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By Siraj Sarwar

When a company makes ongoing regular cash distributions, it sends a positive message about the fundamentals, performance and prospects of the business, and indicates that management is more concerned about returning value to shareholders than using excess cash to bolster executive pay. Stocks that consistently pay dividends tend to be less volatile than those that don't. Investors believe that dividends are a far more predictable thing, based on a company's track record than share price. Over the last 82 years, dividends have made up over 40% of the total returns investors have received from the stock market.

In this article, I pick two companies and two MLPs for consistently growing returns. These companies all have solid financial statements to back returns for investors. Let's dig each company's financial position to observe its ability to sustain growing returns for investors.

Intel Corporation (NASDAQ:INTC) is a semiconductor chip maker which develops advanced integrated digital technology products, mainly integrated circuits, for industries such as computing and communications. Intel is well known for paying stable and consistently growing dividends. At present, the company offers a quarterly dividend of $0.225 cents/share. Below is a brief history of Intel's dividends.

Years

Dividend

2012

$0.87

2011

$0.7824

2010

$0.63

2009

$0.56

2008

$0.5475

Morningstar.com

How Dividends are safe

Financial Analysis

Recently, Intel reported full year earnings with a massive turnover of $11 billion. At the end of 2012, its revenue stood at $53.3 billion. Its revenue decreased by $0.7 billion compared to the year before. This is a small decrease, but a decrease in revenue all the time is considered as risky. However, in the case of Intel, the decrease in revenue was because of the severe competition. Digging deeper into the company's financials can reveal the company's real situation.

 

INTC

Industry Average

Rev Growth (3 Yr Avg)

14.9%

11.9%

EPS Growth (3 Yr Avg)

40.4%

-

Operating Margin % TTM

27.4%

22.7%

Net Margin % TTM

20.6%

17.1%

Morningstar.com

Intel has shown strong financial metrics over the years. In the past three years, it was able to increase earnings by 14.9% while the industry average stood at 11.9%. The company has substantial margins on its sales. In the past three years, on average, it has grown Earnings Per Share [EPS] by 40.4%. Additionally, Intel still projects single digit growth in 2013, which is inspiring considering the current PC market.

Intel has a strong liquidity position which is nowhere near in danger. With $8.1 billion in free cash flow, Intel looks to be in a continuing strong position. In addition, it has generated gigantic operating cash flows of nearly $19 billion. Intel is also investing aggressively in growth opportunities. In the past 12 months, its capital expenditures stood at $11.3 billion. Intel's financial health also seems strong. It has huge cash reserves. A few key metrics below demonstrate this trend.

  • Current Ratio 1.93
  • Quick Ratio 1.21
  • Financial Leverage 1.51
  • Debt/Equity 0.14

El Paso Pipeline Partners, L.P. (NYSE:EPB) owns and operates natural gas transportation pipelines and storage assets. At present, the partnership offers a quarterly distribution of $0.61 cents/unit. The Master Limited Partnership [MLP] has a long history of consistently increasing dividends. Recently, it enlarged its distributions from $0.58 cents/unit to $0.61 cents/unit. In the last five years, the MLP enlarged its distributions by nearly 112%. In the last year alone, El Paso Pipeline was able to enlarge distributions by 19.61%.

How distributions are safe

 

2012

2011

2010

Revenue

$1,515

$1,425

$1,344

Operating Income

$863

$784

$747

Net Income

$450

$472

$379

Earnings Per Share

$2.15

$2.03

$1.90

Morningstar.com [Revenue and Income in millions]

The partnership's strong investment strategy led it to achieve massive results in the last few years. In the last three years, on average, it has been able to enlarge revenue by 10.6%. In addition, in the last three years, on average, El Paso was able to raise EPS by 9.4%. This is a big success for any company in a volatile macro-economic environment. The partnership has one of the best margins on its sales. Below are the partnership's margins which make it a superior stock for dividend investors.

