As a dividend growth investor, a new dividend increase is always music to my ears, as this means my investments will be throwing off more income. In this article, we will examine three companies that just announced dividend increases, and whether any of these stocks could be a buy today.
Microsoft Corporation (MSFT, Financial) is global giant in the area of software and hardware. The company provides operating systems, business software, cloud services and video games and gaming hardware to customers. With a market capitalization above $2 trillion, Microsoft is one of the largest public companies in the world. The company generates annual revenues of $168 billion.
On Sept. 19, Microsoft announced that it was raising its dividend 10.7% for the upcoming Dec. 9 payment date. This extends the company’s dividend growth streak to 20 years, putting Microsoft one year closer to achieving Dividend Aristocrat status. The dividend has a compound annual growth rate of 13.1% from 2011 through 2020, so the most recent raise is in the ballpark of the long-term average.
Microsoft’s annualized dividend totals $2.48. Shares yield 0.8% at the current price, which is far below the yield of 2.5% that the stock has averaged over the last decade, according to Value Line.
With the stock trading at $303 presently, Microsoft has a forward price-earnings ratio of 34.5. Though the multiple has expanded in recent years, the 10-year average price-earnings ratio is just above 20.
Microsoft announced yet another double-digit dividend increase as well as a new buyback of $60 billion, or 2.7% of the current market capitalization. The yield might be extremely low relative to its historical average, but shareholders will likely take the share price appreciation that has transpired over the last few years instead. Microsoft has really taken off over the past few years following the advance into the cloud business, which has a massive total addressable market. With a leadership position in this area, Microsoft is deserving of a premium valuation, in my view. That said, Microsoft is already my largest personal holding by a wide margin, so my investment capital will be focused elsewhere for now. For those not yet in the name, a pullback would be a much better entry point.
Philip Morris International Inc. (PM, Financial) sells tobacco products, including the Marlboro brand, in countries outside of its home turf in the U.S. The company was spun off from parent company Altria Group (MO, Financial) in 2008. Philip Morris has a market capitalization of $160 billion and generated revenue of almost $29 billion in its most recent fiscal year.
Philip Morris raised its dividend 4.2% for the Oct. 14 payment date, giving the company a 14 year dividend growth streak. Over the last decade, the dividend has a CAGR of 5.3%, so the most recent raise is just below the long-term average, but nearly double of last year’s.
The new annualized dividend is $5.00. With analysts projecting earnings per share of $6.09 for 2021, this implies a payout ratio of 82%. This sits just above the 10-year average payout ratio of 81%. However, Philip Morris has often had a very high payout ratio, so much so that the five-year average ratio is 90%. The projected payout ratio, if achieved, would be the lowest since 2014.
Philip Morris’ stock has a yield of 4.9% at the moment, nearly four times the average yield of the S&P 500 index. This is also above the yield of 4.7% that the stock has averaged since 2011.
Shares trade hands near $103 as of Thursday’s close. Using analysts’ estimates, Philip Morris has a forward price-earnings ratio of 16.9. The last 10 years has seen the stock trade with an average price-earnings ratio of 17.7, so Philip Morris does appear to be at least slightly undervalued on a historical basis.
Philip Morris’ most recent increase was below its long-term average, but was a better showing than the prior year’s 2.6% increase. The company is also a leader in its industry and does benefit from slightly weaker regulation in the regions that it operates. The stock is trading with a higher than usual yield and lower than usual valuation. For investors looking for income with some possible multiple expansion, Philip Morris could be a solid investment.
Texas Instruments Incorporated (TXN, Financial) is a worldwide leader in the making of semiconductors and electronic products. The company provides semiconductors that can be used in a variety of ways, including the measurement of sound and temperature as well as for specific tasks and applications. Texas Instruments has a market capitalization approaching $182 billion and produced revenue of $14.5 billion in 2020.
Texas Instruments raised its dividend 12.7% for the Nov. 15 payment date. The company has now raised its dividend for 18 straight years. Shareholders have enjoyed a dividend CAGR of 20.8% over the last decade. The growth rate has slowed some recently, but the most recent increase is nearly in-line with last year’s 13.3% increase.
Following the most recent raise, Texas Instruments yields 2.3%. This is lower than the 10-year average yield of 2.5%, but not wildly so.
The annualized dividend now comes to $4.60. Analysts expect that Texas Instruments will earn $8.01 per share this year, meaning the dividend paying ratio is estimated to be 57%. The average payout ratio for the last 10 years is 50%, as this ratio has expanded in recent years and doesn’t appear to be at an unhealthy level.
Texas Instruments closed the latest trading session at $197, resulting in a forward price-earnings ratio of 24.6. This is higher than the 10-year average price-earnings ratio of 19.7, but a bit closer to the average multiple for the past few years.
Texas Instruments’ dividend growth has slowed in the near-term as the dividend has grown in size. The higher than usual payout ratio is likely another reason that the increase has been lower than the long-term average. Still, a double-digit increase is solid and the yield isn’t too far off from its historical average. Shares are more expensive than usual, so I would wait for a pullback in Texas Instruments before purchasing.
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