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3M Company Stock Analysis

3M Company, together with its subsidiaries, operates as a diversified technology company worldwide. It operates in six segments: Industrial and Transportation; Health Care; Consumer and Office; Safety, Security and Protection Services; Display and Graphics; and Electro and Communications.

3M Company is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 52 consecutive years. Over the past decade this dividend growth stock has delivered an annual average total return of 7.90% to its shareholders.


At the same time company has managed to deliver an impressive 7.70% average annual increase in its EPS since 2000. In 2009 earnings per share fell by 7.60% to $4.52. The expectations for 2010 are for increase EPS to almost $5.15/share and an increase in EPS to $5.69 in 2011. Over the long run however, earnings for this conglomerate are relatively diversified which is a decent buffer during recessions. As the economy rebounds, revenues and profitability would improve. The company also invests almost 6% of its revenues in research and development each year, in order to deliver new products to consumers worldwide. Future growth is expected to also come from acquisitions as well as growth in emerging markets such as China and India. Sales are increasing partly due to strong demand of coatings for TV and Computer displays as well as demand for masks in response to the H1N1 virus.

The ROE has remained largely between 29% and 38% with the exception of a temporary dip in 2001 to 23%. After two years of declines in this indicator, I expect that increased profitability would lift returns in 2010.

Annual dividend payments have increased by an average of 6.50% annually since 1999, which is lower than the growth in EPS. Most recently the company increased its dividend by 3% to $0.525/quarter. MMM typically enjoys a slow dividend growth during tough economic conditions, while compensating with stronger dividend growth during boom times. 3M’s dividend is safe, given the strong cashflows that the company generates from its diversified businesses.


A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. Since 1973 3M has actually managed to double its dividend payment on average almost every nine years.

The dividend payout has steadily decreased over the past decade; due to the fact the dividend growth was much slower than earnings growth. Currently the payout is at 45% which is a sustainable level. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.


3M is currently attractively valued. The stock trades at a P/E of 19.50, yields 2.40% and has an adequately covered dividend payment. I would be a buyer of 3M on dips below $84.

Full Disclosure: Long MMM

Relevant Articles:

- Four Prominent Dividend Growth Stocks with rising yields on cost
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- Where are the original Dividend Aristocrats now?
- 29 stocks with sustainable dividends

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Brown and Brown: Midcap Dividend Growth Company Priced to Buy

Brown & Brown, Inc. (BRO) and its subsidiaries, provides insurance and reinsurance products and services, as well as risk management, employee benefit administration and managed health care services. It is a diversified insurance agency and brokerage firm, markets and sells to its customer’s insurance products and services, primarily in the property and casualty area. BRO has operations in 219 locations and in 37 states.

BRO is member of Mergent’s Dividend Achiever Index and S&P Mid-Cap 400 Index. The most recent dividend increase was in October 2009.

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

  • Revenue: In general, a growing trend since 2000. The average revenue growth for last 10 years has been approximately 13.8%.
  • Cash Flows: Overall, until 2008, a growing trend of free cash flow and operating cash flow. FCF is consistently more than net income.
  • EPS from continuing operation: In general, it had an increasing trend until 2007, drop in 2008, and flat in 2009.
  • Dividends per share: Very slow anemic albeit growing trend.


Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.57. This is a low risk category as per my 3-point risk scale.

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 18.9% (stdev. 4.81%) is more than average EPS growth rate of 12.3% (stdev. 14.5%).
  • Duration of dividend growth: 16 years of consecutive dividends growth.
  • 4 year rolling dividend growth rate for past ten years: More than 10%.
  • Payout factor: It has been less than 30% since 2001.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 1.7%; and (b) MMA yield is 2.9%. With my projected dividend growth of 8.2%, the dividend cash flow is 1.41 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $14.1

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: $20.3
  • Average high yield price calculated based on past 10 years: $24.8
  • Pricing based on past 10 year relative price-to-earnings ratio. $29.5
  • Pricing based on price-to-earnings ratio of 12: $15
  • Graham number: $16.4

The range of fair value is calculated as $18.2 to $21.2.

Qualitative Analysis
BRO is a 70 year old company, and is in top 10 independent insurance intermediaries in US. Its growth model consists of growing market share by acquisition of insurance agencies.

