Three Companies with Sustainable Dividends

Even in soft economic environment, there are companies out there that are continuing to increase dividends for their shareholders. While dividend increase is good, it is more critical to make sure we understand that companies can sustain their dividends. Following are four companies that recently announced their quarterly results and increased dividends.

Brady Corp (BRC): It is a dividend achiever and has paid increasing dividends for last 24 years. Most recent dividend increase of 2.9% was in September 2009.

The 4Q09 earning per share was $0.37 (vs. $0.64 in 4Q08).

• The key highlight was $127million cash flow from operations.
• For year 2009, EPS was $1.33 (vs. $2.41 in 2008) which includes all restructuring charges.
• The 2010 earnings expectation is $1.60 to $1.80.
• Yearly dividend of $0.70/share appears to be well covered with earnings.
• This payout ratio is at 47% and current dividend yield is 2.30%.

HCC Insurance Holdings Inc. (HCC): It is a dividend achiever and has paid increasing dividends for last 13 years. Most recent dividend increase of 8% was in August 2009.

• The 2Q09 earning per share was $0.81 (vs. $.79 in 2Q08).

• The key aspects were flat revenue, decrease in new premium underwritings, and increase in EPS due to 4.7 million share repurchases.
• The quarterly dividend of $0.135/share and hence annual dividends of $0.54/share appears to be covered with earnings.
• The payout ratio is 33% and current dividend yield is 2.0%.

Dover Corporation (DOV): It is a dividend aristocrat and member of broad dividend achiever. It has been raising dividends for last 55 years. The most recent dividend increase of 4% was in August 2009.

• The year 2Q09 earnings per share was $0.54 (vs. $0.98 in 2Q08).

• The revenue decrease by 31% year-over-year. This is due to weaker end market.
• The highlights were increased operating margins and free cash flow.
• Quarterly dividend of $0.26/share and hence annual dividend of $1.04/share seems to be well covered with earnings.
• This quarter’s payout ratio is 48% and current dividend yield is 2.7%.

At a high level and in the context of stocks screening, these companies demonstrate ability to cover and sustain their dividends. These increases are well above the inflation level and hence they add up to the real returns over time.

Comments

[notsosmart:]

look @ att & verizon yields.these yields are a joke.

Oct 27 04:07 PM

[anarchist:]

less than 3% dividend? Yeah, they should be sustainable but so are savings bonds.


On Oct 27 04:07 PM notsosmart wrote:

> look @ att & verizon yields.these yields are a joke.

Oct 27 06:55 PM

[mbkelly75:]

T pays a 6.4% dividend at this time - that is true - however, 4 years ago, they dropped that dividend so they do not have a 5+ year record of raising it. Their payout ratio is 86% which may still not be sustainable and even the 5 year average payout ratio is 76% and that is too high to be sustainable even at that level. (I do not feel comfortable with a payout ratio over 70% maximum and I am happier with a ratio that is more like 50% or less). To make it even worse, T only has a 5 year average of growing that dividend by 5.39% annually and the Total Return over the last 5 years has only been 31.86%. The Quick Ratio (a fast look at their financial health with >1 being good) = 0.78

VZ has a similar record to T, except that they are, on the whole, an even worse investment. They also dropped the dividend 4 years ago. Their payout ratio is 85% and even the 5 year average is 71%. Their 5 year average record of growing that dividend is a terrible 2.8% annually with a Total Return over the last 5 years of (4.85%). Such a deal - even with that dividend - you lost money holding the stock. The Quick Ratio = 0.71

I could go deeper into the technical reasons why these may not be the best investments, but what would be the point? The basic idea is clear already. They might be worth a dividend capture play IF they are trending up, but they are not worth holding onto for ANY length of time.

Now let’s look at the stocks mentioned in this article:

BRC pays a 2.4% dividend at this time and have a 21 year record of raising it with a payout ratio of 51%, but the 5 year average payout ratio is only 31% (it is sustainable). They have been growing that dividend with a 5 year average rate of 10.25% and over the last 5 years have given a Total Return of 16.9%. The Quick Ratio = 1.87

HCC pays a 2.02% dividend at this time and have been doing it for 12 years now. Their payout ratio is a VERY sustainable 19% and the 5 year average is even less at 14%. They have a 5 year record of growing that dividend of 19.59%. They have given a 5 year Total Return of 48.54% too. The Quick Ratio does not exist (insurance companies have had a tough time along with everyone else).

DOV pays a dividend of 2.7% at this time and have a 53 year record of raising it. (I have owned them for over 50 years and long since gained a zero cost-basis on the stock.) Their payout ratio is 41% right now and over the last 5 years has averaged only 27% (very sustainable). They have grown that dividend by an average of 9.16% over the last 5 years and given a Total Return of 14.84% over that time period. The Quick Ratio = 2.14

Savings Bonds might pay a larger dividend this year, but those interest payments do NOT grow with time. The dividend growth rates guarantee those bond returns will not be ahead in a few years - even less time if you re-invest those dividends as they come in so you are compounding the dividends. David Van Knapp has an outstanding article here that shows how important Dividend Growth Rates and Yields are to your portfolio’s success: www.dividendgrowthinve...

His 10X10 table shows that Growth Rate is only slightly less important over the long-term than the starting rate. Granted that 2% will not be enough to make up for a 6% yield unless the Growth Rate is over 15%, but it does not take into effect, the acceleration that comes from compounding those dividends. It also assumes that that 6% yield is sustainable. All bets are off if the higher yield is not sustainable. Stocks go up and down - it is the nature of the beast. If you do not like the current yields of a stock that has a 5+ year record of growing them - put them on your watch list and wait for a better one. It will come around sooner or later. I look for at least 3% so BRC would have to go down to $26.18, HCC would need to be down to $24.07 and DOV would need to be down to $34.20 to make them a buy - until they raise the dividend again.

BRC’s 20 Day Moving Average has trended down below the 50 Day Moving Average. If it continues down, the target price may be met soon. HCC hit a lower low yesterday and may be trending down also. DOV seems to be still hitting higher highs and higher lows so it still seems to be trending up but is worth watching. I would wait a bit before investing in any of them. If they would be so kind as to move down into a Death Cross and then up into a Golden Cross - any one of the 3 stocks listed in the article would be an outstanding buy at that point and would give at least 3% dividend yield at that time also. You would lock in a good yield while riding the stock up for a capital gain as well. Think about it.

Oct 27 11:35 PM

[cocomurph:]

Why not enhance your "analysis " a bit by at least mentioning what each company's business is! ;-)

Oct 28 08:42 AM

[auto44:]

Ahmen,


On Oct 28 08:42 AM cocomurph wrote:

> Why not enhance your "analysis " a bit by at least mentioning what
> each company's business is! ;-)

Oct 28 12:36 PM