Arnold Van Den Berg is a value investor with a long term track record of success stretching back to the 70s. His portfolio has a fairly low turnover for an active manager, at only 10% quarter over quarter. Although as a value investor he is willing to invest in whatever space he finds value, his portfolio is currently rather focused on large caps, which is where he is finding value currently. This has resulted in his portfolio containing many solid dividend payers.
A GuruFocus interview with Van Den Berg can be found here. His investment strategy uses bottom-up fundamental value analysis, but he also strongly incorporates expectations of inflation or deflation into his macro strategy. He described his expectations of America finishing a bear market over the next 5-6 year period, possibly followed by a robust bull market.
This article will cover five of his large dividend payers. His top five holdings are Microsoft (MSFT, Financial), Walmart (WMT, Financial), Coca Cola (KO, Financial), Colgate Palmolive (CL, Financial) and Dell (DELL). Since Dell doesn't pay a dividend, that brings us to his sixth largest holding, which is 3M (MMM, Financial).
Large American dividend-paying companies tend to focus on increasing their dividend each and every year. This sometimes presents a dilemma. If they have a strong year, they may feel inclined to provide a large dividend increase, but then according to the strategy of increasing the dividend each year, that permanently locks the company in at a higher dividend rate which might become problematic in years of poor company performance. It's more flexible to keep a moderate payout ratio. So, while the dividend policies of many American large caps tend to provide the investor with good psychological benefits, such as highly dependable income growth, they also tend to make the dividend decision rather inflexible.
Many companies choose to solve this with share repurchases. In a given year, they raise the dividend by a reasonable amount and any excess capital that they wish to return to shareholders goes towards share repurchases. Net share repurchases, if performed in large quantities, can help fuel EPS and dividend growth. They are also treated better from a tax perspective. The downside, of course, is that investors cannot spend share repurchases like they can dividends. They also have less control over how to reinvest the money; investors can choose where to reinvest dividends, if at all, whereas share repurchases are effectively reinvested for them. Plus, executives can use share repurchases to boost share prices for their own requirements and advantages. In addition, the whole point of this approach is to retain flexibly for management, which more specifically, typically means being able to reduce or eliminate share repurchases when times are tough (and when it's often one of the better times to buy stock). Still, the American model of dividends and share repurchases tends to work pretty well over time.
Many of the top holdings in Van Den Berg's portfolio have moderate dividend rates and significant dividend growth, mainly due to the combination of dividend payouts and net share repurchases.
Microsoft Corporation
Microsoft, the large software producer of Windows, Office, Xbox and Server tools, has seen its stock remain effectively flat for a decade now. I've run into people that for this reason or another, believe Microsoft's performance has been just as flat, but this is nowhere near the case. Microsoft's revenue in 2002 was around $28 billion, while today it's nearly $70 billion. Over the same time period, net income roughly tripled from $7.8 million to over $23 million and EPS has nearly quadrupled due to the effect of share repurchases. And Microsoft consistently generates free cash flows that exceed net income, which means the cost of growth is low and Microsoft is able to send a large portion of their cash flows back to shareholders in the form of dividends and share repurchases. The flat stock price has been due to a reduction in stock valuation over the decade, rather than flat fundamental performance.
There are concerns about how the continued shift towards mobile and cloud computing will affect Microsoft and about slumping PC sales, but there is considerable upside as well; Microsoft has a lot invested in many areas of cloud computing, from Windows Azure to Xbox Live, potential shifts in business models to address rampant software piracy in emerging markets and the increasing use of personal computers in emerging markets. There is considerable risk/reward potential, but with a P/E of under 9, a clean balance sheet and shareholder-friendly management, I can see why the company would be Van Den Berg's top holding.
In particular, Microsoft spends nearly twice as much on net share repurchases as they do on dividends and when the valuation is low like it currently is, this provides solid returns. Microsoft's stock valuation has been diminishing for the whole decade, but the approximately $14 billion that goes into dividends and net share repurchases (approximately 7% of the current market cap of the company annually), should provide a floor of the stock price. With a P/E of under 9, a 2.67% dividend yield and double digit dividend growth, unless Microsoft runs into major profitability issues during the transition to more server-based revenues and profits, the stock price must eventually follow the performance. And the longer that it does not, the more lucrative Microsoft's share repurchases become.
Dividend Yield: 2.67%
Most Recent Dividend Increase: 23%
Total Debt/Equity: 0.21
Interest Coverage Ratio: 92
P/E: 8.9
Percentage of FCF Going Towards Dividends and Net Repurchases: 65% (2011), 56% (2010)
Walmart Stores
Despite being a very different business, Walmart's story is similar to that of Microsoft. The stock has gone nowhere for a decade, while at the same time, the company itself has performed very well in the retail business. Between 2002 and 2010, revenue nearly doubled, net income more than doubled and EPS has tripled. And like Microsoft, Walmart generates a ton of free cash flow, which it uses to pay dividends and buy back a ton of low-priced shares.
