Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Dividend Growth Investing Benefits Youth - 15 Sep 2013 13:37

Tags: calculator

Because DGI has the word DIVIDEND in it many people associate with basic dividend investing.

Basic dividend investing is typically associated with portfolios of people in retirement where they take their lifetime of accumulated wealth and invest in bonds, dividend paying stocks, and annuities to generate an income stream to supplement social security and/or pension. Because of this there is a misunderstanding that you need a large investment (more than $250K) for DGI to work.

The reality is you do not need a large sum at all! Instead the largest investment you need is time (10+ years) for the power of re-investing (compounding) and dividend growth to create your wealth.

When I started my professional career I had a huge advantage. I got to live at home with my parents for the first five years with little debt and virtually no financial commitments. I easily could have saved one year of salary in that time but instead squandered it away on lavish spending and good times. Looking back all it would take was two years of aggressive savings to accumulate $15,000 (a small salary even in the late 1980s) and I still would have had three years of living with my parents to spend my money anyway I wished.

Putting that $15,000 to work in a DGI portfolio with 3% yield, 10% div growth and not contributing anything other than re-investment of dividends would have resulted in an income stream as follows:

Annual Dividend Income at…

  • Age 21 - $450
  • Age 35 - $2,490
  • Age 45 - $8,454
  • Age 55- $28,699
  • Age 60 - $52,877

At age 60, the dividend would represent a large % of my base per-retirement salary and, when combined with my 401K, would allow me to retire early and not collect social security.

Of course I did not discover DGI until I was in my 40s but I still have time on my side and it’s just that the benefits will not be as large. The lesson here is that the investment of time is a lot easier than the investment of cash so DGI benefits the young more than those near or in retirement.

Since time is a critical investment I made a basic calculator for estimating potential DGI income in out years. It is not perfect as it assumes a consistent growth rate and does not adjust for when you stop re-investing dividends but is still useful for planning your goals. - Comments: 0

Helmerich & Payne (HP) - 12 Sep 2013 23:06

Tags: drilling helmerich&payne hp oil&gas stock_review_2013

hp.jpg

Are you interested in investing into the shale oil boom but nervous about the risk? A safer alternative could be investing in companies that service the industry such as Helmerich & Payne (HP). HP is the leading U.S. provider for land contract drilling services. Their drilling techniques use directional and horizontal drilling, critical for shale fields.

HP has long been a dividend growth player with 41 consecutive years of growth with the most recent annual increase coming in at 7.7%.

.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
7.7% 11.9% 9.2% 6.1%

.

Looking at some of my screening criteria for a DG stock we see some solid numbers:

.

Dividend Growth Rate Debt/Equity Ratio
Criteria HP Criteria HP
>= 7.2% 7.7% < 1 0.05
Dividend Yield Payout Ratio
Criteria HP Criteria HP
> 3% 3.01% < 70% 30%

.

2013 earnings have been strong with HP already reporting $5.33 per share and they still have one quarter left to report which should place EPS in the $7+ range. Compared to 2012 earnings of $5.34 EPS this represents a 40% improvement year over year.

HP rig assets consisted primarily of U.S. based land rigs and year over year increases average about 13%.
.
2012 Rigs 2011 Rigs 2010 Rigs
U.S. Land 282 248 220
Offshore 9 9 9
International Land 29 24 28
Total Rigs 320 281 257

.

Looking at the balance sheet, HP’s efforts to dramatically decrease long term debt has been successful as the debt to equity ratio is down to an all-time low of .05.

LTDEBT%20CHART.png

.
HP also has maintained a backlog of services of $3.6B in 2012 and $3.8B. Combined with the decrease in debt liabilities it becomes easier to see how solid their earnings have become.

One item in the 2012 annual financial statement that jumped out at me was a large increase in accounts receivable $460M in 2011 to $620M in 2012. But there was also a dramatic increase in annual revenue from 2011 to 2012 and when you create an “AR/Revenue” ratio both years are 18% so no cause for alarms.

The one area of weakness I found with HP was their source of earnings. 59% of HP's annual earnings come from only 10 major oil & gas exploration companies. If just one of these companies cancels a drilling contract it would greatly impact earnings.

