There were three companies with at least a decade of dividend increases under their belt which hiked distributions last week. I reviewed the latest increase against the ten year average in each of the three instances. I also reviewed the trends in earnings, and then looked at the valuation, in order to come up with a conclusion on whether these companies are worth researching further or not. I own shares in one of these companies, but I would not be adding today to it. I did identify one company that may be worth a second look if I can find it at the right entry price.
Per my dividend growth investing strategy, I am looking for companies that grow earnings and dividends, which are also available at attractive valuations. When I acquire shares in a company, I monitor the situation, in order to determine if my original thesis is still working. I also use my weekly dividend increase monitoring process to uncover companies for further research.
The companies raising dividends last week include:
Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other nicotine-containing products, and smoke-free products and related electronic devices and accessories.
The company raised its quarterly dividend by 2.60% to $1.17. Philip Morris International has managed to boost distributions annually since being spun off from Altria in 2008.
The company has managed to boost dividends at an annualized 16%/year over the past decade. However, dividend growth has definitely slowed down substantially, to just 4.80%/year annualized over the past five years.
Dividend growth has slowed down due to the lack of earnings growth since hitting $5.26/share in 2013. The company has been able to boost dividends by increasing its dividend payout ratio, which has a natural limit to dividend growth.
Between 2008 and 2018, earnings per share rose from $3.24 to $5.08. The company is expected to generate $5.22/share in 2019.
The stock is attractively valued at 14 times forward earnings and offers a dividend yield of 6.40%. The payout ratio is at 89.70%, which is high for a tobacco company, but potentially dangerous given the flat earnings. There is an increased risk that the dividend may be sacrificed if PMI and Altria are allowed to merge.
For a value investor, it may make sense to buy the stock today, and hope that the P/E multiple expands so that you can sell the stock. You will be paid a nice 6.40% in the process, for as long as the dividend is at least maintained. As a long-term dividend growth investor, I see increased risks of a dividend cut, and I do not want to be limited to just earning the dividend from a security. I buy shares in growing businesses to hold on to, and not to buy low and sell high. The flat earnings per share create pressure on management to do something, such as pursue acquisitions and do different things to jump-start earnings growth. This activity may come at the expense of the dividend. If they successfully manage to kick-start earnings growth, then the payout ratio could gradually decline to a more manageable level, while still growing the dividend. Either way, I will continue holding on to PMI and Altria for the time being, but will refrain from adding more to my positions.
New Jersey Resources Corporation (NJR) is an energy services holding company, provides regulated gas distribution, and retail and wholesale energy services. The company operates through four segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, and Midstream segments.
The board of directors of New Jersey Resources approved a 6.80 percent increase in the quarterly dividend rate to 31.25 cents per share. This marked the 24th consecutive annual dividend increase for this dividend achiever.
Between 2008 and 2018, the company has managed to grow earnings from $1.30/share to $2.64/share. The company is expected to earn $1.96/share in 2019.
The stock looks overvalued at 23.10 times forward earnings and yields 2.80%. While the dividend is secure, I am a little put off by the volatility in earnings per share. This security requires much closer research to identify the reasons behind the sharp ups and downs in earnings than your typical dividend growth stock.
Fortis Inc. (FTS) operates as an electric and gas utility company in Canada, the United States, and the Caribbean.
The Board declared a common share dividend of $0.4775 per share, marking its 46th consecutive year of increased dividends. This is one of the few international dividend companies with such a long history of annual dividend increases. The new payment represents a 6.10% increase over the prior dividend of 45 cents/share. Fortis also provided guidance of a 6% annualized dividend increase through 2024.
Over the past decade, Fortis has managed to grow dividends at an annualized rate of 5.70%. I love the consistency around the annualized dividend growth. I decided to check the grows in earnings during the past decade.
The company managed to earn $1.51/share in 2008, and grow the bottom line all the way up to $2.59/share in 2018. This comes out to an annualized earnings growth of 5.50%/year, which is just a tad slower than the annualized historical dividend growth during the same time period. The company is expected to generate $2.57/share in 2019, implying lack of growth this year. The forward payout ratio is at 74%.
Right now the stock seems a little overvalued at 21.60 times forward earnings, offers a dividend yield of 3.40%, and a payout ratio of a little over 74%. Fortis may be worth a second look if it is available for less than 20 times earnings. Just as a side note, I wanted to mention that all figures are in Canadian Dollars for Fortis.
Relevant Articles:
- Rising Earnings – The Source of Future Dividend Growth