Walmart, however, has not had nearly the consistency or success internationally as it has domestically. And online retailers such as Amazon (AMZN, Financial) pose a threat that is not going to go away. Walmart's revenue growth has slowed down considerably in recent years, with a less than 1% revenue increase for 2010 and approximately 3% revenue growth for 2011. Walmart has responded by strengthening its own online retail business and has also entered the streaming movie business via its 2010 Vulu acquisition. If Walmart can apply its scale to business outside of brick-and-mortar retail, their potential for growth is considerable. Alternatively, Walmart's endeavors may cannibalize its own operations (online retail taking market share form its own physical retail, online movie streaming taking market share from its own DVD sales, etc.), which can reduce growth potential. All things considered, with a P/E of under 12, the potential for solid risk-adjusted returns is there.
Dividend Yield: 2.80%
Most Recent Dividend Increase: 21%
Total Debt/Equity: 68%
Interest Coverage Ratio: 11
P/E: 11.8
Percentage of FCF Going Towards Dividends and Net Repurchases: 175% (2011), 82% (2010)
The Coca Cola Company
Coca Cola is a classic blue chip dividend growth company. Unlike Microsoft and Walmart that have substantial headwinds and rather low valuations, Coca Cola still enjoys a healthy valuation. The forward P/E is over 15, which is healthy and is lower than Coca Cola's sky-high valuation from the last decade. With a moderate dividend yield and moderate dividend growth, built on top of a very sturdy foundation (huge international sales, one of the most powerful brand icons in the world, a simple and highly scalable business model, high net profit margins, diversified brands and the leading distribution system), Coca Cola may be poised to offer shareholders reasonable long-term risk-adjusted returns. It's the type of investment that one doesn't need to check up on very often.
Still, not all is rosy for Coke. Unhealthy soda beverages are facing pressure in developed markets and this isn't likely to stop. The answer for a company like Coca Cola or Pepsico (PEP), is to continue to seek emerging market share and to include more and more healthy beverage brands. Coca Cola offers juices, teas and sports drinks in addition to its sodas and the emerging market opportunity is enormous. Citizens of China, India, Pakistan, Nigeria and Indonesia, some of world's most populous countries, consume less than a tenth of the annual per-capita servings of various Coca Cola brands than Americans.
Dividend Yield: 2.79%
Most Recent Dividend Increase: 7%
Total Debt/Equity: 0.76
Interest Coverage Ratio: 12
P/E: 12.6 (But realistically higher, due to one-time events)
Percentage of FCF Going Towards Dividends and Net Repurchases: 73% (2010), 75% (2009)
Colgate Palmolive
The stock for Colgate Palmolive, the producer of oral care, soaps and a variety of other consumer products, is in a similar position to Coca Cola stock. The market is currently paying a premium valuation for a premium company and Colgate Palmolive derives a substantial portion of its revenue, nearly 75%, from outside of the United States. Analysts currently project reasonable EPS growth for 2011 and 2012, partly due to Colgate Palmolive's continued business growth and partially due to their share repurchases which boost EPS growth.
Unfortunately, the company's P/E ratio of over 17 means that the company isn't getting a great rate of return on its share repurchases. Management is spending nearly twice as much on share repurchases as they are paying dividends, which I'm not sure is a great idea at these valuations.
Colgate's balance sheet is not as solid as some of its peers. Total debt/equity is about 1.28, which is rather high and most of the shareholder equity consists of goodwill. But, the stability of the business has allowed the company to get very low interest rates on its debt, so its interest coverage ratio is very high and much better than average. The result is a heavy but stable balance sheet, which has resulted in achieving very high returns on equity (currently around 90%), over a long period of time. It's a rather aggressive approach.
Dividend Yield: 2.72%
Most Recent Dividend Increase: 9%
Total Debt/Equity: 1.28
Interest Coverage Ratio: 53
P/E: 17.5
Percentage of FCF Going Towards Dividends and Net Repurchases: 119% (2010), 76% (2009)
3M Company
3M, the producer of a huge variety of industrial products and office products, also boasts strong international exposure. The company has segments that span consumer and office, display and graphics, electrical and communications, health care, industrial and transportation and safety, security and protection.
The company is currently trading at around its 52-week low, after falling from its 52 week-high in July. Unlike many other companies that partially recovered their stock prices during this volatile market period, MMM continued declining. The P/E is now only 13 and the dividend yield is increasing. If the valuation were to dip a bit more, such that the dividend yield becomes 3%, it would be a strong buy in my view.
