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.

3M; Low Yield; Highly Interesting

3M Company (NYSE: MMM) is a diverse conglomerate that produces a broad array of products and materials for both consumers and businesses.stock report

-Seven Year Revenue Growth Rate: 4.46%
-Seven Year EPS Growth Rate: 3.97%
-Seven Year Dividend Growth Rate: 9.85%
-Current Dividend Yield: 2.56%
-Balance Sheet Strength: Extremely Strong

Overview

3M Company (NYSE: MMM), once called the Minnesota Mining and Manufacturing Company, was founded in 1902. The company, now with 80,000 employees, produces products like Scotch tape, projector systems, Post-it notes, Tartan track, and Thinsulate. This is a conglomerate that produces products for many industries and for both personal and business use, and their manufacturing, research, and sales offices are all over the world.

Business Segments

The company is divided into five business segments:

Industrial Business
This segment provides adhesives, abrasives, filtration systems, fasteners, and specialty materials to a variety of industries. This is the largest segment, accounting for about 34% of sales.

Safety and Graphics Business
This segment provides display films, reflective materials, projection systems, and the like. This segment accounts for about 18% of sales.

Electronics and Energy
This segment provides products for electronics and energy businesses including films for LCD screens and splicing products for signal cables, and accounts for about 17% of sales. Nearly two-thirds of sales from this segment come from the Asia Pacific region.

Health Care Business
This segments provides several products in the areas of wound care, oral care, drug delivery systems, and more. This segment accounts for about 17% of sales. The bulk of sales come mainly come from the U.S. and Europe, as the products are more targeted towards developed countries.

Consumer and Office Business
This segment provides solutions for the home and office, and includes well-known products like Scotch tape. This segment accounts for about 14% of sales. The U.S. accounts for over half of sales from this segment.

Ratios

Price to Earnings: 21.21
Price to Free Cash Flow: 19.85
Price to Book: 7.3
Return on Equity: 31.72%

Revenue

MMM revenue

MMM revenue trend is very strong. Since 2012, revenue doesn’t increase at the same pace mainly because the company faces currency headwinds. The organic growth is present (4.9% in Q1 2015), but the negative impact of a strong dollar reduces sales significantly.

Earnings and Dividends

MMM earnings and dividends

Approximate historical dividend yield at beginning of each year:

MMM div history

 

 

 

 

 

The company has been paying dividends each year for the past… 98 years. We can definitely talk about a strong dividend payer here. Most importantly, the dividend increase in 2014 and 2015 are stronger than its previous years. Nonetheless, the past 7 years shows an annualized dividend growth rate near double digits (9.85%). In other words, the company is nearly doubling its dividend payment every 7 years.

How Does 3M Company Spend Its Cash?

The company generates over 5 billion per year in free cash flow. The fact MMM is selling mostly consumable products makes its cash flow base stable and predictable. This enables the company to manage growth through R&D and acquisitions while returning a good amount of money to shareholders at the same time. In 2014, MMM used $1.5 billion for capital expenditures, $1.8 billion in R&D and $1 billion in acquisitions. At the same time, it has returned $7.9 billion to shareholders via a share repurchase program and dividend payments.

Investment Thesis

3M Company is definitely more diversified than a balanced mutual fund. It is present in various consumable product areas and the bulk of its sales comes from business-to-business transactions.

Roughly 50% of its products are consumable, which implies a very high rate of repeat business year after year. Product diversification is at the center of MMM business which offers continuous growth opportunities.

The company also allocates between $1 and $2 billion per year for acquisitions providing external growth on top of what is coming out of its own R&D department. MMM also benefits from top-of-the-line technology enabling to control costs like no other company. It can easily scale any production and each innovation means higher sales volume.

It is very hard to compete against MMM due to its size and investing power. Since the company keeps investing massively in R&D and buys other innovating companies, it ensures its sustainability over time.

Risks

When an investor buys MMM, he doesn’t expect to lose 40% of its value overnight. Product and geographic diversification enables the company to post predictable and stable numbers. However, these two advantages could also be linked to some other risks.

