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LOWE’S Company – Priced to Buy for Long Term Holdings

LOWE’s Company (LOW) is a home improvement retailer. It focuses on retail do-it-yourself (DIY) customers and do-it-for-me (DIFM) customers who utilize LOW’s installation services, and commercial business customers. Its product lines include products and services for home decorating, maintenance, repair, remodeling, and the maintenance of commercial buildings. It has approximately 1650 retail stores in US and Canada.

LOW is member of Dividend Aristocrats, Mergent’s Broad Dividend Achiever Index, and S&P500 Index. The most recent dividend increase was in July 2010.

Trend Analysis
Here I am looking at trends for past 9 years of company’s revenue and profitability. These parameters should show consistently growth trends. The trend charts is shown in image below.

  • Revenue: In general, a growing trend since 2000. The average revenue growth for last 9 years has been approximately 14 (std dev of 6.8%). Growth has slowed down in last few years and expected to be negative in 2009.
  • Cash Flows: Overall, until 2008, a growing trend of operating cash flow. It is above net income. The free cash flow is consistently less than net income.
  • EPS from continuing operation: In general, it had an increasing trend until 2007. Negative since 2008 and it is reflection of economic downturn.
  • Dividends per share: 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 1.43. This is a low risk category as per my 3-point risk scale. Other than negative EPS growth, all other parameters are positive.

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 49% (stdev. 15%) is more than average EPS growth rate of 20% (stdev. 16.4%).
  • Duration of dividend growth: Consecutive dividends growth for more than 25 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10%.
  • Payout factor: It has been less than 25% since 2000.
  • 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 2.0%; and (b) MMA yield is 1.75%. With my projected dividend growth of 8.2%, the dividend cash flow is 2 times the MMA income in 10 years time period.

Fair Value Calculation
This section determines what price I should pay to buy a given stock
  • Net present value (NPV) price based on 15 year DCF: $26.0
  • Average high yield price calculated based on past 10 years: $26.8
  • Pricing based on past 10 year relative price-to-earnings ratio. $39.0
  • Pricing based on price-to-earnings ratio of 12: $22.3
  • Graham number: $22.7
The range of fair value is calculated as $24 to $27.3.

Qualitative Analysis
LOW is a founded in 1952 and is the second largest retailer in home improvement segment. Its growth model consists of growing market share by expanding more markets.
  • Its revenue is pretty much focused in US markets (with some presence in Canada and Mexico).
  • It continues to have very stable gross and operating margins. It continues to generate operating cash flows.
  • One would expect that with housing market crash, LOW’s earnings would also crash (similar to financial sector banks). However, it was not the case, and it indicates the strength of its business model.
  • Even though the housing market is grim, I believe the repair and maintenance segment will continue to generate revenue and income for LOWs.
  • The risk factor is that continued slackness in housing market.

Conclusion
Lowe’s Corporation is a stable and slow growing company in long term. It is expected to continue to have a sustainable cash flow over next few years. One issue with Lowe’s is that, historically, it has had a very low dividend yield of less than 2%. At such a low yield, it is less attractive relative to any high yield bond or CDs. However, LOW shares bought at fair value or below would make up of the lack of dividends. In addition, the low payout factor and low dividend risk provides stability for dividend cash flow. The current pricing of $22.19 is less than my buy range. I would continue to add to my existing position based my allocation levels.

Full Disclosure: Long on LOW.
This article was written by Dividend Tree. If you enjoyed this article, please consider subscribing to my feed at [feed link].


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Abatix Corp

Finding companies trading at discounts to their net current assets is not as easy as it was last year. However, such companies do exist. For example, Abatix Corp (ABIX), distributor of safety equipment and tools, trades for $10 million despite net current assets of $15 million. Furthermore, the company is profitable, having earned $400K and $500K in the first 3 months and first 6 months of this year, respectively.

What's unfortunate, however, is that management does not communicate with shareholders - at all. When the company publishes its quarterly financial statements, it offers no discussion, no outlook and no conference call. Basically, shareholders have no way of knowing what's on management's mind. Under these circumstances, it's hard to believe anyone can understand this business enough to warrant a purchase.

For example, while the company's sales are up year-over-year, the company's inventory and receivable balances are up a disproportionate amount. This could occur for many reasons, including any combination of the following:

- the company sees an opportunity for expansion
- the company is offering more favourable terms to encourage customer purchases
- sales were lower than anticipated
- some customers are in financial trouble
- simple timing issues related to quarter-end dates

But since management doesn't offer any colour on the above issue (or any other), shareholders are left to make guesses as to the challenges currently facing the company. Unfortunately, a guessing shareholder is not one who is likely to be able to protect his downside risk with any certainty.