Dividend Yield: 2.86%
Most Recent Dividend Increase: 5%
Total Debt/Equity: 0.35
Interest Coverage Ratio: 31
P/E: 13
Percentage of FCF Going Towards Dividends and Net Repurchases: 41% (2010), 25% (2009)
Full Disclosure: I own shares of KO.
A GuruFocus interview with Van Den Berg can be found here. His investment strategy uses bottom-up fundamental value analysis, but he also strongly incorporates expectations of inflation or deflation into his macro strategy. He described his expectations of America finishing a bear market over the next 5-6 year period, possibly followed by a robust bull market.
This article will cover five of his large dividend payers. His top five holdings are Microsoft (MSFT, Financial), Walmart (WMT, Financial), Coca Cola (KO, Financial), Colgate Palmolive (CL, Financial) and Dell (DELL). Since Dell doesn't pay a dividend, that brings us to his sixth largest holding, which is 3M (MMM, Financial).
Large American dividend-paying companies tend to focus on increasing their dividend each and every year. This sometimes presents a dilemma. If they have a strong year, they may feel inclined to provide a large dividend increase, but then according to the strategy of increasing the dividend each year, that permanently locks the company in at a higher dividend rate which might become problematic in years of poor company performance. It's more flexible to keep a moderate payout ratio. So, while the dividend policies of many American large caps tend to provide the investor with good psychological benefits, such as highly dependable income growth, they also tend to make the dividend decision rather inflexible.
Many companies choose to solve this with share repurchases. In a given year, they raise the dividend by a reasonable amount and any excess capital that they wish to return to shareholders goes towards share repurchases. Net share repurchases, if performed in large quantities, can help fuel EPS and dividend growth. They are also treated better from a tax perspective. The downside, of course, is that investors cannot spend share repurchases like they can dividends. They also have less control over how to reinvest the money; investors can choose where to reinvest dividends, if at all, whereas share repurchases are effectively reinvested for them. Plus, executives can use share repurchases to boost share prices for their own requirements and advantages. In addition, the whole point of this approach is to retain flexibly for management, which more specifically, typically means being able to reduce or eliminate share repurchases when times are tough (and when it's often one of the better times to buy stock). Still, the American model of dividends and share repurchases tends to work pretty well over time.
Many of the top holdings in Van Den Berg's portfolio have moderate dividend rates and significant dividend growth, mainly due to the combination of dividend payouts and net share repurchases.
Microsoft Corporation
Microsoft, the large software producer of Windows, Office, Xbox and Server tools, has seen its stock remain effectively flat for a decade now. I've run into people that for this reason or another, believe Microsoft's performance has been just as flat, but this is nowhere near the case. Microsoft's revenue in 2002 was around $28 billion, while today it's nearly $70 billion. Over the same time period, net income roughly tripled from $7.8 million to over $23 million and EPS has nearly quadrupled due to the effect of share repurchases. And Microsoft consistently generates free cash flows that exceed net income, which means the cost of growth is low and Microsoft is able to send a large portion of their cash flows back to shareholders in the form of dividends and share repurchases. The flat stock price has been due to a reduction in stock valuation over the decade, rather than flat fundamental performance.
There are concerns about how the continued shift towards mobile and cloud computing will affect Microsoft and about slumping PC sales, but there is considerable upside as well; Microsoft has a lot invested in many areas of cloud computing, from Windows Azure to Xbox Live, potential shifts in business models to address rampant software piracy in emerging markets and the increasing use of personal computers in emerging markets. There is considerable risk/reward potential, but with a P/E of under 9, a clean balance sheet and shareholder-friendly management, I can see why the company would be Van Den Berg's top holding.
In particular, Microsoft spends nearly twice as much on net share repurchases as they do on dividends and when the valuation is low like it currently is, this provides solid returns. Microsoft's stock valuation has been diminishing for the whole decade, but the approximately $14 billion that goes into dividends and net share repurchases (approximately 7% of the current market cap of the company annually), should provide a floor of the stock price. With a P/E of under 9, a 2.67% dividend yield and double digit dividend growth, unless Microsoft runs into major profitability issues during the transition to more server-based revenues and profits, the stock price must eventually follow the performance. And the longer that it does not, the more lucrative Microsoft's share repurchases become.
Dividend Yield: 2.67%
Most Recent Dividend Increase: 23%
Total Debt/Equity: 0.21
Interest Coverage Ratio: 92
P/E: 8.9
Percentage of FCF Going Towards Dividends and Net Repurchases: 65% (2011), 56% (2010)
Walmart Stores
Despite being a very different business, Walmart's story is similar to that of Microsoft. The stock has gone nowhere for a decade, while at the same time, the company itself has performed very well in the retail business. Between 2002 and 2010, revenue nearly doubled, net income more than doubled and EPS has tripled. And like Microsoft, Walmart generates a ton of free cash flow, which it uses to pay dividends and buy back a ton of low-priced shares.
