With 2009 finally banished from the calendar, the Wall Street Journal reported, through Friday, a torrent of 2010 dividend increases. All are worth a look, and some are better than others.
So here’s a quick take on some royalty and riches in recent dividend news, at least from where I’m sitting.
At a glance, discount retailer Family Dollar Stores (FDO) seems like real royalty, a Dividend Aristocrat whose pedigree now shows 34 years of dividend increases. FDO hit the news with a recent 15% increase, which brings its yield to about 2%.
FDO has little debt, excellent return on equity and high margins for its industry. Its counter-cyclical, discount general merchandise business grew during the economic downturn.
But FDO is a prince whose shareholders might feel like paupers. The stock has gone lower than nowhere for the past five years, so although the dividend has steadily increased, a five-year FDO stockholder gained only a 2% yield-on-cost and less than a percent a year in total annual return That’s hardly aristocratic, though in fairness, over ten years FDO has outperformed the market, a feat that should be within reach of good dividend growers.
Contrast FDO with Fastenal (FAST) a business-to-business retailer of specialized hardware for maintenance, repair, and construction operations.
FAST, which recently gained Dividend Achiever status, made recent news with a 14% dividend increase that brings its yield to about 1.8%. Looks a little like FDO so far.
But over the past five years, FAST not only enriched its dividend by double digits each year, it rang up annual total returns of almost 9%. Meanwhile the broad market guillotined investors with a negative total return.
FAST, with return-on-equity of 16% and no long-term debt, suffers cyclically depressed sales and earnings right now, but still churns out profits and good cash flow. Still, FAST’s depressed results produce towering valuations.
And partly due to missing earnings estimates by a penny, FAST’s stock price has tumbled so far this year, likely a sign that valuations as well as expectations were too high for current business conditions.
But with the industrial economy turning, FAST’s earnings growth over the next couple of years looks like it will about double FDO’s. And across a complete economic cycle, there’s no doubt which of these dividend newsmakers gave investors richer returns.
Kimberly Clark (KMB), yielding 4%, decreed in its earnings release that a high single-digit to low double-digit dividend hike is coming in 2010. KMB’s board will officially declare the increase later this quarter, maybe as soon as the end of February. That will make 38 consecutive years of dividend growth.
Aristocrat KMB isn’t showy royalty. The company slowly grinds out above-market returns over the long run, while steadily building rich yield-on-cost through management’s commitment to being a top-tier dividend payer in their sector and an objective of raising the dividend high single-digits to low double-digits annually.
KMB valuations are at bargain levels compared to its historical benchmarks. The company carries more debt than equity, but Morningstar grades it ‘A’ on both Financial Health and Profitability.
Next, how about an Aristocrat that offers only a beggar’s dividend, but brims with other riches? Wesco Financial (WSC), an insurance company with conglomerate interests in other businesses, recently nudged its dividend by less than 4% to reach a yield of less than half a percent.
That’s not a rich combination. An unattractively low dividend yield and low dividend growth to boot. Typically, not much else needs to be said.
But in this case, none other than Charlie Munger runs WSC. He’s Chairman, CEO and President. As well, of course, as King Warren of Omaha’s right-hand man, and genuine investing royalty in his own right.
So it’s worthwhile to take a peek at WSC’s long-term returns. After all, you don’t buy into a company like this strictly for the dividend, even after nearly four decades of increases. (The usual increase is about the rate of inflation, by the way).
Here’s what you’ll see. Measured over decades WSC handily beats the S&P 500, building long-term riches for long-term shareholders.
And just for fun, take a look at the past 15 years, about the time since FAST began trading. (Remember them?)
True to his talent as a businessman, returns for Munger’s WSC beat the S&P over those 15 years. So it’s all the more amazing that FAST clobbered them both, up nearly 800% to WSC’s 200%. And FAST also sprinted past WSC over the trailing 1-year, 2-year, and 5-year periods.
What about the next 15 years? Who knows. But over the long run well-chosen stocks that consistently raise dividends can make investors feel as rich as royalty.
And that wraps up some royalty and riches in recent dividend news, at least for now.
Finally, for an optimistic historical analysis of stocks that consistently increase their dividends, check out my Seeking Alpha article “Stocks That Raise Dividends Outperform,” published September 23.
References and Links
Morningstar, “Family Dollar Stores Performance and Dividends Table,” January 2010.
Morningstar, “Fastenal Performance and Dividends Table,” January 2010.
Yahoo Finance, “Fastenal, Analysts’ Estimates,” January 2010.
Wall Street Journal, “Kimberly-Clark Profit Rises 17%,” January 22, 2010.
Morningstar, “Wesco Financial Performance and Dividends Table,” January 2010.
Disclosure: Author holds a long position in KMB