The company is able to legally get away with avoiding disclosures of this nature because it de-listed from the Nasdaq in 2007, and thus is not bound by its previous reporting requirements. It now trades on the pink sheets, which contain companies of varying quality. Investors are warned to avoid such companies unless they fully understand the risks. Investor protections for exchange-listed companies are there for a reason!

Disclosure: None

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


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Two Technology Companies That Buffett Likes

Warren Buffett has been buying shares of Fiserv and Iron Mountain. He owns 8 million shares of Iron Mountain Inc. (IRM) which provides information management services to IT companies. The company offers document management, data protection, destruction services, and records management services. Iron Mountain is one of the companies on the cutting edge of cloud computing. Buffett also owns 4.4 million shares of Fiserv (FISV). Fiserv offers information management services and electronic payment processing solutions to its clients.

Fiserv and Iron Mountain both generate large amounts of free cash flow. Fiserv generates $970 million dollars in free cash flow and Iron Mountain has $630 million dollars in free cash. Both companies have similar balance sheets with $300 million in cash and $3 billion dollars in long term debt.

Both companies had straight years of sequential revenue growth until last year. The economic crash of 2009 hit the service revenues for both companies as clients ratcheted down capital spending. Iron Mountain had nine straight years of revenue growth before last year. Fiserv had a streak of consecutive earnings growth until the company had its first revenue drop in 2009.

Fiserv trades at 12.5 times earnings which is right in line with the historical growth rate. Iron Mountain trades at 17.5 times earnings which is slightly higher than the 13.6% historical growth rate. Neither company could be classified as a steal or as expensive. Both companies appear reasonably valued. They trade at PEG ratios close to 1.

E-commerce is the present and future of business. The market is still in its infancy and has great growth potential. E-commerce sales are currently 7% of all United States retail sales and are expected to hit $170 billion dollars this year. Berkshire Hathaway’s investments in both firms are clearly designed to benefit from this emerging trend.

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


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Stock Analysis: HCC Insurance Holdings Inc. (HCC)

Linked here is a detailed quantitative analysis of HCC Insurance Holdings Inc. (HCC). Below are some highlights from the above linked analysis:

Company Description: HCC Insurance Holdings Inc. is a multi-line insurer specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K.

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

HCC is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 9.7% discount to its calculated fair value of $28.99. HCC 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%

HCC 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%. HCC 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 1996 and has increased its dividend payments for 14 consecutive years.

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

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

HCC earned a Star in this section for its NPV MMA Diff. of the $2,883. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as HCC has. If HCC 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 3.71%.

Memberships and Peers: HCC is a member of the Broad Dividend Achievers™ Index. HCC's peer group includes: American Financial Group Inc. (AFG) with a 1.8% yield, American National Insurance Co. (ANAT) with a 4.1% yield, Assurant Inc. (AIZ) with a 1.6% yield and Unitrin Inc. (UTR) with a 3.5% yield.

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $29.56 before HCC's NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.89%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 13.9%. This dividend growth rate is below the 15% used in this analysis, thus providing a margin of safety. HCC has a risk rating of 1.50 which classifies it as a low risk stock.

HCC's diverse business mix along with its underwriting discipline have positioned it well in an environment that has left many other insurers struggling. The company's investment portfolio reflects management's conservative bias and a culture that rewards profitability rather than growth. With very little debt and a low free cash flow payout, HCC's financials are strong. The stock is favorably priced to my calculated fair value of $28.99. However, its yield of 2.14% is below by current minimum, so for now I will stay on the sidelines. 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 HCC (0.0% of my Income Portfolio). See a list of all my income holdings here.


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


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Weekend Reading Links - September 26, 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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Stock Analysis: Commerce Bancorp

Commerce Bancshares, Inc. (CBSH)operates as the bank holding company for Commerce Bank, N.A. that provides various general banking services to individuals and businesses. It operates in three segments: Consumer, Commercial, and Wealth.

The company is a member of the dividend champions list, and has increased dividends for 42 years in a row. In addition to paying a cash dividend, this bank also pays a 5% stock dividend at the end of each year.

Over the past decade, this dividend stock has delivered an annual total return of 7.50% on average.

