Philip Morris: A Solid International Tobacco Play

Philip Morris International (PM) appears to be a solid international play, operating in the somewhat murky waters of the tobacco industry. I say murky because although tobacco laws are not as stringent outside the U.S. and lawsuits are not as omnipresent, you always have to be careful investing in an industry where the product the company sells causes health problems to the people buying said product. That being said, this is a very profitable business, and if investing in tobacco companies doesn't go against your moral code, I think this is a solid play.
 
Per Morningstar:

Philip Morris International is the world's second-largest tobacco company, behind only China National Tobacco, and holds almost 16% of the non-U.S. market. The firm owns seven of the leading 15 international brands, including Marlboro, the company's flagship brand that accounted for more than one third of total volume in 2010. Other key brands include L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Owning almost half of the leading international brands in any product segment is appealing, coming from an investor standpoint. This, to me, is no different with tobacco. There appears to be significant brand loyalty with cigarettes, so this bodes well for Philip Morris. Owning almost half of the leading international brands gives Philip Morris an enviable spot, and I would say it has an economic moat due to its brand loyalty, economy of scale on a global footprint and the fact that the products it sells are addictive.

Let's take a look at some numbers.

I can't include numbers as far back as some of the companies I look at because Philip Morris was spun off from Altria (MO) in 2008. The numbers I'm posting are from 2008-forward.

Earnings per share has grown at a rate of 8.7%, compounded annually, over the last two years. Obviously, two years is a short time frame to try and analyze a company, but this company was part of Altria for many years so it's hitting the ground running. This isn't your local start-up.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.90 1.07 0.99 0.96 3.92
2009 0.74 0.79 0.93 0.80 3.24
2008 0.89 0.80 1.01 0.71 3.32

Revenue has grown by a rate of 2.9%, compounded annually. This is a lower number than I expected, but I think this number will be close to double digits going forward. The growth from 2009-2010 was almost 9%, and analysts expect revenue to grow by 11% this year.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 6,496 7,061 6,614 7,037 27,208
2009 5,597 6,134 6,587 6,717 25,035
2008 6,330 6,709 6,953 6,122 25,705

As always, dividend growth is my favorite metric to inspect. This is where Philip Morris shines, and probably will continue to shine as time goes on. This isn't a dividend growth stock if you consider that most investors need at least five years of growth to invest, and some need ten. I feel that having a long history as part of Altria gives it the benefit of the doubt here. Dividends have grown by 25.87%, compounded annually over the last 2 years. Huge growth here, but this is largely skewed by the fact that 2008 only had 3 dividends paid due to the split that year from Altria. The 1-year growth from 2009-2010 was 8.93%, which is certainly a realistic figure going forward. The entry yield as of this writing is 3.88%, which is attractive, but not as attractive as some other tobacco stocks. I like the international growth prospects as they rank either #1 or #2 in the top 3 cigarette markets in the world (except the U.S. and China). I'll sacrifice a little yield now, for growth later here. The payout ratio is 63%, which is very comfortable and even perhaps a little low for a tobacco company. I feel there is plenty of room for growth of the dividend.

Dividends Per Year($ Per Share)
2010 2.44
2009 2.24
2008 1.54

Overall, I'm a buyer of Philip Morris at current prices. I think it's attractively valued with a current P/E ratio of 16.19. That's a great valuation for a company with a strong yield, excellent growth prospects, a great product lineup and let's not forget the product is addictive.

S&P has Philip Morris at a 5-star STRONG BUY. I generally agree with that.

The stock did recently touch a lifetime high at $71.75 and has since scaled back to the mid-$60's. I would like to be patient with this stock and see if it scales back even further, perhaps to the high $50's. At any rate, I like it at it's current price and would consider adding to my position.

Disclosure: I am long PM.

Thanks for reading.  

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New Frontier Media: Pre-Catalyst

Companies with large depreciation charges usually require matching capital expenditures just to keep revenues stable. But in the rare instances where this is not the case, earnings are often a poor proxy for a company's free cash flow. New Frontier Media (NOOF) appears to be a prime example of this phenomenon, to such a large extent that its cash balance at the end of the year may exceed its market cap.

New Frontier Media is a small cap that trades for $25 million. While the company has approximately broken even on an earnings basis over the last three years, it has generated $21 million in operating cash flow against just $9 million of capital expenditures. That trend is set to continue this year, as the company anticipates effective capex spend of under $1 million ($2.3 million in building improvements plus $0.3 million in new equipment minus $1.7 million in tenant allowances that will flow through the income statement).

