Stock Analysis: T. Rowe Price Group Inc. (TROW)

Linked here is a detailed quantitative analysis of T. Rowe Price Group Inc. (TROW). Below are some highlights from the above linked analysis:

Company Description: T. Rowe Price Group Inc. operates one of the largest no-load mutual fund complexes in the United States.

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

TROW is trading at a premium to all four valuations above. The stock is trading at a 27.8% premium to its calculated fair value of $38.74. TROW 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%

TROW 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%. TROW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 23 consecutive years.

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

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

TROW earned a Star in this section for its NPV MMA Diff. of the $2,801. This amount is in excess of the $1,200 target I look for in a stock that has increased dividends as long as TROW has. If TROW grows its dividend at 15.0% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.02%.

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

Conclusion: TROW 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 TROW as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $67.21 before TROW's NPV MMA Differential decreased to the $1,200 minimum that I look for in a stock with 23 years of consecutive dividend increases. At that price the stock would yield 1.61%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,200 NPV MMA Differential, the calculated rate is 12.3%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing a margin of safety. TROW has a risk rating of 1.75 which classifies it as a medium risk stock.

TROW is well-positioned as an asset manager with a strong market share and a well-respected brand. It consistently produces net client inflows based on the relative performance of its funds (nearly 90% of its funds are in the top half of their categories on a five-year performance basis). When considering TROW as a possible buy, my concerns are three-fold. First, the yield at 2.18% is below my current 2.5% minimum. Secondly, its current valuation is 28% above my calculated buy price of $38.74. However, my greatest concern are the dividend fundamentals. The 15% dividend growth rate used in this valuation is driven off a strong past - the company averaged 17.4% between 2001 and 2008, but only averaged 6.1% in 2009 and 2010. For now, I will pass on TROW. 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 TROW (0.0% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

• Stock Analysis: Genuine Parts Company (GPC)
  
• Stock Analysis: Johnson & Johnson (JNJ)
  
• Stock Analysis: Owens & Minor, Inc. (OMI)
  
• Stock Analysis: The Procter & Gamble Company (PG)
  
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Weekend Reading Links - May 30, 2010

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented 11 Low Beta, High Quality Dividend Stocks
  
• The Dividend Guy presented My Biggest Problem as a Dividend Investor
  
• Dividend Growth Investor presented A dividend portfolio for the long-term
  
• Barel Karsan presented Info You Can't Get Anywhere Else
  
• Dividend Tree presented Dividends in the Context of Taxation Environment
  
• The Div Guy presented Big Stocks With Plump Dividends
  
• Disciplined Approach to Investing presented Are You A Contrarian Investor?
  
• BuyLikeBuffett.com presented This Yield Is Just Right!
  
• 40percent 20years presented Did you manage to buy anything from Mr. Market?
  
• Value Walk presented Bruce Greenwald on Walmart and American Express
  
• The Market Capitalist presented Adding Preferred Stocks to Your Investment Mix

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

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Coca Cola Stock Analysis

The Coca-Cola Company manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. One of the largest holders of Coca-Cola stock is no other than the Oracle Warren Buffett, who is the chairman of Berkshire Hathaway ( BRK.A;BRK.B) and one of the best investors in the world.

Over the past decade this dividend stock has delivered an average total return of 3.60% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.

The company has managed to deliver a 14.30% average annual increase in its EPS over the past decade. Analysts are expecting an increase in EPS to $3.45 for 2010 and $3.76 by 2011. This would be a nice increase from the 2009 earnings per share of $2.93. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time, as well as increases in volumes in emerging markets such as China.

The acquisition of Vitaminwater in 2007 has increased growth in the company’s non-soda business, which is where Coke lags behind PepsiCo. The acquisition of CCE’s North American bottling business, should bring in sufficient cost savings for the company’s North American supply chain, which would result in increase in cash flows. The deal is expected to deliver approximately $350 million dollars in cost savings over the first four years of implementation. In addition to that, it will bring more control over North American operations, deliver more flexibility in the company’s strategy implementation and reduce conflicts over the product mix with bottlers.

The Return on Equity has been in a decline after hitting a high in 2001. It has stabilized since 2005 at a very impressive 30%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The reason for the high returns on equity is that the company does not generally own the high capital intensive bottlers or fountain wholesalers, which produce and distribute the actual drinks. Instead it sells syrups, which are then mixed at the bottlers plants, and then are packaged and distributed. Coca Cola does have partial interests in 38 bottlers and distributors however, which accounted for over half of its worldwide volumes. Coca Cola Enterprises (CCE), in which Coca Cola (KO) owns a 34% stake, accounts for almost half of Coca-Cola’s US concentrate sales.

