Seeking Alpha
Solar, utilities, quantitative analysis, dividend investing
Profile| Send Message|
( followers)  
Are 20% EPS growth and 20% dividend growth a winning combination?At first glance the answer seems obvious, but historical performance does not necessarily indicate future success. Value investors often look for strong dividend growth and attractive fundamentals, while growth investors look for -- naturally -- growth. Some companies have both.
Table 1 shows a list of companies that have achieved historical 5-year dividend growth in excess of 20% and historical 5-year EPS growth in excess of 20%, and currently are providing at least a 1.5% dividend yield. Since we're in the middle of the NBA season and right around from the NCAA March Madness tournament, I'll refer to these stocks as double-doubles, a term which traditionally refers to a basketball player getting at least 10 in two major statistical categories. However, in this case, I've upped the level to requiring at least 20% growth in both categories.
There are 21 companies that met this criteria; however, not all may be good investments, since growth often comes with a premium. This article will investigate further which of these companies might make good investments and identify some additional analysis that should be performed.
Table 1: The Double-Double Club
Ticker
Name
Price 2/15/2011
5 Yr Hist. Div. Growth %
5 Yr. Hist. EPS Growth %
Dividend Yield
Annaly Capital Management Inc
$ 17.37
49.3
61.2
14.7%
Life Partners Holdings Inc.
$ 7.57
69.8
93.8
13.2%
Anworth Mortgage Asset Corp.
$ 6.93
97.7
31.2
12.7%
Capstead Mortgage Corporation
$ 12.79
123.2
31.1
12.2%
MFA Financial, Inc.
$ 8.28
48.4
36.0
11.4%
Dynex Capital, Inc.
$ 10.67
71.7
76.7
10.1%
Triangle Capital Corporation
$ 19.33
21.9
24.4
8.7%
Partner Communications Company
$ 19.18
57.7
31.5
8.4%
Duncan Energy Partners L.P.
$ 32.60
25.3
20.1
5.6%
Hudson City Bancorp, Inc.
$ 11.36
21.4
23.6
5.3%
Rogers Communication, Inc.
$ 35.20
91.5
72.6
3.6%
Westwood Holdings Group Inc.
$ 36.45
27.3
20.4
3.6%
Strayer Education, Inc.
$132.23
32.0
25.5
3.0%
Elbit Systems Ltd.
$ 50.69
30.1
38.9
2.8%
ABV
Companhia de Bebidas das Americas
$ 26.77
42.6
27.0
2.7%
Buckle, Inc.
$ 36.77
26.2
25.4
2.2%
Shenandoah Telecommunications
$ 17.48
21.8
24.3
1.9%
Tower Group, Inc.
$ 26.59
39.1
22.1
1.9%
Guess?, Inc.
$ 46.45
32.7
30.6
1.7%
AmTrust Financial Services, Inc
$ 19.14
40.7
28.2
1.7%
Monsanto Company
$ 71.54
29.7
24.1
1.6%
Data provided by Zacks.com services.
The first observation is that many of the top companies are Real Estate Investment Trusts. This includes NLY, CMO, ANH, MFA, and DX. Westwood Holdings and Triangle Capital are asset management firms. With a detailed review of their holdings, it would be difficult to understand whether these companies are overvalued or not, despite having what appear to be low P/E ratios. LPHI operates in the secondary market for life insurance. Based on the headlines for the company, it is also facing some legal challenges. TWGP and AFSI are in the casualty insurance industry. The rest of the article will focus on the other stocks.
These stocks were then evaluated across valuation metrics to ensure that the tremendous growth was not already priced in and against future anticipated growth to see if the trend would continue.

Table 2: P/E Ratios
Ticker
Name
P/E
PTNR
Partner Communications Company
9.0
HCBK
Hudson City Bancorp, Inc.
10.5
ESLT
Elbit Systems Ltd.
11.6
RCI
Rogers Communication, Inc.
13.8
STRA
Strayer Education, Inc.
13.9
BKE
Buckle, Inc.
14.1
GES
Guess?, Inc.
16.0
SHEN
Shenandoah Telecommunications
18.7
ABV
Companhia de Bebidas das Americas
20.9
DEP
Duncan Energy Partners L.P.