Since the company already has $18 million in net cash (compared to a trading price of $25 million), its net cash may actually exceed its market cap this year. This could prompt a dividend or buyback that generates strong returns for investors are the current price.

Unfortunately, the company's top executive doesn't own a significant number of shares; his annual salary is three times larger than his actual stake in the business. But to his credit, the company has bought back shares in the past. In 2008 and 2009, the company bought back a combined $13 million of stock. The way the company is building up its cash position at the present time, it is on track to comfortably afford a similar buyback.

Disclosure: Author has a long position in shares of NOOF

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

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An Oil And Gas Company That Buffett Would Love

Investors that are bullish on oil prices can find some great yields in the oil and gas sector. It wasn’t that long ago that oil was trading over $100 a barrel and that people were paying $4 a gallon for gas. Gas prices have plummeted over the past few weeks as oil prices have dropped. This has caused oil stocks to dip and turned some companies into high yielders. Let’s take a look at an oil and gas company that has a good yield.

ConocoPhillips (COP) has been a holding of longtime value investor Warren Buffett. Buffett liked the strong cash flows that the company generates and has to like the solid dividend payouts. ConocoPhillips is the largest major integrated oil producer and fifth largest refiner. The company is a Fortune 500 firm boasting nearly $200 billion dollars in annual revenue.

ConocoPhillips has had a challenging time over the past 10 years because the company made a number of poor managerial decisions. These poor decisions hindered revenue growth and profitability. Now the company appears to be getting back to its core business model and is focused on increasing ROE. ConocoPhillips is heavily tied to the price of crude oil and has a lot more natural gas exposure than many of the other major oil companies.

Shares of ConocoPhillips currently trade for 8.8 times this year’s earnings. This is an average P/E for an industry in which many companies trade at single digit P/E ratios. Shares currently trade at 1.5 times book value which is reasonable. The stock trades at just 0.5 time sales which is cheap.

ConocoPhillips is currently paying a dividend of $2.64 per share. That is an annual yield of 3.7%. The company recently increased it dividend 20% just a few month ago. Conoco also announced a $10 billion dollar share repurchase program. The company has significant room for dividend increases since the current payout ratio is incredibly low at 29.6%. The company generated $17.6 billion dollars in cash flow from operations and $7 billion dollars in free cash flow.

The stock offers investors decent growth potential and a dividend that should continue to rise over the next few years.

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Stock Analysis: McDonald's Corporation (MCD)

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

Company Description: McDonald's Corporation is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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

MCD is trading at a discount to only 2.) above. The stock is trading at a 14.3% discount to its calculated fair value of $95.49. MCD 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%

MCD earned one Star in this section for 3.) above. MCD 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 (2001-2004, 2002-2005, 2003-2006, 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) or Treasury bond? 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

MCD earned a Star in this section for its NPV MMA Diff. of the $6,669. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as MCD has. If MCD 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 4.%. MCD earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Memberships and Peers: MCD is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Yum! Brands, Inc. (YUM) with a 1.8% yield, Starbucks Corp. (SBUX) with a 1.4% yield and Wendy's/Arby's Group, Inc. (WEN) with a 1.6% yield.

Conclusion: MCD earned one Star in the Fair Value section, earned one Star 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 MCD as a 3 Star-Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $197.51 before MCD'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 1.24%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.8%. This dividend growth rate is well below the 15.0% used in this analysis, providing a significant margin of safety. MCD has a risk rating of 1.50 which classifies it as a Low risk stock.

MCD is the dominant brand in the global fast food industry. In addition, the company enjoys unrivaled scale advantages and substantial international growth opportunities. After updating MCD for Q1/2011 financials, it slipped one level to a 3-Star stock as a result of its debt to total capital going slightly above 45%. However, I still consider the stock to be one of the premier dividend growth stocks and will continue to add to my position in MCD when it is trading below my fair value price of $95.49, and as my allocation allows.

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 MCD (6.3% of my Income Portfolio). See a list of all my income holdings my income holdings here.