Annual dividend payments have increased by an average of 10.30% since 2000, which is lower than the growth in EPS. The company last raised its dividend by 7.30% in February 2010, for the 48th year in a row.

A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1968, The Coca Cola Company has aindeed managed to double its dividend payment every seven years on average.

The dividend payout ratio remained above 50% for the majority of the past decade. 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 Coca Cola is trading at 17.60 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 17 and yields 2.80%. Check my analysis of Pepsi Co (PEP).
I believe that The Coca Cola Company is just as attractively valued at the moment as Pepsi Co. I would consider adding to my position in the stock as long as it trades below $58.60.


Full Disclosure: Long KO and PEP

Relevant Articles:

- Capitalize on China’s Growth with these dividend stocks
- Seven dividend aristocrats that Buffett owns
- Buffett the dividend investor
- Four notable dividend increases

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Exxon Mobil – Priced to Buy for Dividend Growth Portfolio

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. It also involves in the manufacture, transportation, and sale of petroleum products. The company manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and other specialty products. XOM pretty much operates in all parts of the world such as United States, Canada, Europe, Africa, the Asia Pacific, the Middle East, Russia/Caspian region, and South America. Exxon Mobil Corporation was founded in 1870 and is based in Irving, Texas.

XOM is a part of the dividend aristocrats, S&P500 index, and DJIA index. It has been raising its dividend for last 28 years. The latest increase in dividend was 4.8% in April 2010. My objective here is to analyze XOM to determine fair price range for buying and how will it rate on my scale of risk-to-dividends.

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

• Revenue: Overall had a growing trend, but dropped significantly in 2009.
• Cash Flows: In general, a slow growing trend, but dropped significantly in 2009. The free cash flow is generally close to net income. Operating cash flow is always higher.
• EPS from continuing operation: In general, growing trend, but dropped in 2009.
• Dividends per share: Consistently growing dividends.
  

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 1.86. This is a medium risk category (relatively closer low risk) as per my 3-point risk scale. The sudden drop in 2009 (EPS and gross margins) 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 ten years.

• Dividend growth rate: The average dividend growth of 7% (stdev. 3.6%) is almost same as average EPS growth rate of 7.6%. Dividends have grown inline with earnings per share.
• Duration of dividend growth: 28 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10% for past 10 years.
• Payout factor: It has been in the less than 30%. It was at 42% (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 2.9%; and (b) MMA yield is 1.75%. Last 10 years average dividend growth rate has been 7.1%, and I expect XOM dividend growth rate to be 7.1%. With my projected dividend growth of 7.1%, the dividend cash flow is twice the MMA income at the price of $77.0.

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: $37
• Average high yield price calculated based on past 10 years: $63
• Pricing based on past 8 year relative price-to-earnings ratio. $87
• Pricing based on price-to-earnings ratio of 12: $72
• Graham number: $56

The range of fair value is calculated as $53 to $63.

Qualitative Analysis
XOM is one of the largest vertically integrated oil and natural gas company. It has exploration and production operations in more than 180 countries, full-to-partial ownership in 37 refineries, and high oil and gas reserves.

• The revenue distribution shows that US contributes approximately 30% of the revenue. The rest 70% comes from foreign markets and emerging markets.
• Investing in XOM can be considered as a good proxy for foreign/emerging markets
• It has taken initiatives to expand its capabilities and capacity in natural gas by proposing to acquire XTO.
• The company seems to spend more on share buybacks than on dividends. This is a drawback. The fact that it has cash for share buyback, I would argue why not increase dividends (and reduce the share buybacks). Higher dividend payout could support its prices. But for a large organization like XOM, there could be large number of options exercised that require buybacks, otherwise EPS starts getting affected.
• Contrarily, when we look at dividend growth, it has kept pace with earnings growth.

Conclusion
I like XOM’s large size, worldwide operation, presence in every international market. It has built a global operation with integrated exploration, productions, and refining. This gives it moat for economies of scale. The dividend growth seems to follow the growth in EPS. The stock’s current risk-to-dividend rating is 1.86 (medium risk). This is much closer to being a low risk. I recently added a new starter position in XOM. I will continue to build my position as per my allocation level if the stock stays within my buy price range.

Full Disclosure: Long on XOM.