  • Its revenue is pretty much focused in US markets; with approx 70% of revenue is concentrated in 9 states.
  • It continues to have very stable gross and operating margins. It continues to generate relatively stable free cash flows.
  • Keeping with the downturn and financial service/insurance industry, BRO is also experiencing slow down. However, it is still profitable and has consistent cash flows.
  • The risk factor is that other than acquisition mode of growth model, there is not other source of growth.

Conclusion
Brown and Brown Inc is stable and slow growth mid-cap company. It is expected to continue to have a sustainable cash flow over next few years. It is typical dividend growth company where dividends grow in excess of 10%. However, the dividends yields are less than 2%. The stock’s current risk-to-dividend rating is 1.57 (low risk). The current pricing of $19.8 is within my buy range. I would be open to initiating a position based my allocation levels.


Full Disclosure: No position at the time of this writing. I may buy in near future.

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


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Jet Setting

Of the 4500 or so airports in the United States, the major airlines only service about 10% of them. Security concerns have also made passenger airplane travel a time-consuming endeavor. As such, for some companies it's quite likely that a business case can be made for the purchase of a corporate jet (though not always).

But increasingly, executives have begun to make personal use of the corporate jet, for which no business case can be made.


This is a veiled attempt at increasing compensation, without the appearance of doing so. In some cases, an executive's personal (i.e. non-business related activities) use of the company jet costs the company more than his entire salary! In most of these cases, the company will also issue a bonus to the executive to cover his related tax bill!

A strong corporate governance process is of vital importance to shareholders looking to maximize their returns. Shareholders can get clues as to the quality of a company's corporate governance by examining the company's behaviour when it comes to items like corporate jets.

For example, consider Abercrombie and Fitch, a company we discussed last year as one that re-affirmed its strategy, only to seemingly change it a few weeks later. The company and its CEO recently entered an agreement whereby the CEO was limited to keeping his personal use of the company jet to $200,000 per year. This still seems fairly generous, as $200K for vacation travel in a year does seem rather excessive, but at least it's capped at something, right?

Unfortunately, in return for signing this agreement, the CEO was provided $4 million in cash! This makes you wonder...how much personal use of the jet was he getting before this agreement? A significant amount, if this payment for the $200K cap is any indication. His base salary is just $1.5 million, meaning his use of the corporate jet was a significant perk!

Managers will always try to glean what they can from the company kitty. It's human nature, and so they can hardly be blamed in the aggregate. But as a result, the importance of a governance structure that protects shareholders is instrumental, so that the managers are working for, rather than against, the shareholders. Frivolous use of company property should be a clear sign to shareholders that all isn't right with a company's governance structure, and so they may wish to avoid such companies.

Disclosure: Author has no corporate jet, and reserves the right to change his mind should his company acquire one.

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


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Stock Analysis: Abbott Laboratories (ABT)

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

Company Description: Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products including: drugs, nutritional products, diabetes monitoring devices and diagnostics.

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
ABT is trading at a discount to 1.) and 3.) above. Since ABT's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 16.4% discount to its calculated fair value of $61.24. ABT 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%
ABT 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%. ABT earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 38 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
ABT earned a Star in this section for its NPV MMA Diff. of the $1,217. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ABT has. If ABT grows its dividend at 8.3% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.02%. ABT earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

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

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $66.87 before ABT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 38 years of consecutive dividend increases. At that price the stock would yield 2.57%.

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 5.6%. This dividend growth rate is less than the 8.3% used in this analysis, thus providing a margin of safety. ABT has a risk rating of 1.25 which classifies it as a low risk stock.

All pharmaceutical companies face the inevitable patent expirations and the ensuing generic competition. However, ABT's product pipeline includes potential significant launches in the medical device and pharmaceutical areas. With its strong financials and excellent management team, ABT is in a position to continue its growth and to generate strong returns. I will continue to add to my position while it is trading below my buy price of $61.24 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 ABT (2.1% of my Income Portfolio). See a list of all my income holdings here.


Recent Stock Analyses:

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Weekend Reading Links - April 25, 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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United Technologies (UTX) Stock Analysis

United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide.
United Technologies is a major component of the S&P 500 and Dow Industrials indexes. The company is also a dividend achiever, which has been consistently increasing its dividends for 16 consecutive years.