The fact MMM produces so many different products makes high digit growth difficult to generate. It is most likely to follow closely GDP growth instead of reaching high double digit figures.

MMM has increased its sales throughout the world in the past decade. This makes the company more at risk of currency headwinds.

As you can see, these are not the biggest concerns an investor could have while buying a stock. Overall, MMM shows a very strong profile.

Conclusion and Valuation

In my opinion, MMM should be part of most conservative (or core) dividend portfolios. While you shouldn’t expect incredible growth from this company, dividend payment increases will always be there each year. In order to verify if it’s the right time to buy MMM, we will look at the company 10 year PE history along with a Dividend Discount Model calculation.

MMM PE Ratio

As you can see, the strong dividend increase in the past 5 years hasn’t been ignored by the market. The P/E ratio has continuously increased over the past 3 years.

Full Disclosure: As of this writing, I have no position in MMM. It seems the company hasn’t been highly valued as right now. Let’s use the dividend discount model to see how much the company worth according to its dividend payment ability.

MMM intrinsic value

 

 

 

 

Source: Dividend Toolkit

I’ve used a dividend growth rate of 10% for the first 10 years and reduced it to 7.5% afterward. Then, I used a discount rate of 9% since the company shows stellar numbers.

According to the DDM, the company trades at a discount of 15% or so with a fair value of $179. Strong dividend growth perspective justifies a higher P/E valuation at the moment.

Considering MMM product portfolio and the fact the company is making the bulk of its sales from consumable products in a business-to-business model, MMM seems fairly attractive at the current price. This is a “long-term-dividend-growth” stock for patient investors.

Disclaimer: I do not hold MMM in my portfolio.

 

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Wisconsin Energy; Can it Support Growth Through Acquisitions?

The company operates in mainly 2 segments: Utility (1.1M electricity customers. Power is generated via coal & natural gas) and Non-Utility (consists primarily of generating plants constructed). However, the non-utility segment generates less than 5% of WEC revenues. stock report

-Seven Year Revenue Growth Rate: 2.12%
-Seven Year EPS Growth Rate: 9.83%
-Seven Year Dividend Growth Rate: 19%
-Current Dividend Yield: 3.52%

Overview

The company benefits from a very solid business model and continuously raises its dividend. Over the past five years, the company has been relatively aggressive with its dividend growth payment showing a 5yr growth of 21.76%. Nonetheless, the payout ratio remains under 60%. The Wisconsin economy is now growing stronger, pushing WEC to new highs. All three sectors (residential, industrial and commercial customers) are consuming more energy and the forecast for the upcoming years looks promising.

Then again, it’s always the same story; WEC’s main energy source is coming from coal. Stricter regulations will definitely hit companies such as Wisconsin Energy sooner or later. This should reduce their margin as additional cost may be required to continue to run coal energy plants.

Ratios

Price to Earnings: 18.94
Price to Free Cash Flow: 28.14
Price to Book: 2.399
Return on Equity: 13.04%

Revenue

WEC revenueRevenue Graph from Ycharts

WEC declared lower than expected revenues in its most recent quarterly update (May 5th). While the company beat analysts’ estimates for earnings, revenues were hit due to a harsher winter and higher spot price for natural gas.

In order to generate future growth, WEC has entered into a deal to buy Intergrys Energy Group for $9.1 billion, including $3.3 billion in assumed debts. With this acquisition, we expect WEC to generate EPS growth between 5 and 7%. The acquisition price wasn’t cheap, but many analysts think it was the fair price to pay to insure future growth.

Earnings and Dividends

WEC earnings and div

As with many utilities, WEC’s payout ratio remains around 50-60%. Most recent dividend growth brought the ratio to slightly over 60%. As the stock price grew, the dividend yield remained stable around 3.50%.

We don’t expect such high (19%) dividend growth in the future but the recent acquisition should keep the future increase around 7-8%.

How Does WEC Spend Its Cash?

