Reports of the Best Dividend Stocks

This category contains listings of the most recently published stock analysis reports.

For the full list, see the alphabetical listing of stock reports.

Canadian National Railway – Trading on both markets, Great Opportunity

Summary:

15% CAGR dividend growth rate over the past 5 years and the company still has plenty of room to reward investors.

Both Revenues and Earnings show double digit growth over the past five years.

Strong management with conservative cost control approach makes this money making machine even stronger.

DSR Quick Stats

Sector: Industrial – Railroads

5 Year Revenue Growth: 11.22%

5 Year EPS Growth: 14.64%

5 Year Dividend Growth: 15.40%

Current Dividend Yield: 1.71%

What Makes Canadian National Railway (CNI (CNR.TO)) a Good Business?

Founded in 1918, Canadian National Railway is the largest railway in Canada and has significant operations in the United States. The rail network extends from the Atlantic to the Pacific Ocean through Canada, and also extends southward to the Gulf of Mexico through the United States. The total mileage of track exceeds 20,000. The company trades on both Canadian and US markets under CNR.TO and CNI tickers.

The company is divided into seven commodity groups:

-Petroleum and Chemicals

-Metals and Minerals

-Forest Products

-Coal

-Grain and Fertilizers

-Intermodal

-Automotive

Ratios

Price to Earnings: 16.08
Price to Free Cash Flow: 26.60
Price to Book: 3.934
Return on Equity: 24.06%

Revenue

CNI revenueRevenue Graph from Ycharts

Revenues were slightly lower in 2015 for the first time since 2010 due to less economic activity around coal, grain and crude oil. The global shift toward cleaner energy will continue to hurt the demand for coal, but the company should benefit from higher activity in the forest industry since the CAD is ever lower compared to the USD.

How CNI (CNR.TO) fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies using various sources. This is how I came up with my 7 investing principles of dividend investing. The first four principles are directly linked to company metrics. Let’s take a closer look at them.

CNISource: Ycharts

Principle #1: High dividend yield doesn’t equal high returns

I’m usually not a big fan of high yield dividend stocks, but I’m not a huge fan of low yield dividend stocks either. Financial research has proven that stocks with yield in the 2nd highest quartile outperform the others. Therefore, my target for a strong dividend stock is usually between 2% and 5%. CNI fails to meet this requirement:

CNI div paid yieldSource: data from Ycharts.

On the other hand, the dividend growth is quite impressive. This is why I have decided to look into this company further.

Principle#2: If there is one metric, it’s called dividend growth

Speaking of dividend growth, CNI is probably one of the best examples of a Canadian dividend growth stock. By the nature of its business model, railway companies produce important levels of cash flow leading to strong ability to increase dividend payouts. Over the past 5 years, the company has a dividend growth rate over 15% annually. At this rate, the dividend payment will double every 5 years.

Such strong dividend growth perspective is fueled by ever increasing revenues and profits. Without such a strong base, a company wouldn’t be able to open the dividend reservoir that wide.

Principle #3: A dividend payment today is good, a dividend guaranteed for the next ten years is better

The real question is; can Canadian National Railway keep increasing its dividend at this pace? Here is how the dividend payment and the payout ratio have looked like over the past 10 years:

CNI payout ratio

As you can see, the payout ratio is steadily increasing from a low of 16% in 2007 to 27% in 2015. However, the company could easily keep up with a 10% dividend increase for several years with such low payout ratio.

Principle #4: The Foundation of dividend growth stocks lies in its business model

The company’s business model is strong as they serve many different industries. This makes CNI able to switch from coal, grain and crude transportation to lumber & panels, chemistry and automotive transportation in a heartbeat.

The company’s cash flow generating ability has been envied by its peers for years and this makes CNI dividend growth base more solid than rock.

What Canadian National Railway Does With its Cash?

There is nearly 20% of CNI revenue used for railway maintenance. This is probably the biggest downside of such companies is the high cost of maintenance. As trucks can use “free roads” and pipelines require less maintenance, railway companies must take care of their own track.

However, the company is generating over 2 Billion in free cash flow per year. In 2015, the company uses this cash flow to increase the dividend payment by 25%. Management goal is to reach 35% payout ratio in the upcoming years, opening the door for more dividend increases.