Over the past decade this dividend stock has delivered an annual average total return of 9.70% to its shareholders.


At the same time company has managed to deliver a 9.80% average annual increase in its EPS since 2000. Analysts are expecting an increase in overall earnings per share in 2010 to $4.60 and $5.30 in 2011.
The company is operating under 6 divisions, each of which provides different types of products or services. Its businesses include Carrier heating, air-conditioning and refrigeration solutions; Hamilton Sundstrand aerospace and industrial systems; Otis elevators and escalators; Pratt & Whitney engines; Sikorsky helicopters; and UTC Fire & Security systems. The company also operates a central research organization that pursues technologies for improving the performance, energy efficiency and cost of UTC products and processes.
United Technolgies is well positioned to ride any major megatrends such as emerging markets growth and demand for clean energy solutions and would also be positioned well for economic rebound due to its diverse offerings. One of its divisions, Hamilton Sundstrand, has been involved in the Boeing’s 787 Dreamliner project, by delivering nine systems that contributed to the successful first flight of the airplane.

The return on equity has remained largely between a low of 20% in 2005 and a high of 25% in 2008.

Annual dividends have increased by an average of 15.80% annually since 2000, which is much higher than the growth in EPS.A 15 % growth in dividends translates into the dividend payment doubling almost every five years. Since 1970 United Technologies has actually managed to double its dividend payment almost every eight years on average.

The dividend payout had largely remained below 30% over the past decade. In 2009 there was a spike in this ratio to 38% due to the impact of the recession on earnings per share and the 10.40% dividend increase last year. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

United Technologies is currently attractively valued. The stock trades at a P/E of 18, yields 2.30% and has an adequately covered dividend payment. I would be a buyer of UTX on dips below $68.

Full Disclosure: Long UTX


Relevant Articles:


- Four notable dividend increases
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- United Technologies (UTX) Dividend Stock Analysis
- Estimating future Dividend Growth

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




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Short-Term Predictions

Frequent readers of this site know that we don't believe short-term market movements can be predicted profitably. This opinion is not unique, as it is shared by some of the market's brightest participants. Nevertheless, it appears as though there will always be providers of short-term predictions, both for people who think short-term movements can be predicted and for those who don't but who consume short-term predictions anyway.

Consider these comments from stock market prognosticator Jim Cramer two weeks ago, one day before Goldman Sachs (GS) lost 13% of its value (on the news that it was being sued by the SEC):

I did some work today behind the scenes. My understanding of the current talks is that the big banks are the winners, not the losers. You will read that story in the papers 72 hours from now. Big banks are about to get their way. That is what is going on behind the scenes...a huge victory for JP Morgan and Goldman Sachs, and the other big banks. Yes, a huge victory. The press will not write that. I know better; you just heard it first, right here.

Of course, it is easy to pick on tv personality Jim Cramer. It's been done on this site before, and his picks have been ridiculed elsewhere rather frequently. But the truth is, he is likely no worse than others who attempt to crystal ball stock prices using a time-frame of hours or days instead of years. But he's more famous and more followed, allowing for easier dissection of his misses. (For example, consider the pushers of airline stocks just one day before they began their long descent.)

Cramer and others like him are not there because of their investing prowess (or lack thereof), but because they can entertain. The important take-away for readers is that they not confuse their entertainment choices with their investment decisions, which should be made with a long-term, rather than a short-term, focus.

Disclosure: None

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


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Daily Dividend Report

If you like to keep track of dividend related happenings in the stock market, there are a lot of resources available to you.  One I like to check out often is the Daily Dividend Report that is put out by Forbes.com.  In this particular episode from April 16th, the website covers dividend paying companies Caterpillar and Carnival Cruise Lines to name a few.  Not a bad way to stay on top of things.




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Stock Analysis: Colgate-Palmolive Company (CL)

Linked here is a detailed quantitative analysis of Colgate-Palmolive Company (CL). Below are some highlights from the above linked analysis:

Company Description: Colgate-Palmolive Company is a consumer products company, whose products are marketed throughout the world. Colgate’s Oral Care products include toothpaste, toothbrushes, oral rinses, dental floss and pharmaceutical products.

