by Robert Gordon
Dividends can provide much needed stability in volatile markets. Investors seeking such stability may use a number of different criteria to find new companies to add to their portfolios. Dividend investors value a long history of consecutive dividend payments and periodic increases. Sustaining dividend payments throughout a recession is a difficult task, which only few companies can achieve. Dividend investors also look for companies with great liquidity, relatively low debt and steady revenue and earnings growth. The following dividend kings were lucrative for shareholders in 2011 with EPS growth over 10%, a debt to equity ratio in 2011 that declined relative to 2010, and an expected forward dividend growth rate of greater than 10%. In the following article I will discuss why this trend will likely continue in the coming quarters.
Shares of General Electric (GE) are currently trading just under $19, up from their lows of $14 a share earlier in 2011. General Electric is a company that has paid quarterly dividends consistently for the last 32 years. Just after the Great Recession of 2008, the company cut its dividend 66% to $0.10 a share for five quarters; since then the company has increased dividends four times. In the fourth quarter of 2011 the company exceeded analyst expectations and reported earnings of $4.1 billion. EPS increased 11% from Q4 2010.
Shares are trading at a forward price-to-earnings multiple of 10.64, indicating General Electric is currently undervalued. The company pays a dividend of 3.6%, with a payout ratio of 48% of net income. The company is very liquid with $132 billion in cash on hand. General Electric is likely to retain its position as a dividend king throughout 2012.
Emerson Electric (EMR) is another solid company that pays investors a strong and reliable dividend. The company pays an annual dividend of $1.60 a share equal to a dividend yield of 3.2%, and shares are currently trading just above $50. Emerson Electric has paid investors a dividend every quarter since February 1982. The company has also managed to increase the dividend each year, including the recent increase of $0.055 from $0.345 to $0.40 a share.
Emerson Electric is a fundamentally sound company that has managed to increase its quarterly earnings by 12.10% on a year over year basis, while sustaining a profit margin of 10.25%. The company has $2.05 billion in cash on hand and $5.20 billion of total debt outstanding. Emerson Electric currently pays out 42% of income in dividends.
Honeywell International, Inc (HON) shares are trading between $57 and $58, and the current dividend yield is 2.6%. Similar to General Electric, Honeywell has paid dividends since 1970 while never decreasing payments. However, the company did freeze its payment of $0.303 from February 2009 for eight consecutive quarters before a $0.03 increase in February 2011. The company recently increased the dividend by $0.04 to $0.373 in November 2011.
Honeywell has performed extremely well in the first three quarters of 2011. Revenues grew by 14.2% in the third quarter of 2011 on a year over year basis and earnings grew by 44.10% during the same period. In Q4 2011, Honeywell reported an income of $1.05, which topped analyst estimates by $0.01 a share. However, the company took a pension charge of $1.45 a share. Subsequently the company reported a loss of $0.40 per share. Last year the company paid out 32% of its income in dividends. Honeywell's reasonable payout ratio, in addition to consistent revenue growth and great liquidity (which boasts $4.4 billion in cash), makes it a great dividend pick for any investor.
First Niagara Financial Group (FNFG) has been a cash cow company for investors. The financial service company operates over 257 branches in Pennsylvania and Upstate New York. Shares of First Niagara are currently trading near $10 a share and the company pays a quarterly dividend of $0.16 a share, yielding 6.6%. The company has paid investors a dividend since 1998. First Niagara has been a favorite of many institutional investors, including respected investor and co-founder of thestreet.com Jim Cramer who recommended the company on January 11th 2012.
First Niagara performed relatively well in 2011. In Q4 2011, revenues grew 45% on a year over year basis, while earnings grew 25% during the same period. Though it is the nature of the industry (loans), the company seems to be highly leveraged in comparison to competitors; the company has $7.2 billion in total debt on its books compared to a mere $390 million of cash and liquid assets on hand. In 2011 First Niagara paid 91% of its income as dividends. Due to such a high payout ratio and the threat of insolvency, I do not believe the company's current dividend is sustainable. Based on its current position, I do not believe the company will be able to retain its throne as a dividend king throughout 2012.
Shares of the tax service provider H&R Block, Inc (HRB) are trading just below $17 and pay a dividend of $0.80 a share, yielding 4.9%. The company has paid dividends every quarter since 1982. In December 2011, the company raised its dividend for the first time in three years by 33% to $0.20 a share. Share prices also appreciated over 25% in 2011, indicating investor confidence in revenue and profit growth. Although share prices have recently rallied, the company is still trading at a forward price-to-earnings 10.04.
Revenues grew 9.3% in the last quarter of 2011, on a year over year basis. The company pays out 58% of income as dividends, and has a current ratio of .95, with $1.1 billion in total debt outstanding and $570 million cash on hand. I believe H&R Block's dividend is sustainable for the next 18 to 24 months due primarily to its consistent dividend history and strong fundamentals.