A Tough Pill to Swallow
Pharmaceutical company Merck (MRK), despite its history as a dividend payer with a respectable 42 years of uninterrupted disbursements, has unfortunately been a little irregular with increases.
From 2004 onwards, it didn't give its program any action at all. Payments remained stunted at $0.38 a share until the final quarter of 2011, when it upped the quarterly payout by 10.5%, to $0.42.
Then, just this month, the company announced an additional raise to $0.43. It's a meager increase (and only the second in as many years). But it could still be taken as a sign of early dividend growth behavior, right?
I wouldn't bet on it.
Merck might be a long-time payer, but the chances it'll ever be a dividend growth stock are slim to none.
Simply put, the company's heavily invested in external R&D, so the return of greater amounts of cash to shareholders is going to remain a secondary priority. CEO Kenneth Frazier said as much on Merck's third-quarter earnings call:
"I would say the first objective is to continue to do smart deals where they can add value to the long- term, and the second one is return cash to shareholders."
If anything, the cash distributions are a great perk for investors that hold Merck for reasons other than income. But as a pure dividend play, it's lacking.
Granted, its 3.88% yield is a percentage point or so above the average yield of the S&P 500, and the dividend payout ratio remains in the low double-digits. But with no good reason to expect reliable growth, it's simply not worth considering as a viable dividend investment.
Dividends on a Platter
Hard drive manufacturer Seagate Technologies (STX) has serious dividend-paying credentials …
To start with, its yield is on the high end at 5.36%, which is more than twice the S&P 500 average.
And not only did Seagate recently increase its quarterly payment to $0.38, it has also amped up payments by nearly 111% since 2011 - making it a strong candidate for a dividend growth stock.
Furthermore, its dividend payout ratio (DPR) remains extremely manageable. Its trailing 12-month DPR of 13.3% shows that dividend growth could continue into the foreseeable future.
Well, it could continue. But given present uncertainties, it might not.
You see, the company's specialization is in hard disks. And as a storage medium, HDDs are being phased out - if not completely, at least enough to cast doubt over Seagate's future.
The increasing demand for solid-state drives (which Seagate doesn't produce) and the weakening demand for HDDs (Seagate's bread and butter) is a trend that's unlikely to let up. And although the company could reposition itself adequately, the long-term risk that it won't remains significant.
And if earnings take a substantial enough dive, the dividend could hit the dust, as well. Case in point: The company suspended payments in 2010, after 2009's substantially weakened market conditions.
Having said that, the stock has outperformed year-to-date, gaining 79.6%, compared to the S&P 500's 15.9% gain over the same period.
I wouldn't recommend it for more risk-averse income investors. But given the high yield - plus the stock's dirt-cheap P/E of 3.76 - for those with a (much) more speculative streak, Seagate might present an interesting opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.