Dividend growth investors always look forward to the announcement of a dividend increase. These investors like being paid to hold shares of companies. We will discuss three companies that recently raised dividends and whether or not they are offering good value at the moment.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (CM, Financial) can trace its roots all the way back to 1867. The bank is one of the largest financial institutions in Canada today. Canadian Imperial was formed in 1961 through a merger of Canadian Bank of Commerce and the Imperial Bank of Canada. The bank has a market capitalization of $35.4 billion and generated more than $14 billion in sales over the last year. Shares are down 4.5% year to date, but well off the lows seen at the end of March.
Canadian Imperial raised its dividend by 6.1% for the Oct. 28 payment date, which was the largest raise announced among Canada's five biggest banks. This gives the bank nine years in a row of dividend growth following a pause in 2009 and 2010. Canadian Imperial has a lengthy history of paying dividends, as the first distribution took place in 1868. U.S. investors have seen dividend growth of a little more than 2% over the last decade, so the most recent increase is considerably higher than normal.
Wall Street analysts, according to Seeking Alpha, expect earnings per share of $7.17 for the current year. Using the new annualized dividend of $4.20, Canadian Imperial has a payout ratio of 59%. This is above the 10-year average payout ratio of 47%, but not likely in an area where the dividend could be at risk for a cut. Given the payout ratio, I expect dividend growth to be lower going forward unless earnings per share grows at a higher rate.
With a current share price of $79.42, Canadian Imperial offers a yield of 5.3%. This is down from a yield of 6.8% that the stock offered the last time I examined the bank, but still higher than the 10-year average yield of 4.7%. The stock offers considerably more income than the average yield of 1.7% for the S&P 500.
Using the current share price and expected earnings per share, Canadian Imperial trades with a forward price-earnings ratio of 11.1. The stock's average price-earnings ratio is 10.2 since 2010.
Canadian Imperial now trades above its long-term valuation. I would hold the stock if I owned it as the bank continues to pay a high yield and just gave a higher-than-usual dividend increase. The stock is slightly overvalued against its own historical earnings multiple, so a better entry point would be advised for those not yet in the name.
Intuit Inc. (INTU, Financial) is a provider of business and financial management solutions to small businesses, consumers and accounting professionals. The company is a leader in cloud-based accounting and tax preparation services. Intuit's products include TurboTax and QuickBooks. Intuit is currently valued at almost $90 billion. The company's revenue totaled $7.7 billion over the last 12 months. The stock has had a very good year so far in 2020 as the share price is higher by more than 32%.
Intuit raised its dividend 11.3% for the upcoming Oct. 19 payment. This marks the 10th consecutive dividend increase for the company and is just below the five-year annual increase of 13.5%.
The new annualized dividend of $2.36 would consume just 28% of expected earnings per share of $8.42 for the current fiscal year (Intuit's fiscal year concludes at the end of July). This compares favorably to the payout ratio of 35% that the company has averaged since it began paying a dividend.
The stock offers a very small yield of just 0.7%, which is less than half of the S&P 500 yield. Intuit has never been much of an income stock as the yield has averaged just over 1% since 2012.
Intuit's stock is currently priced at $346.42, giving the stock a forward price-earnings ratio of 43.3. This is very expensive compared to the 10-year average price-earnings ratio of 24.8. Intuit has become more of a growth stock in recent years and has had an average multiple of almost 31 times earnings over the last five years.
Intuit's dividend raise was solid, but the yield is the lowest among the stocks discussed here. The stock is also trading with a valuation in excess of even its short-term average. Investors looking to purchase the stock might do better waiting for a valuation more in line with the historical average.
Lam Research Corp. (LRCX, Financial) provides semiconductor processing equipment used in the production of integrated circuits to customers around the globe. Lam Research is also a leading supplier of wafer fabrication equipment and services to customers in the semiconductor industry. The company has a market capitalization of just under $50 billion and had revenue of $10 billion in its most recent fiscal year (which ends June 30). The stock has gained nearly 17% in 2020.
Shareholders will receive a 13% increase for the dividend payment scheduled for Oct. 14. Lam Research now has seven years of dividend growth, but the annualized payment has gone from 18 cents in 2014 to $4.40 last year. This is fast-paced growth that cannot continue forever. Even though the most recent increase is well off the five-year average increase of 39%, investors still received a double-digit raise.
Following the increase, the annualized dividend totals $5.20. With analysts expecting earnings of $21.12 per share for the current fiscal year, the payout ratio is 25%. This is higher than the five-year average payout ratio of 19%, but very much in a manageable range.
Lam Research yields 1.5% at the moment, slightly below the average yield of 1.6% that the stock has had since it began paying a dividend.
With a current price of $341.20, Lam Research has a forward price-earnings ratio of 16.2. The stock has averaged a price-earnings ratio of 14.9 since 2010. However, this includes one year (2012) where earnings declined considerably from the previous year, resulting in a much higher-than-usual valuation. Removing this year from the equation and the average price-earnings ratio drops to 13.1.
Lam Research's dividend growth over the years helps to offset the low yield that the stock offers. That said, the stock trades above its decade-long valuation average. I would prefer to see a better price before adding the stock to my portfolio.
Canadian Imperial, Intuit and Lam Research have all announced dividend increases in the last week or so. Of these names, Canadian Imperial gave the lowest increase, but offers the highest dividend yield. The company's most recent increase is also much better than its long-term average. Intuit gave a double-digit increase, but the stock is quite expensive. Lam Research had the highest dividend growth of all the names discussed, but it, too, would look better at a lower price.
As with every investment, valuation considerations remain paramount. While I like each of these companies does for a living, I would wait for a better price before adding any of their stocks to my portfolio.
Disclosure: The author has no positions in any stocks discussed in this article.
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