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What's Old Is New Again

Stock price volatility benefits the value investor. Stocks that are especially volatile can provide investors with entry points that provide a margin of safety, and exit prices that reward the investor for "putting up with" the volatility. One stock exhibiting such tendencies is Acorn International (ATV), a distributor and marketer of hundreds of products through infomercials, catalogs and other channels.

Long-time readers of this site may recognize this company already. Last year, the company traded at a substantial discount to its net current assets. When business conditions stabilized, the stock price drove right through its net current asset value, and shareholders were further rewarded as the company paid out a portion of its cash reserves in a special dividend. The stock proceeded to trade at a range that made it difficult to tell if the company was under- or over-valued, allowing for an exit point for value investors.

Last week, however, as the company's first quarter results came in below expectations, the stock once again plunged to a level far below its net current asset value, to lows not seen since November of 2008. But while the company trades for under $100 million, it holds current assets of $194 million ($120 million of which is cash) against liabilities of just $35 million.

Often, a company trading at this kind of discount to its current assets is losing money hand over fist. But Acorn expects to pull in net income of over $12 million this year, even after a first quarter result that was below expectations. As the company has now worked through much of its older inventory, it can now focus on selling items with better margins and returns. With so many products to choose from, the company has an inherent advantage (compared to a one-product company, for example) in being able to choose to promote the most successful products.

As an added bonus to investors, most of the cash the company holds is held in Chinese yuan, which may appreciate relative to the US dollar in the near future, as many are reporting. But while the short-term is inherently difficult to predict, over the long-term the Chinese yuan should definitely appreciate relative to the US dollar due to the high productivity gains Chinese workers are expected to experience relative to their US counterparts (due to the low starting point of the Chinese worker).

This stock is not for the faint of heart. Its price can fluctuate severely on a day-to-day, week-to-week or month-to-month period. As such, the mainstream finance industry would tag this stock as risky and leave it at that. But for value investors, price volatility is not the same as risk. To the value investor, the value of this company does not change nearly as dramatically as the company's price, offering opportunities to buy when the company trades at a discount.

Disclosure: Author has a long position in shares of ATV

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How Financial Reform Impacts Bank Investors

Bank stocks have traditionally been known as stocks loved by dividend investors. They often pay higher than average dividends, and many of them have long histories of increasing those dividends. That is until the last couple of years when the financial world has been turned upside down due to bad lending habits by the banks. Below is an interesting video by Morningstar dividend editor Josh Peters on recent changes to bank's business plans and what this means for investors.





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Stock Analysis: Genuine Parts Company (GPC)

Linked here is a detailed quantitative analysis of Genuine Parts Company (GPC). Below are some highlights from the above linked analysis:

Company Description: Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office 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

GPC is trading at a premium to all four valuations above. The stock is trading at a 10.3% premium to its calculated fair value of $35.67. GPC 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%

GPC 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%. GPC 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 1948 and has increased its dividend payments for 54 consecutive years.

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

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

The NPV MMA Diff. of the $346 is below the $500 target I look for in a stock that has increased dividends as long as GPC has. The stock's current yield of 4.17% exceeds the 4.02% estimated 20-year average MMA rate.

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

Conclusion: GPC 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 GPC as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $36.16 before GPC's NPV MMA Differential increased 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 4.54%.

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 3.4%. This dividend growth rate is greater than the 2.5% used in this analysis, thus there is no margin of safety. GPC has a risk rating of 1.25 which classifies it as a low risk stock.

GPC's long string of dividend increases are supported by its strong underlying fundamentals of sales, earnings and free cash flow growth. The company exhibits excellent financial leadership as evidenced by its record free cash flow per share of $4.40 in 2009. From an operating standpoint, GPC has an extensive distribution network and it has built a loyal customer following over the years. Since the company is trading well above my buy price of $35.67 and the $36.16 maximum price supported by its dividend fundamentals, I will wait for a pullback before adding to my position. 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 GPC (2.7% of my Income Portfolio). See a list of all my income holdings here.