In summary, HP is currently operating in a boom U.S. shale market with strong a balance sheet and backlog of orders. Their dividend rate looks to be secure and their long history of dividend growth should continue.

Note: I do not own this stock at time of this writing. - Comments: 0

Sturm, Ruger & Company (RGR) - 02 Sep 2013 13:11

Tags: gun rgr stock_review_2013

RGR.jpg

Sturm, Ruger & Company (RGR) has been making a bang lately on the market. A gun manufacturer since 1949, RGR is blowing away analysts EPS forecasts quarter after quarter. In fact, RGR has beaten the high end EPS estimates for 9 straight quarters with the last exceeding estimates by 35% reporting Q2 2013 of $1.63 per share vs. an estimate of $1.18 per share. With next Q3 2013 estimates at $1.46 per share it looks like it will become 10 quarters in a row.

Considering the amount of institutional & mutual fund investor stock ownership (79%) I do find it astounding how many misses there have been. Some of the problem is that RGR provides no financial guidance and even points it out as item #3 in their Investment Community Communications (http://www.ruger.com/corporate/PDF/InvestorCommunicationPolicy.pdf). But one could argue that without the guidance analysts just aren’t doing their homework and are doing a disservice to both their companies and clients.

On the dividend front RGR has been growing at just as a rapid pace as their earnings and the only downside is the limited history of consecutive years of growth which stands at just under 5 years. My normal criterion is at least 10 years of dividend history but for the potential of a high dividend growth it may be a risk worth taking.

.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
201% 61% n/a n/a

.

Looking at some of my screening criteria for a DG stock we see some solid numbers:

.

Dividend Growth Rate Debt/Equity Ratio
Criteria RGR Criteria RGR
>= 7.2% 201% < 1 0
Dividend Yield Payout Ratio
Criteria RGR Criteria RGR
> 3% 5.0% < 70% 40%

.

The 1 year dividend growth listed at 201% is actually deceiving. At the end of 2012 there was the high probability of the Bush Tax Cuts expiring sending taxable qualified dividends shooting up from a tax rate of 15% to as high as 39%. In response many companies issued special dividend to reward shareholders before the tax expired of which RGR issued a special dividend of $4.50 per share in Q4 2012. Luckily the 15% tax rate (for the most part) was retained.

A deeper look in RGR’s dividend growth yielded something odd. RGR does not declare a fixed annual dividend rate payable each quarter and each quarter pays a different dividend amount. Instead it looks as though RGR has been trying to find a reasonable payout ratio and seems to have settled at ratio of around 40% for the last two years. By basing each quarterly dividend on a payout ratio of earnings would explain the fluctuations seen in dividend rates from quarter to quarter. What this translates into is that dividend payments are directly attributable to earnings growth so the better the company performs the better your dividend and vice-versa. To determine if the dividend growth is sustainable we need to analyze earnings growth.

Earnings from 2009 to 2012 have seen noticeable earning jumps but there is caution to 2012 earnings. In the last quarter of 2012 the terrible massacre of children occurred in Newton, Connecticut. This event spurred a national debate on tightening gun control laws and in turn caused a rush of existing gun owners to purchase guns before new laws were enacted. Even the CEO of RGR attributed the large bump in Q4 sales to this phenomenon in their 2012 annual report.

2012 EPS 2011 EPS 2010 EPS 2009 EPS
3.60 2.09 1.46 1.42

Looking further into the 2012 annual report there was another figure that was quite interesting, $427.1M in order backlogs and for the year they only processed $369.6M in orders. Going into 2013 the rush for gun orders continued to over flow into Q1 and Q2 numbers further expanding their backlog to $590M.

The National Instant Check System (NICS) used for background checks has become a good leading indicator into gun sales. In July the FBI reported 1.284 million NICS checks, a decrease year over year as July 2012 had 1.301 million and is a good signal that gun demand is starting to wane.