 

Stock

Industry Average

Rev Growth (3 Yr Avg)

10.6%

7.1%

EPS Growth (3 Yr Avg)

$9.4%

-

Operating Margin % TTM

57.0%

11.2%

Net Margin % TTM

67.9%

5.2%

Morningstar.com

Furthermore, its cash flows are also in a solid position. At the end of 2012, its operating cash flows were standing at $716 million, representing an increase of $44 million over the past two years. Free cash flow also portrays a similar trend. With its solid financial position, Wall Street analysts also recommend a buy for distribution and growth.

Cisco Systems, Inc. (NASDAQ:CSCO) designs, manufactures and sells Internet Protocol based networking and other products. At present, Cisco offers a quarterly dividend of $0.17 cent/share. Since 2011, Cisco has been able to boost its dividends by 183.3%. Its dividends are very strong, and the company is in a solid financial situation.

How dividends are safe

Financial Situation

At the moment, Cisco is moving towards software and cloud computing. Over the past years, it has invested about $6 billion in software-related companies to enhance growth and profitability. Its business strategy is working. It reported record revenue for the consecutive eight quarters in a tough economic environment.

 

Q1 FY2013

Q2 FY2013

Q2 FY2012

Net Sales

$11,876

$12,098

$11,527

Year/Year Growth

6%

5%

11%

Gross Margin

61.0%

60.7%

61.3%

Operating Expenses

$4,588

$4,554

$4,311

Operating Income

22.3%

23.1%

23.7%

Net Income

$2,092

$3,143

$2,182

Source; 10Q form [Sales, Expenses, and Net Income in millions]

At the end of Q2, the company generated record revenues for the eighth quarter successively. As the above table demonstrates, the company has been able to raise revenues at a high pace.

In addition, it has been able to sustain its margins in a high cost environment. Together with record revenues and stable margins, the firm has also been able to produce record EPS. Below are a few metrics which reveal more facts about its financial heath and anticipated future returns.

  • Current Ratio 3.38
  • Quick Ratio 3.05
  • Debt/Equity 0.29
  • Financial Leverage 1.74

At the end of Q2, the company's current ratio stood at 3.38. At the end of latest quarter, it had a massive amount of cash and cash equivalent on its balance sheet, accounting for 53.09% of its total assets. On the other side, current liabilities represent about 18% of stockholders' equity. Examining its cash flows can reveal more facts about its cash position.

Figures in Million

2011

2012

TTM

Operating Cash Flow

$10,079

$11,491

$11,871

Capital Expenditure

($1,174)

($1,126)

($1,129)

Free Cash Flows

$8,905

$10,365

$10,742

Source; Morningsatr.com

Cisco has been displaying extremely solid cash flows. Over the last two years, the firm has been able to raise its operating cash flows by $2 billion. Moreover, in the Trailing Twelve Months [TTM], it has been able to produce $11 billion in free cash flows while dividend payments stood at $2 billion, representing a considerable potential to lift dividends. With strong financial position, Wall Street analysts recommend a strong buy for investors.

Legacy Reserves, LP (NASDAQ:LGCY) is engaged in the acquisition and development of oil and natural gas properties. At present, Legacy Reserves offers a quarterly distribution of $0.57 cents/unit. Below is a brief history of its consistently increasing dividends.

Years

Dividend

2012

$2.23

2011

$2.14

2010

$2.08

2009

$2.08

2008

$1.98

How distributions are safe

 

2012

2011

2010

Revenue

$346

$337

$216

Operating Income

$51

$84

$38

Net Income

$137

$72

$11

Earnings Per Share

$1.40

$1.63

$0.27

Morningstar.com [Revenue and Income in millions]

The partnership has shown exceptional growth both in revenue and earnings. In the past three years, the partnership has been able to grow its revenue by 36.2% while the industry average stood at a negative 2.8%. On the negative side, its operating margin condensed over the past year. However, it had one of the best net margins of 39.6% while the industry average stood at 13.1%.

The company is also investing heavily in growth opportunities. Recently, it closed the largest acquisition in its history of $502.6 million for the purchase of Permian Basin properties from Concho. These properties are in some of the most prolific fields in the Permian Basin. With recent strong drilling results and its newly-expanded development inventory, it announced a capital budget of $90 million for 2013. With its recent strong financial position and smart investment strategy, all three Wall Street analysts recommend this partnership as a strong buy for investors.

Source: 4 Dividend Stocks For The Long Haul