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.

Genuine Parts – Strong Company; Overpriced Stock

Genuine Parts Co (GPC) is a service organization engaged in the distribution of automotive replacement parts, industrial replacement parts, office products and electrical & electronic materials. This dividend aristocrat has an interesting growth model combining small but recurring acquisitions added to internal growth.

-Seven Year Revenue Growth Rate: 3.80% stock report
-Seven Year EPS Growth Rate: 5.72%
-Seven Year Dividend Growth Rate: 5.00%
-Current Dividend Yield: 2.33%
-Balance Sheet Strength: Strong

Overview

Genuine Parts (GPC) was founded in 1928 and is part of the dividend aristocrats. The company has increased its dividend payout for 58 consecutive years. The company shows around 37,500 employees across 2,600 operation sites.

Business Segments

The company is divided into four business segments:

 

gpc net sales by segment

The automotive segment is the most important with 53% of overall sales. The company offers over 427,000 different parts through its UAP NAPA stores. They also market and distribute their replacement parts. GPC is also present in Asia under GPC Asia Pacific.

The industrial segment is operated under the Motion Industries brand. They distribute a variety of industrial parts such as bearings, mechanical and electrical power transmission, hose and hydraulic components. They are present in all kinds of industries from food and beverage to forest as well as healthcare industries.

The Office Products segment is headquartered in Atlanta and operates under the name of S. P. Richards Company. The company is engaged in the wholesale distribution of a broad line of office and other business related products through a diverse customer base of resellers.

The Electrical / Electronic Materials Group is the smallest GPC business division with only 4% of overall sales. It provides distribution services to OEM’s, motor repair shops, specialty wire and cable users, and a variety of industrial assembly markets.

Ratios

Price to Earnings: 21.86
Price to Free Cash Flow: 21.94
Price to Book: 4.31
Return on Equity: 20.88%

Revenue

gpc revenue

Revenue grew at a rate of 3.80% per year on average over this period. Since 2010, we have a steady uptrend as the economy strengthened. The automobile industry went through an important recession since 2008 but sales are now increasing. The automotive parts business is linked to the automobile industry and this is why GPC benefits from the current economic environment. The bulk of GPC’s revenue growth comes from its automotive part business while other segments have faced various challenges. The company has acquired smaller players in the industrial parts industry to boost their sales in the upcoming years.

Earnings and Dividends

gpc earnings and dividends

The previous graph explains how EPS growth is strong at GPC. While we have a continuously increasing dividend paid (red line), the dividend payout ratio slowly decreases (orange line). We also see how the dividend yield is slowly decreasing as well. This is a result of the stock price continuously increasing on strong quarterly announcements throughout the past five years.

Approximate historical dividend yield at beginning of each year:

gpc dividend yield

 

 

 

 

 

How Does GPC Spend Its Cash?

Genuine Parts shows a balanced model of acquisitions, shares repurchased and dividend growth. Their business model is based on buying small competitors each year. GPC benefits from exceptional integration abilities, turning their acquisitions into strong assets. In 2014, they bought Garland C. Norris, EIS, Electro-Wire and Impact products. GPC continually looks for companies to buy with revenues in the range of $25M to $125M. Small acquisitions ensure external growth each year without hurting the balance sheet too much.

The company also considers its investors. In 2013 it has repurchased 1.5 million shares and approved a 10.7 million share buyback program on December 31, 2013. In addition to stock buyback programs, the company also increases its dividend year after year.

Balance Sheet

Genuine Parts shows a strong balance sheet. GPC has a Debt to equity ratio of 1.385 and a current ratio of 1.536. Despites its history of acquisitions, goodwill counts for 10% of total assets.

Investment Thesis

Genuine Parts is a leader in auto parts and should benefit from the current positive economic environment in the US. The company is able to grow both from internal sources and through acquisitions. The low interest rate environment improves acquisition terms and facilitates GPC’s crusade to grow ever bigger.

While the auto part industry will continue to ride alongside US automotive growth, the industrial segment will benefit from a growing US GDP. Studies have shown that when the price of oil drops significantly, it has a positive correlation to US GDP growth. Since we expect a growth around 3.9% in 2015, the industrial segment will certainly strengthen.

You can buy GPC for its strong dividend growth as it continues to show potential. The automobile industry should continue to grow in 2015-2016.

Risks

While I like the numbers, I don’t like the fact that GPC fails to meet analysts’ estimates from time to time. They were too optimistic at the beginning of 2013 and raised their guidance to disappoint 9 months later with lower than expected results. Then again, the stock shows a low dividend yield around 2.25%, this might turn off some investors.