Sifting through 2013 Q1 & Q2 sales numbers an interesting statistic that jumps out is that 31% of sales is for brand new models. RGR has been aggressively increasing R&D spending at a rate that almost doubled in three years and is starting to see a payoff in sales.

Research & Development Spending
2012 2011 2009
$5.9M $4M $3.2M

In August 2013, the company announced its plans to expand manufacturing capacity by opening a new facility in Mayodan, North Carolina. Interestingly this new facility will not be used to help reduce the existing order backlog but will only produce new products not yet announced and the company expects the new facility to begin producing in early 2014. This is actually a very smart and conservative approach as the company will only be investing in new machinery & tooling in one facility instead of duplicating machinery & tooling used for existing product lines at their New Hampshire and Arizona facilities allowing then to work down the backlog while the NC plant handles new incoming orders.

There will be some cost deferred with the opening of the NC facility. The state of North Carolina is providing $9M in incentives and the town of Mayodan & Rockingham County are currently considering another $1.7M in local tax incentives over a period of 14 years.

Looking at the balance sheet RGR has maintained one impressive number over the years, zero long term debt. With zero long term debt I expected to see solid financials and the only area of concern was the Current Ratio which dipped to 1.6 in 2012

Current Ratio
2012 2011 2009
1.6 3 3.2

With no debt and high gross profit margins I expected a current ratio greater than 2.5. I credit the significant drop in 2012 to the Q4 2012 special dividend of $4.50 a share which siphoned off cash from the books thus lowering the ratio. With the NC facility investment I see this as a slight drag on the 2013 current ratio but still higher than 2012 and a slow and steady return to a normal ratio for a company with no long term debt.

Looking at the recent stock price of approximately $52 per share it carries a trailing P/E of 11.09 and a forward P/E of 14.96. The 5 year average P/E has been 12.78 so the current stock price looks to be appropriately valued but it looks like it is underestimated for 2014 as analysts do not seem to be taking into account the significant backlog of orders. I’d expect 2014 earnings to be in line with 2013 keeping the dividend yield at 5% but because of the nature of the earnings growth I would discount it and treat it more like 3.5% and plan year over year growth from the discount which I would expect the yield to return to in 2015.

In summary, I consider the 5% yield a temporary anomaly and for future growth I’m using a base 3.5% rate with a 10% per year growth. The company has strengths in gross profit margins and no long term debt. For weaknesses there is lack of long term consistent dividend growth and significant drop in current ratio. As long as the company continues to aggressively increase R&D funding and increases its cash position I would consider this a worthy investment in lieu of the risks and would be a buyer at current price levels and an aggressive buyer if share price drops below $49 per share.

Note: I do not own this stock at time of this writing. - Comments: 0

Investors Need Goals & Strategies - 28 Aug 2013 22:47

Tags: goals strategies

Dividend Growth Investing (DGI) is not an investment strategy by itself. DGI is a proven successful investing model but the more you investigate the topic you will discover investors use different approaches. Each investor has a different level of dividend yield and dividend growth rates. For example I prefer a yield greater than 3% yield and growth rate greater than 9%.

No one DGI investor’s criteria are the perfect answer; instead what you are seeing is an individual’s strategy to DGI investing. The key to a strategy is defining a goal, without a goal you are simply blindly investing with a strategy that may or may not be correct. The key is to define a goal and pick the right strategy. Since I haven’t shown my goals we can use my scenario to see why I use the strategy I use for picking DGI stocks.

Current age: 45
Current Annual Dividend: $1905
Emergency Funds: 1 month salary
Goal: To have $20,000 in annual dividends by age 60 without exposing my portfolio to high risk.
Initial Strategy: Invest in DGI stocks with a dividend greater than 3% and growth rate greater than 9%

Part of my goal is also to avoid high risk so I need to modify my strategy to address risk.

Revised Strategy: …payout ratio cannot exceed 70% and debt/asset ratio cannot exceed 1.2

With these factors we can now forecast how much my annual dividend will be at age 60 assuming dividends are reinvested at 3% and dividend growth is 10% which comes out to $12,500 annually. Not quite the $20,000 I was expecting so we’ll have to revisit my strategy.

