Seeking Alpha
Growth at reasonable price, healthcare, long-term horizon, value
Profile| Send Message|
( followers)  

The intent of this case study is to determine if there is a predictable, profitable pattern when a company consistently purchases stock and increases dividends. The motivation behind the study is with market averages at all time highs, I am conducting the study to seek out value using Dow 30 stocks only. Dow 30 shares tend to be large well established names with long track records providing ample data to conduct the study. The first article in the series can be seen here.

The intent of this study is to compound gains over a long period of time. The strategy is not suitable for short-term investments (less than two year trading horizons), but will generate substantial gains over time. The period used in the study was 2004 through 2012, which encompassed a roaring bull market and subsequent bust.

Exxon Mobil (NYSE:XOM) is the first candidate for the study. XOM is a vertically integrated producer of petroleum and natural gas. XOM is classified as a super major and is currently the largest publicly traded oil company. With a current market cap of over 400 billion dollars, XOM is the most valuable company in the world. To say the least, XOM is a model of stability which makes it an excellent candidate for the study.

Year

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dividend per share

1.06

1.14

1.28

1.37

1.55

1.66

1.74

1.85

2.18

Shares outstanding in millions

6401

6133

5729

5382

4976

4727

4979

4734

4502

Earnings per share

3.89

5.35

6.55

7.28

8.69

3.98

6.22

8.42

8.09

XOM Total Return Price Chart

XOM Total Return Price data by YCharts

As we can see from the table above, XOM has doubled its dividend in the last 9 years. With a current yield of over 2.5% XOM pays out substantially more than a 10 year US treasury bond while providing consistent yearly bumps in the dividend rate. The consistent dividend hikes provides a nice inflation hedge which adds to the appeal of the shares.

XOM has been roundly criticized in some circles for its aggressive buyback program. It seems shareholders would prefer higher dividend payouts instead. In 2004, XOM opened at $41.02 a share and ended the study period at $86.55. If you click the above link, according to Yahoo Finance, the adjusted opening purchase price equates to $33.14. Assuming a stakeholder reinvested the dividends received, a shareholder would have a capital gain north of 150%. Considering the S&P is up considerably less than XOM's performance, it's hard to argue with management's performance.

In 2010, XOM acquired XTO energy for its considerable natural gas containing properties and expertise in extracting the product. The company issued some shares to close the transaction which accounts for the slight increase in share count in 2010. The subsequent shares were reabsorbed by the company over the last two years, illustrating XOM commitment to returning capital via buybacks. For a more in depth discussion on XOM please click here.

Year

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dividend per share

0.70

0.88

1.02

1.17

1.35

1.54

1.70

1.87

2.03

Shares outstanding in millions

1022

1014

996

981

943

937

921

907

919

Earnings per share

2.73

3.05

3.64

4.27

4.90

4.12

4.74

5.49

5.34

UTX Total Return Price Chart

UTX Total Return Price data by YCharts

The second candidate for the study is United Technologies (NYSE:UTX). UTX is a conglomerate comprised of five distinct divisions ranging from airplane engines, helicopters, climate control, elevators and aerospace. The company currently sports a market cap north of 80 billion dollars - this, combined with its diverse divisions, make UTX a strong stable company worthy of inclusion into the study.

The first compelling data point is the dividend growth experienced by UTX shareholders during the study period. As we can see from the table above the dividend has virtually tripled, handsomely rewarding income seeking investors. For the long term growth investor this should immediately pique one's attention as it is a strong signal that management intends to richly reward shareholders. In the subsequent timeframe earnings have virtually doubled which speaks well to the end demand for their products. Strong demand for the companies end products augurs well for future earnings and dividend gains.

Management has retired roughly 10% of all shares outstanding during the study period. While not as aggressive as XOM, UTX shares have performed admirably, rising over 100% during the study period. UTX has more than doubled the performance of the S&P 500 during the study period, handsomely rewarding patient shareholders.

UTX recently completed the acquisition of Goodrich Aerospace which led to a small increase in shares outstanding. The acquisition in my opinion will be a positive one for the company, providing an immediate boost to earnings. Over the subsequent years, I expect management to continue to raise dividends and buy back shares similar to the pattern exhibited in the recent past.

From the data presented above, the conclusion can be made that rising dividends along with consistent buybacks are a good indicator of future share gains. Combining the data from the first study the five Dow 30 stocks have been analyzed with, the same conclusion is gleamed from all. In my opinion it isn't a coincidence that all 5 have outperformed the S&P 500 during their respective study periods.

Thank you for reading and I look forward to your comments.

Source: How Increasing Dividends And Stock Buybacks Leads To Long-Term Capital Gains, Part II

Additional disclosure: The article is for informational purposes only.