Related Articles:
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- The Procter & Gamble Company (PG) Dividend Stock Analysis
- The Clorox Company (CLX) Dividend Stock Analysis
- W.W. Grainger, Inc. Dividend Stock Analysis
- More Stock Analysis

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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Weekend Reading Links - June 26, 2011

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

• Dividends4Life presented 11 Higher Yielding, Lower Risk Stocks To Perk Up Your Dividend Income
• Dividend Growth Investor presented Is your dividend income riskier than expected?
• Barel Karsan presented Earnings Power When Assets Change
• Buy Like Buffett presented The Magic Of Compounding Via Dividend Investing
• Disciplined Approach to Investing presented Market Adjusting To Slower Growth Economic Environment
• 40percent 20years presented Vestas - industry of the future but what is the profitability?
• The Market Capitalist presented The Implications of Investing in Low Volume Stocks
• Dividend Monk presented Dover Corporation (DOV) Dividend Stock Analysis
• Wax Inc presented Value Thoughts - Whole Foods Market, Inc.
• Sigma Swan presented Is Your Portfolio Financially Fragile?
• Compounding Returns presented Buy and Hold vs. Buy to Own Stock Investing

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

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Stock Analysis: Realty Income (O)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. Realty Income is a real estate investment trust widely known among its investors as the monthly dividend company. The company is a dividend achiever, which has increased its dividend for 16 years in a row by raising its monthly distributions several times per year.

Over the past decade this dividend growth stock has delivered a total return of 15% per annum to its shareholders.

Realty Income owned 2496 retail properties at the end of 2010. The company’s properties which are leased by 122 retail and other consumer businesses in 32 industries are located in 49 states. Most new properties acquired are under long term leases (15-20 years) with tenants from a variety of industries and geographic location. The average remaining lease life was 11.4 years in 2010. Tenants are typically responsible for monthly rent and property operating expenses including property taxes, insurance and maintenance. In addition, occupants are also responsible for future rent increases based on increases in the consumer price index, fixed increases or, to a lesser degree, additional rent calculated as a percentage of the tenants’ gross sales above a specified level. Due to the stability of company's revenue streams and above average yield, the company might be a good pick for investors who are seeking current retirement income.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.83/share in 2010. Realty Income distributed $1.722 /share in 2010. FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. The company doesn’t have any debt maturing until 2013 and also has an unused credit facility worth $425 million.

Over the past decade FFO has increased by 3.90% on average.

Over the past decade distributions have increased by 4.90% per annum. A 5% annual gowth in distributions translates into dividends doubling every 14 years. In 2010 the company has raised distributions by 0.90%.

The FFO payout ratio has increased to 94.10% in 2010, which is higher than the range over the past decade. In addition, FFO payout ratio of over 90% is not very sustainable for a real estate investment trust.

The main risk for the company is if occupancy rate decreases. About 3% - 4% of the company’s properties face lease expirations each year, which is why it has to be able to find new tenants. The company could try to sell properties which are not occupied currently however, which might be problematic in the current market for real estate. The portfolio occupancy rate for Realty Income hit a record low of 96.60% in 2010, which was down slightly from 96.80% in 2009. Another negative for the company is the fact that it typically expands its operations through additional sales of its common stock, which dilutes the stakes of existing stockholders.

Realty Income acquired 186 new properties in 2010 for $713.5 million dollars. The average lease term was 15.70 years and the initial weighted average lease rate was 7.90%. The company’s strategy is to acquire existing seasoned properties, which are already profitable and where profits far exceed the rent the retailer pays to Realty Income. This characteristic makes it more likely for the retailer to renew their lease after the 15 -20 year term is up. In addition to that, the company is spending a lot of time, effort and research to uncover new areas of investment which would allow the company to increase FFO and dividends.

Realty Income has also acquired 13 properties so far in 2011 for $18.40 million and also has signed definitive purchase agreements to acquire 33 additional properties for $544 million. The tenants of these properties include Caterpillar, FedEx, International Paper, Walgreen Co, Cinemark, T-Mobile, Coca Cola Enterprises and others.

The company owns and actively manages a diverse mix of properties, which provide a stable and dependable income stream for the company’s shareholders. Realty Income currently yields and has raised distributions and FFO’s for over 16 years in a row. I believe that Realty Income is a good addition to any dividend growth portfolio, since it provides growing income and also provides diversification into commercial real estate.

Full disclosure: Long O

Relevant Articles:

- Dividend Achievers Offer Income Growth and Capital Appreciation

- Four High Yield REITs for current income

- Dividend Portfolios – concentrate or diversify?

- Are Dividend Investors Stock Pickers?

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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Asset vs Earnings Managers

Value investors can spend a lot of time evaluating the quality of a company's management. We look at management's track record, and attempt to gauge the level of management's candor in providing information to shareholders.


But when it comes to companies that trade at large discounts to their net assets, is this exercise worthwhile? Thanks to our capitalist system, managers who are not getting the most out of company assets will often be replaced, a process which can often serve as the catalyst that helps a stock's price converge with its intrinsic value. By avoiding the companies with poorly performing managers, shareholders may be missing out on the potential for large gains.

