I review the list of weekly dividend increases as part of my monitoring process. Over the past week, there were several companies that raised dividends to investors. I am going to discuss how I came up with the list of companies that raised dividends this week. I will then also discuss the quick review process I go through.
This is a useful exercise for many reasons, but also as an educational exercise on the process I use to quickly narrow down any list of prospective dividend growth stocks down to a more manageable level.
I focused my attention to companies that have managed to increase annual dividends for at least ten years in a row. We do this in order to focus out companies which have managed to boost distributions throughout at least one or two economic cycles. In addition to that, we focused on companies whose recent dividend increases over the past year was more than a token increase.
The next step I the process involved reviewing valuation. I usually weed out companies where P/E ratios were below 20. Due to the large number of one-time accounting hits to earnings, I use forward earnings as a shortcut way to go through a lot of companies quickly.
We also weed out companies where earnings per share or funds from operations didn’t grow over the past decade.
In addition, we also avoid companies with unsustainable dividend payout ratios. For C Corporations such as Cummins, we want to avoid payout ratios exceeding 60%. For real estate investment trusts like Omega Healthcare Investors (OHI), we want to avoid FFO payout ratios that are too high relative to the payout ratios over the past decade.
Over the past week, four companies raised dividends. I go through the process outlined above with each of these four companies:
Walgreens Boots Alliance, Inc. (WBA) operates as a pharmacy-led health and wellbeing company. It operates through three segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The company raised its quarterly dividend by 6.70% to 40 cents/share. This marked the 42nd consecutive annual dividend increase for this dividend champion. Over the past decade Walgreens Boots Alliance has been able to boost annual dividends at a rate of 17.80%/year. The dividend payout ratio is at a safe 40%, which means that the distribution is well covered by earnings. The company earned $2.03/share in 2007, and is expected to earn $5/share in 2017. Currently, the stock is attractively valued at 15.80 times forward earnings and yields 2.10%. I last added to the stock in 2014 - please check my analysis.
Omega Healthcare Investors, Inc. (OHI) is a real estate investment trust that invests in healthcare facilities, primarily in long-term healthcare facilities. The REIT increased its quarterly distributions to 64 cents/share. Omega Healthcare Investors has rewarded shareholders with a raise for 15 years in a row. Over the past decade, this dividend achiever has been able to boost distributions at a rate of 9.40%/year. Funds from operations increased from $1.42/share in 2007 to $3.27/share in 2016. The FFO/payout ratio is adequate at 78%. The REIT yields 7.70%, which I believe to be sustainable. However, experience has taught us that abnormally high yields are usually a sign that expectations on the dividend sustainability are usually low.
Cummins Inc. (CMI), together with its subsidiaries, designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products worldwide. It operates through Engine, Distribution, Components, and Power Systems segments. The company raised its quarterly dividend by 5.40% to $1.08/share. This marked the 12th consecutive annual dividend increase for Cummins. Over the past decade Cummins has been able to boost annual dividends at a rate of 17.80%/year. This was supported by an increase in earnings from $3.70/share in 2007 to $8.23/share in 2016. Forward earnings are $9.39/share. The company has a sustainable dividend payment, and is fairly valued at 17.70 times forward earnings, while yielding 2.60%. The flat earnings per share since 2011 are preventing me from getting too excited about the prospects for this investment.
Occidental Petroleum Corporation (OXY) engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally. The company operates in three segments: Oil and Gas, Chemical, and Midstream and Marketing. The company raised its quarterly dividend by a little over 1.30% to 77 cents/share. This marked the fourteenth consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has boosted annual distributions at a rate of 14.60%/year. I have high doubts about the sustainability of Occidental Petroleum’s dividend, given the fact that earnings per share have been negative for the past three fiscal years. This was driven largely by the decline in oil prices. The forward earning estimate is for $0.99/share for 2017. Given the high dividend payout ratio of 311%, I do not view the 5.20% dividend yield to be safe. The forward P/E ratio is at 60. If oil prices rebound from here, the company will be able to earn more and possibly keep the dividend unchanged. My goal as an investor is to find the energy company that will have the adequate margin of safety in dividends that would allow it to keep paying a dividend, even if things are tough. As a result, I would not be interested in the company at this time.
Full Disclosure: Long WBA, OHI
- Dividend Achievers Offer Income Growth and Capital Appreciation
- Dividend Champions - The Best List for Dividend Investors
- Five Things to Look For in a Real Estate Investment Trust
- How I Manage to Monitor So Many Companies
Article by Dividend Growth Investor