Investment Thesis

Railroads serve a critical role in world transportation. They remain the most energy efficient way of transporting large amounts of material far distances. From an investing point of view, railways also have among the very strongest of economic moats, in that they are established businesses where new competitors are scarce. Obstacles to starting up a new railway business are obvious, because once track is put down to serve an area, duplicate track would be a poor investment.

The company has several strong indicators:

-None of the seven commodity groups account for more than 20% of revenue, which is solid diversification.

-Further evidence in terms of diversification; 18% of revenue comes from U.S. domestic traffic, 22% comes from Canadian domestic traffic, 28% comes from trans-border traffic, and 32% comes from international traffic.

Overall, I view Canadian National Railway as a fundamentally solid, albeit cyclical, business. The revenue growth is consistent, free cash flow is fairly strong, and the balance sheet is healthy. The business portfolio has satisfactory diversification and breadth in terms of geography and commodity groups. Railways have natural moats surrounding their businesses. A simultaneous pro/con is that capital expenditure is very regular and increasing. It shows that management is on top of their priorities for long-term sustainable growth, efficiency, and safety, but when this outpaces revenue growth, there is of course a cost.

Risks

The company is fairly safe from competitors in my view, so the risks are mainly associated with macroeconomic conditions. The company held up well during the recession but was still materially impacted by it, and this will likely be the case during the next recession as well, whenever it occurs. The company has good safety metrics and as previously mentioned, spends considerable sums on capital expenditures, so catastrophic incidents should be rare. My view is that the company is cyclical, but fundamentally solid on all observable quantitative and qualitative matters.

The global slow down for various commodities at the same time might affect revenues in the near-term but the railways will still be there to benefits from the next economic boom.

Should You Buy CNI (CNR.TO) at this Value?

Now, usually stellar companies command a premium on their stock price. Is it the case for CNI? Let’s take a look at the past 10 years PE ratio to see how the market values the company:

CNI PE ratio

The latest correction in the market seems to have created a very interesting entry point in CNI. The company seems fairly valued at a PE ratio around 16 if we compared the past 5 years.

Since I’m a dividend growth investor, I will also consider the company as a pure money making machine by using the dividend discount model. Since CNI evolves in a fairly stable and predictable market, I will use a discount rate of 9%. As for dividend growth, I use a 10% rate for the first 10 years and reduce it to 7% to be more conservative.

CNI intrinsic valueSource: Dividend Toolkit Calculation Spreadsheet

As you can see, while the stock price has gone up by 77% over the past 5 years, there is still room for more growth. The company is currently undervalued by over 10% which is definitely a great entry point. This gives a good margin of safety for someone considering buying the stock at this time.

Final Thoughts on CNI (CNR.TO) – Buy, Hold or Sell?

Canadian National Railway is not paying the highest dividend yield on the market (1.76%) but it is continuously increasing its payout (400% total increase over the past 10 years) while maintaining a payout ratio under 30%. There is limited competition in this sector and CNR is often cited as one of the best managed railway company in North America. For more conservative investors, CNR will bring more stability coupled with better dividend growth perspectives.

 

Disclaimer: I hold shares of CNI in our DividendStocksRock portfolios

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IDA Corp Stock Analysis

DSR Quick Stats

Sector: Utilities (Electric)

5 Year Revenue Growth: 4.09%

5 Year EPS Growth: 6.91%

5 Year Dividend Growth: 7.96%

Current Dividend Yield: 2.96%

What Makes Idacorp (IDA) a Good Business?

IDACORP, Inc. is an electricity holding company, incorporated in Idaho with headquarters in Boise. The company provides services through its principal operating subsidiary Idaho Power Company. Idaho Power is the parent of Idaho Energy Resources Co. (IERCo), a joint venture in Bridger Coal Company (BCC), which mines and supplies coal to the Jim Bridger generating plant owned in part by Idaho Power. It also owns natural gas-fired power plants and coal-fired generating stations.