Consider RCM Technologies (RCMT), a company we discussed about a couple of years ago as one that traded at a deep discount to its net assets despite a flexible cost structure and therefore a decent earnings outlook. Nevertheless, management's poor capital allocation decisions in the past and their seeming intentions to continue to "build empires" had me avoiding the company.

But those who were willing to take the plunge despite the management situation would be rewarded. The company subsequently received a buy-out offer at a price which is about twice that of what it was when it was brought up on the site. This is a classic case of getting rewarded for buying assets for less than they are worth.

For companies expected/required to generate above-average returns on capital, the management team is likely a very important factor in determining whether the investment makes sense. But perhaps we place too much emphasis on the management team when it comes to companies trading at large discounts to their assets. After all, management teams can be replaced, and shareholders can get rewarded in the process. On the other hand, buyouts are difficult to predict and may not occur with enough frequency to remove every poorly performing management in a timely manner.

The right decision is not always clear, but investors should keep in mind that the importance placed on the management team in weighing an investment decision may change according to the type of investment (e.g. an earnings play vs an asset play) being made.

Disclosure: None

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

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A Look At Chesapeake Energy

Energy companies have a favorite of investors over the past few years. Crude oil prices have risen in recent months due to political instability in the Middle Eastern region. Energy investors have benefited from this boom as crude oil has crossed the $100 threshold many times. Not all sectors of the energy complex have taken. Natural gas prices have remained depressed over the past few years.

The low prices for natural gas have hit Chesapeake Energy (CHK) especially hard. Chesapeake Energy is the second largest natural gas producer in the United States. Chesapeake has nearly 3 billion feet of natural gas. The company owns 14.3 million acres of land. Chesapeake performs well in an environment of rising natural gas prices and poorly when prices are depressed. Natural gas accounts for 87% of the company’s production efforts as a whole.

Chesapeake has been a relatively consistent slow grower whose performance is one of the best in the industry. The stock however has not been an outperformer as the company has suffered under some poor management decisions. The chief executive officer was the subject of a margin call 2 years ago that led to a massive selloff in the stock. Chesapeake is hoping top unlock value for shareholders.

So, how does the stock look? Chesapeake trades at 9 times earnings. The stock trades at 1.5 times book value and 2 times sales. The stock currently sells for 0.8 times earnings growth. Chesapeake has been hampered by its massive debt burden of nearly $10 billion dollars. The company has been making a concerted effort to lower its debt level over the past year. Management plans to trim the outstanding debt by 25%.

The company recently raised its dividend 17% to 35 cents per share. The one cent quarterly increase seems to be a response to the cries of shareholder asking for a dividend boost. Chesapeake Energy had not raised its dividend in almost four years. The company is finally releasing some of its cash to shareholders who have been waiting for the natural gas stock to bounce back. The company is still not a great dividend play with a 1% yield but the increasei is a move in the right direction.

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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Stock Analysis: Cincinnati Financial Corp. (CINF)

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

Company Description: Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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

CINF is trading at a discount to only 4.) above. The stock is trading at a slight premium to its calculated fair value of $28.13. CINF 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%

CINF 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%.

CINF 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 1954 and has increased its dividend payments for 51 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) or Treasury bond? 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

CINF earned a Star in this section for its NPV MMA Diff. of the $569. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CINF has. The stock's current yield of 5.54% exceeds the 4.0% estimated 20-year average MMA rate.

Memberships and Peers: CINF is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Axis Capital Holdings Ltd. (AXS) with a 3.0% yield, The Allstate Corporation (ALL) with a 2.8% yield, and The Travelers Companies, Inc. (TRV) with a 3.0% yield.

Conclusion: CINF 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 CINF as a 4 Star-Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $29.89 before CINF's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 51 years of consecutive dividend increases. At that price the stock would yield 5.35%.

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 0.2%. This dividend growth rate is below the 0.6% used in this analysis, thus an insignificant margin of safety. CINF has a risk rating of 1.25 which classifies it as a Low risk stock.

CINF was founded by independent insurance agents in order to better service their needs by providing them preferential treatment when picking an underwriter. The company primarily sells commercial property-casualty insurance with a smaller personal lines exposure marketed through a select group of independent insurance agencies. CINF is more heavily exposed to equity risk than its peers; however management is taking steps to re-balance its investments. I will continue to add to my position in CINF when it is trading at or below my $28.13 buy price, and as my allocation allows.

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 CINF (2.5% of my Income Portfolio). See a list of all my income holdings my income holdings here.

