By Serkan Unal
Flush with cash and enjoying strong free cash flow generating capacity, many companies continue to boost their dividends. Some do it with strong confidence, increasing dividends at high nominal rates. These dividend increases, especially when sizable, signify financial strength and project a company's confidence in its capacity to earn sufficient profits or to generate enough free cash flow to sustain dividends at higher levels for an extended period of time. Rising dividends may also represent the absence of opportunities to invest in growth; however, even then, higher dividends represent the companies' commitment to sustainable investor-friendly policies that boost shareholder value.
Below is a review of five stocks with yields of at least 2% that have recently reported dividend increases of at least 10%. Some of these stocks, such as Cisco Systems, Inc. (CSCO), are good value and income investments, while others, including Stewart Enterprises Inc. (STEI) have a good dividend growth potential. Steelcase Inc. (SCS) is a play on a rebounding economy and pays a decent yield.
Cisco Systems Inc., the global networking giant, recently boosted its quarterly payout by 3 cents to 17 cents per share. This marks the second increase in the quarterly dividend over the past 12 months. The dividend hikes reflect the company's strong financial position. CSCO reported fiscal second-quarter revenue in line with analyst estimates, but beat analysts' expectations for the bottom line. Despite the weak macro backdrop, the company has reported record revenues for eight consecutive quarters, record EPS, net income, and non-GAAP operating income, with stable gross margins and strong operating margins. The company's prospects are bolstered by the recovery in the U.S. enterprise sector and long-term growth in data demand and cloud computing. In this sense, CSCO is oriented toward growth through acquisitions. The company's balance sheet looks rock solid, as CSCO has a low long-term debt-to-equity of 29% and as much as 48% of total assets in cash and short-term investments. The company also boasts a high free cash flow yield of 7.3%. In terms of valuation, CSCO is trading at a low forward multiple of 10.7x. Its price-to-book of 2.1 is lower than the company's five-year average of 2.5. Last quarter, value investors Donald Yacktman held more than $1 billion in this stock (check out Yacktman Asset Management's top holdings here).
Stewart Enterprises Inc., a provider of funeral and cemetery products and services, recently hiked its quarterly payout by 0.5 cents to 4.5 cents per share. STEI, the second largest publicly-traded company of its kind, operates in a fragmented and highly competitive industry. However, although the average life expectancy of Americans has increased, which has a negative impact on this industry's growth, the crude death rates will be increasing as those aged 65 or more rise to 50 million, or 17% of the total U.S. population, by 2020. Aside from the long-term prospects, the company's near-term performance has been strong. STEI recently posted an estimates-beating first-quarter adjusted EPS from continuing operations, which increased 50% from the same quarter a year earlier. The business is improving, as same-store funeral services revenues rise for the third consecutive quarter and cemetery segment revenues increase 9% year-over-year in the first quarter. Rising earnings and a low payout ratio bode well for STEI's future dividend growth. In terms of valuation, STEI is trading at a forward P/E of 16.1x, about on par with its average earnings multiple over the past four years, despite the 47% run-up in STEI's stock price over the past year. Last quarter, the stock was popular with Pentwater Capital.
Steelcase Inc., the world's largest office furniture company, recently increased its quarterly dividend by 1 cent to 10 cents per share. This company's dividend was slashed markedly during the Great Recession in 2009, as office furniture shipments dived; however it has recovered smartly since then. Its operating environment remains challenging, but the company reported organic revenue growth of 4% overall in the fiscal fourth quarter that ended February 22, 2013. Its adjusted operating profit in the quarter jumped 50%, however, the company still recorded a quarterly loss on a GAAP basis, due to write-offs associated with its operations in Europe, the Middle East and Africa [EMEA]. Going forward, the improving U.S. labor market - which still has to pick up steam - and rising non-residential construction bode well for this office furniture maker. BIFMA, the not‐for-profit trade association for business and institutional furniture manufacturers, forecasts a notable improvement in the industry trends next year. Reflecting these optimistic forecasts, analysts see the company's long-term EPS CAGR at a robust 20%. In terms of valuation, SCS is trading at 15x forward earnings, which is well below the furnishings industry's 19.1x. Last quarter, SCS was popular with the hedge funds of Cliff Asness and Israel Englander.
Rockwell Automation Inc. (ROK), an industrial automation power, control, and information solutions firm, recently boosted its quarterly dividend by 5 cents to 52 cents per share. The company is cash rich, as it holds 23% of its total assets in cash and short-term investments. It also converts 100% of its earnings into free cash flow. Back in January, the company reported revenues that matched analyst expectations; however, its EPS was below consensus estimates. The company's organic sales improved 1.5% in the quarter, driven by 6% growth in the U.S. and 7% growth in Latin America, and largely offset by a 9% decline in the Asia-Pacific region. Still, its FY2013 EPS guidance range of $5.35-$5.75, implies growth of about 5% based on the guidance midpoint. However, the company's performance is falling short of its long-term targets, including annualized sales growth of 6%-to-8% and double-digit EPS growth. Its ROIC of 18.8% is also below the long-term target of above 20%. The company's growth strategy includes an aggressive expansion in emerging markets, which it hopes will account for 30% of sales by 2017. ROK appears to be pricey based on its forward P/E of 15.6x, which is a small premium to its respective industry's multiple of 14.8x. Last quarter, ROK was popular with billionaire Ken Griffin.
The PNC Financial Services Group (PNC) the 11th largest U.S. financial services company by assets, recently hiked its quarterly dividend by 4 cents to 44 cents per share. The bank has performed fairly well due to its exposure to the strong Midwest economy, supported by farming and the shale oil and gas boom. The bank's high exposure to commercial and industrial (C&I) loans bodes well for earnings growth in the future, as the general economy picks up steam this year. One of the company's growth strategies has been expansion through acquisitions, including the acquisitions of National City Crop. in 2008 and RBC Bank's southeastern U.S. assets last year. Interestingly, a notable contributor to PNC's earnings has been the bank's 21% stake in investment manager BlackRock Inc. (BLK). The bank has seen improvement in its capital adequacy, and it passed the Dodd-Frank Act Stress Test 2013 with a minimum Tier 1 common ratio of 8.7% versus the peer median of 7.7% in a severely adverse scenario. Its Basel III Tier 1 common ratio of 7.3% is expected to reach the target of 8%-to-8.5% by year-end. The bank is trading at a 10% discount to its book value and has a ROE of 9.6%, in line with its peers. Fund manager Richard S. Pzena was bullish about PNC last quarter.