Also, longer manufacturer warranties prevent GPC from acquiring clients with relatively new cars. Since warranties are extended for several years, many car buyers tend to go directly to the dealership instead of buying parts from UAP NAPA.

Conclusion and Valuation

When you look at the metrics, you can see that sales, earnings and dividend payments are all going in the same direction. We also believe in the car industry for 2015. GPC is another strong dividend aristocrat that should continue to raise its dividend this year. The company shows a strong balance sheet and the ability to increase its dividend for years. GPC not only shows good results but it also grows by acquisition. Their ability to integrate new companies is reflected in their earnings which show a steep uptrend. GPC will continue to be a leader in its industry and we won’t lack for car parts in the near future. Now, we have to determine if GPC is trading at a good value.

Using the Discounted Cash Flow Analysis, we look at GPC as a simple money making machine. The point is to assess the value of the company by considering its cash flow generation capacity. Consider the EPS to continuously grow by 5% for the next five years and then by 4% and a discount rate of 9%, we have a stock value of $97.78 which is very close to the current value on the market.

The Gordon Growth Model can be used to estimate ranges of fair value for the stock. The dividend growth rate averaged 5% over the last seven years and we can expect the company will continue in that range. Due to the strong nature of the balance sheet, a conservative discount rate can be used to focus the fair value assessment on risk-adjusted returns.

Using an expected 5.5% dividend growth rate and a 9% discount rate, the fair value is only $69.33, which is under the current share price of around $98.50. Due to the low yield, the model is particularly sensitive, and reducing the discount rate to 8% boosts the fair value to $102. On the other hand, if the company was able to grow its dividend by 6.5% per year instead of 5.5% we would reach the current value ($97.98 with a discount rate of 9%).

Finally, we can use the Price Earnings Ratio method. As we can see, GPC is not only trading over the S&P 500 historical average (between 16 and 17) but also around its highest valuation over the past ten years:

 

gpc pe ratio

Considering the Gordon Growth model and the P/E ratio valuation, I tend to agree that GPC is currently overpriced. An investor could wait for a dip in the market before acquiring a position in GPC.

Full Disclosure: As of this writing, GPC is part of our DSR Portfolios.

 Dividend Insights Newsletter

We respect your email privacy

JM Smucker: Fair at $100

-Seven Year Average Revenue Growth Rate: 15.4% Dividend Stock Report
-Seven Year Average EPS Growth Rate: 10.7%
-Seven Year Average Dividend Growth Rate: 9.5%
-Current Dividend Yield: 2.29%
-Balance Sheet Strength: Strong

For solid if not impressive risk-adjusted returns, J.M. Smucker seems well-positioned and fairly valued.

Overview

The J.M. Smucker Company (symbol: SJM) was founded in 1897, is headquartered in Ohio, and is still run by the Smuckers family.

The company produces jam, jelly, preserves, peanut butter, sandwich products, ice cream toppings, baking products, oil, juices, and coffee. The company draws its revenue mostly from North America, but has international ambitions as well. The company focuses primarily on having the #1 brand in any given category.

Coffee
For coffee brands, Smuckers has gone on a buying spree. They acquired the large Folgers brand of coffee from Procter and Gamble, and they also sell Dunkin Donuts coffee for retail markets. They now sell Millstone, Cafe Bustelo, and Pilon coffee, with the last two being popular among Hispanic demographics, statistically speaking.

K-Cups are becoming more popular, and Smuckers has offerings in this area, including from their Folgers Gourmet Selections brand. Smuckers does face strong coffee competition from several brands, with Starbucks and Green Mountain Coffee Roasters being the two most worth mentioning.

Coffee contributes 39% of SJM sales.

U.S. Retail Consumer Foods
The company’s original flagship product is their line of Smuckers fruit spreads: jams, jellies, and preserves. They were smart to acquire the Jif peanut butter brand as well, and they also control or license other brands like Crisco, Pillsbury, and Hungry Jack.

This segment contributes 38% of SJM sales.

International, Foodservice, and “Natural” Foods
Some of the company’s largest brands compete internationally, and they also have brands dedicated to certain markets, like Canada. For “natural foods” in this category, they have Santa Cruz Organic and R.W. Krudsen Family. In fiscal year 2012, the company invested in Seamild, a leading provider of oats products throughout China.

This segment contributes the remaining 23% of sales.

Valuation Metrics

Price to Earnings: 19
Price to Free Cash Flow: 22
Price to Book: 2.1

Revenue

Smuckers Revenue
(Chart Source: DividendMonk.com)

The revenue growth rate is high at 15.4% per year averaged over the past 7 years. This is because the company issued new shares for capital to make acquisitions up until 2010.