Related Articles:
- The Procter & Gamble Company (PG) Dividend Stock Analysis
- The Clorox Company (CLX) Dividend Stock Analysis
- W.W. Grainger, Inc. Dividend Stock Analysis
- Community Trust Bank Corp. (CTBI) Dividend Stock Analysis
- More Stock Analysis


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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Weekend Reading Links - June 19, 2011

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

• Dividends4Life presented 4 Secrets To Finding The Best Dividend Stocks
• Dividend Growth Investor presented Why the best investment plans never turn out as expected
• Barel Karsan presented Profit Sources
• Buy Like Buffett presented Dividends Do Lie Sometimes
• Dividend Money presented Life Leases: What In The World Are They?
• 40percent 20years presented H & M Sales - Good but still bad!
• The Market Capitalist presented Dividends – Focus on the growth rate, not the yield
• Dividend Monk presented 6 Premium Dividend Payers to Buy on Dips or Drops
• Wax Inc presented Value Thoughts - Costco Wholesale Corporation
• Dividend Ninja presented Susan P. Brunner Interview – Part 2
• Sigma Swan presented Stock Analysis: Tiffany Company (TIF)

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

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Stock Analysis: McDonald's

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, and other beverages. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. McDonald’s has paid uninterrupted dividends on its common stock since 1976 and increased payments to common shareholders every year for 34 years.

The most recent dividend increase was in September 2010, when the Board of Directors approved an 11% increase to 61 cents/share. The major competitors of McDonald’s include Yum! Brands (YUM) and Starbucks (SBUX).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 15.50% per year since 2001. Analysts expect McDonald’s to earn $5.09 per share in 2011 and $5.55 per share in 2012. This would be a nice increase from the $4.58/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. I expect future earnings per share growth to average 10% per year over the next decade.

The company has been able to increase in return on equity from the high teens in early 2000s to over 30% over the past three years. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 26.50% per year since 2000, which is much higher than the growth in EPS. Future dividend growth would likely average 10% per year.

A 26% growth in distributions translates into the dividend payment doubling almost every three years. If we look at historical data, going as far back as 1979, we see that McDonald’s has actually managed to double its dividend every fouryears on average.

Over the past decade the dividend payout ratio has increased from 18% in 2001 to 49% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. 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 McDonald’s fits my entry criteria trading at 16.60 times earnings, yields 3.10% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long MCD and YUM

Relevant Articles:

- Two Consistent Dividend Paying Stocks in the News

- Why Dividend Growth Stocks Rock?

- Six Dividend Stocks to Hold Forever

- Six Dividend Paying Sin Stocks to Consider

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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Taitron: Promised Cash

Taitron Components (TAIT) has been discussed on this site as a potential value investment. The company has a bloated inventory position; inventory sits above $12 million, while annual sales are barely over $7 million. This is where the value opportunity comes from, however, as the company trades for significantly less than its inventory position.

Management recognizes that inventories are too high, as per the following statement in Taitron's most recent quarterly report:

"[W]e are focused on lowering our inventory balances and increasing our cash holdings."

But even as inventory has been slowly decreasing, the company's cash balance has not been rising. A major reason for this is that the company has been funneling money into joint ventures. Most recently, Taitron agreed to invest almost 10% of its market cap in cash for a minority stake in a Chinese company.

Only some of this money has already been invested, however. The bulk of it is committed (as per the notes to the financial statements) but remains listed under "cash" on the balance sheet. Investors should adjust their cash expectations for this company accordingly, as some of it has been promised away to other entities with rather uncertain returns.

For many companies, investments to expand the product/service portfolio should be encouraged. But when a company has a poor track record of allocating capital (Taitron has lost money in 8 of the last 10 years), shareholders should beware.

Consider the company's next largest commitment, a $150,000 investment (or 4% of the company's market cap) in a joint venture which "is not operational and as such, there has been no activity in this joint venture during 2010." In fact, that money has been tied up for years, as there was no activity in either 2009 or 2008. To the company's credit, management did respond to a call seeking comment, and asserted that they are pursuing a change in strategy and should get most of that money back (from the joint venture with no operations).

The good news for shareholders is that management owns a significant stake in this business. The bad news is that they don't appear obsessed with shareholder returns, to put it mildly. Based on the discount at which this company trades to its assets, each value investor must decide for himself whether the risks are worth the potential returns.

Disclosure: Author has a long position in shares of TAIT

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

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McDonald's Has A Solid Dividend

There are quite a lot of good dividend stocks that investors can take advantage of right now. A perfect example of this is a stock like McDonald's. McDonald's is cited as the fast food king and a company that is known for tremendous growth over the years. You cannot go anywhere without seeing a McDonald's on the corner and lots of cars lined up everywhere. Investors have often lined up to buy the company's shares as well because of the great growth. McDonald’s is the most popular fast food restaurant in the industry. Everyone goes to McDonald’s. Whether it’s the Big Mac, the milkshakes, salads, crispy chicken wraps, ice cream cones or the fries; customers flock to McDonald’s by the millions. . McDonald’s is a great earnings company with over $24 billion dollars in annual revenue.