21.4
MON
Monsanto Company
35.5
Data is sourced from Yahoo!Finance on February 16, 2011.
While the companies with P/Es over 20x may still be good opportunities, I will focus on the other members of the group.
Partner Communications Company provides wireless telecommunications services in Israel, ranging from voice mail to SMS to international dialing. The company has over 3 million subscribers and was founded in 1997. Analyst estimates show flat to declining EPS and Revenue, which would explain its low P/E.
Hudson City Bancorp Inc. is the holding company for Hudson City Savings Bank and provides retail banking services through 95 branches throughout 17 counties in the Northeast, clustered around metro New York City. Analyst estimates show substantially declining revenue into the next year. Furthermore, despite a strong track record of dividend growth, the dividend has not been increased in the last eight quarters. A detailed fundamental analysis might show some challenges.
Elbit Systems Ltd. is an Israeli defense systems provider that has shown revenue and income growth over the last three years. However, when looking at its Operating Cash Flow less capital expenditures it gives around $100 million for each of 2007, 2008, and 2009 which makes its enterprise value at $2.4 billion appear high.
Rogers Communications Inc. provides wireless communications and media in Canada. It operates over 50 radio stations, serves 1.7 million households with digital cable and 1.6 million households with Internet. It is also engaged in media by publishing 70 magazines. Its total enterprise value is around $29.7 B and has consistently low valuation metrics despite reasonably strong margins (12.5% net income and 24.1% operating margin) and good productivity with 10.7% ROA and 34.9% ROE. However, analyst estimates show slight growth and the ratings are typically around perform with some recent downgrades.
Strayer Education Inc. is in the for-profit education space and owns Strayer University Inc. It runs approximately 80 campuses with over 50,000 students offering programs in healthcare, criminal justice, accounting, and information technology. It has a short interest of 25.2% despite no debt and $124 million in cash, attractive margins 20.8% for net income and 34.2% for operating income. Analyst estimates show strong growth in both earnings and revenue.
Buckle Inc. is a retailer of apparel and footwear. It has over 400 retail stores in 41 states. The company has $164 million in cash and no debt with reasonable margins (13.8% net income and 21.8% operating income). Analyst estimates show flat to modest earnings growth and single digit revenue growth. One key question would be its decline in net income and operating cash flow over the past four quarters.
Guess? Inc. designs, distributes and licenses apparel around the iconic Guess? brand. GES operates over 400 stores in Canada and the U.S. and almost another 100 stores in the rest of the world (Mexico and Europe). It has strong liquidity with about $450 million of net cash. Its margins and capital productivity are lower than BKE. Analyst estimates show single digit earnings growth and double digit revenue growth, which continue a consistent trend of growth.
Shenandoah Telecommunications Co. is the third telecommunications company on this list and offers a variety of voice, data, and video services. It is also one of the smaller companies, with an enterprise value of just $557.4 million. Analyst estimates show earnings contraction despite strong revenue growth of over 20%. Given its relatively high P/E in the group, this could prove to be challenging.
Conclusion
These stocks, despite strong historical earnings and dividend growth, would require additional research and analysis prior to making a long investment. This goes to show that past performance is not an indicator of future success. Table 3 summarizes the key issues and opportunities for each stock identified in Table 2.
Table 3: Conclusion Summary
TickerOpportunityComments
PTNRNeutralLow P/E offset by flat to declining EPS and Revenue
DEPNeutral to UnattractiveHigher P/E reduces safety margin
HCBKNeutral to AttractiveLow valuation but shows declining revenue
RCIAttractiveGood fundamentals, low valuation, good dividend
STRANeutral to AttractiveLarge short interest requires additional review, but fundamentals look strong
ESLTNeutralLimited information available
ABVNeutral to AttractiveHigher P/E, strong margins offset against a lower value/cash flow
BKENeutralDeclining growth offsets margins and valuation
SHENUnattractiveProjected lower earnings growth and higher P/E
GESNeutral to AttractiveStrong brand, reasonable valuation
MONNeutralHigher current and forward P/E, estimates show strong EPS growth
Data is sourced from Yahoo!Finance on February 17, 2011.
Hopefully you will find some of these opportunities to be slam-dunks. As always, it is important to do additional analysis before making an investment decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Are 20% EPS Growth and 20% Dividend Growth a Winning Combo?