Quick Ideas

In the initial screening process for new investments, it helps to review quick information for multiple companies. I provide regular articles to highlight groups of dividend-paying companies under various themes and concepts so that you can help find investments you're interested in, and you can find them below.
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For convenience, you can get monthly dividend stock ideas and market updates via my free dividend growth newsletter. I'll point out individual stocks and sectors that I believe are trading at appealing valuations:

Five Dividend Stocks Buying Back Their Own Shares

Top Dividend StocksWhen management of a company is looking to make good use of incoming capital for shareholders, there are various options.

If they have a good expansion opportunity, or believe stronger advertising can provide good returns, then the money may be beneficially reinvested for organic growth. Organic growth is often the best use of capital, but there’s a limit to how quickly a large company can grow in a given amount of time.

Alternatively, if there is a complementary business that management believes is appropriately priced and will strengthen their company, they can make an acquisition. The downside is that, in many industries, acquisitions are often over-priced empire-building activities rather than truly beneficial to shareholders.

And of course, if a company has a weak balance sheet, some incoming capital can be used to pay off debt and add additional liquidity to the balance sheet.

In addition, there are two more direct ways to give money back to shareholders. The most direct way is to pay a dividend, where a company sends a portion of the profits to shareholders, ideally on a regular basis.

Alternatively, or in addition to dividends, company management might want to use some incoming profits to buy back shares of the company, and thus decrease the number of shares outstanding, and therefore increased the percent ownership of each share. All else being equal, share buybacks boost EPS, and are functionally similar to reinvested dividends, but are treated better than dividends under current tax law. The downside to buybacks is that a lot of companies buy back shares when they are expensive and hold tightly onto their money when times are tough, with the end results being similar to a nervous investor that avoids investing in market bottoms and happily invested in market tops.

There are some companies that pay regular growing dividends, and then use any extra cash flow after that and other options, to buy back some shares. The dividend yield and share buyback yield, put together, are the shareholder yield, which gives the investor a decent idea of what rate of return can be expected merely from taking existing profits and giving them back to shareholders, on top of all other growth prospects.

One of the criticisms about the sustainability of capitalism is that it requires constant growth to function, but that’s only partially true. You can get substantial returns from a company that isn’t growing. When a stock is at the right valuation, then a significant number of share buybacks along with dividends can produce a 10% rate of return even when the company is not growing at all, or only growing due to keeping pricing up to pace with inflation. A good example of that is Chubb Corporation (CB), which has no revenue growth, but has boosted EPS, dividends, book value, and the stock price, over the long term.

This is a non-exhaustive list of five more select companies that are both paying dividends and regularly buying back shares.

Becton Dickinson (BDX)

Becton Dickinson is a global medical device company, producing a variety of medical, diagnostic, and bioscience products, with significantly more than half of company revenue coming from outside of the United States.

The company has over four decades of consecutive annual dividend growth, but due to a modest payout ratio and the recent surge in stock price for 2013, the dividend yield is fairly low at only 2%. Much of the capital goes to buybacks, however. In the past nine years, they’ve bought back nearly 25% of the company’s market cap. Recently, the company has bought back over 7% of its market cap in each of two years, but that has largely been due to taking advantage of low interest rates to increase the corporate leverage. More sustainably over the long-term, the company buys back perhaps 3% of its stock per year, while paying a 2-3% dividend yield, and combining that cash return with solid revenue growth.

I view the current valuation of BDX to be reasonable, if not exactly appealing, compared to many other potential investments on the market currently. A full analysis from earlier this year is available here.

Lowe’s Companies (LOW)

I haven’t published a report on Lowe’s in a few years, primarily due to the low dividend yield of only 1.5% (despite five decades of consecutive annual dividend growth). It’s a good mention in a share buyback list, however, since it couples the dividend with serious regular stock buybacks. The company bought back 30% of its market cap in under 8 years, reducing the share count considerably from over 1.6 billion to well under 1.2 billion. The company offers a decent 5% shareholder yield overall, along with solid core growth.

Overall, I’d classify this home improvement retailer as being a bit pricey at the current time after the 2013 run-up.