Earnings and Dividends

Smuckers Dividends
(Chart Source: DividendMonk.com)

Over the same 7 year period, EPS growth was 10.7% per year while dividend growth was close behind at 9.5% per year. The most recent dividend increase was 11.5%.

The current dividend payout ratio from earnings is about 40%, so the dividend is well-covered and has room to grow.

Approximate historical dividend yield at beginning of each year:

Year Yield
Current 2.3%
2013 2.3%
2012 2.5%
2011 2.6%
2010 2.3%
2009 2.9%
2008 2.4%
2007 2.3%
2006 2.3%

As can be seen by the chart, except for certain points of volatility, Smuckers stock has maintained a fairly consistent mediocre dividend yield. The price of the stock has risen at almost exactly the same rate as the dividend growth.

How Does SJM Spend Its Cash?

Over the past three years combined, Smuckers brought in about $1,300 million in reported free cash flow. About half of that, or $630 million, was spent on dividends. Over $1 billion was spent to buy back stock, and the outstanding share count has decreased by nearly 8% cumulatively over the past three years. Approximately $730 million was spent on acquisitions.

Balance Sheet

Smuckers has a total debt/equity ratio of under 45%, although goodwill makes up about 60% of existing shareholder equity due to acquisitions. The total debt/income ratio is about 4x. The interest coverage ratio is just over 10x, indicating that Smuckers can easily pay all debt interest.

Overall, the balance sheet is in a strong position. Management has used leverage appropriately and conservatively.

Investment Thesis

Smuckers has substantially outperformed the market over the last 15 years due to a series of large successful acquisitions and good management of their capital. A diverse set of top brands gives the company a steady, defensive position while outperforming, and therefore the risk-adjusted returns have been particularly good.

Looking to the future, management aims for sales growth of 6% per year (organic growth of 3-4% and acquisition growth of 2-3%), and EPS growth of 8% driven primarily from that sales growth plus share buybacks. With the dividend, this would lead to total returns of 10-10.5% or so, which is higher than the S&P 500 historical average.

The internal strategic efforts appear to be a page out of Pepsico’s current playbook with their “Healthy for You”, “Good for You” and “Fun for You” levels of products representing the spectrum of how bad for you a given product is. Smuckers has “Good for You”, “Easy for You” and “Makes You Smile”.

Overall focus of the company includes concentrating on North America and China rather than expanding everywhere, focusing on health products such as ones with natural ingredients or special-diet options such as gluten free products, and continuing to look for bolt-on acquisitions to complement their previous transformational acquisitions.

Risks

Like any company, SJM has risks. Being a food company, they are a defensive stock, but they always face risk in two main forms: commodity costs and cheaper private label competition. In addition, in contrast to many large American companies, Smuckers has most of its sales and operations in North America, meaning it is geographically concentrated.

Packaged food is a competitive business, and Smuckers expects flat volume growth and a 1% sales reduction in 2014, but decent EPS and dividend growth.

Conclusion and Valuation

With the DJIA and S&P 500 continuing to hit new records, stocks at a decent valuation are difficult to find, and this is especially so for relatively stable blue-chips that you can buy and set aside for a while. In addition to increasing risk and reducing overall returns, this pushes dividend yields lower across the market, which reduces the amount of dividend income you can buy with any given amount of cash.

That being said, SJM neither appears to be a clear value or a clear overvaluation. While the markets soared upward throughout 2013, SJM actually fell over ten bucks from its mid-year high.

The earnings multiple approach should work well for valuating the company. If management is successful and raises EPS by 8% per year over the next 10 years, then the EPS figure will be $10.57 at that time. Putting an earnings multiple of 16 on that EPS figure in ten years (compared to an earnings multiple of 19 now) puts the stock price at about $169. If dividends continue to be paid with a payout ratio of 40%, that’ll be about $30 in cumulative dividends over those ten years, or about $42 if they are reinvested into the stock. So, $169 + $42 = $211 in value in ten years.

That’s an annualized rate of return of about 7.5% from the current price of $101, which is neither particularly appealing, nor particularly bad for a defensive company in a highly valued market, and assumes a significant drop in valuation. If instead the valuation remains constant at a P/E of about 19, the rate of return under the same conditions would be about 9% per year, which is in line with historical S&P 500 growth.

Excluding any major company missteps, it seems unlikely that investors would be disappointed having invested in Smuckers stock at the current price over the long-term, and so I view the company as a reasonable, if not appealing, buy. There is of course a large risk of near or mid-term stock price declines during a market correction.

