Dividends still make quite a bit of sense in today’s market. The currently low interest rate environment makes most bonds work only for capital preservation rather than real capital growth. On the other side, while there are certainly some solid growth stocks around, I don’t think there are too many expectations out there about a broadly sustained bull market of growth anytime soon.
A workable solution continues to be shareholder friendly companies. Businesses that can grow sales volume of their products or services modestly year by year, can maintain or increase pricing power on that volume (due to an economic moat or some privileged position), have reasonable valuations, and return most of their free cash flows to shareholders as dividends (and share repurchases, with the remainder), are a solid medium-risk option for sustained income growth and long-term capital appreciation, in my view.
Here are five examples of solid dividend payers that recently increased dividends at a substantial rate.
Being a leading company in a cyclical business, Exxon Mobil maintains an excellent balance sheet with total debt/equity of only 10% and an extremely high interest coverage ratio. Free cash flow is only moderately strong, due to the immense capital expenditures required to operate in this industry. But with large scale and efficiency ratios that are top notch, XOM is approaching three decades of consistent annual dividend growth.
Full XOM Analysis
Chevron’s recent increase was a solid 11%, but they already had a mild dividend increase in the midst of the year. So the dividend increase compared to the same quarter last year is over 15%.
The company has an even stronger tie to oil than its peers, as it focused on deep sea drilling. Still, the company also does have natural gas investments, including the Marcellus shale. The company maintains a meticulous balance sheet, with total debt/equity at only around 7%, an extremely high interest coverage ratio, and very little goodwill. The company has nearly tripled the book value of the shares over the past 7 years.
Full CVX Analysis
A concern I have with APD is that their free cash flow isn’t as strong as I’d like to see in a solid business such as this. Their operating cash flow is fine, but their capital expenditures are fairly high. With APD’s long record of good performance and their strong market position, I’d consider them to be fairly reliable, but if the free cash flow growth doesn’t accelerate over the next few years, I might have to reconsider that conclusion.
Compared to Coca Cola, which boosted the latest dividend by a nice 8.5%, Pepsico has a slightly higher yield and lower valuation (and is a mix between beverages and snacks compared to Coca Cola’s pure focus on beverages). But with Coke’s plan to increase their total number of daily servings from 1.7 billion today to 3 billion a day in 2020, it may be hard for Pepsico’s beverage business to keep up with market share.
Still, Pepsico has some advantages. Their snack business is incredibly strong, without equal in their markets in the United States. And they were the first to do the bottler acquisition, with Coca Cola following that move rather than leading. By shifting towards healthier brands, which is what Pepsi has done, it seem unlikely that they’d stop growing any time soon.
Even though the balance sheet was stretched by the bottler purchases, their financial position is reasonably solid, with an interest coverage ratio of comfortably above 10, and total debt/equity of a decent 130% or so. The dividend is well-covered by free cash flow, with a<70% FCF payout ratio.
The recession proved difficult for insurers. Their business is mostly a commodity service, so it’s difficult to establish a moat. Interest rates on capital invested in bonds were low, and business conditions and overall pricing power were lackluster. Chubb handled the worst of the recession quite well, and mild premium growth has returned for the 2009-2011 period. This is the sort of business where, since most profits are given back to shareholders, only mild growth is needed for decent returns. At a P/E of around 12, and a dividend that increased by a bit over 5% for 2012, I think that risk-adjusted value is reasonable at the current stock price.
Full Chubb Analysis
Full Disclosure: As of this writing, I am long CVX, XOM, KO, and CB.
A workable solution continues to be shareholder friendly companies. Businesses that can grow sales volume of their products or services modestly year by year, can maintain or increase pricing power on that volume (due to an economic moat or some privileged position), have reasonable valuations, and return most of their free cash flows to shareholders as dividends (and share repurchases, with the remainder), are a solid medium-risk option for sustained income growth and long-term capital appreciation, in my view.
Here are five examples of solid dividend payers that recently increased dividends at a substantial rate.