Idacorp has over $5.9 billion in assets and serves over half a million clients with electricity provided by its 24 facilities split as follow:

Resources Facilities MW
Hydro 17 1709
Coal 3 1118
Natural Gas 3 762
Diesel 1 5

 

The company shows a small, but steady growth customer base year after year:

IDA growth

 

 

 

 

 

 

 

Ratios

Price to Earnings: 14.79
Price to Free Cash Flow: 42.84
Price to Book: 1.565
Return on Equity: 10.84%

Revenue

IDA revenueRevenue Graph from Ycharts

Idacorp benefits from a strong economy in Idaho where the unemployment rate is well below the US average. The demand for electricity keeps increasing in this state and therefore should see better volume in the upcoming year.

How IDA fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve gone through several stock research mrthodoligies from various sources. This is how I came up with my 7 investing principles of dividend investing. The first four principles are directly linked to company metrics. Let’s take a closer look at them.

IDA metricsSource: Ycharts

Principle #1: High dividend yield doesn’t equal high returns

Many income seeking investors will look at utilities to complement their portfolio’s income. Utilities usually have a relatively high dividend yield because they don’t show important growth potential. I’m not chasing high yielding stocks as they usually don’t offer anything else but their dividend payment. I would rather pick a company that will provide me with both dividends and stock value growth.

IDA yield and divSource: data from Ycharts.

Historically, IDA’s dividend yield has been around 3% since 2011. Considering its recent dividend growth and the fact the yield has stayed consistent, this tells me the company is able to provide investors with both types of growth. IDA passes my first investing principle.

Principle #2: If there is one metric, it’s called dividend growth

While the dividend payment was stagnant for several years in the 2000s, the company started to increase its dividend payment in 2012. The 5 year dividend growth rate is interesting (over 8%) and management expects to keep increasing the payment by 5% or more per year as long as the dividend payout ratio remains under 60%.

The dividend growth in the upcoming years will not be astounding, but we can expect to see a dividend payment increase nonetheless.

Principle #3: A dividend payment today is good, a dividend guaranteed for the next ten years is better

I like to cross reference the dividends paid and the dividend payout ratio to see if the company will be able to maintain and eventually increase its dividend in the years to come.

IDA div paid payout ratio

As previously mentioned, the dividend payment remained the same for several years. However, the company was stuck with a higher payout ratio and wanted to reduce it to a more manageable level. Now that this objective has been achieved, we see IDA dividend payment increasing at very good rate while keeping a strong control over its payout ratio.

Principle #4: The Foundation of dividend growth stocks lies in its business model

IDA business model is pretty simple and its growth will ultimately depend on how the economy in the state Idaho goes. For now, we can expect stronger electricity demand stimulated by a strong economy. I like the fact IDA has various facilities generating energy from various sources.

What Idacorp Does With its Cash?

As is the case with many utilities, IDA is a dividend investor friendly stock. Management approved a 9.3% dividend payment increase toward the end of 2014 and expects a 5% increase per year or more until payout ratio reach between 50-60%.

Investment Thesis

An investment in IDA is not investing in a high growth company. However, for income seeking investors looking for a steady investment, I believe the company will keep on increasing its dividend for several years to come as the payout ratio is very low.

The dividend growth has not always been very stable, but for the moment, we can expect steady growth and the company stock should continue to go up and keep a dividend yield around 3%. This year’s results have been affected by abnormal weather and has created a buying opportunity.

Risks

Regulation, regulation, regulation. This is probably the biggest challenge all utilities using coal have to face. While the company shows positive numbers, we are not looking at a super powered growth company either. This is why a shift in regulations requiring additional costs to be incurred could hurt the share price heavily.

The good news is many facilities are generating electricity from water (hydroelectric) and this should minimize regulatory problems. This is still a small company compared to other utilities but could be a good addition to a solid core portfolio.

Should You Buy IDA at this Value?

The recent stock price drop may be the start of an interesting entry point for this utility. However, I will still take a look at the 10 year PE history and use the dividend discount model to see how IDA is valued:

IDA PE ratio

The company valuation started to rise again when the company increased its dividend in 2012. Recent bad weather conditions slowed down the market expectations and we now have a relatively good price for IDA if we look at the overall chart.

I will use a double stage dividend discount model to value IDA. For the first ten years, I will consider a 7% dividend growth rate. This number comes from what management expect to do until the payout ratio goes up to 60%. It is smaller than the previous 5 years, but we can’t expect massive growth forever. This is why I’m reducing the growth rate to 5% after the first 10 years. I will use a 9% discount rate as utilities are fairly stable dividend paying machines.