At the same time earnings per share have increased only by 1.70% since 2000. The EPS trend has been down since 2006. For 2010 and 2011 however analysts are expecting EPS to increase to $2.63 and $2.93. This would be much higher in comparison to FY 2009 EPS of $2.07. This regional bank is one of the financial institutions that didn’t cut dividends during the financial crisis. Over the past decade the company has also managed to decrease the average number of shares outstanding by 2.5% annually. The company generates 61% of its revenues from net interest income, 12% comes from Card Income, while service charges and wealth management account for 10% each.

The annual dividend per share has increase by 10.60% per year since 2000, which was higher than the growth in EPS. A 10% increase in dividends leads to dividend payment doubling every 7 years on average. Since 1986 the company has indeed managed to double its dividend payments every seven years on average.

The dividend payout ratio has doubled, mostly due to the fact that the company has shared a higher proportion of its earnings in the form of dividends and due to the downward trend in earnings since 2006.

Between 2006 and 2009, the return on equity has been decreasing sharply from 16% to less than 10%. This was in contrast to stability in the ROE between 14 and 16 over the preceding five years.

Overall I find Commerce Bancshares to be attractively valued at 15.50 times earnings, yield of 2.50% and having an adequately covered dividend. I would consider initiating a position in the stock on dips below $37.60.

Full Disclosure: None

Relevant Articles:

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


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Dividend Yields in Three Different Economies

Individual investors know that dividends are paid to common shareholders by corporations across the world, in different economies, different markets, and variety of industry segments. It is also a common knowledge that the characteristics of such dividends such as yield, frequency, how dividends are perceived, quality, and growth are very different. In addition, as a US-based investor, there are additional risk factors, some of which I had discussed earlier.

I am of the view that a look at individual index and their yield should provide general birds’ eye view of trends in any given market. While there may be varied arguments about quality and validity of such comparison, I still believe it is a good start to understand any given market and its policies vis-à-vis common shareholder dividends.

I compared three markets viz. US markets (using SPY), Europe (using IEV), India (S&P CNX NIFTY). I would have liked to compare Brazil and China, but could not identify a low cost ETF or fund that represented at least 60%+ of the local market.

  • SPY: It represents S&P500 equity index which approximately covers 75% of the large to mid cap market capitalization of US equities.
  • IEV: It represents S&P Europe 350 equity index which covers 17 major European markets and approximately 70% of the region’s market capitalization.
  • NIFTY: It represents S&P CNX NIFTY index which covers 22 different sectors in Indian economy and approximately 64%+ of the countries market capitalization.
I looked at dividends from year 2000 onwards because (1) Emerging markets like India started showing significant addition to global economy; and (2) since year 2000 US markets are considered to be facing challenges. I wanted to compare this period because differences get magnified during challenging economic times. The Chart 1 shows the dividend yield for all three indexes (as represented by corresponding ETFs) and Chart 2 shows the dividend growth year-over-year.



  • In terms of percentage yield, the dividends seem to be consistently higher for European markets. It was around 2.5% yield and has increased to 3%+ in last few years. In terms growth of dividends, there is quite a bit of variation in year-over-year growth. The key observation here is, 2009 was a year in which growth went negative (meaning dividends were reduced).
  • The dividend yield for S&P is lower than European 350 index. It has been somewhat consistent around 1.8% to 1.9%. In terms of growth of dividends, the year-over-year growth seems to be very erratic, many times on negative sides. 2009 saw reduction in dividends.
  • The dividend yield of Indian market appears to have an upward trend. However, it has seen wild swings in terms of year-over-year growth. As any investor would have expected, the volatility in dividends is clearly seen on Chart 2 (although it is only for 6 years of data). Here also, dividends were reduced.
This does not include the focused dividend funds which may provide higher yield and a different growth trends. However, it does provide a birds eye view based on local indexes. The summary is, the US and European markets show consistency in dividends relative to Indian market. Overall all markets reduced dividends in 2009.

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


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A Bank That Buffett Loves

U.S. Bancorp (USB) is the fifth largest commercial bank in the United States and has branches in 24 states. The bank currently has over $280 billion dollars in assets. The retail banking giant is a longtime favorite of buy and hold investor Warren Buffett.

US Bancorp has managed to maintain profitability in a volatile earnings environment for commercial banks. The banking institution had revenue of $4.3 billion dollars and net income of $669 million dollars. U.S. Bancorp has done an excellent job of increasing its deposit base. Total deposits increased 13.7% to $182 billion dollars and savings account deposits rose nearly 41%. Profitability jumped 55% due to increased revenue one commercial loan fees.

The banking giant loaned out over $36.5 billion dollars over the first quarter. Corporate payment products revenue grew 9.1% and merchant processing services revenue increased 13.2%. The growth at U.S. Bank is just beginning with the company looking for additional expansion opportunities to increase the bank’s visibility nationally.

