Thursday, June 20, 2019

Five Dividend Machines Working Hard for Their Owners

There were several dividend increases last week for companies who are either dividend achievers or dividend champions. A long record of annual dividend increases is a sign of quality, because only stable companies with dependable earnings are able to achieve this track record. I review the notable dividend increases weekly, as part of my monitoring process.

I reviewed the dividend increases, along with the underlying financial performance, in order to determine the likelihood of future dividend growth. After all, successful dividend growth investing is based on acquiring ownership stakes in companies which grow earnings, raise dividends and expand their intrinsic value over time. Rising earnings per share provide the fuel behind future dividend growth. Without earnings growth, dividends have a nature limit to growth. Dividend income that grow at or above the rate of inflation tend to help maintain the standard of living for the retirees living off investments;

It is equally important to determine if the valuation makes sense however, because when you overpay for a future stream of income, your future returns will be lower, as you lock in a lower dividend yield. When you overpay, you end up paying up for the near term expected growth of the business. Since things never work out as expected, this is an example of a risky behavior.

The companies that raised dividends last week include:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is structured as a REIT, and its monthly dividends are supported by the cash flow from over 5,800 real estate properties owned under long-term lease agreements with regional and national commercial tenants.

The REIT increased its monthly cash dividend to $0.2265 per share from $0.226 per share. The dividend is payable on July 15, 2019 to shareholders of record as of July 1, 2019. Realty Income is about to become a dividend champion later this year, after increasing dividends several times per year since 1994. The ten year dividend growth rate is 4.50%/annum.



"We remain committed to our company's mission of paying dependable monthly dividends to our shareholders that increase over time," said Sumit Roy, President and Chief Executive Officer of Realty Income. "Our Board of Directors has once again determined that we are able to increase the amount of the monthly dividend to our shareholders, marking the 102nd increase since our company's public listing in 1994. With the payment of the July dividend, we will have made 588 consecutive monthly dividend payments throughout our 50-year operating history."

Between 2008 and 2018, Realty Income has managed to grow FFO from $1.84/share to $3.12/share. Realty Income expects FFO/share in the range of $3.26 - $3.31 for 2020.

The stock is overvalued at 22.50 times forward FFO. Realty Income yields 3.70% today. Investors have bid up the Monthly Dividend Company, because it has dependable rent streams, which increase over time. In addition, Realty Income is also growing its FFO/share over time. I would like to see this quality REIT sell at a more reasonable valuation, before adding to my position there. Check my analysis of Realty Income for more information about the company.

Target Corporation (TGT) operates as a general merchandise retailer in the United States. The board of directors of Target Corporation declared a quarterly dividend of 66 cents per common share, a 3.1% increase from the prior quarterly dividend of 64 cents. This event marked the 48th consecutive year in which Target has increased its annual dividend. A lot of resources claim that Target is a dividend king. My research has uncovered that it is not. This is why it makes sense to always double check everything you read on the internet.

During the past decade, Target has been able to grow dividends at an annual rate of 15.40%/year. This is the third year in a row where dividend growth has been slowing down to around 3%/year. I would expect that Target keeps dividend growth slow for the foreseeable future, as it invests in the competitiveness of its operations, and fend off rivals such as Amazon.com and Wal-Mart.

Between 2009 and 2019, Target has managed to grow earnings from $2.85/share to $5.51/share. Target is expected to generate $5.93/share in 2020.

The stock looks cheap around 14.80 times forward earnings and offers a forward dividend yield of 3%. It is possible that the next market decline or retail apocalypse doomsday fear will lower the share price to somewhere in the low 60s. That is usually a good time to consider Target.

W. P. Carey (WPC) ranks among the largest net lease REITs with an enterprise value of approximately $19 billion and a diversified portfolio of operationally-critical commercial real estate that includes 1,168 net lease properties covering approximately 134 million square feet. W.P. Carey (WPC) increased its quarterly dividend to $1.034/share. This was a 1.40% increase in the quarterly dividend over the distributions paid during the same time last year. Dividend growth has slowed down considerably from the 7.70%/year annual dividend increases during the past decade. W.P. Carey has managed to boost AFFO from $3.09/share in 2008 to $5.39/share in 2018.

W.P. Carey expects AFFO/share to be in the range of $4.95 - $5.15/share in 2019.

I find the REIT to be fairly valued today at 17.30 times forward AFFO. The REIT offers a slow distribution growth, but yields a respectable and relatively safe 4.80%. It is cheaper than the likes of Realty Income and National Retail Properties but offers slower dividend growth too. If Interest rates were to rise however, all REITs will see lower prices, higher yields and higher costs of capital. Check my analysis of W.P. Carey for more information about the REIT.

Casey's General Stores, Inc. (CASY), operates convenience stores under the Casey's and Casey's General Store names. The company increased its dividend by 10.30% to 32 cents/share. This marked the 19th year of consecutive annual dividend increases for this dividend achiever.

Over the past decade, it has managed to grow dividends at an annual rate of 14.70%/year.

Between 2009 and 2019, Casey’s has been able to grow its earnings from $1.68/share to $5.51/share. The company is expected to earn $5.50/share in 2020.

Right now, the stock is overvalued at 27.60 times forward earnings. Casey’s yields 0.80%.

National Fuel Gas Company (NFG) operates as a diversified energy company. It operates through five segments: Exploration and Production, Pipeline and Storage, Gathering, Utility, and Energy Marketing. National Fuel Gas Company (NFG) announced a 2.4 percent increase in the quarterly dividend, raising the quarterly rate to 43.5 cents per share. National Fuel has paid dividends for 117 consecutive years and has increased its annual dividend for 49 straight years.

The latest dividend increase is in line with the ten-year average of 2.80%/year.

Earnings went from $3.18/share in 2008 to $3.34/share in 2018. The company is expected to generate $3.52/share in 2019. The slow growth in earnings per share explains the slow growth in dividends per share.

The stock looks fairly valued today at 15.40 times forward earnings and offers a dividend yield of 3.20%. Given the lack of earnings growth and the slow rate of distributions growth, I view this stock as a hold.

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