High and Growing Dividends - Analyst Blog

Zacks Investment Research
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Posted: Aug 19, 2011 12:58 PM
High and Growing Dividends - Analyst Blog
If you are an investor -- not a trader or a speculator -- this is a very good time to get into the market. The time to buy is when everyone else is despondently selling.

Am I saying that we have hit bottom? No. There are plenty of macro challenges out there and things could easily get worse before they get better.

On the other hand, valuations are extremely attractive. Focus on companies that have stood the test of time and can provide you with a good income while you wait for things to improve. Look for dividends that will not only be maintained, but are likely to grow over time.

Screen for These Good Things

The list below should give you some ideas to work with. It shows the stocks with market caps over $500 million that have dividend yields over 3.0%, payout ratios less than 60%, have grown their dividends by more than 10% per year over the last five years. They also all have single-digit P/Es based on next year’s earnings, and I have eliminated all the stocks that have Zacks #4 Ranks (Sell) and Zacks #5 Ranks (Strong Sell).

Since I wanted companies that have strong balance sheets, I also eliminated any firm where the ratio of debt to equity was more than 1.0. Further narrowing down the list, I eliminated all firms where the expected earnings over the next 12 months is lower than the earnings they have recorded over the trailing 12 months.

Investing - Not Trading

What I am talking about is long-term investment, not short-term trading. Thus the Zacks Rank is less important, but you still don’t want to be trying to catch a falling knife. A low P/E based on current forward earnings does not do you much good if the earnings estimates are being slashed.

If you see a good company with a solid dividend yield and a history of growing its dividend at a solid rate that has a Zacks #4 Rank or Zacks #5 Rank, just put it on your watch list. Ideally you would wait until it has a Zacks #1 Rank (Strong Buy) and Zacks #2 Rank (Buy), but if you really do plan to sock it away for a long time, a Zacks #3 Rank (Hold) is OK. 

An equally weighted portfolio of these 15 stocks would provide you with a yield of 4.07%, far above what you could earn even in the 30-year T-bond. The average P/E is just 7.27 based on 2012 earnings. Only one of them are paying out more than half of their earnings now, so there is very little danger of any of the dividends being cut anytime soon.

The equally weighted portfolio would have grown your income by 16.16% over the last five years. If they were to continue to raise their dividends at that pace, in five years your average yield on cost would be 8.61% and in ten years it would be 18.16%. That could provide you with a very nice retirement income.

The first table focuses on the dividend characteristics of these firms.

Company Ticker Div Yield Payout Ratio Zacks Rank Div 5-Yr Growth P/E Using Next FY Est Market Cap
Rwe Ag -Sp Adr RWEOY 9.41% 0.51 2 12.26% 4.65 $20,779
Total Fina Sa TOT 5.66% 0.39 3 12.15% 5.66 $110,903
Repsol Sa-Adr REPYY 4.25% 0.39 3 26.49% 6.9 $33,684
Intel Corp INTC 4.07% 0.32 3 12.18% 8.37 $109,486
Conocophillips COP 4.00% 0.37 3 11.27% 7.29 $93,362
Abbott Labs ABT 3.87% 0.44 3 10.59% 9.9 $77,139
Astrazeneca Plc AZN 3.77% 0.42 3 12.07% 7.32 $63,505
Novartis Ag-Adr NVS 3.63% 0.37 3 21.50% 9.55 $126,233
Maiden Holdings MHLD 3.41% 0.3 3 11.12% 6.47 $591
Ecopetrol- Adr EC 3.30% 0.39 3 29.84% 9.75 $84,628
Aflac Inc AFL 3.21% 0.2 3 15.04% 5.72 $17,469
Lukoil Hldg-Adr LUKOY 3.19% 0.06 1 19.41% 4.12 $47,632
Amer Greetings AM 3.09% 0.24 3 13.07% 7.14 $789
Medtronic MDT 3.08% 0.27 3 20.36% 8.33 $33,462
Genl Dynamics GD 3.07% 0.27 3 15.09% 7.96 $22,759
Average   4.07% 0.33   16.16% 7.27 $56,161

 
The second table focuses on the balance sheets of these firms. While buying stocks is very much in the “Risk On Trade” camp, in this environment you don’t want to be taking too much risk. None of these stocks is leveraged to the eyeballs. Only two have debt that is more than 50% of equity. Most have significant amounts of cash on their balance sheets relative to their market capitalizations.

Despite the large amount of cash -- an asset in the current environment -- and low leverage, these firms have earned on average 20.56% on their equity over the last four quarters. None of these firms is likely to disappear, except perhaps by takeover, anytime soon.

Company Ticker Debt/Equity Current Ratio Interest Coverage Return on Equity EPS Est Growth Next 12 Mo. Cash & Mkt Secs Qtr ($mil)
Astrazeneca Plc AZN 38.67% 1.64 N/A 36.92% 9.22% $10,295
Abbott Labs ABT 47.71% 1.52 15.56 28.77% 11.32% $8,893
Ecopetrol- Adr EC 18.35% 0.9 60.35 28.62% 35.64% $4,023
Intel Corp INTC 4.29% 2.23 N/A 26.28% 7.41% $11,547
Aflac Inc AFL 25.44% 0.03 10.85 24.92% 7.96% $1,291
Medtronic MDT 50.80% 1.93 4.3 23.99% 5.30% $2,428
Genl Dynamics GD 17.30% 1.28 31.93 19.47% 6.68% $2,157
Novartis Ag-Adr NVS 20.75% 0.9 18.08 19.00% 6.50% $5,604
Total Fina Sa TOT 33.00% 1.25 40.27 18.46% 20.99% $19,264
Lukoil Hldg-Adr LUKOY 14.59% 1.89 24.53 17.52% 1.63% $2,676
Rwe Ag -Sp Adr RWEOY 0.00% 1.08 N/A 17.12% 10.01% $10,011
Conocophillips COP 32.01% 1.18 26.07 14.57% 24.75% $8,140
Amer Greetings AM 29.75% 2.27 9.3 14.04% 4.35% $211
Repsol Sa-Adr REPYY 68.40% 1.46 N/A 10.05% 42.59% $7,963
Maiden Holdings MHLD 42.48% 0.32 3.25 8.65% 27.70% $315
Average   29.57% 1.33 22.23 20.56% 14.80% $6,321.24


 
CONOCOPHILLIPS (COP): Free Stock Analysis Report
 
INTEL CORP (INTC): Free Stock Analysis Report
 
REPSOL SA-ADR (REPYY): Free Stock Analysis Report
 
TOTAL FINA SA (TOT): Free Stock Analysis Report
 
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