The only negative for the bank is that net-charge offs rose 2.3% to $1.1 billion dollars. However, company management believes that loan losses have peaked and will stabilize in the foreseeable future. U.S. Bancorp’s conservative lending practices are allowing the bank to outperform many of its competitors.

U.S. Bancorp is currently trading at $23 per share. EPS is projected at $1.64 for the current year and shares currently trade at just 11 times next year’s earnings estimate of $2.18. That is a little expensive for a company who is expecting to grow earnings in the single digits for the next few years. The stock is selling for 1.7 times book value which is a reasonable valuation for such a premium franchise.

The company is currently paying a dividend of 1%. The company was forced to cut its dividend during the financial crisis of the last 2 years. The current yield is still higher than most industry peers. US Bancorp should be among the first banks to return to normalized earnings and raise its dividend. US Bank is looking raise its dividend next year and the stock will likely return to its historical dividend yield of 4.3% in the future.

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


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Dividend Stock Screens

As a keen dividend growth and value investor part of my investing activities each month include running some basic screens on various stock exchanges to gauge the relative value of the market and pick out interesting stocks that might qualify for more than a simple glance. The difficulty for many novice investors is deciding what criteria to include in their screen to maximize the chances of finding those elusive bargain stocks.

Stock screens aren’t difficult to use, but for many investors their search through a stock screener often finds them far too many or too few results to make it worth their while. No investor wants to sift through 1,200 results on the NYSE or feels defeated when their criteria turn up only 5 results of companies they don’t like or understand.

Part of the difficulty for any investor is deciding what information is important to include in a stock screener and what information doesn’t really need to be there. As fun as it is to include multiple factors you might be limiting yourself to some really good stocks that don’t fit one or two of your criteria and not including enough factors will leave you with a search result not specific enough for what you’re looking for.

The factors I like to screen for are some of the easiest to determine from both a dividend and value investing approach and leave you with enough quality results to filter out 10-15 quality stocks for your consideration.

Share Price:

In almost all situations I avoid stocks that trade under $5.00 because for a few important reasons. Often their market cap will be too low for inclusion in my portfolio because from experience I know this will impact the growth rate of their dividends. While every value investor likes undervalued companies, but when looking for dividends an investor should realize that many companies who are experiencing difficulties will be the first to cut their dividend. I also don’t place a ceiling on this item because dollar value doesn’t always mean a company is over-valued when you consider the relation to the number of outstanding shares of a company.

Market Capitalization:

Market cap is a little tricky and on that each investor has to decide for themselves. Smaller market capitalized companies may have significantly higher growth rates and dividend growth but may also shovel back cashflow into operations much faster than a dividend oriented investor may prefer. Generally speaking I like to have a minimum of $500 million as the baseline for my screens.

Divided Yield:

This is an important item to screen with but investors should be realistic in what numbers they choose as both a minimum and maximum yield. Often I find many investors avoid screening below 3% because they feel the current yield isn’t high enough or a company may be overpriced, but often companies with a yield under 3% and a strong history of dividend growth grow those dividends at double digit rates each year. Likewise searching for only high yield stocks may predispose an investor to looking at companies whose dividend is at risk or not sustainable. Generally I like to screen stocks between 2% & 6.5% for a modest number of stocks that I can tackle filtering through and provide me with enough breadth that the screen is useful although for this screen I only set a maximum yield at 10% because of the sector.

Price/Earnings Ratio:

I’m an investor who’s often m0re focused on forward P/E than trailing P/E simply because a trailing P/E is an indication of what a company has done in the past and not what they’re going to be doing in the future. Screening for forward P/E is often difficult depending on the screening tool you’re using so if you’re forced to use trailing earnings the range I like to screen for is between 5 & 15. As a value investor I want to be buying at some discount to the true value I’ve determined for a stock. A P/E over 20 often leads me to determine that the company is overvalued and the range of 5-15 gives me a good enough range to include not too many but also not too few results.

Price/Book Ratio:

I admit that deep down I’m still a cold-blooded value investor; I don’t invest with emotion and finding a dividend growth stock at a discount to its peers, its net asset value (NAV) or its intrinsic value makes my week! When screening with P/B and investor needs to be conscious that some industries/sectors will have a variance in their P/B than other industries/sectors and comparing apples to oranges doesn’t always work. This tool is included in my screen because I’m a value oriented investor but in today’s post I didn’t use my usual range of 0.5-2.0 because of the sector I wanted to examine.