Full Disclosure: As of this writing, I am long SJM.
You can see my dividend portfolio here.

Strategic Dividend Newsletter:
Sign up for the free dividend and income investing newsletter to get market updates, attractively priced stock ideas, resources, investing tips, and exclusive investing strategies:

 Dividend Insights Newsletter

We respect your email privacy

Johnson and Johnson: Let it Dip to a 3% Yield

-Seven Year Average Revenue Growth Rate: 4.2% Dividend Stock Report
-Seven Year Average EPS Growth Rate: 1.6%
-Seven Year Average Dividend Growth Rate: 9.4%
-Current Dividend Yield: 2.83%
-Balance Sheet Strength: Perfect

The company has a good foundation for growth after a difficult few years, but the current price in the low $90’s leaves little or no margin of safety.

Overview

Johnson and Johnson (NYSE: JNJ) was founded in 1886 and today is the largest and among the most diverse of health care companies in the world. The company consists of three segments: Medical Devices, Pharmaceuticals, and Consumer.

Medical Devices and Diagnostics Segment
This segment was responsible for $27.4 billion in sales in 2012, which is up 6.4% from the previous year. Orthopaedics is the largest unit, accounting for over a quarter of the sales from this segment. Surgical care is the next largest unit, accounting for nearly a quarter of segment sales. The remaining units are vision care, diabetes care, specialty surgery, cardiovascular care, diagnostics, and infection.

Pharmaceuticals Segment
Johnson and Johnson brought in $25.4 billion in sales for 2012 with pharmaceuticals, and this figure was up 4% from the previous year. Immunology is the largest pharmaceutical unit (nearly a third of segment sales), followed by neuroscience (about a quarter of segment sales), infectious diseases, oncology, and other.

Consumer Segment
Consumer sales were $14.4 billion in 2012, and this figure was down 2.9% from the previous year. OTC is the largest unit accounting for nearly a third of segment sales. Skin care is another big unit, accounting for a quarter of segment sales. Other units are baby care, oral care, women’s health, and wound care.

Valuation Metrics

Price to Earnings: 20.7
Price to Free Cash Flow: 21.2
Price to Book: 3.8

Revenue

Johnson and Johnson Revenue
(Chart Source: DividendMonk.com)

The revenue growth rate over the latest seven year period was about 4.2% per year on average. Over the trailing twelve month period, the company has sustained strong revenue growth, going from $67.2 billion in 2012 to about $70 billion over the last four quarters.

Earnings and Dividends

Johnson and Johnson Dividends
(Chart Source: DividendMonk.com)

The EPS growth rate over this period was only 1.6%. But, EPS for the trailing twelve month period is much higher than it was in 2012, and using that adjusted time period, the EPS growth rate is 2.7%. Overall, JNJ has had weak earnings growth.

The dividend growth rate over this period has been a solid 9.4% per year, which when combined with a yield of 3% or so represents very solid long-term returns. The dividend payout ratio from earnings however, has increased over the last decade from comfortably under 40% to nearly 60%.

Approximate historical dividend yield at beginning of each year:

Year Yield
Current 2.9%
2013 3.5%
2012 3.5%
2011 3.5%
2010 3.0%
2009 3.0%
2008 2.5%
2007 2.2%
2006 2.1%
2005 1.8%

The yield for Johnson and Johnson is currently at a low point. Although JNJ boosted its dividend for 2013, the fact that the stock price roared from the low $70’s to the low $90’s during the year to date, has increased the valuation and decreased the current dividend yield.

How Does JNJ Spend Its Cash?

During the fiscal years of 2010, 2011, and 2012, the company brought in nearly $38 billion in free cash flow. Over the same period, the company paid about $18.5 billion in dividends, another $18.2 billion on share repurchases, and about $8.5 billion on net acquisitions.

Balance Sheet

Johnson and Johnson is one of only a very few non-financial companies that maintains a perfect AAA credit rating.

The total debt/equity ratio is about 21%, and less than a third of existing shareholder equity consists of goodwill. The existing amount of total debt is less than 1.2x the annual net income figure, and the interest coverage ratio is 35x, which is extremely well-covered.

The company generates positive free cash flow each year from a highly diverse sales base, and often it’s a higher figure than net income.

Investment Thesis

The company has started fresh with a relatively new CEO (of which there have only been 7 in over 120 years of operating history) with substantial industry experience, and with several difficult years behind the company, the next few years look brighter.