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
CL is trading at a discount to only 3.) above. Since CL's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 8.0% discount to its calculated fair value of $91.57. CL 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%
CL earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1895 and has increased its dividend payments for 47 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
CL earned a Star in this section for its NPV MMA Diff. of the $1,708. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as CL has. If CL grows its dividend at 12.5% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.02%.

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

Conclusion: CL 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 CL as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $123.70 before CL's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.64%.

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 8.9%. This dividend growth rate is significantly less than the 12.5% used in this analysis, thus providing a margin of safety. CL has a risk rating of 1.25 which classifies it as a low risk stock.

CL dominate the oral care category with a worldwide toothpaste market share of almost 45%. The company's confidence in its growth prospects are reflected in it most recent dividend increase of 20.5%. Historically, the company has produced strong free cash flow. Its debt level has prevented me from purchasing the stock in the past. CL's debt to total capital has been as high as 91% in 2002. Over the years the company has steadily decreased this ratio to its current 51%. Though it is still above the 51% I prefer, the trend is headed in the right direction and the company's FCF payout is low enough to support continued debt reduction. I am looking to initiate a CL position in May. 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 CL (0.0% of my Income Portfolio). See a list of all my income holdings here.


Recent Stock Analyses:


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Weekend Reading Links - April 18, 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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Greek Default: A History of Failure

Greece is in a bad state, there is no doubt about it. When a country builds up a billion dollars in debt (some estimates are 30% of GDP) and shows no mechanism to repay there is little good that can be said about the circumstance. Without the assistance of an EU German backed bailout there is a very good chance Greece will be forced to default on its debt. If you were to believe the general media this is tantamount to the outright failure of the nation which can result in nothing short of the entire country descending into chaos and likely taking the rest of Europe and the West with it.

The reality isn’t so grim. If Greece defaults on its debt some country’s and banks (mostly IMF) will loose money, and probably a fair bit of it. Defaulting on debt isn’t a new revelation though it has happened to the majority of countries regardless of size or stature and will likely happen to them again. As Reinhart puts it in his book, This Time is Different: Eight Centuries of Financial Folly:

"Greece’s default on debt reached an almost pandemic reoccurrence at the turn of the century… Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century."

On a local level a default of government debt is disastrous, on a national level painful; on an international level it is nothing more than an inconvenience. Have no doubts about it, if Greece defaults it will likely effect the overall confidence of investors in the west. But a default in Greece should not have any direct and sustained impact to those economies not directly tied to the rise and fall of Greece’s national debt and bond structure.


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UHT Dividend Stock Analysis

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company is a dividend achiever and has raised distributions for 22 consecutive years.

Over the past decade this dividend stock has delivered a total return of 16.70% per annum to its shareholders.

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). Over the past decade FFO has increased by 1.10% on average. Future growth in funds from operations could come from acquisitions or increase in rents. Universal Health Realty Income Trust earns bonus rents from the subsidiaries of UHS, which are based on the excess over base amounts revenue that these facilities generate. There were no acquisitions in 2009, although the company did make a few acquisitions in 2010 and 2008.

Fifty-one percent of UHT’s revenues are derived from leases to Universal Health Services. UHT’s advisor is a subsidiary of UHS, and all officers of Universal Health Realty are employees of UHS, which could create conflicts of interest. In addition to that over $32 million dollars in long-term debt are expected to mature in 2010. The company expects to refinance almost $12 million dollars of its maturing loans, which carry market interest rates. Another portion of the debt maturing in 2010 for $7 million could be extended for an additional three years to 2013. A construction loan for almost $13.5 million at a very low rate could be extended for up to one additional year. The company also has $48.8 million of outstanding borrowings under the terms of its revolving credit agreement which matures in January 2012.

Over the past decade distributions have increased by 2.90% per annum, which was higher than the growth in FFO. A 3% annual growth in distributions translates into dividends doubling every 24 years. In 2009 the company raised quarterly distributions by 1.70%. Dividends of $2.38 per share were declared and paid during 2009, of which $1.94 per share was ordinary income and $.44 per share was a return of capital distribution.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 85%, which was the first decrease in this indicator since 2004. Overall the FFO payout has increased from 72% in 2000 to 85%, which was due to distributions growing faster than funds from operations. A lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.


