Four Dividend-Growth Stocks, One Year Later

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 |  Includes: CAH, DRI, FDS, HRS, JKHY, MDY, XLK
by: Low Sweat Investing

Happy anniversary to me. Sort of.

I’ve been writing on Seeking Alpha about a year now, and decided that as the anniversary date of old articles popped onto the calendar (at the 12 to 15 month mark), I’d scratch out a quick update on how things turned out so far – stock fundamentals, dividend growth, total returns and so forth, along with a link to the original article so readers can keep me honest.

I’ll admit that I coin-flipped this idea for a while. As a long-haul investor, I wondered whether a year was the right time frame. But it seemed like at least enough time for a check-in, so that’s where the coin landed.

Anyway, here we go.

First up, “Three Midcap Tech Stocks with Rising Dividends” (August 24, 2009) profiled what I considered a trio of good dividend-growing midcap technology stocks: Harris Corp. (NYSE:HRS), a communications technology firm; and Factset Research Systems (NYSE:FDS) and Jack Henry & Associates (NASDAQ:JKHY), both data processors.

All three of these midcap techs still show attractive internal rates of return and healthy balance sheets. ROEs range from 17% to 30%. FDS and JKHY continue to carry no long-term debt, while HRS took on additional though manageable debt. All three kept up their double-digit dividend hikes, with annual increases ranging from 12% to 15%. Dividend growth generally tracked earnings, so payout ratios, now below 30% for all three companies, stayed about the same or declined.

As I pointed out in the original article, the yields on these stocks, just 1.2% to 2.2%, won’t satisfy pure income investors. But diversifying with a smattering of these types of smaller dividend-growers might boost capital gains for total return investors.

On that count, since the article was published the S&P is up about 8%, FDS about 39%, HRS about 24% and JKHY about 6%, none of this including dividends. Two other benchmarks noted in original article, the SPDR MidCap ETF (NYSEARCA:MDY) and Technology Sector ETF (NYSEARCA:XLK) rose 15% and 7%, respectively.

The FDS price run-up over the past year sent its valuation skyward, but JKHY and especially HRS sit at reasonable multiples.

I can’t forecast these companies’ future growth but analysts, who think they can, see mostly good prospects. A predicted HRS slowdown next year is likely what’s depressing its current P/E. I won’t attempt to run through a year’s worth of news and earnings releases, so you might find more you like, or not, by checking out any of these three stocks for yourself.

Next, a stroll down memory lane with pharmaceutical and healthcare products distributor and Dividend Achiever Cardinal Health (NYSE:CAH).

“Cardinal Health Dividend Has A New Spin” (August 31, 2009) appeared the day before CAH spun off its medical division CareFusion (NYSE:CFN). As described in the article, all of CAH’s long-running dividend stayed with the parent company, so when CAH’s stock price dropped to account for the spinoff, the CAH yield immediately jumped from about 2% to nearly 3%. Better yet, CAH management announced they would increase the dividend in line with future earnings growth and would also lift the payout ratio to 30% from 20%.

True to those intentions, CAH bumped its dividend 25% in October 2009 then 11% in July 2010. And the stock rose about 25% since my article was published.

Too bad for me. Because I didn’t like CAH’s erratic earnings growth and cash flow, my article concluded the stock would go on my watchlist. I’ve been watching it go up ever since.

Still, Reuters shows CAH dividends have grown 20% to 25% over the past one and three years, while earnings decreased 7% to 23% over those same periods. And that 30% payout target? Already over 40%. Call me crazy, but I’m still watching.

In fairness, analysts forecast double-digit earnings growth for CAH over the next couple of years, and shareholders have been amply rewarded by the post-spinoff returns.

I wrote one additional article last August, “The Economy Is Growing Under Our Noses” (August 17, 2009), which presented evidence that the recession had ended months before. Since then, the economy confirmed positive growth but unemployment still stinks.

For a more recent article, on a 3% yielder with promising prospects for business growth and dividend growth, click here to check out Darden Restaurants (NYSE:DRI).

Disclosure: Long DRI, FDS, HRS, JKHY