Recent Stock Analyses:

• Stock Analysis: Johnson & Johnson (JNJ)
  
• Stock Analysis: Owens & Minor, Inc. (OMI)
  
• Stock Analysis: The Procter & Gamble Company (PG)
  
• Stock Analysis: Abbott Laboratories [ABT]
  
• More Stock Analyses

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Weekend Reading Links - May 23, 2010

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented Five Dividend Stocks To Buy On A Dip
  
• The Dividend Guy presented One Dividend Rule that Can Help Your Investing Performance
  
• Dividend Growth Investor presented Dividend Payback from six quality dividend stocks
  
• Barel Karsan presented Dividends After The Fact
  
• Dividend Tree presented Dividend Investing and Businesses with Moat
  
• moneygardener presented Clorox ups dividend
  
• The Div Guy presented Zecco Trading: $4.50 for Stock Trades
  
• Disciplined Approach to Investing presented Higher Yielding Bonds Tend To Hold Up Better In Rising Interest Rate Environment
  
• Old School Value presented Free Piotroski Score Spreadsheet
  
• Triaging My Way To Financial Success presented Successful Motivation of Investors
  
• BuyLikeBuffett.com presented The Biggest Rental Rip-offs
  
• 40percent 20years presented Overdose - Now it works again!
  
• Value Walk presented Early Writings of Benjamin Graham: A Case Study of US Steel
  
• The Market Capitalist presented Companies you know (and maybe love?) with great dividend yields

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

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Making Sense of Things

It is very difficult to get a true gauge of the economy, the media is full of pundits and economists who create a dizzying amount of idle speculation. Getting down to brass tax is critical. When evaluating a business as a potential investment I often find myself in similar circumstances- too much information. To get past the noise I find the best thing to do is to focus on the fundamentals. In looking at the overall economy I think a similar approach can be taken.

The Vancouver port is one of the largest on the western sea board.  If you are exporting odds are the product went through this port. If you are importing odds are it came through. If we want to evaluate the overall health of the economy looking how the inbound and how outbound shipments have varied is at the very least an interesting prospect and perhaps can also provide some insight into the overall health of the economy.

Click on the image for a larger view. I have added in a shading to indicate the period when the recession occurred in Canada and how, in turn, the Canadian market responded.

 
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Chevron (CVX) Stock Analysis

Chevron Corporation operates as an integrated energy company worldwide. Chevron Corporation is a component of the S&P 500 and Dow Jones Industrials Indexes. The company is also a dividend achiever, which has consistently raised its dividends for 23 years in a row.

Over the past decade this dividend stock has delivered an annual average total return of 10.30% to its shareholders.

At the same time company has managed to deliver a 3.10% average annual increase in its EPS since 2000. The increase in prices of crude oil and natural gas definitely helped with earnings. The rapid fall of energy prices in late 2008 and early 2009 and weak global demand led to a 55% decrease in earnings per share in 2009 to $5.24. For fiscal year 2010 analysts expect earnings to increase by 53% to $8/share. Analysts also expect earnings per share to rise 25% from there to $10/share by FY 2011.

Any analysis of earnings trends for an oil and gas producer such as Chevron would definitely depend of the future prices of energy commodities over the next few years. Nevertheless the dividend is sustainable at current levels and there definitely is some room for dividend growth in 2011 and beyond.

Returns on Equity decreased to 11.70% in 2009, after a few years of consistently being above 20%. Year over year this indicator will fluctuate, due to the changes in the value of oil and natural gas. The company should be able to generate sufficient average returns on equity in excess of 20% in the long run.

Annual dividend payments have increased by an average of 8.30% annually since 2000, which is higher than the growth in EPS. The reason for this is that earnings have a much higher volatility than dividend payments. In my analysis of Chevron from last year, the growth in earnings was much higher than the dividend growth.

An 8 % growth in dividends translates into the dividend payment doubling almost every nine years. Since 1989 Chevron Corporation has actually managed to double its dividend payment almost every ten years on average. The company recently raised its quarterly dividend by 5.90% to 72 cents/share.

The dividend payout ratio has followed the trend in earnings and returns on equity. It largely remained at or below 50% after 2003. Before that it did shoot up above 50% in 2000 and in 2002. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Chevron Corporation is trading at a P/E of 11.70, yields 3.70% and has an adequately covered dividend payment. The forward P/E for 2010 earnings is close to 10. In comparison Exxon Mobil (XOM) trades at a P/E multiple of 14.50 and yields 2.80%, while British Petroleum (BP) trades at a P/E multiple 8 while yielding 6.80%.I find Chevron attractively valued at current levels given its stable dividend growth history. If you are looking to add exposure to the energy sector for your dividend portfolio then CVX could just be the right stock for you.

