As a dividend growth investor, one of the primary stats I look at when evaluating a stock is the number of annual dividend increases. The longer a stock has been increasing its dividend payment, the more that becomes part of the corporate identity. Typically, it takes a major event within the company (or industry) to prevent the board of directors from continuing to raise its dividend after a long history has been established. This adds a layer of safety that helps me sleep better at night. I am quite certain that Kimberly-Clark (KMB) - 38 years of increases, Wal-Mart (WMT) - 37 years of increases, and AFLAC (AFL) - 30 years of increases, will provide me with a raise once again this year. Companies like these should be at the core of any dividend growth portfolio.
I also believe that the younger dividend payers play an important role as well. These are companies who have started building a history of annually increasing their dividend payments. These companies are typically increasing their dividends by double-digit percentages each year as they can grow their payments not only through internal growth but also through increases in their overall dividend payout ratio. Microsoft (MSFT) - 7 years of increases and Intel (INTC) - 9 years of increases, are perfect examples.
Finally there are the companies that are in their infancy of paying and increasing their dividend. As I am a younger dividend growth investor, I like to set aside a small percentage of my portfolio for a couple of these types of stocks. These are typically much riskier dividend growth plays as there is little established history. Its much easier for these companies to suspend, cut, or continue paying the same amount year after year without much shareholder backlash. But if you find a financially sound company that is established in their industry, does business where there are strong barriers of entry from competitors, and appears to be serious about creating shareholder value through dividends, then you may have found a dividend growth future star. I am hoping I found just that in Amgen (AMGN).
Barriers of Entry
Amgen is the largest independent biotechnology company in the world. Biotechnology is not an easy industry for new competitors to enter. It takes massive amounts of money to invest in research and development. If a company can successfully create a product, it then takes a great deal of time for the product to get to market due to the extensive testing required. Typically, if a smaller biotech company is successful in developing a drug, it usually still needs partnerships with larger companies for financial, regulatory, manufacturing and marketing support. Many times these smaller firms are bought out by the larger companies if they are seen as adding substantial value to the company's pipeline. Amgen bought out four companies alone in 2012: Micromet Inc., Kai Pharmaceuticals, Mustafa Nevzat (a Turkish Pharmaceutical Company), and DeCode Genetics Inc.
Amgen has $25 billion in cash. The company's debt to total capital increased to 57% from 38% a year earlier which initially threw up a red flag, but when digging deeper, you see that their cash on hand increased 44% in that period of time as well from $17.7 billion to $25.4 billion. This leads me to believe that the company was taking advantage of a favorable debt market to finance buyouts and stock buybacks in lieu of using its own cash. Also, for the trailing twelve months, Amgen's dividend free cash flow payout ratio was only 18%.
Creating Shareholder Value
Amgen first began paying a quarterly dividend of $0.28 in August 2011. Just six months later in February 2012, it had increased that dividend nearly 30% to $0.36. This past month, Amgen increased its dividend 31% for the first quarter of 2013 to $0.47 per share. Albeit brief, I believe this history of increases is a sign of continuing things to come. On top of these increases, Amgen is just wrapping up a $10 billion stock buyback program and has authorized an additional $2 billion more to be repurchased.
Amgen is the first independent biotech company to pay a dividend. There are few, if any, competitors that have the balance sheet strength, drug pipeline, and research & development prowess that compares with Amgen. The company has made it clear that they intend to reward shareholders with the aggressive stock buybacks and dividend increases. At 2.1% yield, Amgen will likely not be appealing to investors looking for immediate dividend income. But those of you who are currently DRIP'ing and looking for a grower, I believe Amgen represents a strong candidate despite its limited history.
References: All figures mentioned above were taken from morningstar.com