% in 2000 to 64% in 2009. This is a direct result of the fact that dividends have been increasing much faster than earnings over the past decade.

Currently Illinois Tool Works trades at a P/E of 14.40, yields 2.70% and has an adequately covered dividend payment based off next year’s earnings. I would add to my position there subject to availability of funds in my portfolio.

Full Disclosure: Long ITW

Relevant Articles:

- Automatic Data Processing (ADP) Dividend Stock Analysis
- Wal-Mart (WMT): A High Dividend Growth Stock
- Chubb Corporation (CB) Dividend Stock Analysis
- Family Dollar Stores (FDO) Dividend Stock Analysis...






This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Wednesday, August 11, 2010

Turning Intangibles Into Cash

As value investors, we are trained to look at the "Goodwill" and "Intangibles" lines on a company's balance sheet with great skepticism. After all, these supposed company assets are not hard assets like equipment or land or receivables and therefore can't be used to generate cash flows and furthermore they have no salvage value. But the future cash flows of companies with large intangible assets listed on their balance sheets can often be underestimated unless those intangibles are taken into account.


As Warren Buffett has reminded us time and again, an investment is worth the discounted future stream of cash flows that accrue to the investor. Often, we use earnings as a proxy for cash flow, since earnings are meant to be a smoothed out version of cash flow, which can be volatile from quarter to quarter and year to year (e.g. cash flows can vary dramatically as a result of inventory build-ups/reductions, receivable/payable timing issues, capital purchases/sales, bank loans, tax refunds/payments etc.).

But it's important to keep in mind that intangibles (apart from Goodwill) are amortized on the income statement, even though the cash to buy these intangibles has already been spent. As such, shareholders who do not add back the amortized intangibles to the company's earnings are underestimating the company's cash flow.

As an example, consider Dorel (DIIB), a company we discussed last year as a potential value investment. The company's intangible assets fell $12 million in its most recent quarter, which is significant compared to the $35 million the company earned in the quarter (some of the $12 million change was likely due to currency effects, but the rest would have been amortized, thus subtracting from income). The extra cash "generated" by these intangibles contributes to the company's cash flow in a meaningful way, and can be used by the company to buy back shares, grow the business, or some combination of the two, which is what Dorel has been doing.

Of course, it's important to determine if the intangible assets being amortized need to be replaced with future cash flows. Often, a note to the financial statements will describe exactly what line items are included in the intangible assets (e.g. customer lists, non-compete agreements etc.). Amortization for items that need to be replaced to keep the business at its current level should not be added back to income in estimating cash flows, as they should instead be treated similarly to depreciation of capital assets.

The money to purchase intangibles has already been spent, but the expenditure is not yet recognized on the income statement. As such, future income statements often underestimate the actual cash flows of a business when large charges for amortization of intangibles are taken. But the cash flow benefits of these assets accrue to the current shareholder. As such, the current shareholder should take these cash flows into account in estimating the future cash flows of the business.

Disclosure: Author has a long position in shares of DIIB

This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to my feed.


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Tuesday, August 10, 2010

A Utility Company With A 5% Yield

Duke Energy (DUK) is one of the largest utility companies in the world. Duke provides energy to 4 million customers located primarily in the Midwestern region of the country. Duke operates nuclear, hydro-electric, oil, gas, and coal power plants. The North Carolina based company earns it revenue off of consumer and business demand for its energy products.

Duke just reported a $220 million dollar loss in its earnings announcement last week. The company lost 17 cents a share because the company took a $660 million dollar charge for writing down the value of some of its power plants. Without this charge, the company would have had a $440 million dollar gain which amounts to 34 cents per share. Duke beat the top line estimates. Revenue came in at $3.29 billion which was higher than analyst expectations of $3.1 billion.

Duke raised its EPS projection for the year with the company forecasting earnings of $1.35 per share. Earnings are expected to grow +4.4% over the next 5 years. This is favorable compared to the -8.2% decline over the past 5 years. Duke has over $57 billion dollars in assets and $1 billion in cash on its balance sheet. The company does have a large debt burden of $17 billion dollars but it is not uncommon for utility companies to have large debt servicing obligations.