So what was I looking at out of curiosity when I did my most recent screen? Telecom....

Now not all (or any) of these five companies would be considered for inclusion in my dividend growth portfolio, but one specifically is already in my portfolio and another has been on a watchlist of mine for some time. When I weeded through the best of the bunch for consideration in this screen here is what I got:

France Telecom (FTE)
• Dividend of 7.3%
• Down 16% YTD
• Forward P/E of 9.8

Vodafone (VOD)
• Dividend of 6.9%
• Up only 10% YTD
• Forward P/E of 9.6

AT&T (T)
• Dividend of 6.0%
• Up 0.5% YTD
• Forward P/E of 11.2

Verizon (VZ)
• Dividend of 6.2%
• Down 4.4% YTD
• Forward P/E of 13.7

Telefonica (TEF)
• Dividend of 7.0%
• Down 15.5% YTD
• Forward P/E of 10.5

This article was written by Triaging My Way To Financial Success. You may email questions or comments to me via my contact page.


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Stock Analysis: Universal Health Realty Income Trust (UHT)

Linked here is a detailed quantitative analysis of Universal Health Realty Income Trust (UHT). Below are some highlights from the above linked analysis:

Company Description: Universal Health Realty Income Trust is a real estate investment trust (REIT) that invests in healthcare and human service related facilities.

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

UHT is trading at a premium to all four valuations above. The stock is trading at a 6.9% premium to its calculated fair value of $30.41. UHT 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%

UHT earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. UHT 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 1987 and has increased its dividend payments for 24 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? 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

UHT earned a Star in this section for its NPV MMA Diff. of the $1,881. This amount is in excess of the $1,100 target I look for in a stock that has increased dividends as long as UHT has. The stock's current yield of 7.43% exceeds the 3.71% estimated 20-year average MMA rate.

Memberships and Peers: UHT is a member of the Broad Dividend Achievers™ Index. UHT's peer group includes: Hersha Hospitality Trust (HT) with a 3.9% yield, Cogdell Spencer Inc. (CSA) with a 5.9% yield, LTC Properties Inc. (LTC) with a 6.1% yield and Pittsburgh & West Virginia Railroad (PW) with a 4.5% yield.

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $39.76 before UHT's NPV MMA Differential decreased to the $1,100 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 6.07%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,100 NPV MMA Differential, the calculated rate is negative (0.8%). This dividend growth rate is below the 1.5% used in this analysis, thus providing a margin of safety. UHT has a risk rating of 1.75 which classifies it as a medium risk stock.

UHT's property portfolio includes hospitals, medical office buildings, and child-care centers with mare than half of the firm's square footage located in Arizona, Nevada, and Texas. At 3 Stars UHT is the highest ranked REIT that I follow. It's dividend fundamentals, including debt to total capital of 38% are good. Being a REIT, its free cash flow payout is high due to legal requirements of the structure. However, the company had no negative free cash flows over the last 10 years, which is highly unusual for a REIT. I recently initiated a position in UHT for allocation purposes. 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 UHT (2.5% of my Income Portfolio). See a list of all my income holdings here.

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


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Weekend Reading Links - September 19, 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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Stock Analysis: Piedmont Natural Gas (PNY)

Piedmont Natural Gas Company, Inc. (PNY), an energy services company, distributes natural gas to residential, commercial, industrial, and power generation customers in portions of North Carolina, South Carolina, and Tennessee. It also operates various energy-related businesses, including unregulated retail natural gas marketing, interstate natural gas storage, and intrastate natural gas transportation.

The company is a member of High Yield Dividend Aristocrats index, and has increased dividends for 32 years in a row. At the latest dividend increase for Piedmont Natural Gas, the company raised its distribution by 3.70% in March 2010.


Over the past decade, this dividend stock has delivered a total return of 11.50% per year on average.


The company has also enjoyed a persistent increase of earnings per share, to the tune of 5.70% per year on average since 2000. For 2010 and 2011 analysts are expecting EPS of $1.57 and $1.68.

The annual dividend per share has increased at a rate of 4.50% per annum on average since the year 2000.

The dividend payout ratio has been in a downtrend over the past decade, with short bursts up followed by reaching lower levels afterwards. While the payout ratio is higher than my 50% threshold, it is adequate for a utility company. In other words, the dividend is adequately covered from the strong and consistent revenues and earnings.

The return on equity has stayed in a tight range between 10% and 13% over the past decade.