IDA intrinsic value

 

 

 

 

As you can see, we might have been tempted to invest in IDA after the recent stock price drop, but this is still not enough to become a bargain if we consider the future dividend growth potential of the company.

At the moment, the company doesn’t seem to be a safe trade unless you want to buy a solid dividend stock without many worries.

Final Thoughts on IDA – Buy, Hold or Sell?

I’m not too excited after looking at IDA. I think it’s the perfect fit for a conservative portfolio as it will generate an interesting dividend payment for several years. However, the current price is not interesting enough to deserve a BUY rating. I would rather say IDA is a hold for any investor who has it in their portfolio as there are many other very interesting buying opportunities right now.

 

Disclaimer: I do not hold shares of IDA at the moment.

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Clorox has never traded at a higher PE valuation, yet it’s still a bargain

Summary:

Clorox has focused on innovation to generate future growth;

The company shows a portfolio of premium brands providing stable cash flow;

While the PE ratio is high (23+), the company is still trading at a 10% discount.

DSR Quick Stats

Sector: Consumer Defensive

5 Year Revenue Growth: 0.51%

5 Year EPS Growth: 2.07%

5 Year Dividend Growth: 9.07%

Current Dividend Yield: 2.79%

What Makes Clorox (CLX) a Good Business?

The Clorox Company (Clorox) is a manufacturer and marketer of consumer and professional products. Basically, anything you find when you open a closet at home has a 50% chance to belong to CLX portfolio brand. The Company operates four divisions: Cleaning (Pinsol, Clorox), Household (such as bags & wraps… Glad anyone?), Lifestyle (Brita, Burts Bees) and International (to cover sales for the above three divisions outside the US of A). As you can see, their revenues are pretty well spread among the four divisions:

CLX sectors

What is even more interesting about Clorox is that 80% of their brands are #1 or #2 in their market. The size and variety of its brand portfolio enables CLX to scale their production and generate important synergy among its different brands. This is how CLX also shows a lower sales & administration cost as a percentage of sales vs their main competitors (14% compared to 21% in the industry according to a Clorox investor presentation: source)

Ratios

Price to Earnings: 25.10
Price to Free Cash Flow: 19.94
Price to Book: 46.09
Return on Equity: 291.40%

Revenue

CLX revenueRevenue Graph from Ycharts

Since 2013, CLX revenues have barely increased, this is why the 5 year growth is far from being spectacular (CAGR of 0.51%). This is mainly due to the difficult international context coupled with currency headwinds. In order to support revenue growth, CLX has put in place a massive innovation program to improve its existing products and create new ones.

The innovation program now has a 3% sales growth target for 2015 and the years to follow. This seems like solid growth for such a large and mature company.

How CLX fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve gone through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. The first four principles are directly linked to company metrics. Let’s take a closer look at them.

CLXSource: Ycharts

Principle #1: High dividend yield doesnt equal high returns

High dividend stocks systematically underperformed the market mostly because there is always a good reason why the dividend yield is so high. In general, the market requires a higher yield from company showing higher risk. Also, most companies with high dividend yield show very limited dividend growth capacity.

CLX TTMSource: Ycharts

The CLX yield has been relatively low over the past 5 years and it’s even more true ever since the stock price increased in valuation over the past 12 months. The yield is now around 2.75%. This is not a huge dividend yield, but I would rather buy shares of a company that shows strong dividend growth than a high dividend yield.

Principle#2: If there is one metric, its called dividend growth

As I just wrote, dividend growth is the mother of all solid companies held in my portfolio. The reason is simple; if a company shows strong dividend growth, it is driven by increasing sales and profits. Two very powerful factors to look at for any type of business.

CLX dividend paymentSource: CLX website

The dividend payment has more than doubled in the past 10 years. Enough said.

Principle #3: A dividend payment today is good, a dividend guaranteed for the next ten years is better

I think CLX’s dividend payment reputation is not to be discussed here. After 38 consecutive years of dividend increases, we can expect the company to continue. However, a quick look at the dividend payout ratio is always a good idea.

The company used to stick between 50% and 60% which leaves a very comfortable margin to increase it. Lately, the ratio has drifted higher than 70% and the aggressive dividend growth policy (9% over 5 years) might has to be reviewed in the long term.

