Chances are that if you're a dividend investor, reinvesting dividend income is part of your portfolio strategy. Reinvesting dividends allows investors to realize large returns that outperform the larger market in general even when investing in stocks that are not considered growth stocks.
In this article, I will list and review three stocks that I feel are perfect candidates for long term growth investors to add to their portfolio. In determining why I find these stocks attractive as long term buys and DRIP candidates, I will be looking at each company's current financials, current valuation and recent trading activity, earnings, dividends, and company outlooks.
Stock #1: Bank of Montreal
The Bank of Montreal (BMO) is the fourth largest bank in Canada by deposits. BMO provides various retail banking, wealth management, and investment banking products and services in North America and internationally in over 1,500 branches. The company was founded in 1817 and is headquartered in Montreal, Canada.
|Profit Margin Quarterly||27.68%|
|Return on Assets||0.77%|
|Return on Equity||15.69%|
|Revenue per share Quarterly||$6.09|
|Quarterly Revenue Growth||2.20%|
Looking at the chart below, you can see that BMO has a track record of consistently growing long term revenues.
Current Valuation and Recent Trading Activity
BMO has a current price to earnings ratio of 10.57 and a price to book value of 1.58 with earnings per share of $6.20.
BMO closed Tuesday at $65.53, which is its 52 week high and $9.92 higher than its 52 week low.
At its current price, BMO is trading toward the low end of its historical PE ratio and is trading at a better value than some of its competitors such as Bank of Nova's (BNS) 11.68 PE ratio and 1.83 price to book value or Toronto-Dominion's (TD) 13.05 PE ratio and 1.82 price to book value.
For BMO's latest quarter, the company reported earnings per share of $1.60, $0.11 higher than analyst estimates and $0.10 higher than the same period last year. BMO has done a good job of creating growth of long term earnings, while dealing with short term issues that often have negative effects on the overall industry.
BMO's net income increased from $1.36B in 2003 to $4.11B last year and the company is on pace to see increased earnings this year as well.
BMO pays a quarterly dividend that is currently yielding 4.38%. The company's dividend has consistently yielded between 4% and 5.5% in the past four years.
In the past 10 years, BMO's dividend has increased by over 150%. The growth has slowed (just over 25% the past five years), but remains stable. Seeing as how BMO is Canada's longest running dividend paying company, there is no reason to assume that its current dividend is anything but safe with long term growth still very likely.
BMO is set to continue seeing increased revenue growth and shareholder returns as it maintains its status as one of the elite Canadian banks. World Finance Magazine recently named BMO the best private bank in Canada, taking into consideration several of its strengths including:
- Developing strong client relationships
- Delivering high-quality wealth management solutions
- Implementing impressive client-focused educational programs
- Having a powerful brand presence
- The strength of its management team
In my opinion, BMO is a great long term buy and a prime candidate for dividend reinvestment. BMO's stock price has increased 47% the past five years, but when taking into consideration reinvested dividends, total stock return for BMO the past five years has been just over 90%. I think investors can expect to see continued high returns in the future from this stock.
Stock #2: Kinder Morgan
Kinder Morgan, Inc. (KMI) is an American energy company that owns and operates pipelines and terminals that transport and store natural gas, oil, coal, and related products. Headquartered in Texas, KMI has operations throughout the United States and Canada.
|Profit Margin Quarterly||8.19%|
|Return on Assets||1.41%|
|Return on Equity||7.11%|
|Revenue per share Quarterly||$3.26|
|Quarterly Revenue Growth||56.07%|
In the past four years, KMI's revenue has increased over 75% from $7.19B in 2009 to $9.97B last year. The company's gross profit has increased nearly 40% from $2.96B in 2009 to $5.21B last year.
The company is on pace for increased gains this year and KMI is on track to see revenues over $12B this year and gross profit of over $6B.
Current Valuation and Recent Trading Activity
KMI has a current price to earnings ratio of 42.44x and a price to book value of 2.63 with earnings per share of $0.82.
KMI closed Tuesday at $34.71, $6.78 shy of its 52-week high and $2.79 higher than its 52-week low. KMI is trading below both its 50-day moving average and its 200-day moving average.
For its last quarter, KMI reported earnings per share of $0.27. This was $0.04 less than estimates and $0.09 less than the same period last year. Even though the quarterly report was less than stellar, the company still maintains a positive one year earnings growth rate.
KMI currently pays a $0.40 quarterly dividend that yields 4.61%. As you can see from the chart below, KMI has grown its dividend substantially over the past few years, with the dividend growing nearly 200% in just over two years.
There has been a lot of talk surrounding KMI recently, most of it related to the Hedgeye report that came out. While the report was negative, the claims made in the report are suspect at best. KMI's financial reporting seems legit and has been analyzed in several recent reports including this one.
KMI is a solid company with an outstanding infrastructure and asset allocation. I feel that continued growth is on the horizon as different reports like this one show that increased oil and gas shipments are on the rise. I feel that recent drops in KMI's stock price has presented a great buying opportunity for long term investors.
Stock #3: AT&T
AT&T Inc. (T) is one of the four main wireless providers in the United States; Verizon, Sprint, and T-Mobile being the other three. AT&T ranks second in size (in terms of subscribers), just behind Verizon, but is first in revenue.
|Profit Margin Quarterly||11.92%|
|Return on Assets||2.71%|
|Return on Equity||7.76%|
|Revenue per share Quarterly||$5.94|
|Quarterly Revenue Growth||1.58%|
AT&T's revenue growth has been slow, but it has remained consistent, rising every year since 2009. Revenue was $123.02 billion in 2009, $124.28 billion in 2010, $126.72 billion in 2011 and $127.43 billion in 2012. The company is on pace to see an increase in revenue this year as well.