Full Disclosure: Long BP, CVX and XOM

Relevant Articles:

- A record 22 companies boost dividend payouts

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- Chevron (CVX) Raises Dividends; MLPs follow suit

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Dividends in the Context of Taxation Environment

One the benefit that dividend investors have is lower tax percentage (i.e. 15%) on qualified dividends. In case of lower tax brackets, the qualified dividends are not even subject to taxes. In 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act. One of provision in this law was to reduced the tax rates on certain dividends (known as qualified dividends) to 15% for the highest income earners. Furthermore, this provision are to expire at the end of 2010 if Congress fails to renew or modify. So far, it has not been extended.

Imagine that Berkshire had only $1, which we put in a security that doubled by year-end and was then sold.

Image further that we used after-tax proceeds to repeat this process in each of the next 19 years, scoring double each time

At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government. We would have left with about $25,250. Not bad.

If, however, we made a single fantastic investment that itself doubled 20 times during the 20- years, our dollar would grow to $1,048,576.

Were we then to cash out, we would pay 34% tax of roughly $356,500 and be left with about $692,000.

--- Warren Buffett in Berkshire’s 1989 annual report.

This is not directly applicable to dividends. But the reason I bring this up, is it highlights the importance of taxation in growth of investments over time.

In the event that Congress does not take any action, this existing law will expire and taxes will be reverted back to pre-2001 level. In accordance to pre-2001 level, the dividend income will be treated as ordinary income. So for many, depending upon their tax bracket, this could mean 30% or even 40% tax on dividends.

With our government under debt and running large deficits, it appears that our President may take this as an opportunity to raise tax. If not to pre-2001 era, then at least to some higher level. The proposal is to raise dividend income tax to 20% for married couples earning $250,000 or more, while keeping it same at 15% for lower income tax bracket.

These increase in dividend taxation may seem like a small increase. However, in my view this is likely to affect the macro-environment around dividends, for example:

• Will it affect stock valuations? Increase in dividend taxes for large shareholders will result in reduced returns. To increase their returns, they may likely pay less for buying a stocks, thereby affecting valuations. In addition, it is also likely that they may start influencing management about payout ratios.

• Will it affect share buybacks? It is also likely that share buyback paradigm may get a boost because it is believed to provide a floor. Large shareholders would tend to prefer higher stock prices when compared to dividends.

• Will cash flow into IRA? If we combine all taxation (dividends, capital gains, etc), then using tax deffered account becomes more attractive. It is likely that financial advisors will start recommending dividend companies in IRA account rather than individual portfolios.

To small individual investors like me, I does affect a bit, but not by a significant amount. The only impact is slowing down of dividend reinvestment which will not be visible immediately. One could argue that similar taxation, pre-2001 era, did not affect the dividend policy of good companies. That's true to a certain extent. However, we need to realize that US companies may not have similar earnings growth as seen in pre-2001 level. Therefore, it is likely that the environment surrounding dividends, the motivation behind, etc, may get affected.


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Effecting Change

Which company inspires more confidence in its financial results, one that has had a publicized auditing misstep in the past, or one with a pristine history? Surprisingly, the first company may be more credible. The reason is that for positive corporate governance changes to occur, the problems with poor corporate governance often have to surface. The company that has experienced serious enough issues to take notice, but not so serious that they proved fatal, has been provided a catalyst for change.

Consider Genesis Land Development (GDC), a company we have previously discussed as a potential value investment. The company is preparing for its annual meeting by issuing press releases recommending "that a strong independent slate of directors be elected...to assist with the ongoing efforts to improve governance, oversight and shareholder value".

The release goes on to say that "additional steps must be taken to strengthen governance, management oversight and management itself" and "a strong independent board of directors is critical to the future success of the Corporation".

Of course, a strong independent board is something that shareholders would like to see at many companies, but it is not often made a point of focus by companies with otherwise poor governance.

But GDC has seen what poor governance can lead to. Two years ago, the company's CEO and CFO were dismissed with cause following findings that they misled auditors. As the recession started to threaten the company's viability, the CEO was re-hired and has engineered the company's return to profitability.

However, shareholders have not forgotten the mistakes of the past. Shareholder groups have stated that "it is clear that [CEO] Gobi Singh, with his inexcusable history when it comes to transparency and good governance, needs to report into a strong, independent Board" and that they will put forth an independent slate if the company does not.

This brush with the pitfalls of a poor corporate governance structure has provided Genesis shareholders with the burning platform they need to effectuate positive change. Hopefully, this will lead to a stronger company better able to raise its share price such that it is commensurate with the value of its assets.