Overall I find Piedmont Natural Gas Company to be an attractively valued dividend stock. The company trades at a P/E of 13.80 , yields 4%, and has an adequately covered distribution, which has grown above the rate of inflation over the past decade. I would consider initiating a position in the stock at current prices.

Full Disclosure: None

Relevant Articles:
- Consolidated Edison (ED) Dividend Stock Analysis
- Utility dividends for current income
- 33 Dividend Champions to Consider
- Long term returns of S&P high-yield aristocrats


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Profiting From NOLs

A net operating loss (NOL) can be carried forward to offset future income for the purposes of calculating a company's taxes. The market doesn't always properly recognize these assets (which are often not on company balance sheets), as we've seen a couple of examples where investors were offered great discounts on NOLs. A current example may be ADPT Corp. (ADPT), formerly known as Adaptec.

ADPT trades for $350 million, despite net current assets of $380 million. In addition, the company has over $50 million of tax assets (due to NOLs) that it can carry forward.

Unfortunately, the company is currently burning cash; however, new management has been shrinking the business, selling off patents and assets to realize shareholder value. (For more on this, see this article at the Motley Fool.)

But with almost no operations now, the company cannot use its NOLs as it currently stands, leaving it with two options. It can sell the company to someone who can utilize the assets, or it can buy a profitable company in the same business line and apply the NOLs to the new business.

In the former case, the gains realized are immediate and can benefit shareholders with little risk. Unfortunately, management appears to have decided to pursue* the latter option, which spreads the gains out over time (in the form of reduced taxes owing) and subjects the investor to operating risk (i.e. if business is not so good, the gains may never be realized!) Likely contributing to management's decision in this regard is that there are legal restrictions on the amount of NOLs that an acquiring company can apply (to avoid having successful companies buy failed companies simply for their NOLs).

ADPT trades at a discount to cash less liabilities, and has a bunch of NOLs as well. But this is no ordinary situation for investors looking to capitalize on these NOLs; in order to capture them, management appears intent on spending the cash, which would otherwise act as a margin of safety. As a result, the downside risk to this stock is not limited despite the upside potential.

* From the company's latest 10-Q: "Going forward, our business is expected to consist of capital redeployment and identification of new, profitable business operations in which we can utilize our existing working capital and maximize the use of our net operating losses"

Disclosure: None
This article was written by Saj Karsan of Barel Karsan. If you enjoyed this article, please consider subscribing to Barel Karsan.


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A Chinese Telecom Stock With Lots Of Cash

What company is the most valuable telecommunications company in the world? It’s not Verizon, Sprint, AT&T or T-Mobile. The answer is China Mobile (CHL). China Mobile has a market cap of $200 billion dollars and over half a billion customers. China Mobile is unique in that it is a publicly listed state owned enterprise. 74.22% of China Mobile is owned by the Peoples Republic of China. This leaves a 25.78% ownership interest for the general public.

China Mobile has a virtual lock on then entire mobile market in China. The company has a 70.6% market share in mainland China. The company’s vast network covers almost all of China. The company’s services include local calls, domestic long distance calls, international long distance calls and international roaming. China Mobile was voted the best managed company on the Asian continent by FinanceAsia.

There is a lot to like about China Mobile. The company has an incredible balance sheet with $46.8 billion dollars in cash and only $4.97 billion dollars in debt. The company has $11.68 per share in cash alone. China Mobile generates a remarkable $32 billion dollars in free cash flow.

The company has incredible operating margins. The operating margin is at 33% which is well above the industry average of 6%. Gross margins are at 84% which is nearly double the average of Chinese competitors. The profit margin is a healthy 25%. Earnings have exploded over the past 5 years with sales growing 28.5% over the next 5 years. Obviously the company will have trouble approaching these numbers with such a huge market capitalization.

The stock is currently yielding 3.4% which is a reasonable yield. The current payout rate is 38% which is easily maintainable for the earnings giant. Even at $50 per share, the stock looks like a great value. The company currently trades at just under 12 times earnings which is less than half of the P/E ratio of industry competitors. The biggest threat to the company would be a loss of market share due to increased competition.

Value investors should consider buying shares if the stock pulls back to the mid $40's.
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Stock Analysis: Cardinal Health, Inc. (CAH)

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

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

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

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

CAH is trading at a discount to only 1.) above. The stock is trading at a slight premium to its calculated fair value of $30.95. CAH did not earn any Stars in this section.

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

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

CAH earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CAH earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 14 consecutive years.