Between important dividend payouts and its recent acquisition, Wisconsin Energy uses most of its cash flow. The company was able to control cost efficiently reducing its operating expenses by 19% last quarter. Some analysts fear return on investment on the recent acquisition might not be as good and represents a regulation risk over the long haul. WEC must always use part of its cash to maintain its investment and make sure they keep up with new regulations.

Investment Thesis

The investor looking for a steady dividend payment will be interested in WEC. The fact that WEC is operating in a monopoly in Wisconsin confirms a minimum level of cash flow annually, leading to a solid dividend distribution.

The company is well managed and focused on distributing an important part of their profits to investors. Cost control seems to be at the center of their attention at the moment.

Risks

Relation with regulators is the main source of uncertainty for a utility such as WEC. If their relations with regulators turn sour, WEC will lose their ability to increase rates as they wish. This would put pressure on their margins and limit profitability.

Borrowing inflation might also be a concern in the future. At the moment, utilities benefit from low rates on both sides; companies can borrow money at a very cheap rate for their investment and many income seeking investors moved their money towards this sector. With interest rate on the edge of rising, WEC may not be that interesting in the future from a stock price growth perspective. However, the dividend payment is sustainable and should continue to increase over time.

Conclusion and Valuation

Looking at the past 10 years of PE history, we can see how lower earnings affected the recent PE ratio.

WEC PE Ratio

The stock seems currently overpriced compared to its valuation history. Let’s use the dividend discount model to see how the company is priced considering its dividend.

WEC intrinsic valueSource: Dividend Toolkit Excel Spreadsheet

I’ve used a 9% discount rate since utilities are evolving in a very stable portfolio. I’ve used a 7% dividend growth for the first 10 years and drop it down to 5% to make sure it’s sustainable. Past growth was impressive but I don’t expect the company to continue boosting its dividend as it has before. Their most recent acquisition will help WEC to keep increasing their dividend by 7% for a few years, and should reduce their growth to 5% to reflect the new economic environment (higher interest rates, slower consumption growth).

Nonetheless, the company seems to trade at a 10% discount. The stock lost almost 9% since the beginning of the year, it’s like saying it was fairly valued at the beginning of the year and it may become an interesting play for dividend growth investors.

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

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Caterpillar – The Right Timing to Buy Tonkas

Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel & natural gas engines, industrial gas turbines & diesel-electric locomotives. Its segments include Resource Industries, Construction Industries and Power Systems. It is highly linked to the mining and home construction industries. stock report

-Seven Year Revenue Growth Rate: 3.78%
-Seven Year EPS Growth Rate: 2.61%
-Seven Year Dividend Growth Rate: 12.84%
-Current Dividend Yield: 3.17%

Overview

While the US housing construction industry finally came back from the dead, the mining industry is falling into a deep sleep due to the lack of demand. Emerging markets are not so emerging anymore and their appetite for resources has slowed down. But this is short term news. The truth is that CAT is highly diversified among the mining, construction & energy and transportation industries. Global energy demand growth will continue to sustain the E&T division while construction won’t slow in the States anytime soon. Since sales and profits have declined over the past 12 months, CAT has tightened its control over inventory and costs. The company is now leaner and stronger. The demand for resources will reappear at one point and the mining industry will benefit from it. CAT is the leader in mining equipment; it will get its share of the cake at that point.

While CAT is a very strong pick for a long term perspective, it might be riskier over a short period such as 12 months. If the mining industry continues to slow down as is the case right now, CAT might not be able to meet its double digit growth projection. For that reason, I think you should take a careful look at this company before going forward.

Ratios

Price to Earnings: 14.17
Price to Free Cash Flow: 13.46
Price to Book: 3.145
Return on Equity: 20.73%

Revenue

CAT Revenue

As previously mentioned, Caterpillar is suffering from the global economic slowdown for resources. Low oil prices reduce the demand for drilling equipment. Then, emerging markets appetite for resources has seriously declined leading the mining industry downward. The US construction environment is doing well, supporting Caterpillar’s revenue at the moment. However, we don’t expect much growth in the upcoming year. CAT is a cyclical company evolving in a tough market at the moment. It may be the right time to invest. Let’s take a look at others metrics.

