Rising Dividend Yields at TransCanada and Kimberly-Clark

 |  Includes: KMB, SPY, TRP
by: Low Sweat Investing

As 2010 toddles ahead, the Wall Street Journal continues to report a gaggle of dividend increases. Here’s a quick gander at two that grabbed me. With their more than 4% yields and lively tales of loonies and Huggies, they’re quite a pair:

1. TransCanada Corp. (NYSE:TRP), a Canadian operator of natural gas pipelines, gas storage facilities and electric power generation plants, announced a 5% dividend hike that gooses the stock’s yield to about 4.8%, though the payment will bounce around with currency fluctuations between the U.S. buck and the Canadian “loonie.”

Of course, a passel of Canadian energy plays pump out higher yields, but with TRP bobbing up in the dividend news, now’s as good a time as any to give them the once-over.

TRP generally shows steady-eddie revenue and earnings growth that easily support its dividend growth. The company has suffered recent effects of cyclically low industrial power use, but cash flows are strong and set to get stronger as new TRP projects come on line.

Here’s management, in their latest quarterly release:

Looking forward, we expect that our $22 billion capital program will lead to significant growth in cash flow and earnings over the next five years as a number of attractive, low-risk projects are placed into service. This has enabled our Board of Directors to increase the dividend on common shares for the tenth consecutive year.

Morningstar nods agreement, concluding TRP’s most recent earnings report shows its “growth prospects remain bright.”

But TRP’s numbers aren’t slam-dunks. Valuations are sneaking up on the high end of their historical range, so the company’s growth needs to be more than just a prospect. Return on equity is under 10%, with more debt than equity, and 2010 dividends will gobble over 70% of estimated earnings.

Still, TRP has something to crow about. The stock has rewarded shareholders with a raft of loonies while murdering the S&P 500, posting double-digit average total returns over the past 5-years and 10-years.

So investors attracted to TRP’s growing dividend and gargantuan cash flow can perhaps afford some patience. And if a cyclical recovery restarts industrial power usage as TRP’s new projects come on line, shareholders might end up whistling like songbirds.

2. Back in the USA, Kimberly-Clark (NYSE:KMB), maker of Huggies, Kleenex and reams of other branded paper products, boosted its dividend 10%, lifting the indicated yield to about 4.4%, and marking 38 consecutive years of dividend growth.

The 10% dividend jump hit the top-end of the “high single-digit to low double-digit increase” KMB previewed in its January earnings release, giving them plenty to gush over. Management reported:

Having delivered record cash flow and strong bottom-line growth in 2009, this dividend increase reflects our solid balance sheet and confidence in our ability to continue to execute our strategic business plan and generate strong cash flow going forward. It also demonstrates our commitment to returning cash to our shareholders and to maintaining Kimberly-Clark's rating as a top-tier dividend payer among consumer packaged goods companies.

And with the company forecasting growth of 5% to 6% in sales and 7% to 11% in operating profit to drive next year’s dividend pop, KMB might provide a good demonstration of how dividend hikes can boost stock prices.

Specifically, if KMB’s stock stayed stuck where it is for another year, one more healthy dividend bump would lift its yield to about 4.8%. But KMB’s business is growing now, and its yield is typically closer to 3%. So it seems a good bet for the dividend increases to begin pulling the stock upward, and pushing the yield back down. (You could make a similar argument about TRP, though its gets muddied by moves in the gas and power markets.)

KMB valuations rest near their bottoms compared to historical benchmarks. The payout ratio is about 54%. Morningstar grades the company ‘A’ on both Financial Health and Profitability. KMB carries more debt than equity, plumping its return on equity to more than 35%. Over the past 5-years and 10-years, the dividend has kept shareholders above water, and ahead of the S&P.

And, for the record, KMB says Huggies’ sales and market share gains were strong contributors to growth in the reporting period they just wrapped up.

Disclosure: Author long KMB and TRP