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

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

CAH earned a Star in this section for its NPV MMA Diff. of the $4,212. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 15.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. CAH earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Peers: CAH is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. CAH's peer group includes: McKesson Corp. (MCK) with a 1.2% yield, AmerisourceBergen Corporation (ABC) with a 1.1% yield, Emergent Group, Inc. (LZR) with a 8.0% yield and Owens & Minor Inc. (OMI) with a 2.6% yield.

Conclusion: CAH did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks CAH as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $41.17 before CAH's NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.89%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 12.6%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. CAH has a risk rating of 1.50 which classifies it as a low risk stock.

CAH offers a diversified line of products and services. It is well-situated, with relationships with two major retail pharmacy
chains (CVS Caremark and Walgreen) generating over 40% of its revenues. However, intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. The company generates strong cash flow, which provides flexibility for expansion, dividends and share buybacks. CAH is currently trading slightly above my fair value price of $30.95. This is an interesting company, but I am not quite ready to buy. For additional information, including the stock's dividend history, please refer to its data page.

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

Full Disclosure: At the time of this writing, I held no position in CAH (0.0% of my Income Portfolio). See a list of all my income holdings here.

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


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Weekend Reading Links - September 12, 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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Stock Analysis: Nucor (NUE)

Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. The company operates through three segments: Steel Mills, Steel Products, and Raw Materials. This dividend champion has managed to increase distributions for 37 years in a row. At the company's latest dividend increase in December 2009, the dividend was increased by 2.90%.

Over the past decade this dividend stock has delivered a 17.60% annual return on average to its shareholders. This is after a 50% drop off its all-time-highs achieved in 2008.

The company reported a loss of $0.94/share for FY 2009, which reflected a 50% drop in revenues and was lower than the $5.98/share reported in FY 2008. For FY 2010 analysts expect Nucor to earn $1.10/share, followed by a steep jump to $3.30/share in FY 2011.
The company’s business model is highly cyclical and thus dependent on the economic situation at the moment. Characteristic of cyclical industries is that P/E ratios are lowest when the economy is at its peak, since earnings per share are highest. On the other hand during recessions the P/E ratio is highest since earnings are depressed.

The company has managed to increase its quarterly dividends at a pace of 28.30% per year. Obviously this strong dividend growth reflected the strong earnings growth, fueled by the increasing demand and prices for commodities up until the global financial crisis of 2007-2009. The company paid a special dividend between 2005 and 2008 as well.

The dividend payout ratio follows the volatility in earnings. Currently the payout looks unsustainable based off FY 2010 actual and expected earnings. Based off FY 2011 earnings however it does looks sustainable and also leaves some room for a small increase this year.

The return on equity also seems to follow the erratic pattern in earnings. It was low between 2000 and 2003, after which it stayed above 28% until 2009. Whether the increased economic activity worldwide leads to an increase in return on equity for Nucor remains to be seen.

Currently the company is trading at a forward P/E of 28.70, yields 3.70% and doesn’t seem to have a well covered distribution. However, based on estimates for FY 2011 earnings the company trades at a P/E of 12.10 and has an adequately covered dividend with some room to grow the distribution. The company’s financial position is a little bit more volatile in comparison with other dividend champions, but it should provide decent exposure to basic materials sector for dividend portfolios. I would add to my position on dips.

Full Disclosure: Long NUE

Relevant Articles:


- 8 Dividend Achievers Strike Back
- A dividend portfolio for the long-term
- Dividend Aristocrats List for 2009
- Best Dividends Stocks for the Long Run



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Context To Consumer Debt

One of the reasons many market observers believe this recession will be a long one is the growth in consumer debt over the years. As consumers now focus on paying down debt levels, they won't be able to spend to the same extent; thus, fewer goods will be produced, acting as a drag on GDP. But what is worth mentioning is that this argument is used in every recession by those who anticipate a depression, so are things really that different this time?

In an article in Forbes magazine in 1991, Ken Fisher responded to those who argued that the recession of the early 1990s was to turn into a depression because mountains of consumer debt had to be paid back before the economy could once again grow. In Fisher's view, this argument was nothing more than fear mongering, as it ignored consumer income. While absolute debt levels were high, debt as a percentage of income was not.

Today, we hear similar arguments about consumer debt levels. But as debt has risen over the years, so has productivity (thanks to education, innovation and investment). So let's consider these debt levels in relation to income. The following chart illustrates the consumer household debt service ratio (DSR), which is the ratio of required mortgage and consumer debt to disposable personal income:



The DSR is clearly not out of line with what it has been over the last 3 decades. Though it is still higher now than it was in the early 1980s and early 1990s, how is one to know what is the "right" level of consumer debt? Fisher argued that as long as there are assets that generate substantially more returns than the cost of debt, there will be people who exploit such opportunities, thus driving up the level of debt.