The stock currently trades at 13 times this year’s earnings. This is about average for a utility company. Shares trade at a similar valuation to Progress Energy and Southern Company. All of these companies are currently yielding over 5%. At $17 a share, the stock sells at just 1.08 times book value.

Duke Energy recently increased its dividend raising the payout 2%. Duke has paid investors a dividend for 84 consecutive years.The company will now pay investors 98 cents per year. The stock is currently yielding 5.6%. The dividend payout ratio is 72.5% which is higher than many industry competitors. The company has historically paid out a high percentage of earnings via distributions over the last 5 years.

Duke’s biggest challenge is that the company expects energy demand to be down over the next few years due to the challenging economy, tougher environmental regulations, and lower demand for energy products. The company believes that it could take 5 years before energy demand returns to the global economy. Duke is a safe company to invest in that will provide income seeking investors with stable dividend payouts for years to come.

This article was written by [Buy Like Buffett]. If you enjoyed this article, please consider subscribing to my feed at [RSS].


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Monday, August 9, 2010

Stock Analysis: Automatic Data Processing Inc. (ADP)

Linked here is a detailed quantitative analysis of Automatic Data Processing Inc. (ADP). Below are some highlights from the above linked analysis:

Company Description: Automatic Data Processing Inc. is one of the world's largest independent computing services companies, provides a broad range of data processing services.

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

ADP is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $39.62. ADP 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%

ADP 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%. ADP 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 1974 and has increased its dividend payments for 34 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

ADP earned a Star in this section for its NPV MMA Diff. of the $522. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADP has. If ADP grows its dividend at 5.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. ADP earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

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

Conclusion: ADP 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 ADP as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $41.74 before ADP's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 34 years of consecutive dividend increases. At that price the stock would yield 3.23%.

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 5.4%. This dividend growth rate is virtually the same as the 5.5% used in this analysis, thus not providing any margin of safety. ADP has a risk rating of 1.00 which classifies it as a low risk stock.

A weak economy and low employment levels have negatively impacted ADP, and will likely continue to do so in the near-term. However, as the industry leader ADP enjoys advantages of scale and a respected brand. Financially, the company has a strong balance sheet and steady cash flows from a recurring revenue stream. Recently moving up to a 4-Star rating, ADP is worthy of additional consideration when trading close to my buy price of $39.62. 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 ADP (0.8% of my Income Portfolio). See a list of all my income holdings here.


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This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Sunday, August 8, 2010

Weekend Reading Links - August 8, 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

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


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Friday, August 6, 2010

Stock Analysis: Cardinal Health (CAH)

Cardinal Health, Inc. provides health care products and services primarily in the United States. The company is a member of the Dividend Achievers index and has raised dividends for 21 years in a row. The company last raised its dividend by 11% to 21.50 cents/share in May 2010.

Over the past decade this dividend stock has delivered a total return of 1.40% per year.

Earnings per share have increased by 7.90% per year over the past decade. Since 2004 however the company has delivered no growth in earnings. The earnings picture is expected to further deteriorate in FY 2010 and FY 2011, as earnings per share are expected to contract to $2.21 and $2.44 respectively.

The annual dividend per share has increased by a staggering 31.80% over the past decade, which was several times faster than the growth in earnings. The disconnect between earnings and dividend growth came as a result of the increase in the dividend payout ratio. If the company manages to maintain earnings per share at $3, the dividend could increase by 10% annually over the next decade and would still be adequately covered. The company has managed to double dividends every three and a half years on average since 1988.

Since reaching its highs at 20% in 2003, the return on equity has declined steadily. Any earnings reinvested back into the business have not led to increase in net income and might have even led to losses, which could be one reason for the decline in returns since 2003.

The dividend payout ratio has increased from 3% in 2000 to 19% in 2009. As the company’s earnings have stagnated in recent years, and given management’s recent history of dividend increases, I expect the company to share a greater proportion of its profits with shareholders in the form of dividends.

Right now the company is trading at a P/E ratio of 17 and yields 2.40%, with an adequately covered dividend payment. I view the stock as a hold. Cardinal Health is a prime example why investors should not purchase stocks with long history dividend growth on autopilot without doing any research. While the company could expand its payout ratio for the next decade until it reaches danger territory at 50%, and yields on cost could grow to 5% or 6%, without the ability to grow earnings per share, future dividend growth will be limited.