The stock trades at just over $81 per share right now.. This values the company at 16.times earnings. This is not a high multiple based on past growth but is high compared to future forecasts. McDonald’s is projected to grow earnings at a 10% clip over the next few years.

Now the company has easily become a great dividend play. The company has increased its dividend over the years and is now paying investors more than two dollars for every share of stock. The company is now yielding three percent which is pretty healthy for such a great company. This is a good time to take a look at the company's shares and see if it is right for your portfolio.

The payout rate is equal to 49% of earnings. The 3% yield is much higher than the average yield of 2.1%. More dividend increases are likely to come as McDonalds sees slower growth domestically. The company is still trying to increase revenue internationally. McDonald’s generates $6 billion dollars n cash flow and has nearly $2 billion dollars in cash on its balance sheet. The free cash flow payout ratio is 76.2 which is high but still relatively safe.

The stock is not cheap at its current price. If the current market pullback continues, investors should see if they can initiate a position in McDonald’s.
 
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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: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 discount to only 3.) above. The stock is trading at a 19.9% premium to its calculated fair value of $25.78. 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 24 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) or Treasury bond? 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 $649 is below the $1,100 target I look for in a stock that has increased dividends as long as UGI has. If UGI grows its dividend at 6.5% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.0%. UGI earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Peers: UGI is a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Nicor Inc. (GAS) with a 3.5% yield, New Jersey Resources Corp. (NJR) with a 3.2% yield, and ONEOK Inc. (OKE) with a 3.0% yield.

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 stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $26.22 before UGI's NPV MMA Differential increased to the $1,100 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 3.89%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,100 NPV MMA Differential, the calculated rate is 8.1%. This dividend growth rate is above the 6.5% used in this analysis, thus providing no 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. Not having any negative free cash flows over the last 10 years is virtually unheard of for a utility.

The company is trading at a premium to my $25.78 calculated fair value. However, I will watch it closely for an appropriate entry point since it is the highest rated stock in a sector in which I am trying to increase my exposure.

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 my income holdings here.

Related Articles:
- The Clorox Company (CLX) Dividend Stock Analysis
- W.W. Grainger, Inc. Dividend Stock Analysis
- Community Trust Bank Corp. (CTBI) Dividend Stock Analysis
- Abbott Laboratories (ABT) Dividend Stock Analysis
- More Stock Analysis

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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Weekend Reading Links - June 12, 2011

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

• Dividends4Life presented 7 Undervalued, Big-Name Stocks To Consider For Your Dividend Portfolio
• Dividend Growth Investor presented Lifecycle of the dividend investor
• Barel Karsan presented The Lower The Better
• Buy Like Buffett presented How To Invest In International Stocks
• Disciplined Approach to Investing presented Market Is Looking Oversold
• The Market Capitalist presented Betting on a Growing Cloud With A Dividend
• Dividend Monk presented Coca Cola (KO) Dividend Stock Analysis
• Wax Inc presented Value Thoughts - Insituform Technologies, Inc.
• The Dividend Pig presented SumZero is the Best Way To See Your Competition
• Dividend Ninja presented The Safety of Short Term Bonds
• Sigma Swan presented Why Your Portfolio Needs a Few Heroes

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

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Wal-Mart Stock Analysis

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has paid uninterrupted dividends on its common stock since 1973 and increased payments to common shareholders every year for 37 years.The most recent dividend increase was in March 2011, when the Board of Directors approved a 20.70% increase to 36.50 cents/share. The major competitors of Wal-Mart Stores include Costco Wholesale (COST), Target (TGT) and Family Dollar (FDO).

Over the past decade this dividend growth stock has delivered an annualized total return of 2.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.20% per year since 2001. Analysts expect Wal-Mart to earn $4.44 per share in 2011 and $4.88 per share in 2012. This would be a nice increase from the $4.18/share the company earned in 2010. On average the company has managed to repurchase 2.20% of its stock annually over the past decade. Wal-Mart has one of the largest and most consistent stock buyback programs in the US.

The company has had a high return on equity, which has remained in a tight range between 20% and 23% over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 17.70% per year since 2001, which is much higher than the growth in EPS.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1976, we see that Wal-Mart has actually managed to double its dividend every three years on average.

