By Andrew Hawkins
Investment Underground took a look at some dividend kings currently ruling the market.
Coca-Cola Company (KO): Coca-Cola Company is the world leader in manufacturing and distributing carbonated and non-carbonated beverages. They sell a wide range of beverages from water and flavored water to juices and energy drinks. KO sells mainly to distributors who then sell to the consumer. They also sell concentrates and syrups to fountain drink wholesalers. Coca-Cola has a market cap of $152.06 billion.
Coca-Cola announced a first quarter 2011 quarterly payout of $0.47. This is a 6.8% jump from last year’s quarterly dividend of $0.44. The $0.47 quarterly distribution makes for an annual dividend yield of 2.8%. KO has a payout ratio of 34%. I think that the brand name of Coca-Cola provides a huge competitor advantage and makes the barriers for others huge. Coca-Cola has $12B in cash and $26B in debt. Operating cash flow over the trailing twelve months came in at $8.6B, so we think there is plenty of room for continued dividend increases.
At current prices, we think KO represents a slightly better buy than Pepsi (PEP) due to sales abroad. Among foreign markets, we think India represents KO's best opportunities for growth. In 2010, KO grew India sales by approximately 20%.
Altria Group Inc. (MO): Altria Group is made up of several large tobacco companies and wineries. Through these subsidiaries, Altria produces cigarettes, wine, and other tobacco products. The group also manages a portfolio of leases. These leases can be leverage or direct financing and are mainly leases on transportation and power generation equipment. They are trading around $26.95 and have a market cap of $56.41 billion.
Altria declared a quarterly dividend of $0.380 for first and second quarter of 2011. This gives MO a projected annual yield of 5.7%. Altria had a solid first quarter with net income jumping 15.25% from same quarter last year. Earnings per share also went up from the same quarter last year. In 1Q 2010, EPS was $0.39 and in 1Q 2011 EPS came in at $0.45. Altria says that it has a target payout ratio of 80%, but today the payout ratio stands at 77%. With $3.43 billion in cash and $12.19 billion in debt, I think we will see a rise in future payouts from Altria Group.
Merck & Co. Inc. (MRK): Merck & Co is a health care solutions company. It mainly produces pharmaceutical products that treat a range of conditions in the bone, respiratory system, immune system, heart, and other places. Merck also makes a line of preventative pediatric and adult vaccines. In addition, the company has a consumer care segment that makes a variety of products sold over-the-counter and in drug stores. MRK is currently trading around $35.24 and has a market cap of $108.8 billion.
Since 2004, Merck has paid quarterly distributions of $0.38.This distribution made for a 5% yield in 2008, a 4.16% yield in 2009, and a yield of 4.22% in 2010. MRK has a projected yield of 4.3% for 2011. Merck announced healthy first quarter results. It slashed a bunch of cost and raised sales slightly. Net income came in at $1.071 billion compared to same quarter last year net income of $330 million. Merck is finally feeling the synergies and growth it expected from the acquisition of Schering-Plough in 2009 and Merck announced that it will be acquiring Inspire Pharmaceuticals for about $430 million. The company has $13.04 billion in cash and $17.86 billion in debt. I see room to grow for Merck's dividends.
Eli Lilly and Company (LLY): Eli Lilly is a worldwide pharmaceutical provider. It manufactures and markets drugs focused on the fields of neuroscience, endocrinology, oncology, cardiology, and also animal health. The products LLY makes treat a variety of conditions and illnesses within these fields.
Eli Lilly stated earlier in the year that their first quarter 2011 dividend would be $0.49, which is a dividend yield of 5.1%. It is currently trading around $38.10. It has a price to earnings of 8.7, compared to the industry average of 19.7. LLY has a strong operating margin of 26.4% and earnings per share growth (3 year average) of 19.1. It also has a return on equity of 25.6%. Eli Lilly has $6.71 billion in cash and $6.67 in debt. I think Eli Lilly will continue to line your portfolio with strong dividends for quite a while. Be careful on how long you hold this position though. There is a lot of skepticism about LLY due to some patents expiring in the coming years.
Exxon Mobil Corporation (XOM): Exxon Mobil Corporation is an international oil and gas company. It explores for, produces, and refines crude oil and natural gases. It also transports and sells oil to consumers. The company also engages in the selling of commodity petrochemicals. It has a share price of about $79.05 and has a market cap of $389.4 billion.
Exxon Mobil Corporation declared a dividend increase for the second quarter of 2011. It raised the quarterly payout from $0.44 to $0.47. This gives XOM a projected annual yield of 2.4%. Exxon had a great first quarter. Earnings grew 69% from 1Q 2010 to $10.650 billion. During the 1Q 2011, Exxon purchased 69 million common shares at a cost of $5.7 billion. Exxon has a 25% payout ratio and $12.83 billion in cash and $15.88 billion in debt. Exxon is returning value to shareholders and has room for continued dividend growth.