Options to close the gap:

  1. Change the dividend criteria to greater than 6%
  2. Invest in high yielding stocks with little or no growth
  3. Save some money and contribute more annually

Items 1 & 2 are viable but they add risk which doesn’t jive with my goal of low risk. Item 3 might work. Going back to my spreadsheet I discover that I will need to contribute an additional $4,000 annually to meet my goal at age 60. Looking at my annual budget I seem to only have a spare $3,000 annually to invest falling short once again. It looks like the only alternative is to expose myself to some risk and since I have 1 month of salary tucked away I can afford some risk.

If we combine some options it might get us there, by contributing $2500 to DGI stocks with my original criteria and invest the remaining $500 in high yielding stocks my annual dividend yield at age 60 becomes $20,220. Finally a combination that works but now I need to finalize my strategy:

Final Strategy : Invest 83% of future contributions in DGI stocks with a dividend greater than 3%, growth rate greater than 9%, payout ratio cannot exceed 70% and debt/asset ratio cannot exceed 1.2. Invest 17% of future contributions in high yield stocks (greater than 9%).

The only reasons why I ended up at this strategy were:

  1. I could not meet my goal
  2. My time horizon was only 15 years.

If I had a longer time period by only 5 years I could have met my goals without adding risk. So what are your goals & time horizons? - Comments: 0

Owens & Minor (OMI) - 24 Aug 2013 14:36

Tags: omi stock_review_2013

omi_logo.gif

Owens & Minor (OMI) isn’t exactly a household name that you easily recognize but more than likely you have seen the services they provide and didn’t even know it.

When you visit a hospital look around the room and OMI is all around. The examining table, cotton swabs, tongue depressors, pillows, stools, the tissue paper on the exam table, end even the stethoscope around the doctor’s neck, all supplied by OMI. OMI does not make these products but is the U.S. leading supplier for healthcare facilities.

From a dividend growth investor (DGI) perspective is also just as surprising. For the last 16 years they have been increasing their dividend payout at a wonderful pace and current yield of 2.7%.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
10% 12.8% 14.2% 15.6%

Looking at some basic numbers OMI meets most of my screening criteria for a DG stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria OMI Criteria OMI
>= 7.2% 10% < 1 .22
Dividend Yield Payout Ratio
Criteria OMI Criteria OMI
> 3% 2.7% < 70% 57.5%

Though the dividend yield is slightly lower than my criteria the growth rate was more than enough to compensate. But dividend growth has been decreasing over the years so it is vital to dig deeper to determine future growth potential and sustainment.

Earnings from 2011 to 2012 actually decreased by 4.9% and was a reflection of the overall U.S. economy and availability of affordable healthcare for 2012:
2012 EPS 2011 EPS 2010 EPS
1.72 1.81 1.75

Looking deeper into the company, OMI has 55 distribution centers in the U.S. offering more than 220,000 products from more than 1400 suppliers and has access to more than 50% of U.S. Healthcare facilities. That is a far reaching network giving it a lot of leverage with OEM suppliers, especially young or small OEMs that cannot afford the overhead costs of large scale suppliers. But more mature and established suppliers have complained over the years of the limited market. Looking at some of the more major suppliers we see Covidien and Avid, both with recent declining earnings.

In response, OMI has expanded into Europe after they acquired Movianto from Celesio AG in 2012. The Movianto acquisition provided an additional 22 distribution centers in 11 countries and provides the additional large growth markets their suppliers were looking for and makes them even more attractive for enlisting additional suppliers.

OMI has been in the healthcare distribution and logistics supply chain for more 128 years and has honed the business model as sharp as the scalpels they sell. As OMI integrates Movianto they will incorporate what they have learned and greatly reduce Movianto’s overhead expenses while increasing effectiveness and providing organic growth. Once the improvements are incorporated they can then focus on expanding throughout Europe.

Europe is not the only significant investment OMI has recently made. Domestically the company has invested $50 million in technology over the last two years further improving their distribution, supply chain management, and consulting capabilities. The most notable is how strategic OMI's investments have been without impacting their long term debt during this time period:

2012 Long Term Debt 2011 Long Term Debt 2010 Long Term Debt
$217M $214.6M $210.9

These critical investments should begin to yield earning growth in 2013 and forward but much depends on how quickly their European operations expand.