Over the past decade the dividend payout ratio has increased from 18.70% in 2001 to 29% in 2010. This has mostly been as a result of dividend growth being faster than earnings growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Wal-Mart fits my entry criteria as it is trading at 12.30 times earnings, yields 2.70% and has a sustainable dividend payout. I would consider adding to my position in the stock subject to availability of funds.

Full Disclosure: Long WMT

Relevant Articles:

- My Entry Criteria for Dividend Stocks

- Ten Dividend Stocks with High Returns on Equity

- Dividend Aristocrats list for 2011

- Dividend Achievers Offer Income Growth and Capital Appreciation

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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Deceptive Stock Compensation at Meade

It wasn't long ago that stock compensation wasn't considered an expense according to GAAP, which bloated the reported net income figures of many otherwise barely satisfactory companies. But common sense eventually prevailed, and so income statements now contain an estimate for stock compensation expenses. However, this expense item is not trivial in its application, and can lead to shareholder confusion and misinterpretation.

Consider the cash flow statement of Meade (MEAD), a company discussed a couple of weeks ago on this site as a potential value investment. Meade shows fiscal 2011 operating cash flows of just $88K, helped by a cash flow line item of $323K titled "stock-based compensation".

This sort of thing should set off red flags to shareholders, as it suggests that the company is only cash flow positive because it is paying its managers in options instead of cash. (This situation has been discussed on this site before with another company here.) If the $323K in compensation had been paid in cash instead of options, the company would not have the "benefit" of being able to add back this expense item in the cash flow statement.

But this line of thinking would be erroneous, because of a subtlety of how option expenses are accounted for. Options are not all expensed immediately, but are rather amortized over the life of the options' vesting period. In Meade's case, the company has stopped giving out large option awards; but the company still has to expense options from previous years that have not yet amortized.

This info is all available from the company's notes to its financial statements. Meade states that "As of February 28, 2011 and 2010, there was approximately $0.1 million and $0.4 million, respectively, of unrecognized compensation cost related to unvested stock options." The bulk of the difference between the $0.4 million and the $0.1 million is the $323K (referred to above) that was expensed this year.

Shareholders can also see how many options were granted this year in that same note (Note 10 to the 2011 financial statements) in a table listing details of the options that are outstanding. Meade started and ended the year with 78K outstanding options, having only granted 1K options all year (with 1K options also forfeited).

The implications of such an analysis are intriguing. While an initial glance at the cash flow statement suggested the company was diluting its shareholders in a bid to stay cash flow positive, this is actually not the case. Meade is only expensing options it gave out years ago, and because it is no longer giving out options, its net income today underestimates what the company earned this year (all else equal). Investors are encouraged to dig into the company's financials to confirm they understand this distinction.

Disclosure: Author has a long position in shares of MEAD

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

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Altria Has A Fat Dividend

Investors actively seeking dividends should turn their attention to tobacco stocks. Investing in tobacco stocks is an ethical question for some investors and a solid investment for others. All investors have to agree that the sector does present some incredible dividend opportunities. Tobacco companies have long been favorites of dividend investors.
 
Altria is the largest tobacco company in the United States with a market cap of $56 billion dollars. Altria has been around for a long time as the company used to exist under its old name Phillip Morris Companies. The Altria Group has holding in both the tobacco and wine industry. The company is currently paying out a dividend of $1.52 per share and has a fat dividend yield of 5.5%. This yield is actually low compared to the 5 year average of 10%.

Altria is not as a growth stocks as the company has been able to grow in the single digits for the current years. Even optimists are only expecting growth of 8% per annum over the next five year. So, why is the stock attractive? The Altria Group has been known to repay earnings growth back to investors in the form of dividends. The company current pays out about 75% of its earnings via dividend distributions. That would seem high for most companies but not Altria.

The biggest barrier to the company is regulatory requirements and lawsuits. Tobacco companies are easy fodder for trial lawyers and regulatory agencies which are always dragging them into court. Tobacco companies earnings can be severely hampered by lawsuits and settlements that may occur in the industry.

Altria is an earnings machine with more than $17 billion dollars in revenue and $3.6 billion in cash flow. The stock currently trades at 13 times this year’s earnings which is below the industry average. At $27 a share, the stock is not an absolute steal but it is a decent safe haven for investors looking for dividends in a rocky market.
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Stock Analysis: The Procter & Gamble Company (PG)

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

Company Description: The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

PG is trading at a discount to only 2.) above. Since PG's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 18.4% discount to its calculated fair value of $80.22. PG earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

PG earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%.