Earnings and Dividends

CAT earnings and div

Throughout the years, I’ve built a serious investing model including 7 rules of investing. These rules were built based on much stock researches and my 13 years as an investor. Here’s the first rule:

#1 High Dividend Yield Doesn’t Equal High Returns

It has been proven that high yield dividend stocks (over 5%) underperform the market. It’s only normal as companies paying over 5% dividend yield show a high level of risk or limited growth potential when most money is simply redistributed to investors through dividends. Those companies (such as MLP’s) are good for retirees seeking income, but not really interesting for a young investor like me (I’m in my 30s). Let’s take a look at CAT’s dividend yield throughout the years;

Approximate historical dividend yield at beginning of each year:

CAT historic yield

 

 

 

 

 

As you can see, CAT shows a relatively low dividend yield over the past 7 years but recently went over the 3% bar. This places CAT in a good position for dividend investors.

#2 If There is One Metric; It’s Dividend Growth

The second rule is quite simple, but really effective. If there is only one metric you should be looking at, it has to be the dividend growth. If a company grows its dividend year after year, it means profit and sales are also increasing.

While CAT is going through a tougher period at the moment, we can appreciate a strong annualized dividend growth of 12% over the past 5 years. Here again, the company fits my investing criteria.

#3 A Dividend Payment Today is Good, a Payment for the next 10 Years is Better

As previously mentioned; a company increasing its dividend payment year after year must also show revenue and profit growth to sustain its distribution. A good way to see if the company can make it through the next 10 years is to look how the payout ratio has evolved through time. In the previous graph, we see a payout ratio under 50% for the past 4 years. This is a very good indication that the dividend is sustainable.

#4 The Foundation of Dividend Growth Lies in its Business Model

Warren Buffet once said he invests only in businesses he understands. This is crucial to making rational investment decisions. Caterpillar’s economic moat is quite interesting. This business is selling world class equipment for various industries.

The company evolves in cyclical markets and revenues and profits fluctuate over time. However, it’s a leader in its industry and the quality of its equipment is well appreciated around the world.

How Does CAT Spend Its Cash?

The company has well defined priorities for its cash flow:

#1 Maintain financial strength

#2 Growth

#3 Pensions

#4 Dividends

#5 Stock Repurchases

This quote from their last earnings call with management resumes how CAT manages its cash flow:

The top cash deployment priority is to maintain a strong financial position to support our credit rating. As such, the ME&T debt-to-capital ratio was 37.1 percent, down slightly from 37.4 percent at the end of 2014. Our cash and liquidity positions also remain strong with an enterprise cash balance of $7.563 billion as of March 31, 2015. Additionally, cash will be used to support growth, appropriately fund employee benefit plans, pay dividends and repurchase common stock. During the first quarter of 2015, capital expenditures totaled $0.5 billion; funding for defined benefit pension plans was $0.1 billion; the quarterly dividend payment was $0.4 billion; and common stock repurchased was $0.4 billion.

Risks

While CAT is a very strong pick for a long term perspective, it might be riskier over a short period such as 12 months. If the mining industry continues to slow down as is the case right now, CAT might not be able to meet its double digit growth projection. For that reason, I think you should take a careful look at this company before going forward.

The company currently focuses on cost management to maintain its profit while waiting for the next resource driven wave to improve its results.

Conclusion and Valuation

The first valuation method used is a look at the historical PE ratio. It gives me an idea of how the market values the company:

CAT PE Ratio

Due to the economic slowdown, we see CAT losing strength in the valuation multiplier. Not so long ago, the company traded around 18 but it is now back to 14 times the benefits. The company seems slightly undervalued using the PE historic method. Let’s see what it looks like with the Dividend Discount Model:

CAT intrinsic value

Considering a 10 year dividend growth of 5% (considering the current market headwind) and a 7% average dividend growth rate for the future, we get a fair value at $84.59 while the stock is currently trading at $88-$89. I’ve used a discount rate of 10% as the company is very stable and will continue to be a leader in its industry.

In the light of both valuation methods; I can say Caterpillar is a good addition to a portfolio at the current price. What do you think?

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

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