Overall I find UHT Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 13, which is in the low range when compared to the past five years. This REIT yields 6.80% and has an adequately covered dividend.

I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

Full Disclosure: Long UHT


Relevant Articles:


- Realty Income (O) Dividend Stock Analysis
- National Retail Properties (NNN) Dividend Stock Analysis
- Six Dividend Stocks for current income
- 8 Dividend Achievers Strike Back
- Health Care Property Investors, Inc. (HCP) Dividend Stock Analysis

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


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Intel - High Risk to Dividend Stock

Intel Corporation (INTC) designs, manufactures, and sells integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in desktops, workstations, servers, embedded products, communications products, notebooks, netbooks, mobile Internet devices, and consumer electronics. It has been attempting to diversify by making chipsets for embedded designs for industrial equipments, point-of-sale systems, panel PCs, automotive information/entertainment systems, and medical equipment.


INTC is not a dividend achiever. It has been paying growing dividends for last 5 calendar years. The latest dividend increase was in February 2010. I had last reviewed INTC in July 2009. My objective here is to analyze INTC is a continuing to be a good dividend growth stock and how it will 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: Overall the revenue growth as been flat for last 5 years.
  • Cash Flows: In general, a range bound operating cash flow, which does not show increasing trend. The free cash flow is generally close to net income.
  • EPS from continuing operation: In general, a range bound EPS from continuing operations. Overall, not an increasing trend.
  • Dividends per share: Consistently growing dividends since 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 2.29. This is a medium risk category (very close to being high risk) as per my 3-point risk scale. The increased payout factor and erratic EPS 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 14.8% (stdev. 9.2%) is more than average EPS growth rate of (3.8)% (stdev. 31%). Dividends have grown faster than earnings per share.
  • Duration of dividend growth: 5 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 10% for last five years.
  • Payout factor: In the past 8 years, it has been in the range of 10% to 60%. Very wide range. It is now at 72% (at the end of 2009).
  • 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 2.8%; and (b) MMA yield is 1.75%. Last 5 years average dividend growth rate has been 14.8%. I do not expect INTC dividend growth rate at 14.8%. With my projected dividend growth of 3.5%, the dividend cash flow is twice the MMA income at the price of $20.10.


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: $7.21
  • Average high yield price calculated based on past 10 years: $23.8
  • Pricing based on past 8 year relative price-to-earnings ratio. $23.6
  • Pricing based on price-to-earnings ratio of 12: $13.6
  • Graham number: $9.1

The range of fair value is calculated as $12.6 to $16.2.

Qualitative Analysis
INTC continues to remain un-challenged leader in the computing microprocessor market segment. Its sole challenger, AMD keeps raring its head every once in a while. However, it has not seen any sustained challenge. On occasions this makes the company complacent and ignoring what the markets wants.

  • • Like with any other technology company it is operates in a cyclical industry. Current recession seems to have had a significant impact. The recent 2010 Q1 results make us believe earnings are returning back.
  • • The company seems to have entered into stagnation phase where it already has majority of market share. It banks of expansion of market for growth.
  • • INTC is continuously searching for new growth areas with not much success so far.
  • • Lately, it has had few initiatives to go into newer market segments viz. the health care diagnostics products, MIDI devices using its low cost ATOM family of products, and embedded chips. Time will tell whether these two areas provide any growth to the company.
  • The growth in dividends in last five years seems to be the result of historically low payout factor. This dividend growth does not seem to be as a result of the growth in EPS.

Conclusion:

I like INTC technological driven supremacy in its product segment. It has been raising dividends for last five years only. This growth seems be due to historically low payout factor instead of growth in EPS. The stock’s current risk-to-dividend rating is 2.3 (medium risk). This is very close to my high risk point of 3.0. I will continue to hold my existing INTC stock in my dividend portfolio. However, I will only add if the price goes to lower end of my fair value range.

Full Disclosure: Long on INTC.


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Risk Is Back

It is difficult to judge the market's appetite for risk simply on the basis of the equity markets' price levels, as determining what constitutes "too high" or "too low" a price is challenging. One can compare a market's price to its earnings or its book value, but earnings are a moving target and are subject to large non-recurring costs (even in the aggregate) while the efficiency with which assets and leverage are employed also changes.