J.M. Smucker Co. (SJM)

Smuckers, the maker of Jams and Jelly, is an interesting example. Over the past decade, they went on an acquisition-spree buying brands like Folgers coffee and Jif peanut butter to turn Smuckers into a larger, diversified food company. To afford all of this, the company regularly issued new shares, growing the number of outstanding shares in the process. Over the 2005-2010 period alone, the company doubled its number of shares outstanding. The strategy paid off, as per-share metrics had very strong growth and roughly quintupling the investment of their investors over the most recent 12 year period.

Now, the company is using substantial buybacks and decreasing its share count. The current dividend yield is about 2.16%, with another 2-3% buyback yield. I do feel, however, that the valuation is a bit ahead of itself, and it would be better to watch this one for a while.

Target Corporation (TGT)

It’s tough to dig any sort of moat in retail, which is a low margin and hyper-competitive industry. Being a “middle of the road” retailer, avoiding the bargain or luxury extremes, is a particularly dangerous place to be. Target has found a niche at the high end of the budget space- typically a classier shopping experience than Wal-Mart and membership chains, but still with rather low prices. The company’s four and a half decade streak of consecutive annual dividend increases is evidence of the success of this strategy so far, and the current dividend yield is 2.68%.

Target also buys back shares, having bought back nearly 30% of its market cap in the past decade. The company often purchases up to 5% of its market cap in a single year, although it can vary year to year. I view the company as reasonably valued, but with large retail competitors, bulk membership competitors, and disruptive online competitors, I’d like to see a bigger margin of safety.

Texas Instruments (TXN)

Texas Instruments is the largest producer of analog chips in the world. Their products tend to have long life-cycles and high margins, and they supplement those strengths with a particular focus on their large sales team. The headwind for the company is that they’ve been exiting some commodity product lines to focus in their core analog area, and as can expected this decision has impacted revenue.

The company wasn’t much of a dividend payer until the last few years, where it has quickly grown its dividend to a current yield of 2.89%; fairly high for the tech industry. The company bought back 35% of its market cap in the past decade, and continues to buy back ~4% of its shares each year.

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

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5 Dividend Stocks Trading at Appealing Valuations

Top Dividend StocksThe S&P 500 has had a strong upward rise over the last four years, including a sustained increase for the year-to-date in 2013. This pushed dividend yields lower throughout the market, meaning investors can’t buy as large of an income stream with their money.

Despite that, there have been some blue-chip stocks that have missed out on part of this increase. Here are five of them at that trade at valuations that are lower than the rest of the market.

Chevron Corporation (CVX)

Chevron’s stock performance over the past four years has been admirable, but most of the increase in price occurred in in the 2009-2011 period. The stock has been fairly flat and choppy since then, and currently offers a dividend yield of 3.14%, a five-year dividend growth rate of approximately 9%, and a dividend payout ratio of under 40%. The dividend is likely to increase this quarter.

Cost over-runs at the enormous $50+ billion Australian Gorgon LNG gas project, as well as continued litigation risk from their ceased Ecuadorian operations seem to be keeping the stock valuation in check.

Chevron has a pristine balance sheet, and gas output in 2015 from the Gorgon project should be a driver for growth.

Intel Corporation (INTC)

Intel’s #1 problem is that they have the dominant position in the softening PC market. As the world’s largest semiconductor producer, they use their immense capital resources to keep ahead of AMD with the tick-tock method, but ARM has strongly outperformed Intel in the proliferating market of mobile computing devices. This leaves Intel holding the bag in the PC market, but fortunately they do have strong positioning in the growing server market.

Another strike against the company is that their billions spent on acquisitions over the last several years doesn’t seem to be having a material benefit. I pointed out in my 2010 analysis of the company that their McAfee acquisition, at 40 times earnings, doesn’t seem particularly justifiable unless several bullish assumptions all take place.

The company offers a hefty dividend yield of 4.1%, the most recent increase was over 7% (which I believe is a more practical measure of dividend growth at this point compared to their much larger five-year dividend growth rate), and so with a P/E of only 10, the company doesn’t require almost any core growth to offer investors a shot at double-digit returns. The company likely isn’t looking at a whole lot of growth, but since most of their cash goes to investors in the form of dividends and share buybacks (which fuels EPS/dividend growth), Intel stock is still in a reasonably appealing position.

