Mr. Rogers' Dividend Neighborhood - LMT, MDP, ABT, JNJ
At the tender age of 12, his passions for investments were ignited when his father gave him dividend yielding equities as gifts, rather then toys like most young boys would have wanted. Once these seeds of curiosity were in place, the rest is history as this hobby blossomed into an AB in Economics from Princeton University. After a brief stint with brokerage firm, William Blair & Company, Rogers, with the trust and financial seeds of his friends and family, launched what is now Ariel Investments, a full service investment firm with over $3.76 billion in equities under management. To represent their investment philosophies, the firm utilizes the iconic tortoise at the firm’s mascot of choice.
A true value investor at heart, John Rogers is no stranger to the dollar menu at McDonalds, as he is well known at his local franchise for his regular lunch / dinner of a hamburger, large fries with salt, and a diet coke to cap it off. Such a saturated diet would make most people sedentary in their lifestyles. Not John Rogers however, as he serves on several F500 board of directors, including that of his favorite pastime, McDonalds, and takes a very active role in promoting civic causes in his community. Furthermore, he serves as a Forbes contributor under the moniker “The Patient Investor”. Such consistency in both diet and lifestyle must have its rewards, as his firm’s flagship fund has averaged a return of 10.39% since its inception, and a 4.35% annual return over the last 10 years. Comparatively speaking, the S&P 500 returned 9.21% since the fund’s inception, and 2.9% over the last 10 years. Admittedly, the firm has underperformed year-to-date, with a loss of 11.34%, but like most value investors, Rogers remains optimistic for the long term horizon.
So what does John Rogers look for in equities in order to achieve such returns? Like his compatriots, John Rogers seeks equities selling at a significant discount from its intrinsic price. To be more precise, he prefers those that are selling at a 40% discount, or sell at 13x earnings or less, with a strong preference from equities that demonstrate both of these qualities. Strong cash flow, low debt, and high quality services / products are looked upon highly in companies Rogers invest in. However, though somewhat unorthodox, in a manner very similar to his lifestyle, the firm is very pro-community. As such, it should come as no surprise that the firm rejects investments in businesses whose derive most of their revenues from tobacco products, handguns, or has a spotty carbon footprint in the environment. While this decision may affect their bottom line, the firm strongly believes in social responsibility, and chooses to invest in more “ethical” companies.
What can be said about John W. Roger Jr. as a dividend investor? In his composite portfolio of 120 equities, 37 of them bear any sort of equities. Roughly calculated at 30.8% of all equities held, many of the brands held are well known companies such as Target (TGT) and Exxon (XOM). The average top 4 forward dividend yielding equities in Roger’s portfolio normalized to TTM has a dividend yield of 3.63%, with a yield-on-cost of 4.17%. The average payout ratio is rather low, as of these 4 equities, the average payout is 48.83%, which signifies the possibility of large increases in dividend payments to their investors. The following table is an executive summary of the top 4 yielding equities of the portfolio:
Lockheed Martin (LMT)
Lockheed Martin is a global defense company engaged in the research and development of a range of products from radar systems to aviation fighters. Currently, Lockheed Martin has the highest yield in the portfolio, but comprises a mere .1325% of all equities held. In Q3 of 2011, Rogers increased his holdings of LMT by 78%.
Lockheed Martin current trades at $81.99 with a market capitalization of $26.59 billion. It trades at 10.31x earnings, with a trailing dividend yield of 3.96%. It has a yield-on-cost of 4.22% and is paying out approximately 40.93% of their earnings. In terms of their historical growth, over the last 4 years, Lockheed Martin has increased their dividends annually at 22% per year. Could this growth be sustainable? Financially speaking, LMT’s balance sheet demonstrates an all time high in terms of cash holdings, with over $4.5 billion on the balance sheet, an increase of 71.8% from same quarter last year. In terms of profitability, Lockheed Martin has increased their margin to 5.77% for their most recent quarter, compared to 4.9% last year. With a free cash flow payout of merely 29.67%, Lockheed Martin certainly has the ability to maintain if not continuously increase its dividend to their investors for the long term. Compared against the industry, LMT has a ROE of 23.7%, vs. 24.1%, slightly underperforming it by .4%. Analysts have placed an average price target of $81.28 on LMT, signifying that there is a consensus that at this point, LMT is trading above at intrinsic price.
Lockheed Martin recently acquired Procerus Technologies, a developer of unmanned airplanes and systems. In other developments, the US Air Force awarded LMT a $21.5 million contract to maintain their GPS satellites from launch. Future quarters are expected to be “flatter” as oversea conflicts are winding down.
GuruFocus rated LMT with the business predictability rank of 4.5 stars.
Meredith Corporation (MDP)
The Meredith Corporation is a media company operating through a variety of mediums such as magazines and television broadcasting. From Q2 to Q3, Rogers reduced his holdings of MDP by 8.19%, rendering MDP at 1.2419% of the aggregate portfolio.