Disclosure: Author has a long position in shares of GDC

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: Johnson & Johnson (JNJ)

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

Company Description: Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

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

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

JNJ is trading at a discount to 1.) and 3.) above. The stock is trading at a 8.9% discount to its calculated fair value of $70.24. JNJ 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%

JNJ 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%. JNJ 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 1944 and has increased its dividend payments for 48 consecutive years.

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

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

JNJ earned a Star in this section for its NPV MMA Diff. of the $1,208. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 8.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.02%. JNJ earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

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

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $83.33 before JNJ's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.53%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.8%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.00 which classifies it as a low risk stock.

There is no perfect dividend growth stock, but JNJ comes close. The company enjoys a diverse revenue base, an excellent research pipeline, a pristine balance sheet and exceptional free cash-flows to cover it dividend. This diversity and strength will help the company overcome near-term results from patent losses on Risperdal and Topamax. I will continue to add to my position as my allocation allows and when JNJ is trading below my buy price of $70.24. 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 JNJ (4.4% of my Income Portfolio). See a list of all my income holdings here.


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Weekend Reading Links - May 16, 2010

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented The Secret To Finding The Best Dividend Stocks
  
• The Dividend Guy presented How You Can Plan for the Unplannable with Dividends
  
• Dividend Growth Investor presented Four Characteristics of The Best Dividend Growth Stocks
  
• Barel Karsan presented Forced Dividends
  
• moneygardener presented Scotts to grow dividend
  
• The Div Guy presented Two Bank Stock Laggards
  
• Disciplined Approach to Investing presented Aristocrats Outperforming Year To Date
  
• Old School Value presented Investment Book Review: Active Value Investing
  
• BuyLikeBuffett.com presented Get On Board With Goldman Sachs
  
• 40percent 20years presented Data Exchange & What you gonna do about X, Y or Z happens?
  
• Value Walk presented Understanding Financial Statements and Terms
  
• The Market Capitalist presented Increasing interest rates & how to best position your portfolio

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

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Stock Fishing

I always have a running list of great companies I would buy if they were priced a whole lot differently- my wish list you might say.  Being value investors we all spend a lot of time trying to differentiate between garbage and gold. Usually when I am looking at a company it has hit my screens because it is suddenly cheap - my job is to find out if there is a good reason or a bad reason for this, and invest accordingly. This activity can take some time, days, sometimes even weeks. Some opportunities simply don’t last that long though, they can dry up in a matter of a day, an hour or even mere minutes.

To prevent a great opportunity from slipping through my fingers I often have a running wish list. This list is comprised of high quality companies with great leadership, and solid books, they meet all but one of my criteria to invest- they aren't trading at a discount. The P/E might be too high or the dividend yield is just not where I need it to be.

As an example let’s pull three off my list Visa, Cisco and P&G. In my opinion great companies with great management, great products and a solid sustainable competitive advantage. The reality of it is though that they all sport a P/E that is far too high to merit an entry point- in my opinion. During turbulent days though like last week these stocks drop by impressive rates. At these times my wish list turns on and we buy what we can. On news of the sudden crash I was out having lunch and quickly returned back to my office to file a few trades from my list.

So what do you have on your buying wish list and why?

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

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Exxon Mobil Stock Analysis

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. The company is a component of the S&P 500, Dow Jones Industrials and the Dividend Aristocrats indexes. Exxon Mobil has been consistently increasing its dividends for 28 years in a row.

Over the past decade this dividend stock has delivered an annual average total return of 8% to its shareholders.



At the same time company has managed to deliver a 6.40% average annual increase in its EPS since 2000. The forecasts for the foreseeable future are for a 45% increase in the EPS in 2010 to $5.80/share, followed by an increase in EPS to a $7.27 by 2011. The sheer scale of the company gives it huge economies of scale. Its productivity is further boosted by the efficiency of developing new projects in Quatar, Norway and US. Exxon Mobil does business on over 200 countries and derives only 30% of its revenues from the US. The company has over 130 projects worldwide whose goal is to increase reserves of oil and natural gas. The company’s future acquisition of XTO Energy will boost natural gas production by over a quarter. XTO’s resources are close to the markets it serves. In addition to that technical expertise from XTO energy could assist Exxon Mobil in developing new shale fields worldwide.


The ROE had consistently increased from less than 15% in 2002 to over 38% in 2008, before dipping back to 17.30% last year on lower profitability.