Whether the DSR will turn upward soon, or continue downward for some time is anybody's guess. The point is, debt levels are not way out of line with what they have been in the past, and that the ideal consumer debt level for this economy may well be higher than debt levels stand right now.

Reading articles from previous recessions can offer investors perspective. Often, the same situations are seen again and again, but are claimed to be "different this time". Educating oneself is the best defense against spurious arguments. However, timing when debt levels will start to once again expand is very difficult to do. As such, investors are better off keeping perspective with respect to the market, and putting their energy towards investing in companies trading at discounts to their intrinsic values.

Source: Federal Reserve

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


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A High Yielding Food And Beverage Company

Kraft Foods (KFT) is an American staple and was a longtime holding of the Oracle of Omaha for many years. Buffett has been reducing his stake in the foods conglomerate over the past year. Buffett believed that Kraft overpaid for its purchase of Cadbury. So, is Kraft a good buy?

Kraft is the biggest confectioner, food, and beverage company in the world. Kraft is responsible for a number of different food and beverage names. The brand names include A1 steak sauce, Chips Ahoy cookies, Koolaid, Oscar Mayer, Nabisco, Oreo, Planters, Maxwell House, and Stove Top. You name it and this consumer staple sells it.

Kraft may have overpaid for Cadbury but it has not stopped the company from creating revenue. The company made over $40 billion dollars last year and is on pace to earn $48 billion dollars this year. Kraft earned $3 billion dollars in net income last year. The company recently beat analysts’ profit estimates last quarter for the sixth straight time. Kraft increased its cash by 65 percent to $2.85 billion last quarter from a year earlier.

After 5 years of tepid sales growth, sales are up over 20% for the current year. Revenue increased 25% last quarter and earnings grew 13%. The company had an operating margin of 14% and a return on equity just south of 10%.

Kraft’s stock currently sells for just over $30 per share. The stock trades at just under 15 times this year’s earnings. That’s expensive for a company whose earnings are expected to grow 7% for the next 5 years. Kraft has nearly $3 billion dollars in cash and over $30 billion dollars in debt on its balance sheet. Kraft has earned over $ 4 billion dollars in free cash flow over the past year.

The stock does have an attractive dividend yield. Shares of Kraft currently yield 3.80%. This is right in line with the average dividend yield of 3.60%. The payout ratio is 43% which is easily sustainable for an earnings giant like Kraft. The company plans on keeping its dividend unchanged for the foreseeable future. The stock trades at 1.5 times book value and 2 times the projected earnings growth.

While Kraft is a great franchise I would be hesitant to buy the stock at its current levels. There is no real reason to buy the stock at its current valuation. The stock would become attractive again if the company increased its dividend or shares dropped down to $25 a share.

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


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Stock Analysis: Medtronic Inc. (MDT)

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

Company Description: Medtronic Inc. is a global medical device manufacturer has leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management and other medical markets.

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

MDT is trading at a discount to 1.) and 3.) above. The stock is trading at a 16.1% discount to its calculated fair value of $38.78. MDT 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.

MDT 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%. MDT 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 1977 and has increased its dividend payments for 33 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

MDT earned a Star in this section for its NPV MMA Diff. of the $1,106. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as this company. If MDT grows its dividend at 9.4% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. MDT earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.

Memberships and Competitors: MDT is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. MDT's peer group includes: Bard C.R. (BCR) with a 0.9% yield, Baxter International (BAX) with a 2.6% yield and Becton Dickinson (BDX) with a 2.1% yield.

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

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $41.65 before MDT's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 33 years of consecutive dividend increases. At that price the stock would yield 2.16%.

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 7.0%. This dividend growth rate is well below the 9.4% used in this analysis, thus providing a margin of safety. MDT has a risk rating of 1.25 which classifies it as a low risk stock.

MDT owns a diversified portfolio with a strategy to develop products for a wide range of chronic diseases. Although it is exposed to the highly competitive areas of the medical equipment markets, MDT enjoys many competitive advantages including scale (operations and sales), product breadth and financial strength, with a free cash flow payout of 28% and debt to total capital of 39%. The company is well-positioned for future development in disease management. MDT is currently trading more than 15% below my fair value price of $38.78. This company has a lot of promise, as such, I will continue to evaluate it for a place in my portfolio. 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 MDT (0.0% of my Income Portfolio). See a list of all my income holdings here.


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


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Weekend Reading Links - September 5, 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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