Looking at dividend payouts OMI has been increasing payouts faster than earnings growth. In 2010 OMI’s payout ratio sat at 40% and three years later is sitting at 57%. In the short term this is not sustainable and needs to drop into the single digits (possibly as low as 4%). OMI is so conservative managing their financials I cannot foresee them doing otherwise.

Looking at the recent stock price of approximately $35 per share it carries a trailing P/E of 21.4 and a forward P/E of 17.5. The 5 year average P/E has been 16.74 so the current stock price looks to be overvalued to what the market has traditionally valued the company at.

With the potential decrease in dividend growth and current share price it just does not fit my investment goals. Though I do like their long term potential, I’d rather wait on the sidelines to see what happens with their European operations and dividend growth and would only consider if there was a significant drop in share price (less than $29 per share).

Note: I do not own this stock at time of this writing. - Comments: 0

Dividend Tax Considerations - 17 Aug 2013 13:26

Tags: irs tax taxes

IRS.png

One of the best tax moves in the U.S. has been the reduction in qualified dividend payments to a standard rate of 15% (20% for those in the highest in tax bracket).

Initiated during the Bush Presidency in 2003 and extend throughout President Obama’s terms, the change in the dividend tax rate policy has motivated more companies to issue dividends during that time period rewarding shareholders. Of course there are the counter arguments that the dividend tax rate only benefits the rich but as interest rates on savings have remained near zero and the constant reminder people are struggling to fund retirements this argument has been slowly dying off.

Over the years more dividend paying companies have led to the increase in popularity of dividend growth investing. And retirees are learning to embrace a new income stream at a lower tax bracket which has helped provide another solution to funding retirement. A lower tax rate may have been one of the motivators why you became a growth investor but if you are new to this investment style you should be aware that there may be other countries that can tax your dividend.

Just because a stock is listed on a U.S. stock exchange does not mean that all dividends are only taxed by the U.S. There are quite a few foreign stocks also traded and the originating countries may have a tax rate that can hurt you dividend growth. Some countries such as the U.K. have a 0% rate while others such as Switzerland have a rate as high as 35%. Understanding a foreign countries tax rate is essential when evaluating both a dividend payment as well as growth potential, to assist here is a link to a table of dividend tax rates by country.

Additionally, if you are not careful when filing your income tax you could be double taxed (once by the foreign country and once by the U.S.). When filing your annual income tax return there is a credit allowed for foreign taxes to avoid the double taxation (IRS tax credit link http://www.irs.gov/taxtopics/tc856.html). - Comments: 0

Norfolk Southern Corp (NSC) - 13 Aug 2013 22:47

Tags: norfolk nsc southern stock_review_2013

NorfolkSouthern.JPG

No matter how old we get there is always a kid in all of us and I am no exception. As a kid I was fascinated with model trains and when a childhood fascination collides with another favorite hobby (investing) I just cannot help myself.

Norfolk Southern (symbol NSC) is a railroad company operating on the East Coast. For the last 12 years they have been increasing their dividend payout at a significant pace and with a current yield of 2.84% one cannot help but take notice.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
16.9% 12.6% 15.1% 22.3%

The kid in me cannot stop being giddy as what is better than big trains and rising dividends. But the adult in me has to step in and ruin the fun. Looking at some basic numbers NSC meets most of my screening criteria for a DG stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria NSC Criteria NSC
>= 7.2% 16.9% < 1 .83
Dividend Yield Payout Ratio
Criteria NSC Criteria NSC
> 3% 2.84% < 70% 38%

Though dividend was slightly lower than my criteria the growth rate was more than enough to compensate. The big question left was if the dividend growth rate was sustainable and for how long which required a deeper dive.