Oneok Partners LP (OKS)

NGL prices haven’t been helping Oneok, but over the long term, their $5 billion in projects seem to present a clear path to growth over the next several years. I was a bit wary of this MLP back in 2011 when the unit price was soaring, but after a flat unit price of 2012 and 2013 along with continued distribution growth, OKS is looking a bit more attractive compared to the market these days.

With a 5.21% distribution yield and 6% annualized distribution growth over the last five years, the partnership is a strong income producer. Pipelines represent consistent, wide-moat infrastructure investments that are perfect for dividend investors.

For those interested in MLPs, two other partnerships that I’m bullish on (and own) for yield and growth, are Kinder Morgan Inc. (KMI) (full analysis) and Energy Transfer Equity LP (ETE) (recent analysis).

Air Products and Chemicals (APD)

With 30 years of consecutive dividend growth, APD has had some consistency. This company is the largest supplier of hydrogen to companies in the world, and generally signs long-term contracts with customers. The focus recently has been on cost-cutting and selling of non-core business units, and so their revenue for 2012 wasn’t as strong as 2011.

The dividend yield is a decent 3.31%, the dividend growth rate over the last 5 years has averaged more than 10% per year, and the balance sheet is quite strong with an interest coverage ratio of 10.

BHP Billiton ADR (BBL, BHP)

BHP Billiton, headquartered in Australia, is the largest mining company in the world. Two ADRs (with equal economic and voting rights) trade on the NYSE: BBL and BHP. BBL trades at a discount to BHP and therefore offers a higher dividend yield.

The market has boomed in 2013 while the stock price of BHP Billiton has fallen. On April 17th alone, BBL fell over 4.5%. The reason is, commodity prices have fallen compared to 2011, and institutional investors have pulled back a bit. That leaves BBL ADR shares with a 4.2% dividend yield. The 2007-2012 period saw annualized dividend growth of nearly 19% per year in USD, although the 2012-2013 dividend change has so far been 3.6% in USD.

Looking at this from a long-term view rather than a short-term one, BHP Billiton offers a strong combination of yield and growth, has highly diversified mining operations, and it will continue to offer materials that the world needs. At a P/E ratio of 15, the company is on sale compared to the market.

A Snapshot of the Market

The Shiller P/E of the market is currently in the range of 22-23, which places it well above its historical average of under 17, but lower than it was prior to the latest recession. Using the Shiller P/E as the metric of choice, the market’s overall valuation has been fairly flat over the last three years as both earnings and stock prices have risen.

While these five investments don’t necessarily represent recommended picks, they may be good places to look. The most recent issue of the dividend newsletter included three other stock picks that seem to be trading at reasonable valuations. Even in this moderately highly valued market, values can still be found.

Good Dividend Growth Candidates Often Have:
-A sum of dividend yield and expected future EPS growth that sums to 10 or higher. Assuming a constant stock valuation over time, the sum of yield and EPS growth is the best estimate for long-term returns, which can be quantitatively demonstrated with methods like the Dividend Discount Model.

-A sturdy balance sheet with an interest coverage ratio of 8 or higher. A company with a balance sheet that’s stronger than its peers has flexibility to make opportunistic investments, to take advantage of low interest rates to temporarily increase their debt and buy back shares, and to weather major economic downturns. Of course, for asset-heavy businesses like utilities or MLPs, a much lower interest coverage ratio is allowed and expected, and the credit rating becomes a more relevant assessment.

-A specific plan for the future. Rather than operating quarter by quarter, successful companies plan years ahead. Look for companies that proudly explain their plans over the next five years or so, including specific projects or specific growth targets and explanations of how they’ll meet those targets. Blue-chip stocks that have mild to moderate growth and that spend much of their money on dividends and buybacks are often consistent enough for investors and managers to make fairly accurate predictions about EPS and dividend growth over a business cycle.

Full Disclosure: As of this writing, I am long CVX, ETE, and KMI.
You can see my dividend portfolio here.

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5 Engineering Companies that Keep Boosting Dividends

Top Dividend StocksWhen investors think of dividend payers with the longest streaks of consecutive annual dividend increases, their minds may jump towards the Coca Colas and Procter and Gambles of the world, but some of the slightly more volatile diverse engineering companies have among the most consistent dividend histories.