Annual dividend payments have increased by an average of 7.30% annually since 2000, which is higher than the growth in EPS. Currently, the number of shares is lower than the number of shares at the time of the merger between Exxon and Mobil. The tremendous increase in commodities prices over the past decade has greatly contributed to the strength in earnings per share. A 7 % growth in dividends translates into the dividend payment doubling almost every ten years. If we look at historical data, going as far back as 1970, XOM has indeed managed to double its dividend payment every ten years on average. Just a few days ago Exxon boosted its dividend by 4.80% for the 28th year in a row.



The dividend payout has declined from a high of 57% in 2002 to a low of 17.8% in 2008., before increasing to 41.70% 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. The company has returned money to shareholders exclusively through share buybacks, which are typically not as consistent as increases in dividends.



Overall Exxon-Mobil has low dividend payout ratio and a low P/E ratio of 14.50. In addition to that the stock yields 2.80%. I would appreciate it greatly if the company increases its payout of dividends over time at the expense of reducing its massive share buybacks. XOM has the potential to achieve an above average dividend growth over the next decade if oil prices increase over the next few year.In comparison Chevron Corporation (CVX) trades at a P/E multiple of 11.70 and yields 3.70%, while British Petroleum (BP) trades at a P/E multiple 8 while yielding 6.70%. I would consider adding to my position in Exxon Mobil as long as the stock is below $70.

Full Disclosure: Long BP, CVX and XOM

Relevant Articles:
- Chevron Corporation (CVX) Dividend Stock Analysis
- A record 22 companies boost dividend payouts
- Seven dividend aristocrats that Buffett owns
- Best Dividends Stocks for the Long Run

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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Natural Barriers To Competition

Value investors are constantly on the look-out for businesses with "moats" that the competition cannot displace. Usually, this is the result of a competitive advantage that cannot be copied. But perhaps it can also be the result of being in a business that is shunned to the extent that no quality management wants to copy it.

Consider New Frontier Media (NOOF), producer and distributor of pornographic movies. The company has deals in place with the major cable providers which allows them to beam millions of dollars worth of adult pay-per-view content into homes throughout America and the world. Despite being a business that appears to be easily replicated, the company has enjoyed surprisingly good margins (approaching 20% on average) and returns (5-year ROE > 12%), beating up on its primary competitor, Playboy Enterprises (PLA).

Despite this, the company appears to trade at a substantial discount. New Frontier's market cap is just $38 million, while the company has earned operating income far in excess of that in the last four years alone, even after including a $12 million goodwill write-down that caused the company's 2009 net income to be negative. In addition, the company has $15 million of cash against just $3 million of debt.

The future is not without challenges, however. As consolidation in the cable industry throughout the United States has taken place, New Frontier's customers have become more concentrated and powerful. As a result, New Frontier's business would take a substantial hit if one of these operators switched to a different provider. More immediately, however, this has allowed the cable operators to push New Frontier on price, reducing domestic margins.

Furthermore, while the company's founder Michael Weiner (which could also pass for a screen-name in this business) is still the chief executive, his annual salary and bonus dwarf his stock ownership in the company, which doesn't say a lot for the company's incentive structure. Nevertheless, the company has succeeded for years with Weiner at the helm, and shareholders appear to be offered a price at this level with a substantial margin of safety.

We first discussed this company a few months ago here.

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 vote for it by clicking the Buzz Up! button below.

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Are People Saving Too Much?

There are some media articles coming out every now and then stating that there are a group of economists out there who are suggesting that some people may be saving too much for retirement. I find this very interesting.

I find this interesting because I strongly believe that many banks, mutual fund companies, and other investment companies do their best to convince the public that if you don't sock as much money as you can into their investment products then you are going to end being a poor desolate person. Just think of those Freedom 55 ads showing that gray-haired individual sitting by his million dollar lake front property while his grandchildren swim in the water, his wife gives him a big kiss on the cheek, and his daughter smiles at him like he is the best person in the world. All because, we are lead to believe, he has saved for his retirement and is able to provide this for his family. Man, who wouldn't want that!!

That is exactly what the investment companies want you to think! You too can have that if you just give them your money so they can indiscriminately take exorbitant fees to overpay managers who do little more than meet the market (or worse - under perform the market). As a result, people are being guilt-ed into savings as much as possible - sometime too much - into their investment accounts and sacrificing things such as vacations or even going into debt just for the sake of saving.

However, even with all this said I think it is better to be saving more than less. I would rather end up with more money than I know what to do with as opposed to the alternative. I think the important thing is to realistically assess what you will need in your retirement, add some level of cushion to it that makes you comfortable and strive to get there through a regular investment and savings program.