Earnings from 2011 to 2012 actually decreased by 1% sending the first warning signal something might be amiss. After further research the decline was attributable to a decrease in demand for coal which makes up 26% of NSC revenue which was -16.7%. NSC revenue is classified into three main revenue streams:
2012 Revenue M$ 2011 Revenue M$
Coal 2879 3458
General Merchandise 5920 5584
Intermodal 2241 2130

Luckily increased revenue from General Merchandise & Intermodal helped offset some of the loss for 2012. Looking at the first six months of 2013 NSC saw another 17% decline in coal revenue and is on pace to see annual revenues decrease by an additional 2% (pushing the payout ratio up from 38 to 39%).

During 2012 & 2013 NSC has been investing in intermodal deliveries as an alternative and have yielded a 6% increase in 2012 and is on pace for a 7% increase for 2013.

Unfortunately, competitor CSX, which operates in the same area, also has revenue based on a similar structure and allocation as NSC so CSX has also seen steady declines in coal revenue. Like NSC they are also pursuing growth in intermodal business.

Assuming coal demand levels off by the end of 2013 and natural gas remains affordable then revenue growth will primarily come from general merchandise and intermodal shipping. Add to the issue that NSC and CSX are pursuing growth in the same intermodal business that minimizes overall future growth to approximately to 4-5% annually.

With a payout ratio of only 38% and combining it with a 4-5% EPS growth rate, dividend growth could continue at a 10% pace annually for the next 9 years before it hits my limit of a 70% payout. Considering how well NSC manages its financials it does question if they would increase dividends at that rate or hold at a certain payout ratio. Last month NSC announced a 4% dividend increase (well below its average) so my inclination is that they will hold at a payout ratio of 50% or lower.

As much as I would love to buy into a railroad for diversification, and to satisfy the kid in me, I believe now is the wrong time to buy NSC. For now keep watching and see how management reacts to revenue and dividend growth.

Note: I do not own this stock at time of this writing. - Comments: 0

Dividends - DRIP, Hold, or Do Nothing? - 10 Aug 2013 13:57

Tags: drip reinvest

savings.jpg

As a new investor you may be asked by your brokerage if you wish to enroll in a free dividend re-investment program or as it is often referred to as DRIP investing.

A DRIP program is very simple in its nature, when a company issues you a dividend payment your brokerage account will automatically take that payment and buy additional shares of the same company. This concept is often referred to as compounding. Compounding in itself is a powerful savings tool but is it right for your portfolio?

Compounding works best when your investment vehicle has a consistent price. With a money market, savings account or bank C.D. this works very easy. Each unit is valued at $1 so when you reinvest the investment value is always constant at a purchase price of $1.

Dividend yield for stocks are much different. Stock dividend yields are calculated as the dividend payout divided by the price of the stock. Since stock prices are changing daily the dividend yield will fluctuate, the higher the stock price the lower the dividend. When stock prices increase faster than dividend payouts you begin to lose some of your growth momentum and DRIP programs actually hold back your portfolio from peak growth performance as they may be buying when stock price is rapidly increasing. A strategy common among dividend growth investors is to let your dividend payments accumulate and invest when a growth value opportunity presents itself.

Does this mean that DRIP investing has no place in your portfolio? Absolutely not, there are some stock investments where a DRIP works wonderfully if they have what is referred to as a low Beta. Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are scored according to how much their stock price goes up or down in comparison to the market. A stock with small price swings has a low beta (less than 1) and wild price swings have a high beta (greater than 1). Companies that have a beta less than 0.4 typically make for very good DRIP programs. Examples of companies that sport a low Beta are usually utility companies.

So that leaves two reinvestment strategies:

  1. DRIP for companies with a Beta that is less than 0.4
  2. Hold & accumulate for buying opportunities for companies with a Beta greater 0.4

Another topic new investors need to be aware of is whether there is a time when not to reinvest dividends. There are times when you should not reinvest and it will vary by person so I will attempt to address a few:

  • 10% of your portfolio is not in cash – Having a 10% position in cash offers you two significant advantages. First it gives you capital to take advantage of opportunities with a significant position. Second, it provides risk relief in falling markets.
  • Your retired – Dividend payouts may be required to replace income by supplementing Social Security payments.
  • Unemployed – This is similar to being retired where you attempt to replace income loss by supplementing unemployment benefits with your dividend income stream. With a little luck this may hold you over until you get a new job and prevent you from selling any portfolio assets.