Principle #4: The Foundation of dividend growth stocks lies in its business model

The Clorox business model is based on a very solid brand portfolio where most of their brands hold the #1 and #2 position in terms of market share. This makes it very hard for other competitors to enter the CLX playground.

Plus, since the company is selling consumer products, it generates constant cash flow helping the company pay ever increasing dividends while continuing to invest in the future.

What Clorox Does With its Cash?

As is the case for most consumer stocks, CLX is a real money making machine. The company focuses on free cash flow generation as demonstrated:

CLX cash flow

 

 

 

 

Last year, out of the $649 million in free cash flow, CLX paid $368 million in dividends. The company doesn’t only increase its dividend each year but also actively purchases its shares. The company bought nearly 40% of the outstanding shares over the past 10 years. This probably explains its relatively high PE ratio (over 25) but the company shows a smaller price to free cash flow evaluation (around 19).

As previously mentioned, CLX also spend and important part of its budget toward product innovation. The key to remain a leader in consumer products is to evolve continually and maintain a very strong brand portfolio. CLX has successfully done this over the years.

Investment Thesis

The reason an investor would pick CLX to be part of his portfolio is somewhat obvious: it is an ever increasing dividend stock. Clorox is part of the selective group of dividend aristocrats that has increased its dividend for at least 25 years consecutively. In 2015, they have reached their 38th consecutive year with a dividend raise.

The company is currently driving its 2020 vision focusing on 4 key strategies:

#1 Engage our people as business owners

#2 Increase our brand investment behind superior products and more multi-targeted 3D innovation

#3 Keep the base healthy and grow into profitable new categories, channels and countries

#4 Fund growth by reducing waste in our work, products and supply chain

The company goals are to support a 3-5% organic sales, improve margins by 25 to 50 bps and to generate free cash flow of 10-12% of sales.

In other words; this consumer product giant will aim at reducing their costs, improving their sales and focus on high levels of cash flow in order to increase its dividend payment for the next 100 years.

Clorox’s ability to push new products through its distribution channel should support sales in the upcoming years.

Finally, the world is highly sensitive to potential disease spreading catastrophes. We had another example with Ebola last year. Cleaning and disinfecting products have become very important and CLX is in a leadership position to benefit from this robust trend.

Risks

When you look at the CLX sales growth, you will notice there isn’t any growth among its products. Since international sales represent 20% of total sales, we can’t blame everything on currency headwinds. The problem is that Clorox bleach and charcoal products are used by consumers on a daily basis but there aren’t many ways to make consumers buy more to support higher growth.

CLX spends massively on marketing in order to promote their products and it’s working perfectly as CLX usually enjoys a price premium over its competitors without hurting its sales too much. However, this requires a constant advertising effort and the brand differentiation factor is still very slim for the consumer.

Overall, the main risk around a company like Clorox is to see sales stagnate which would push the dividend payout ratio to higher levels. The dividend payment is far from being at risk, but the payment growth might be very thin in the years to come.

The company is well aware of this situation and this is why it is focusing on improving existing products and has created a strong product pipeline for the upcoming years that should increase sales and resolve the current sales stagnation situation.

Should You Buy CLX at this Value?

CLX has recently benefitted from a strong bullish thesis pushing its valuation through higher levels. You can see in the chart below how the CLX PE ratio has risen over the past 10 years.

CLX PE ratio

Considering the previous market valuation, the PE method shows there is a lot of enthusiasm for Clorox at the moment.

Going further, I’ll use the dividend discount model to determine stock value in terms of dividend distribution. Using a 10% discount rate and a dividend growth rate of 8% for the first 10 years and then 7% after, I get the following chart:

CLX intrinsic valueSource: Dividend Toolkit calculation spreadsheet

As the stock is currently trading around $105, it seems to be trading at a 10% discount.

Final Thoughts on CLX – Buy, Hold or Sell?

Buying shares of CLX will not make you double your investment within the next two years. It is relatively stable company evolving in mature markets. However, this doesn’t mean it’s a bad investment. For its solid dividend growth history, its premium brand portfolio and the fact the company is still trading at a discount considering its dividend payment; I think CLX is a buy.

 

Disclaimer: I do not hold shares of CLX at the moment.

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