MDP currently trades at $31.85 at 12.31x earnings. Their market capitalization is $1.43 billion, with a trailing dividend yield of approximately 3.60%. MDP has a yield-on-cost of 5%, and an earning payout ratio of 41.36%. Over the last 4 years, MDP has grown its dividend at an average rate of 11.5% yearly. Examining MDP’s financial statements, there are several items of interest. Over the last 4 quarters, the firm has maintained its profit margin within 9-12%. In terms of FCF payout, the firm is paying out 68.1% of their free cash flow as of last quarter. Items of concern however, are that of possible liquidity issues. For example, for the most recent quarter, MDP has a current ratio of .88, a quick ratio of .83 and a cash ratio of 6.7%. The firm’s debt ratio is at 56%, yielding the conclusion that the firm is a bit leveraged. Furthermore, compared against the industry, the firm has a mere ROE of 3.98% for its most recent quarter vs. the industry standard of 25.7%, a significant underperformance. The overall conclusion that can be rendered is while MDP certainly has the ability to maintain the dividend, the ability to increase it consistently without jeopardizing operations is in question. Analysts have valued the firm at $34.17, yielding an upside of 7.28% from current prices.
The Meredith Corporation recently purchased Allrecipes.com from Reader’s Digest, in a deal valued at $175 million, in an effort to bolster its online presence.
GuruFocus rated MDP with the business predictability rank of 1 star.
Abbott Laboratories (ABT)
Abbott Laboratories researches, develops, and sells products in 4 segments: Pharmaceuticals, diagnostic, nutritional and vascular. In Q3 of 2011, Rogers increased his holdings of ABT by 74.11%, and ABT now comprises .1544% of all equities held.
Abbott Laboratories currently trades at $54.85, with a market capitalization of $85.43 billion. The firm has a P/E ratio of 18.26, and is paying out 65.97% of their earnings. Its yield on cost is 4%, and has trailing dividend yield of 3.49%.Since 2005, the firm has increased its dividends to their investors at an average rate of 12.2%. How likely is ABT to maintain its dividend, if not increase it? The income statement yields a profit margin of 11.3%, and a history of increasing its sales by 31.5% over the last 3 years, amidst a sluggish economy. Under both the current and quick ratios, the firm is considered to be liquid (> 1). Furthermore, the firm is paying out only 34.59% of their free cash flow, with a ROE of 21.12%, well above the industry average of 15.8%. In terms of qualitative factors, Abbott Laboratories manufactures consumer staples like Similac and PediaSure / Pedialyte. With these factors in mind, ABT should not only maintain its dividend, but continuously to increase it, if not at a larger rate then its current 12.2% annual growth. Analysts have valued ABT at an average price target of $59.66, yielding an upside potential of 8.7%.
Federal courts recently ruled in favor of Abbott and fellow competitors against JNJ over a stent patent suit. In early January, Abbott Laboratories won an exclusive contract to market Vitaros, an ED drug in Canada, set to launch in 2012.
GuruFocus rated ABT with the business predictability rank of 5 stars.
Johnson & Johnson (JNJ)
Johnson & Johnson researches, develops and markets a range of products in 3 primary segments: Consumer, Pharmaceutical and Medical Devices / Diagnostics. Rogers increased his holdings of JNJ by 27.15% between Q2 and Q3 of 2011 which now comprises .1496% of all equities held by Ariel Investments.
Johnson & Johnson closed at $65.21, with a market capitalization of $178.08 billion. Trading at 18.72x earnings, JNJ has a trailing dividend yield of 3.45%, a yield-on-cost in the portfolio at 3.44%, and an earning payout ratio of 47.07%. An iconic dividend payer, as noted on their investor website, JNJ has generated “49 consecutive years of dividend increases”. However, its most recent quarter, reported on January 24th saw its net income decline by 89% due to “legal settlements and product-liability costs”. Nonetheless, the company is still flushed with cash at $15.6 billion, and a free cash flow payout of approximately 50.66%. Johnson & Johnson is by basic measures, liquid (current ratio >1) and has a ROE of 15.7%, which is comparable to the industry average of 15.8%. Their product lines are also staples in many households, ranging from lotions to band-aids. With these factors in mind, JNJ should not only be able to maintain its dividend, but continue the 49 year lineage in dividend increases. In fact, if there were to be a year in which dividends did not increase, or were slashed, it is likely that JNJ’s credibility as a blue chip would be quickly called into question in addition to the expected plunge. Analysts have placed an average price target of $72.60 on the firm, rendering an upside potential of 11.3%.
Recently, the FDA warned JNJ regarding their orthopedic replacement devices that were “improperly marketed” due to their lack of approval from the FDA. In other news, JNJ recently settled in a case with Texas over its Risperdal drug for a sum of $158 million.
GuruFocus rated JNJ with the business predictability rank of 4 stars.
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