A dividend is just one of many ways a company can reward its shareholders by paying them out in cash. The investor can then choose to take the cash and run, reinvest it in the company, or invest it in a different company. After a company has made their net income for the quarter they have the choice of what to do with it and the choices are usually to either plow the money back into the business for other investments or pay some of that money back to the shareholders in the form of a dividend.
Most Recent Dividend
Agilent (NYSE:A) recently announced a quarterly dividend of $0.10 per share with an ex-dividend of June 26th, making the must own date June 25th. The dividend is going to be payable to owners of the shares on July 22nd. The dividend is currently good for a 1% yield on today's share price of $39.84. Based on trailing earnings, the dividend is good for a payout ratio of 37% which is pretty low. From a free cash flow perspective the company has paid $0.15 billion in dividends over the past twelve months on free cash flow of $0.19 billion which isn't an ideal situation with a 79% payout ratio with respect to free cash flow.
Potential For Future Dividends
The company doesn't have a good history of increasing its dividend over few years. Actually it started paying a dividend back in 2012 and was increasing it but recently reduced it because there was less income thanks to the Keysight spinoff (KEYS). The company is projected to earn $1.70 per share in earnings for this year and if the payout ratio remains the same at 37% then I anticipate the company to distribute about $0.63 annually, or $0.1575 on a quarterly basis. I do believe the 37% payout ratio is sustainable for the long-term and anticipate an increase to around $0.63 annually. Earnings growth projections for the company are pretty mixed with a one year growth rate of 16.03% and five year growth rate of 4.4% so it wouldn't be surprising if increases to the dividend in the long-term are around the 4% range.
Dividend Valuation
Now let's get to the meat and potatoes, the dividend valuation model to determine a price that the stock should be at based on the dividend alone. The dividend growth model equation takes the form of:
Annual Dividend [D] |
Rate of Return [R] - Dividend Growth rate [G] |
Where D is equivalent to the current dividend, R is the rate of return desired by the investor, and G is the anticipated growth rate of the dividend. For the D value I'm going to use the current dividend rate of $0.40. For the R value I'm going to look at the average return of the First Trust ISE Water Index Fund ETF (FIW) over the past five years because Agilent accounts for nearly 2.01% of the holding. The average annual return on the FIW has been 15.02% which is the number I'm going to use for the R value. For the G value of the equation I'm going to use the long-term dividend growth rate of 4% which I mentioned previously. When you plug and chug all the numbers you get a stock value of $3.63 which makes the stock overvalued by about 91% from today's price of $39.84.
Conclusion
The dividend discount model is just one of many ways to value a company and should be taken into consideration while trying to evaluate a company. Assumptions are always made while using valuation models and I believe I've selected some of the most conservative criteria for the valuation in this article. Agilent is definitely a slow moving stock which I haven't bought in quite some time. The company has about 2.36 times the amount of cash and equivalents on its balance sheet right now compared to its current liabilities which means the company is hoarding quite a bit right now. I'd like to see the company distribute some of that money right now to patient shareholders which have been dealing with a stagnating stock price.
Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