This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to my feed [RSS], or have future articles emailed to you [Email] or follow me on Twitter [Twitter].


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Thursday, August 5, 2010

Analog Devices – Technology Company with Dividend Growth

Analog Devices engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits used in industrial, communication, computer, and consumer applications. Its products are used in communications applications that include wireless handsets and wireless base stations, as well as products used for high-speed access to the Internet, including central office networking equipment.

ADI has been raising dividends for last 6 years. It is a potential Dividend Achiever in making. The most recent dividend increase was in May 2010. I am impressed by ADI’s strong balance sheet and free cash flow. It looks like ADI has withered 2009 declines. My objective here is to see if ADI continues to be potentially 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 flat trend since 2000. Year 2001 and 2002 shows the significant dip which was the aftermath of the tech bubble. It may be intriguing that while revenue seems flat where is growth coming from? This is because, when we remove discontinued or sold Business Units, there is likely to be revenue growth from existing businesses.
  • Cash Flows: Overall, stable to increasing trend for free cash flow and operating cash flow. It is good indicator that FCF is almost always greater than income.
  • EPS from continuing operation: In general, it has an increasing trend since 2002.
  • Dividends per share: Increasing trend since its start in 2003.



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 increased payout factor and sluggish EPS growth rate (relative to its historical average) makes it a medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.
  • Dividend growth rate: The average dividend growth of 28% (stdev. 26%) is higher than average EPS growth rate of 19.4%. The higher growth rate is due to data being skewed by initial years of increasing the dividends. The dividends growth rate is likely to slow down in low double digits.
  • Duration of dividend growth: 6 years.
  • 4 year rolling dividend growth rate for past ten years: Not enough history.
  • Payout factor: In the past 5 years, it has been lower than 50%. This is another indicator that dividend growth is less likely or it does increase it will be high risk.
  • 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 1.75%. Last 5 years average dividend growth rate has been 50% which is unrealistic. My projected dividend growth rate is 6%. With my projected dividend growth of 6%, the dividend cash flow is 2.4 times the MMA income in 10 years time period.

Fair Value Calculation
This section determines what price I should pay to buy a given stock
  • Net present value (NPV) price based on 15 year DCF: $20
  • Average high yield price calculated based on past 10 years: $43
  • Pricing based on past 10 year relative price-to-earnings ratio. $33
  • Pricing based on price-to-earnings ratio of 12: $19
  • Graham number: $16

The range of fair value is calculated as $21 to $27.

Qualitative Analysis
Analog Devices, Inc., is about 44 year old technology based company. It is built on the foundation of innovation by its founder Ray Stata who is still associated with the company. It has survived all the ups and downs of technology industry. One aspect that I like is its ability to command 50% or more gross margins on its products.
  • ADI’s revenue is pretty diversified in different product sectors and geographical region. Close to half of its revenue comes from outside of North America. Its major market sector is industrial electronics and hence is poised to grow with continued industrialization of emerging markets.
  • It has a very strong balance sheet with practically no debt and sustained free cash flow. Even in this recessionary market, it is able to command 50%+ gross margin on its products.
  • Its key strength is core competency in high performance analog chips. These are the chips that convert real world analog signals into digital signals which are further processed for clarity. Every electronics product in the market today will have some form of data convertor. ADI has more than 60% worldwide market share in data convertors. Its products have more than 8 years of life cycle.
  • One significant concern that I have is; being in lucrative market segment, it is likely that it may face increasing competition. Even Texas Instruments has regrouped to focus of higher performance analog market segment.
  • I believe it will remain highly profitable company, but with slower growth in revenue.
  • With respect to dividends, I believe ADI has sufficient financial muscle to continue its dividends and sustain mid single digit growth. However, I would be wary of managements’ dividend strategy. It does not have a long history of dividends.

Conclusion
I like ADI’s diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It truly has a very strong balance sheet that includes free cash flow and low debt. I also like the fact that company continues to remain focused on its core competency which gives it higher gross margin products. I will continue to add to my existing position when the price is in my buy range.

Full Disclosure: Long at the time of writing.

This article was written by Dividend Tree. If you enjoyed this article, please consider subscribing to my feed at [feed link].


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