Walmart, however, has not had nearly the consistency or success internationally as it has domestically. And online retailers such as Amazon (AMZN, Financial) pose a threat that is not going to go away. Walmart's revenue growth has slowed down considerably in recent years, with a less than 1% revenue increase for 2010 and approximately 3% revenue growth for 2011. Walmart has responded by strengthening its own online retail business and has also entered the streaming movie business via its 2010 Vulu acquisition. If Walmart can apply its scale to business outside of brick-and-mortar retail, their potential for growth is considerable. Alternatively, Walmart's endeavors may cannibalize its own operations (online retail taking market share form its own physical retail, online movie streaming taking market share from its own DVD sales, etc.), which can reduce growth potential. All things considered, with a P/E of under 12, the potential for solid risk-adjusted returns is there.
Dividend Yield: 2.80%
Most Recent Dividend Increase: 21%
Total Debt/Equity: 68%
Interest Coverage Ratio: 11
P/E: 11.8
Percentage of FCF Going Towards Dividends and Net Repurchases: 175% (2011), 82% (2010)
The Coca Cola Company
Coca Cola is a classic blue chip dividend growth company. Unlike Microsoft and Walmart that have substantial headwinds and rather low valuations, Coca Cola still enjoys a healthy valuation. The forward P/E is over 15, which is healthy and is lower than Coca Cola's sky-high valuation from the last decade. With a moderate dividend yield and moderate dividend growth, built on top of a very sturdy foundation (huge international sales, one of the most powerful brand icons in the world, a simple and highly scalable business model, high net profit margins, diversified brands and the leading distribution system), Coca Cola may be poised to offer shareholders reasonable long-term risk-adjusted returns. It's the type of investment that one doesn't need to check up on very often.
Still, not all is rosy for Coke. Unhealthy soda beverages are facing pressure in developed markets and this isn't likely to stop. The answer for a company like Coca Cola or Pepsico (PEP), is to continue to seek emerging market share and to include more and more healthy beverage brands. Coca Cola offers juices, teas and sports drinks in addition to its sodas and the emerging market opportunity is enormous. Citizens of China, India, Pakistan, Nigeria and Indonesia, some of world's most populous countries, consume less than a tenth of the annual per-capita servings of various Coca Cola brands than Americans.
Dividend Yield: 2.79%
Most Recent Dividend Increase: 7%
Total Debt/Equity: 0.76
Interest Coverage Ratio: 12
P/E: 12.6 (But realistically higher, due to one-time events)
Percentage of FCF Going Towards Dividends and Net Repurchases: 73% (2010), 75% (2009)
Colgate Palmolive
The stock for Colgate Palmolive, the producer of oral care, soaps and a variety of other consumer products, is in a similar position to Coca Cola stock. The market is currently paying a premium valuation for a premium company and Colgate Palmolive derives a substantial portion of its revenue, nearly 75%, from outside of the United States. Analysts currently project reasonable EPS growth for 2011 and 2012, partly due to Colgate Palmolive's continued business growth and partially due to their share repurchases which boost EPS growth.
Unfortunately, the company's P/E ratio of over 17 means that the company isn't getting a great rate of return on its share repurchases. Management is spending nearly twice as much on share repurchases as they are paying dividends, which I'm not sure is a great idea at these valuations.
Colgate's balance sheet is not as solid as some of its peers. Total debt/equity is about 1.28, which is rather high and most of the shareholder equity consists of goodwill. But, the stability of the business has allowed the company to get very low interest rates on its debt, so its interest coverage ratio is very high and much better than average. The result is a heavy but stable balance sheet, which has resulted in achieving very high returns on equity (currently around 90%), over a long period of time. It's a rather aggressive approach.
Dividend Yield: 2.72%
Most Recent Dividend Increase: 9%
Total Debt/Equity: 1.28
Interest Coverage Ratio: 53
P/E: 17.5
Percentage of FCF Going Towards Dividends and Net Repurchases: 119% (2010), 76% (2009)
3M Company
3M, the producer of a huge variety of industrial products and office products, also boasts strong international exposure. The company has segments that span consumer and office, display and graphics, electrical and communications, health care, industrial and transportation and safety, security and protection.
The company is currently trading at around its 52-week low, after falling from its 52 week-high in July. Unlike many other companies that partially recovered their stock prices during this volatile market period, MMM continued declining. The P/E is now only 13 and the dividend yield is increasing. If the valuation were to dip a bit more, such that the dividend yield becomes 3%, it would be a strong buy in my view.
Dividend Yield: 2.86%
Most Recent Dividend Increase: 5%
Total Debt/Equity: 0.35
Interest Coverage Ratio: 31
P/E: 13
Percentage of FCF Going Towards Dividends and Net Repurchases: 41% (2010), 25% (2009)
Full Disclosure: I own shares of KO.