Exxon Mobil (XOM, Financial)
At only 2.78%, XOM doesn’t boast the highest yield around, but much of that is due to its higher stock valuation than its oil peers. The good news, however, is that XOM recently increased their quarterly dividend payout by a whopping 21%.Being a leading company in a cyclical business, Exxon Mobil maintains an excellent balance sheet with total debt/equity of only 10% and an extremely high interest coverage ratio. Free cash flow is only moderately strong, due to the immense capital expenditures required to operate in this industry. But with large scale and efficiency ratios that are top notch, XOM is approaching three decades of consistent annual dividend growth.
Full XOM Analysis
Chevron Corporation (CVX, Financial)
Chevron has a larger dividend yield than XOM, at 3.64%. Although XOM and CVX have similar dividend payout ratios from earnings, since XOM has the higher valuation, Chevron has the higher yield.Chevron’s recent increase was a solid 11%, but they already had a mild dividend increase in the midst of the year. So the dividend increase compared to the same quarter last year is over 15%.
The company has an even stronger tie to oil than its peers, as it focused on deep sea drilling. Still, the company also does have natural gas investments, including the Marcellus shale. The company maintains a meticulous balance sheet, with total debt/equity at only around 7%, an extremely high interest coverage ratio, and very little goodwill. The company has nearly tripled the book value of the shares over the past 7 years.
Full CVX Analysis
Air Products and Chemicals (APD, Financial)
APD boosted its dividend by comfortably over 10% this year, inching closer to the 30-year mark of consecutive annual dividend increases, and has a 3.22% dividend yield. The company supplies industrial end-users with various atmospheric gases and other gases, and is the largest supplier of Hydrogen in the world. Since the recession, the company has been restructuring and cost-cutting.A concern I have with APD is that their free cash flow isn’t as strong as I’d like to see in a solid business such as this. Their operating cash flow is fine, but their capital expenditures are fairly high. With APD’s long record of good performance and their strong market position, I’d consider them to be fairly reliable, but if the free cash flow growth doesn’t accelerate over the next few years, I might have to reconsider that conclusion.
Pepsico (PEP, Financial)
Pepsico had a bit of a weaker showing here, and has only increased the dividend by 4% this year. It’s enough to boost the dividend to a 3.16% yield. This also happened to be their 40th consecutive dividend increase.Compared to Coca Cola, which boosted the latest dividend by a nice 8.5%, Pepsico has a slightly higher yield and lower valuation (and is a mix between beverages and snacks compared to Coca Cola’s pure focus on beverages). But with Coke’s plan to increase their total number of daily servings from 1.7 billion today to 3 billion a day in 2020, it may be hard for Pepsico’s beverage business to keep up with market share.
Still, Pepsico has some advantages. Their snack business is incredibly strong, without equal in their markets in the United States. And they were the first to do the bottler acquisition, with Coca Cola following that move rather than leading. By shifting towards healthier brands, which is what Pepsi has done, it seem unlikely that they’d stop growing any time soon.
Even though the balance sheet was stretched by the bottler purchases, their financial position is reasonably solid, with an interest coverage ratio of comfortably above 10, and total debt/equity of a decent 130% or so. The dividend is well-covered by free cash flow, with a<70% FCF payout ratio.
Chubb Corporation (CB, Financial)
Chubb is a $19 billion insurance company with over four decades of consecutive annual dividend growth. Most aspects of management are superb- the underwriting ratios are consistently above average, book value per share grows like clockwork, the dividend growth is consistent, and while I’m not a fan of share repurchases in general, this is an example of a business that does them fair enough (buying them consistently and at reasonable valuations). I’d prefer a larger yield (in exchange for fewer shares repurchased) than the current 2.29% dividend yield, but all in all, this business has a lot going for it.The recession proved difficult for insurers. Their business is mostly a commodity service, so it’s difficult to establish a moat. Interest rates on capital invested in bonds were low, and business conditions and overall pricing power were lackluster. Chubb handled the worst of the recession quite well, and mild premium growth has returned for the 2009-2011 period. This is the sort of business where, since most profits are given back to shareholders, only mild growth is needed for decent returns. At a P/E of around 12, and a dividend that increased by a bit over 5% for 2012, I think that risk-adjusted value is reasonable at the current stock price.
Full Chubb Analysis
Full Disclosure: As of this writing, I am long CVX, XOM, KO, and CB.
