Saturday, April 11, 2020

Four Dividend Increases From Last Week

As part of my monitoring process, I review the list of dividend increases every week. This helps in identifying dividend increases for the companies I own, and check to see how my investment is going from a fundamental perspective. It also helps in identifying companies for further review.

Many companies are conserving cash these days, due to the economic disruptions from stay at home orders throughout countless nations worldwide. A lot of companies in cyclical industries are affected, so these are leading the way in dividend cuts. Companies that often cut dividends in a recession are the ones that are cutting dividends into this recession as well.

There are some companies that are doing just fine however. While there will be dividend cuts from many cyclical industries, I also expect that many companies in the dividend aristocrat and dividend champions lists will keep and even increase dividends. It would be interesting to see how this plays out, because so far the economic disruptions seems to be on par with the Great Depression. However, we do have some better social safety nets, including unemployment insurance, social security, and FDIC protection against bank failures. We also have a more accommodative Federal Reserve. This is a health crisis first, and that is causing the financial stress around the world.

That's why we do need more testing, more masks and gloves until we find a vaccine for Covid-19.  That’s when things could start getting back to normal. Until then, we would need to adapt to a whole new world, with industries that are winning, and industries that are losing.

During the past week, there were several companies that bucked the trend of dividend cuts, and announced or reaffirmed their dividend increases. I found reading company statements helpful, because they provide some context that helps me evaluate how safe their distributions are today. Two companies provided context, but the last two didn't.

Nestlé S.A. (NSRGY), together with its subsidiaries, operates as a food and beverage company.

This Swiss based company raised its annual dividend by 10.20% to 2.70 Swiss Francs per share. This marked the 24th consecutive annual dividend increase for this international dividend achiever. Nestle has managed to boost distributions at an annualized rate of 5.40%/year during the past decade.

“We confirm our dividend proposal to the coming annual general meeting. We believe strongly in being dependable, especially in this period of uncertainty,” a spokesman for the world’s biggest food group said. “Nestle has always maintained a strong balance sheet and we are not facing any liquidity issue.”

Between 2009 and 2019, earnings per share increased from 2.92 to 4.30/share. The company is expected to generate 4.52/share in earnings, but in these uncertain times projections should be taken with a huge grain of salt. The stock is overvalued at 22.60 times forward earnings, but yield 2.65%. It’s earnings stream is defensible, and less exposed to the ups and downs of the economic cycle.


H.B. Fuller (FUL) increased its quarterly dividend by 1.60% to 16.25 cents/share. HB Fuller is a dividend king which has increased its quarterly dividend for 51 consecutive years. The company had managed to grow distributions at an annualized rate of 8.90%/year.

"Today's announcement that we are increasing our dividend for the 51st consecutive year demonstrates our confidence in the resiliency of our cash flows," said Jim Owens, president and chief executive officer. "As a global leader in adhesives, H.B. Fuller plays an important role in the supply of essential hygiene, health, and consumer products in the fight against COVID-19, and we are using our vast global resources to meet increased demand for these products. Our operating plans also anticipate negative impacts of the pandemic in other areas of our business. Reduced working capital, the diversity of our products and end markets, and our operating agility are expected to drive continued strong cash flow performance in 2020. We have more than adequate liquidity, and the fundamentals of our business strategy remain solidly intact."

The company is expected to earn $2.51/share in 2020. Between 2009 and 2019, it grew earning from $1.70/share to $2.52/share.

The stock yields 2.50% and sells for 10.20 times forward earnings.

Bank OZK (OZK) provides retail and commercial banking services to businesses, individuals, and non-profit and governmental entities. The bank raised its quarterly dividend by 3.80% to 27 cents/share. That was a 17.40% hike over the dividend paid during the same time last year. Bank OZK has increased dividends for 24 years in a row. Over the past decade, this dividend achiever has managed to grow dividends by 21.90%/year.

Between 2009 and 2019, the company grew earnings from 55 cents/share to $3.30/share. The bank is expected to earn $2.55/share in 2020, but most analyst estimates are not taking into account the effect of stay at home orders.

The stock looks cheap at 6.10 times earnings and a dividend yield of 6.95%. Of course, this low P/E and high yield are telling us that market participants do not believe these earnings will hold. It also appears that the market believes that dividends are at risk.

Watsco, Inc. (WSO) distributes air conditioning, heating, and refrigeration equipment; and related parts and supplies in the United States, Canada, Mexico, and Puerto Rico.

The company increased its quarterly dividend by 10.90% to $1.775/share. This is the 7th consecutive annual dividend increase for this dividend challenger.

Watsco has paid dividends for 46 consecutive years. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. Future dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s financial condition.

In 2012 Watsco was paying a quarterly dividend of 62 cents/share and had an 11 year track record of annual dividend increases. Given the uncertainty regarding taxation of dividends and the potential for higher taxes on dividend income starting in 2013, they paid a special dividend of $5/share. This covered 2 years worth of dividend payments per their press release in October 2012. Afterwards, they reduced the quarterly dividend payment to 25 cents/share for three quarters, increased to 40 cents/share for 3 quarters and reached 60 cents/share for the last two quarters of 2014. While this action reset their long record of annual dividend increases, it was a shareholder friendly move.

Between 2009 and 2019, the company managed to grow earnings from $1.40/share to $6.50/share. Watsco is expected to generate $6.33/share in 2020, which in this turbulent environment should be taken with a grain of salt. During the last recession, earnings declined from $2.96/share in 2006 to $1.40/share in 2009.

The stock is overvalued based on forward earnings of 23.30 but yields a high yield of 4.80%. The payout ratio is at 112%, which is high for my taste.

Relevant Articles:

Dividend Achievers Offer Income Growth and Capital Appreciation
Dividend Kings List For 2020
Dividend Aristocrats List for 2020
Two Companies Escaping the Quarantine on Dividend Hikes

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