Looking at the chart above, you can see that this is nothing new for AT&T. The company has shown several multi-year spans of slow growth followed by a large spurt. From 1955 to 1994, revenue went up slowly from 7.93B to 11.62B. But from 1994 to 2000, revenue skyrocketed from 11.62B to 51.37B.
A similar pattern then happened from 2000 to 2006, where growth was stagnant (even declining some years) and revenue only went from 51.37B to 63.06B during that seven year stretch. Another large increase occurred from 2006 to 2008, with revenue nearly doubling during that span to 124.03B.
I believe another spurt of high increased revenue is on the horizon within the next few years as T continues expanding and upgrading its services.
Current Valuation and Recent Trading Activity
AT&T has a price to earnings value of 26.16x and a price to book value of 2.1x with earnings per share of $1.32. AT&T closed Tuesday at $34.76, $4.24 shy of its 52-week high and $2.05 higher than its 52-week low.
Compared to Verizon (VZ), T is fairly priced and arguably under priced based on comparisons between the two companies. VZ has a PE ratio of 88.7x and a price to book value just over 4x.
T reported Q2 earnings of $0.67 per share. This was $0.01 below estimates but was $0.01 higher than the same period last year. Earnings for AT&T have increased the past three quarters ($0.44 per share for Q4 of 2012, $0.64 per share for Q1 of this year, and $0.67 per share last quarter). The company has a one year earnings growth rate of 8.68%.
Looking at the chart above you can see that both T and VZ has seen modest increases in revenue since 2010 (VZ performing better), but both companies have struggled to turn this into positive earnings growth. On this front, AT&T seems to be doing a better job as the losses in net income (40.15%) are significantly less than Verizon's (82.12%).
When looking at net income on a quarterly level, this is reflected even more. Both companies share the same pattern, but Verizon's losses have been more severe. Because of this I don't think VZ deserves the price premium the stock currently carries.
T is a dividend aristocrat, having increased dividends each year since 1985. During this time, AT&T's dividend has increased 285.70% (4.80% annualized). For the past several years, T's dividend growth has slowed with only $0.01 increases each year to the quarterly dividend since 2009.
Currently, T is the highest yielding dividend aristocrat with a yield of 5.30%.
Looking at the chart above, you can see that both T and VZ have increased dividends at nearly the same rate over the past several years. And both stocks have maintained a high yield (hovering between 4% and 7% the majority of that time).
Why this is important is because the dividend makes it very easy for T and VZ to maintain and often beat S&P annual average return of around 10%, because half or more is already accomplished through the dividend.
If you take a look at the chart below, you can see that AT&T's stock price over the past five years has risen 15.04%. Not bad, but not that good either, considering the S&P has risen by over 42% during that same period.
But when you add in the compounding effect of T's high yield and continuously growing dividend, the results are much different. When AT&T's dividend is reinvested, you can see that the stock actually outperformed the S&P by over 10%.
What you can also see from this chart is that when dividend's are reinvested, there has been virtually no significant amount of time in which T's stock price has underperformed the S&P. This makes it a great defensive stock IMO.
It is true, that earnings have been up and down the past several years for AT&T. While the company has a one year growth rate of 8.68%, it has a five year growth rate of -$1.50%. I believe that AT&T continues to make moves that will ensure long term growth in the future.
Some of these recent moves and accomplishments include:
- Wireless testing firm, RootMetrics, recently announced AT&T has pushed Verizon out of number #1 spot as top carrier in ongoing study.
- AT&T ranked #1 for wireless purchase experience satisfaction for the first time since the study began.
- Through Project VIP, AT&T is planning on targeting 1 million additional business customers with its integrated services
- During Q2 2013, AT&T's strategic business services were up 15% compared to last year
- In Q2, AT&T added 233,000 U-verse TV and 641,000 broadband U-verse costumers
- T recently extended its network connectivity solutions to the SWIFT community in the Middle East
- AT&T recently launched 2 new android smartphones, the Moto X and the HTC One mini. The HTC One mini is exclusive to AT&T at the moment, and AT&T is the only carrier offering customizable Moto X phones.
- AT&T is rolling out 4G LTE to at least 50 additional markets this year.
- AT&T is expanding its Digital Life package to new markets this year, with a goal of 50 markets by the end of 2013.
- AT&T is redesigning its stores with a focus on personalized services and educating customers.
- AT&T's Aio Wireless is now online
- AT&T's recent acquisition has ability to grow 4G Network by 42 million people
The first two items in this list are huge, as it displays AT&T's ability to match and/or beat Verizon's quality, coverage, and customer service. If AT&T can continue making the right moves towards becoming the undisputed #1 wireless provider (which is still a long road to get to, but one I think is completely possible), there will be no stopping what this company can accomplish.
The three companies listed above (BMO, KMI, and T) are all solid companies that appear poised for continued future growth in dividends and overall stock returns.
BMO continues to bolster its investment and corporate banking segment as it expands its North American Platform. KMI is well positioned to see large growth as demand for natural gas is set to rise. In my opinion, AT&T is making the right moves to compete and eventually overtake market share from Verizon. The company will be one of the leading carriers in the U.S. for years to come, limiting the amount in which the price of shares will fall with a market downturn.
I think all three companies are buys and any long term investor should consider adding these stocks to their portfolio while reinvesting dividends in these companies to compound long term returns. As always, I urge anyone to do their own research before making any investment decision.