Dividend yields are often used as an indicator of the market's appetite for risk, but increases/decreases in the utility of retained earnings (that is, do companies have opportunities to generate solid returns on earnings they do not pay out?) can render yield-comparison exercises ineffectual. Furthermore, the increasing and volatile use of stock buybacks as an alternative means of returning capital to shareholders adds uncertainty to such comparisons.

Nevertheless, there are means by which the market's general appetite for risk can be estimated. One such method uses the TED Spread, which measures the difference between inter-bank lending rates and US government debt, which is currently considered by many to be risk-free. A high spread (or large difference between bank rates and government rates) suggests investors are scared of lending, as perceived risk is high.

Consider the TED Spread over the last five years:


From the chart above, it is easy to see why economists were warning of a liquidity crisis in the fall of 2008, as spreads widened dramatically from their previous levels, and continued to rise until the end of the year. At such times, the cost of borrowing is exceedingly high as owners of cash were in no mood to provide capital.

But since May of 2009, spreads have declined dramatically. Not only have they recovered to their pre-crisis levels, they are below the spread levels seen in the last boom-cycle! Considering the economy is still in recovery mode, this eager willingness on the part of capital providers to take on risk is rather surprising. Lenders of capital to banks are currently asking just 15 basis points of return above what government debt returns, despite a rather fragile economy!

What does this mean for the stock market? Maybe nothing, maybe a lot! If investors are once again pricing assets such that they perceive little to no risk in them, prices could fall significantly the next time the market is spooked. The current level of the TED Spread suggests providers of capital are doing just that.

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


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Dividend ETFs for Investors Looking for Yield

As you may know, I like to scour YouTube and other video sites for new videos posted that cover the world of dividend investing. More often than not, there is not much new there and if there is, it is of low quality. This one talks to Morningstar and offers up the Vanguard Dividend Appreciation Fund (VIG) as a potential dividend pick for the right individual.




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Stock Analysis: Wal-Mart Stores, Inc. (WMT)

Linked here is a detailed quantitative analysis of Wal-Mart Stores, Inc. (WMT). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. is the largest retailer in North America. The company operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.

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
WMT is trading at a discount to 1.) and 3.) above. The stock is trading at a 6.3% discount to its calculated fair value of $58.75. WMT 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%
WMT earned two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 36 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to > MMA
WMT earned a Star in this section for its NPV MMA Diff. of the $823. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as WMT has. If WMT grows its dividend at 11.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.98%

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

Conclusion: WMT earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks WMT as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $63.32 before WMT's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 36 years of consecutive dividend increases. At that price the stock would yield 1.91%.

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 9.7%. This dividend growth rate is less than the 11.0% used in this analysis, thus providing a margin of safety. WMT has a risk rating of 1.00 which classifies it as a low risk stock.

WMT enjoys dominant positions in most markets where it competes. The company continues to gain market share aided by the economic downturn as consumers choose WMT over higher-cost competitors and take advantage of its convenience. Its unmatched scale leads to favorable terms on everything from the products it sells to store leases and distribution agreements. These advantages are demonstrated in the company's strong free cash flow of $3.63/share for FY 2010, up over 23% from FY 2009 and 2.7 times FY 2008's comparative number of $1.33. The company recently announced an 11% increase in its cash dividend. Though its yield of 2.2% is less than my desired minimum of 2.25%, WMT is the type of company I want to own. I plan to add to my position this month while it is trading below my buy price of $58.75. 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 WMT (1.8% of my Income Portfolio). See a list of all my income holdings here.



Recent Stock Analyses:

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Weekend Reading Links - April 11, 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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Actively Managed ETFs


A few years back the SEC licensed a new class of ETFs called actively managed ETFs. Being a big fan of the ETF area I thought it would be worth saying a few words about this new class.

ETFs are usually passive investments, some of my favorites are those that model an entire market like the S&P 500 or the S&P TSX. These funds emulate the components of the S&P 500/TSX allowing an investor to gain a diversified exposure to the market at a very very low cost or MER. In these traditional ETFs there isn't a fund manager making a decision about which stocks to select which is the chief reason for the low MER.

Actively managed ETFs take it a step further. In an actively managed ETF we insert a fund manager who researches and selects stocks that meet the fund's guiding principals. Here, a fund manager can select from potentially thousands of stocks selecting only those that they believe will yield the highest return for the fund's shareholders.