Three of the companies on the short list of companies that have 50+ years of dividend increases without a miss are engineering companies, and they’re included below. The other two on this list are in the 40+ year range.

3M Company (MMM)

3M, the largest company on this list in terms of revenue, is the business behind the well-known Scotch Tape brand, but the bulk of their 55,000+ products are marketed towards other businesses rather than consumers. This includes abrasives, adhesives, films for LCD screens, toll booth technology, and safety products. The dividend yield is a bit low at 2.39% but comes with the momentum of five decades of consecutive annual dividend growth.

This business is strong and I believe shareholders will do fine over the long run, but as I described in the latest 3M analysis, the sum of EPS growth and dividend yield is a bit on the lower side which can impact long-term returns.

Emerson Electric (EMR)

Emerson Electric is positioned behind the growing fields of data centers and telecommunications. The world is becoming increasingly connected with more telecommunications infrastructure and more bandwidth, and cloud computing means a larger emphasis on servers rather than client machines, and these industries have the need for reliable power and cooling systems, reliable physical infrastructure to hold and connect the parts, etc. Emerson provides these things, and also is a global player in the industrial automation market.

With one of the more generous payout ratios on this list, Emerson currently offers investors a yield of just shy of 3% with more than five decades of consecutive dividend growth. The full Emerson analysis is here, and personally I’d wait for a pullback allowing a 3+% yield before making a buy here.

Dover Corporation (DOV)

Dover unfortunately offers the lowest yield on this list at slightly under 2% (all of these yields have been pushed lower due to the 2013 year-to-date strong bull market), but also has the longest dividend streak on this list, and as far as I’m aware has the third-longest annual dividend growth streak out of any company in the world.

The five operating segments of the company are Energy, Refrigeration and Food Equipment, Communication Components, Product Identification, and Fluids. The full analysis from a few months ago is available here.

Leggett and Platt (LEG)

LEG is the smallest company on this list but has the largest dividend yield of 3.50% and four decades of dividend growth without fail. The payout ratio appears high at first glance, but as detailed in the full analysis report, the company generates much more free cash flow than reported net income, so they’re able to pay the dividend and then pay just as much towards share buybacks or acquisitions.

The company has had quite the transformation over the last decade as they have divested considerable portions of their business to focus on their strong areas of furniture components, steel wire, shelving, and specialized engineering, and refocused themselves towards the specific and admirable goal of offering total shareholder returns in the top third of the S&P 500. Their business segments are operated like a portfolio, and listed as “grow”, “core”, “fix”, and “divest” to determine how much capital they’re allocated.

Illinois Tool Works (ITW)

Illinois Tool Works now has a similar business model of LEG, where they manage their business units like a portfolio, are divesting non-core units rather than focusing purely on growth, and are focusing on balanced total shareholder returns (core organic growth, acquisitions, dividends, and buybacks). As described in the full ITW stock report, the company is well-known for its focus on the 80/20 rule, where they’d rather limit their number of products and customers to maximize profitability than grow customers and products simply for the sake of growth.

The yield is currently 2.49%, and unlike many other businesses, their stock valuation has not soared in 2013 so they might be a good candidate to look into for dividend investors. I consider their current price to be fairly valued.

Three Notes About Engineering Companies

1) They tend to do well with acquisitions. In general, acquisitions have a reputation for being great for the acquired company but an often expensive and overpriced mistake for the acquirer. It’s sometimes referred to as “Empire Building” when a business seeks to grow itself simply for the sake of growth rather than for maximizing shareholder returns. Engineering companies, on the other hand, tend to make smart and consistent acquisitions at good prices as part of their regular growth policy. Occasionally they do a bit of streamlining and divest non-core operations and return the cash to shareholders.

2) With the exception of LEG and to some extent EMR, engineering companies tend to keep dividend payout ratios a bit on the low side. This is because as a group, they’re slightly more volatile than consumer businesses. They primarily sell their products to other businesses, so their earnings tend to be a bit more erratic during periods of economic weakness.

3) The positive aspect of their volatility is that this is one of the better industries to write puts or sell covered calls with. In many cases, you can lower your cost basis or make an annual return in the range of 8-15% by writing long-term puts or selling calls on companies in this industry. These tools are particularly useful for value investors when stock valuations are a bit on the high side.

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

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