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

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Stock Analysis: Owens & Minor, Inc. (OMI)

Linked here is a detailed quantitative analysis of Owens & Minor, Inc. (OMI). Below are some highlights from the above linked analysis:

Company Description: Owens & Minor Inc. is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.

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Weekend Reading Links - May 9, 2010

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented 20 Dividend Stocks With A 20% Yield In 20 Years
  
• The Dividend Guy presented Vanguard Dividend Lineup
  
• Dividend Growth Investor presented Are Dividend Investors Stock Pickers?
  
• Barel Karsan presented Transocean Oversold?
  
• Dividend Tree presented Selling Shares of BP with Changes in its Fundamentals
  
• moneygardener presented asset diversification update
  
• The Div Guy presented 2010 Retirement Confidence Survey (RCS)
  
• Disciplined Approach to Investing presented Does May 2010 Lead To A Repeat of March 2009
  
• Living Off Dividends & Passive Income presented Euro Breaks $1.30
  
• Old School Value presented Barnes & Noble Stock Analysis
  
• Dividend Money presented Putting Out The Greece Fire!
  
• Triaging My Way To Financial Success presented The Stinky Value Investing Strategy
  
• BuyLikeBuffett.com presented Investing Against The Grain
  
• 40percent 20years presented Investment Tip: Buy-and-Loss with Trigger
  
• EPIC INVESTOR presented Return on salary
  
• Value Walk presented Lessons From Warren Buffett

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

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Clorox Corporation Stock Analysis

The Clorox Company engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International.
Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 32 years. The company is a member of the elite S&P Dividend Aristocrats Index.

Over the past decade this dividend growth stock has delivered an annual average total return of 4.30% to its shareholders.

At the same time company has managed to deliver an impressive 9.80% average annual increase in its EPS since 2000. Analysts are expecting an increase in 2010 earnings per share to $4.24 and $4.63 by 2011. There is stable demand for household and personal care products, which is generally not affected by changes in the economy or by geopolitical factors. Earnings will benefit from various cost savings programs and pricing to offset higher input costs.

In 2007 the company introduced its Centennial Strategy where the company is focused on achieving double-digit annual growth in economic profit. A key driver of the strategy is to accelerate sales by growing existing brands, including expanding into adjacent categories, entering new sales channels and increasing penetration within existing countries. The company also anticipates using its strong cash flow to pursue growth opportunities and increase shareholder returns. For an update on the results from the strategy, check this press release.
Basically the company will try to deliver further growth through an ongoing focus on consumer megatrends. In addition to that the company will be targeting a 2% sales growth through product innovation. Last but not least Clorox will target margin expansion and maximizing cash flow through implementation a continued robust cost-saving program and maintaining price increases the company has taken.

The Return on Assets increased to 11% in 2008 from 7.80% in 2001. I used return on assets, since the stockholders equity portion of the balance sheet was negative after in 2004 Clorox exchanged its ownership in a subsidiary for approximately 29% of the company’s outstanding shares at the time of this transaction. In addition to that the company spent over 1.65 billion in share buybacks in 2007 and 2008.

Annual dividends have increased by an average of 13% annually since 1999, which is lower than the growth in EPS. Clorox has an ever-evolving dividend payment policy, which doesn’t stop the company from raising the annual distributions for 21 years in a row. There have been times such as in 2007 when dividend were raised twice while there are times such as 2003-2004 and 2000-2002 when dividends were not being raised for 6 to 9 quarters.

A 13 % growth in dividends translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1983, The Clorox Company has actually managed to double its dividend payment every six years on average. The dividend is very well covered at the moment and is safe.

The dividend payout ratio remained above 50% until 2002. Since then the dividend payout ratio has consistently remained below 50%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Clorox is trading at a P/E of 15 and yields 3.10%. I believe that the company is attractively valued at current levels and would consider adding to my position in the stock.

In comparison Procter & Gamble (PG) trades at a P/E multiple of 15 and yields 3.10%, Kimberly-Clark (KMB) trades at a P/E multiple of 14 and yields 4.30%, while Colgate Palmolive (CL) trades at a P/E multiple 20 while yielding 2.50%.

Full Disclosure: Long CL, CLX, PG, and KMB.

Relevant articles:

- Procter & Gamble (PG) Stock Dividend Analysis
- Kimberly-Clark Corporation (KMB) Stock Dividend Analysis
- Colgate-Palmolive (CL) Dividend Stock Analysis
- Unilever (UL) Dividend Stock Analysis

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

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