Sounds like a mutual fund, you might be saying to yourself- and you are right. An actively managed ETF is in many respects very much like a mutual fund, with a few key differences. Mutual funds can't be traded inter-day, all prices and trades are settled at the close of the market and are set based on the net asset value (NAV) of the fund's holdings. This makes a fund's price equal to the sum of its parts. With Actively Managed ETFs the price during the day can potentially float well above the NAV or, theoretically speaking, well below the NAV.
 

There is a second key difference between a mutual fund and an actively managed fund. When a shareholder cashes out of a mutual fund the payout come from the mutual fund company. In the event that a significant number of shareholders sell off a mutual fund it will force the mutual fund company to sell off some of its portfolio in order to become liquid enough to pay the shareholder back. In an actively managed ETF, on the other hand, when an investor decides to sell, they are selling into the open market where another investor can purchase the fund, leaving the fund company completely out of the mix.

Let's have a quick look at three comparables, an ETF that models the TSX, a large cap TSX mutual fund, and an actively managed Large Cap TSX ETF. These aren't perfect comparisons but when one considers the breakup of the TSX with its limited number of leading companies (compared to other exchanges) the comparison I believe is somewhat valid.


TypeSymbol/NameMERWhen price is setHow fund is traded
ETFXIU0.17%Price fluctuates throughout daybetween investors
Mutual FundBMO Guardian Canadian Large Cap Eq Mut2.38%Price set at end of daybetween investor and fund company/ partners
Actively Managed ETFHAX0.70% plus 20% of the amount by which the ETF outperforms the S&P/TSX 60 IndexPrice fluctuates throughout daybetween investors


So how does it all stack up? For my money I would keep my dollars in the basic ETF, my concern is always over minimizing costs, and maintaining control. The lower MER of an ETF is desirable and the broad diversification that they offer in my opinion is far superior to a mutual fund. I am not a fan of mutual funds, so I don't see any real advantages to an actively managed ETF. If there are decisions to be made about what individual funds to buy I would prefer to make the decision myself rather than delegating to a fund manager who's interests and motivations may not align with my own.

That is my two cents- what do you think?

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HCP Stock Analysis

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company invests in health care-related properties and provides mortgage financing on health care facilities. This dividend achiever has raised distributions for 24 consecutive years.

Over the past decade the stock has delivered a total return of 18.20% per annum to its shareholders.

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). Over the past decade FFO has increased by 3% on average. The fund has a diversified portfolio of healthcare properties by tenants, type of asset or geography. The major tenants include Sunrise Senior Living, Brookdale Senior Living, HCA, Tenet Healthcare, HCR ManorCare, Covenant Care In addition to that the trust has approximately 14% of total assets invested in debt issued by high-quality healthcare operators, secured by their real estate, rather than in the real estate itself.

The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.
The company’s assets produce a relatively stable stream of income, which is predictable and resilient in times of recessions. There won’t be much growth however asides from general rate increases on its leases, unless management starts acquiring more properties. The trust routinely disposes or acquires properties in order to enhance shareholder value.
One warning statistic is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however

In terms of lease expirations, only Medical Office properties face a steep expirations cycle of leases until 2014. For Senior Housing segment, there aren’t any major lease expirations until 2016.

The company doesn’t face any major debt maturities until 2013, when it has a total of $1.225 billion in Mortgage debt and senior unsecured notes maturing.

Analysts expect FFO to reach $2.15 and $2.24 for 2010 and 2011 respectively. HCP Inc’s leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Substantially all of their senior housing, life science, and skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs.

Over the past decade distributions have increased by 2.50% per annum. A 2.5% annual growth in distributions translates into dividends doubling every 29 years. In 2009 the company raised quarterly distributions by 1.00%.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 86%, which was the first increase in this indicator since it exceeded 100% in 2003. Overall a lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.

Overall I find HCP Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 15, which is one of the lowest in the past decade. I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

I plan on adding a small position in HCP Inc. on dips over the next month. My ideal starter yield however would be 6%, indicating an entry price of $31 however. I would not settle for a current yield of less than 5% on this investment however.


Full Disclosure: None

Relevant Articles:

- Realty Income (O) Dividend Stock Analysis

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