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Stock Analysis: Eaton Vance

Eaton Vance Corp. (EV) , through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. This dividend champion has increased distributions for the past 30 consecutive years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

Over the past decade this dividend growth stock has delivered annualized total returns of 10.80 % to its shareholders.

The company has managed to deliver a 3.50% average annual increase in its EPS between 2000 and 2009. Analysts expect Eaton Vance to earn $1.39 per share in 2010 and $1.76/share in 2011.

The company generates very high return on equity, whose trend has closely followed the rise and fall in equity markets over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The company has managed to raise its annual dividend at a rate of of 22.50% annually since 2000, which is much higher than the growth in EPS. The main reason is the increase in the dividend payout ratio over the past decade. I would reasonably expect Eaton Vance to manage to raise distributions by at least 10% per year for the next few years. The latest dividend increase was in October 2010, when the company raised distributions by 12.50% to 18 cents/share.

A 22 % growth in dividends translates into the dividend payment doubling every three years. If we look at historical data, going as far back as 1990, Eaton Vance has actually managed to double its dividend payment every four years on average. The company last raised its dividends in 2010 by 12.50%.

The dividend payout ratio has increased over the past decade, breaking out above 50% in 2009. Given the expected earnings of $1.40 in 2010 and the new annual dividend rate of $0.72/share, I would expect the payout to drop to 50% and to decrease further by 2011. 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 Eaton Vance is overvalued at 21.20 times earnings, has an adequately covered distribution and yields only 2.40%. Eaton Vance would be more attractively priced below $28. I would continue to monitor this company for dips below $28.

Full Disclosure: None

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