We think XOM represents a better buy than British Petroleum (BP) at this juncture due to BP's tarnished reputation.
Becton, Dickinson and Company (BDX): Becton, Dickinson and Company is a global medical technology company. It sells a variety of medical supplies, devices, lab equipment, and diagnostic products to healthcare institutions, life science researchers, clinical laboratories, industry and general public. BDX has offices in North America, Latin America, Europe, Asia Pacific, Africa, and the Middle East. It is trading around $84.65 and has a market cap of $18.5 billion.
The current quarterly dividend is $0.41 which makes for a projected yield of 1.9%. Although this may not be that high of a yield, BDX has paid regular quarterly dividends since becoming public in 1964 and has made periodic payout increases. Becton, Dickinson increased revenue and net income during 1Q 2011. It also has nice margins. Its operating margin is 22.6% and net margin is 17.8%. The company also has a 3 year average earnings per share growth of 13.4. Becton, Dickinson is performing well and with $1.86 billion in cash and $2.73 billion in debt, I see room for dividends to grow.
Paychex Inc. (PAYX): Paychex offers payroll, human resourcing and benefit outsourcing solutions. Paychex was formed in 1979 from 18 different franchises and partnerships into the one company it is today. It offers services throughout the United States and Germany. PAYX is trading around $29.43 and has a market cap of $10.6 billion.
Paychex has paid a quarterly dividend of $0.31 since 2008. This makes for a projected yield of 4.1%. Paychex experiences very little overhead and operating costs. They have an operating margin twelve month trailing of 37.8% and a net margin twelve month trailing of 24.9%. Paychex also has a great return on equity of 35.7%. PAYX has $469.7 million in cash and current has no debt. Expect to see distributions increase in the future.
Archer Daniels Midland Company (ADM): Archer Daniels Midland Company is one of the world’s leading processors of agricultural commodities. Archer Daniels produces food ingredients, animal feeds, biofuels, and other products. The company also engages in financial activities similar to private equity fund investments and futures commission merchant activities. ADM is trading around $29.52 and has a market cap of $18.83 billion.
Archer Daniels has a strong dividend history. It has paid 318 consecutive quarterly dividends over 79 years. Its current quarterly dividend is $0.16 and it has a projected yield of 2.1%. Archer Daniels reported a net earnings increase of $157 million from quarter ending March 31, 2011 to same quarter 2010. The company also announced on June 13, 2011 that it opened a new feed premix plant in Tianjin, China to serve a growing demand in the Chinese market. This is just one more step in Archer Daniels' plan to expand throughout China. ADM has $1.62 billion in cash and $14.26 billion in debt and has a payout ratio of 19%.
Lowe's (LOW): Lowe’s is the world’s second largest hardware/home improvement store. It operates in North America and offers a variety of products. They offer typical hardware supplies but also sell things such appliances, countertops, and they even have an installation service. Lowe’s has a competitive advantage because of its large size and is able to provide these products and services at a discount to locally owned store.
This stock currently has a quarterly dividend of $0.11 and an annual forward dividend yield of 1.8%. Since their 2:1 stock split in July 2006, Lowe’s has been steadily increasing dividends. In 2006, LOW was paying $0.05 a quarter. Now, LOW is more than double that. Lowe’s has an operating margin of 7.3% and a price to earnings ratio of 17.2. It has $1.84 billion in cash and $6.58 billion in debt. I put a buy on Lowe’s because I believe that Lowe’s has the infrastructure and management to see growth in the near future.
Home Depot (HD): Now a look at the head honcho of the home-improvement industry, Home Depot. With revenue around $68 billion and a market cap of $59.16 billion, Home Depot is a giant. Similarly to Lowe’s (LOW), HD experiences significant scale and can offer customers lower prices because of it. They currently have operating margins of 8.6% and it should only improve as they continue to update their operations and supply chain management.
HD paid a quarterly dividend of $0.25 in March and has a dividend yield of 2.70%. It currently has a payout ratio of 46%. HD is a buy for me. They have come out of the credit crisis leaner and more efficient. Home Depot has an operating margin of 8.8%, which is slightly higher than industry average. It also has $1.81 billion in cash and $10.76 billion in debt. Some say that HD is great because if the housing market picks up, they will see growth because of remodeling and if the housing market continues to suffer it will see growth anyway, from investors flipping houses. I am a little wary of saying that no matter what happens HD will see growth, but I will say that Home Depot is poised to gain as much as it can from favorable conditions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.