Johnson and Johnson is often viewed as the quintessential blue chip stock. The combination of a particularly strong balance sheet, five consecutive decades of annual dividend growth without a miss, strong free cash flow generation, and a highly diverse sales base, is hard to compare to any other company.

Most segments have various durable economic advantages which help to protect their cash flows. For example, the pharmaceutical segment, like other pharmaceutical companies, uses a series of patents to maintain a consistent pipeline and portfolio of patented drugs, and because of their size, they can fund the largest of R&D projects or they can acquire drugs for their pipeline. This makes their pipeline rather consistent from year to year. The medical devices segment is similar, with advanced patented devices created from one of the largest medical device segments in the world. The consumers segment is a bit different in that it relies on brand strength. Each of the three segments is supported by the others, so a weak pharmaceutical period can be balanced by strong medical device sales during that time, or as we saw in previous years, a weak consumer segment can be balanced by the pharmaceuticals and medical devices. Most of JNJ’s products are protected from recessions due to their rather necessary nature, with the exception of some of their over-the-counter products which are vulnerable to market share losses to private label products during those times.

Risks

Although the company is large and well-diversified, the complex nature of the company results in numerous risks. 2010 was a particularly difficult year for the company, as they recalled 43 over-the-counter medications due to systemic quality control issues in their subsidiary that is responsible for this lineup of products, recalled hip replacements due to a revision ratio that was far above acceptable levels, and faced a shareholder lawsuit regarding these quality issues and other aspects of company governance.

The pharmaceuticals segment, like any company in the industry, has pipeline risk. It can take billions of dollars to develop or acquire a blockbuster drug, and a weak pipeline of upcoming drugs can mean that sales will be lackluster in upcoming years. Unexpected events of drugs failing approval or showing to be ineffective can be a major blow to the segment. Currently the pipeline is strong, and unlike pure pharmaceutical companies, Johnson and Johnson buffers this risk with their other business segments.

Litigation is a constant risk for any large health care company, because so many lives are affected so dramatically. Products can mean the difference between life and death for patients, and something like a hip replacement that has a revision rate of over 10% compared to the typical and acceptable 1% can mean major financial losses, recalls, and/or litigation.

Conclusion and Valuation

There’s little doubt that overall, JNJ is a particularly strong company. Just about every metric is spectacular from the balance sheet to the cash flow generation to the diversification to the dividend safety. Still, the company does have downsides.

Growth has been poor in the recent several years due to the recalls which were acting as anchors on profitability, as well as the financial crisis and recession to a limited extent. On one hand, the fact that the company weathered a cluster of problems with flat sales base and earnings base shows the strength of the company. On the other hand, several years of poor growth does have a major negative impact on shareholder returns.

With a strong pipeline and with better quality oversight in place, the company is in a good state for growth going forward. The one problem, of course, is valuation. Johnson and Johnson outperformed the S&P 500 by nearly 10% year to date, and the S&P 500 itself outperformed its average growth rate during 2013 to reach record highs. Last year in the JNJ stock analysis report, I stated similar views about JNJ- that it was in a good position for growth (which based on revenue growth has been true), but at that time the stock was in the high $60’s and I was cautiously optimistic about it being a buying opportunity at that price.

Now at $93/share, we’re looking at a similar situation with a much higher valuation. Using the earnings multiple valuation approach, if the company grows EPS by 8% per year over the next 7 years on average, and we place an earnings multiple of 18x on the stock at the end of that seventh year, then the price will be around $138. The investor will have received about $26 in dividends per share, and if reinvested, can expect another $8 or so in value. The seventh year value therefore would be $184, which is roughly double the current value. This translates into a rate of return of about 9%, which is not bad on a conservative dividend payer.

But that doesn’t leave any margin of safety. If EPS growth averages only 7%, the rate of return under the same circumstances would be down to a bit over 8%, and if the earnings multiple at that time is 16 instead of 18, the annual rate of return is down to about 7%.

In conclusion, I believe that few investors would be disappointed several years from now with a purchase of JNJ stock today, but I don’t think it’s in a good position to outperform unless estimates use very optimistic growth estimates. So, the price is fair but not ideal, in my view. The yield is historically low for the company at 2.83%, and I believe a wiser play would be to wait for the growth to catch up with the valuation and see if the stock becomes available at a lower earnings multiple of under 20, and with a yield of over 3%.

Full Disclosure: As of this writing, I am long JNJ.
You can see my dividend portfolio here.

Strategic Dividend Newsletter:
Sign up for the free dividend and income investing newsletter to get market updates, attractively priced stock ideas, resources, investing tips, and exclusive investing strategies:

 Dividend Insights Newsletter

We respect your email privacy