PG 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 1891 and has increased its dividend payments for 54 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

PG earned a Star in this section for its NPV MMA Diff. of the $1,245. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as PG has. If PG grows its dividend at 9.4% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.0%. PG earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Peers: PG is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Clorox Corporation (CLX) with a 3.5% yield, Colgate-Palmolive Co. (CL) with a 2.7% yield, and Kimberly-Clark Corporation (KMB) with a 4.1% yield.

Conclusion: PG earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks PG as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $86.15 before PG's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 54 years of consecutive dividend increases. At that price the stock would yield 2.29%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.7%. This dividend growth rate is well below the 9.4% used in this analysis, thus providing a margin of safety. PG has a risk rating of 1.25 which classifies it as a Low risk stock.

PG is one of the few premier dividend growth stocks. As a company, it is a leader in understanding consumer needs, marketing and building brand loyalty. Over the past year PG has implemented plans to grow sales and earnings. Going forward, the company's broad product portfolio and sizable distribution network will continue to be a strengths, along with its balance sheet and free cash flow. As my allocation allows, I will continue to buy PG while it is trading below my buy price of $80.22.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in PG (4.7% of my Income Portfolio); in addition, I held positions in CLX, CL and KMB. See a list of all my income holdings my income holdings here.

Related Articles:
- W.W. Grainger, Inc. Dividend Stock Analysis
- Community Trust Bank Corp. (CTBI) Dividend Stock Analysis
- Abbott Laboratories (ABT) Dividend Stock Analysis
- Colgate-Palmolive (CL) Dividend Stock Analysis
- More Stock Analysis

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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Weekend Reading Links - June 5, 2011

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

• Dividends4Life presented 5 Dividend Stocks To Buy After A Market Correction
• Dividend Growth Investor presented Dividend Investing in a Low Interest Rate Environment
• The Dividend Guy presented Dividend Investing eBook – How To build a Never Ending Cash Distributor
• The Div Guy presented May Dividend Income Update
• Disciplined Approach to Investing presented A Slow Growth Market Environment
• 40percent 20years presented H & M Watch - Revenue growth of part 2
• The Market Capitalist presented Behind The Dividend Curtain – Dividend Payout Ratio
• Dividend Monk presented Brookfield Infrastructure Partners (BIP) Analysis 2011
• Wax Inc presented Value Thoughts - Medtronic, Inc.
• Sigma Swan presented Best Free Stock Screeners: Reviewed
• Compounding Returns presented The 15 Year Millionaire Plan: Year 8

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

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Exxon Mobil Stock Analysis

Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. Exxon Mobil is a component of the Dow Jones Industrials and the dividend aristocrats indexes. Exxon Mobil has paid uninterrupted dividends on its common stock since 1882 and increased payments to common shareholders every year for 28 years.The most recent dividend increase was in April 2011, when the Board of Directors approved a 6.80% increase to 47 cents/share. The major competitors of Exxon Mobil include Chevron Corp (CVX), British Petroleum (BP) and Royal Dutch Shell (RDS-B).

Over the past decade this dividend growth stock has delivered an annualized total return of 9.60% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 12.30% per year since 2001. Analysts expect Exxon-Mobil to earn $8.28 per share in 2011 and $8.85 per share in 2012. This would be a nice increase from the $6.22/share the company earned in 2010. On average the company has managed to repurchase 4.20% of its stock annually over the past decade. Exxon Mobil has one of the largest and most consistent stock buyback programs in the US.

The return on equity closely followed the rise of oil prices up until 2008, the fall in 2008- 2009 and the subsequent increase ever since. Right now Exxon-Mobil has a high return on equity of 20%. Given the high oil prices, I expect ROE to reach its 2008 highs this year. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 7.40% per year since 2001, which is lower than the growth in EPS.

A 7% growth in distributions translates into the dividend payment doubling every ten years. If we look at historical data, going as far back as 1970, we see that Exxon Mobil has managed to double its dividend every ten and years on average.

Over the past decade the dividend payout ratio has generally followed a downward trend. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. 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 Exxon Mobil is trading at 14.10 times earnings, yields 2.10% and has a sustainable dividend payout. Despite rising oil prices, and the low P/E ratio, the company has a very stingy dividend payout in comparison to its peers. As a result, I would only consider adding to my position in the stock on dips below $75.

Full Disclosure: Long CVX, XOM, RDS-B

Relevant Articles:

- Dividends versus Share Buybacks/Stock repurchases

- Exxon Mobil’s Stingy Dividend Payout

- Dividend Achievers Offer Income Growth and Capital appreciation

- Seven Dividend Aristocrats to buy on dips

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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