I have heard some folks not re-investing on a hunch (or fear) that a stock market crash is imminent. This is often referred to as market timing which is something few people ever get right (including professional investors). My advice is to not worry about market timing and instead focus on your portfolio growth while balancing it for risk through diversification and maintaining a 10% cash balance. - Comments: 0

McDonald's Corp (MCD) - 09 Aug 2013 19:52

Tags: mcd mcdonalds stock_review_2013

MCD.JPG

McDonald's (symbol MCD) has long been a staple in many Dividend Growth Investor (DGI) portfolios. When you look at its historical dividend growth MCD rewarded shareholders extremely well over the years. The fact that they have increased dividends for 36 straight years it is no surprise as to why it is a dividend favorite among investors.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
13.4% 11.9% 13.9% 28.4%

A more detailed look at some numbers and ratios MCD meets many of the criteria I look for in a Dividend Growth stock:

Dividend Growth Rate Debt/Equity Ratio
Criteria MCD Criteria MCD
>= 7.2% 13.4% < 1 .84
Dividend Yield Payout Ratio
Criteria MCD Criteria MCD
> 3% 3.1% < 70% 56%

The main competitors are Burger King (BKW) and Wendys (WEN). Looking at BKW & WEN they currently have P/E Ratios of 45.98 and 214 versus 17.87 for MCD making it look like the value of the three. But the average P/E for MCD over the last five years has been 16.5 so it is slightly over-valued at its current price of $97.90 per share.

An area of concern has been the surge of small specialty hamburger chains such as Five Guys Burger, In-N-Out Burgers, and Jake’s Wayback. But I see this more of a problem with WEN and to some extent BKW. What is insulating MCD from the specialty burger onslaught is its virtual size. MCD currently has 34,480 restaurants in over 118 countries and when we compare to BKW with 12,997 and WEN with 6,560 restaurants it is easy to see how massive of a scale MCD’s operations are in comparison.

Additionally, 58% of MCDs restaurant are in foreign countries where they do not have to compete with the recent U.S. surge of specialty burger joints. Growth has primarily been in the Asia-Pacific area where it has increased 6.6% from 2011 to 2012 going from 8,865 to 9,454 restaurants and is seven times more penetrated than its closest competitor (BKW has 1,010 restaurants in Asia). Of course as the U.S. dollar strengthens this can turn into a weakness due to currency exchanges.

On the earnings front, earnings per share growth slowed to 5% in 2012 and estimates for 2013 range from 4-5% growth. A fear going forward is if the 13.4% dividend growth rate is sustainable. With a payout ratio of only 56% and combining it with a 4-5% EPS growth rate, dividend growth should continue at a decent pace (7-10% annually) for the next 7 years before it hits my limit of a 70% payout. Personally I do not see MCD management being content with such a slow growth rate over an extended period of time. Their focus on keeping a modern fresh menu and increasing franchise fees should increase growth rates as early as 2014.

Overall, though slightly overvalued, I would not hesitate initiating a small position of MCD in my portfolio and if the stock price drops back to its average P/E of 16.5 (approximately $90 per share) I would increase my investment amount.

Note: I do not own this stock at time of this writing but do have a buy interest. - Comments: 0

First Blog Post! - 08 Aug 2013 21:25

Tags:

This is the first blog post of The Simple Dividend Growth Investor and would like to welcome all readers. Though I have invested in the stock market for many years this is my first foray into Dividend Growth Investing. I used the better part of 2012 to figure out what worked and can now apply My Rules of what I have learned and possibly even refine as I receive feedback.

Going forward I will be sharing my humble stock analysis as well as quarterly adjustments that I make to My Portfolio, which stocks are currently on My Watch List as well as Daily Dividend Growth News of companies increasing their dividend payouts.

So on that note I'll use a phrase from a good friend…"Lets kick it brother!" - Comments: 0

page 18 of 18« previous12...161718

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License