Last year (January, 2015), I described ten mid-cap companies to consider for your dividend growth portfolio. Given the successful performance of these mid-cap equities, I identify here an additional six mid-cap companies using the selection method I employed previously. I suggest these companies for consideration as additions to your dividend growth portfolio.
By including middle-size companies, I feel that I can add value and diversity to my dividend growth portfolio. Over the long term, mid-cap companies can produce stronger returns than stocks in large or small-cap stocks. I use the definition that mid-cap companies have a market capitalization between 1 B$ (billion dollars) and 5 B$.
My Starting List for a Few Mid-Cap Winners
Of the 232 companies that have capital values between 1 B$ and 5 B$ on the June 30, 2016 CCC list (CCC List), 120 companies meet the requirements of current dividend yield greater than 2.40 %. I apply my dividend coverage and dividend growth criteria that reduce the count to 17 companies. Finally, requiring fair value, and scrutinizing the recent transcript and news reports on the companies reduced my count to the six companies, in alphabetical order, that I have listed in the following table together with a few of their key attributes.
|Company Name||Ticker||Industry||Yield*, %||Dividend Growth Rate, 5-yr Ave, %||Consecutive Years of Increasing Dividend, CCC Category|
|Great Plains Energy Inc.||GXP||Utility - Electric||3.37||4.8||5, Challenger|
|Manpower Group Inc.||MAN||Staffing Services||2.74||16.5||6, Challenger|
|MSC Industrial Direct||MSM||Industrial Goods||2.36||14.3||13, Contender|
|Portland General Electric||POR||Utility - Electric||2.89||3.8||11, Contender|
|Steelcase Inc.||SCS||Building Products||3.47||14.9||6, Challenger|
|Williams-Sonoma Inc.||WSM||Retail - Home Products||2.73||16.8||11, Contender|
Table: * Yield as of July 11, 2016
MSC Industrial Direct (NYSE:MSM) exhibits an undervalued characteristic on F.A.S.T. Graphs (F.A.S.T.), although it receives a rating of 2 (slightly overvalued) on the S&P Capital IQ Fair Value scale. Also, the yield on MSM decreased from 2.44 to 2.36 from June 30, to July 11, 2016.
The equities, GXP and POR, exhibit a moderate dividend growth rate as expected for utilities.
Synopses of the Six Mid-Cap Companies
Following are brief synopses of the six companies presented in the order that I recommend them for possible acquisition.
MSC Industrial Direct Company markets and distributes metalworking, maintenance, repair, and operations products primarily in the United States. MSM is famous for "The Big Book," a 3000-page catalog detailing the company's 1 million plus products (now called the "Virtual Big Book," available on line). Shares rose 31 % since the beginning of the year. In light of the industrial goods sector's highly cyclical nature, this rally could indicate that investors anticipate growth in industrial activity.
Steelcase Incorporated (NYSE:SCS) designs, manufactures, and distributes an integrated portfolio of furniture settings, user-centered technologies, and interior architectural products. The company operates internationally with products globally accessible through a network, including over 800 dealer locations. Steelcase is an industry-leading company with fiscal 2016 revenue of $3.1 billion. The company reported essentially flat earnings in the fourth quarter of fiscal 2015 (year ended February 29, 2016). Steelcase stock price slid a bit in the weeks following the release. Since then, however, the equity inched higher but has been effectively range bound.
Portland General Electric Company (NYSE:POR), an integrated electric utility company, engages in the generation, wholesale purchase, transmission, distribution, and retail sale of electricity in the state of Oregon. Portland General Electric will receive an $85 million rate increase if its Carty-440 MW project is completed by July 31, 2016. POR has a current revenue of 1.90 B$ per year, so a delay in completing the Carty project may postpone a 4.5 % increase in revenue.
Manpower Group Incorporated (NYSE:MAN) provides work force and services in the Americas, Europe, and the Asia Pacific and Middle East regions. The company's recruitment services include permanent, temporary, and contract recruitment of professionals, as well as administrative and industrial positions. Manpower Group shares fell sharply after the vote on Brexit. Naturally, the concern is about the United Kingdom's move to leave the European Union and, importantly, on U.S. companies that do business in the U.K. Up to this point, the company has done fairly well. First-quarter revenues were up slightly, year over year.
Great Plains Energy (NYSE:GXP), an electric utility, has agreed to acquire Westar Energy (Announced May 2016). Westar's utility operations in Kansas are a good fit with those of Great Plains and should be accretive. Nevertheless, Great Plains stock weakened upon the announcement. The utilities 2016 earnings estimate yielded profits well above the 2015 tally. Earnings for fiscal year 2017 should advance above those 2016 thanks, in part, to the rate hike the subsidiary, Kansas City Power & Light, got in late 2016. The yield of this stock is average for a utility, with the recent price near the midpoint for the year.
Williams-Sonoma, Incorporated (NYSE:WSM) operates as a multi-channel specialty retailer of various products for the home. The company offers cooking, dining, and entertaining products through e-commerce and retail. Management anticipates revenue growth of 4%-6%, mainly tied to comparable-brand revenue rising 3%-6%. The company's bottom-line target is $3.50-$3.65 a share, a 4%-8% gain over the 2015 tally. Management still believes it can achieve its three-year annual earnings goal (12%-13%) during the 2016-2018 time frame.
My Method of Selecting Mid-Cap Companies
As do many contributors to Seeking Alpha, I use the basis of dividend growth investing that is defined in the book, "The Single Best Investment: Creating Wealth with Dividend Growth," Copyright 2006, by Lowell Miller.
I start with this formula in Lowell's book:
High Quality + High Current Yield + High Growth of Yield = High Total Returns
For "High Quality", I require a B+ rating or better for financial strength by the Value Line rating service. To focus on companies that have paid an increasing dividend in consecutive years, I examined the 232 companies on the June 30, 2016, CCC list with capital values from 1 B$ to 5 B$. The CCC list is expertly updated monthly by David Fish.
Following Lowell Miller, I recognize that high quality also includes management's honesty and management's ability to face challenges such as tough conditions or acquisitions, as well as to expand their niche. For this article, I read transcripts from recent quarterly reports and news articles for each company I recommend to get a sense of the managements' proficiency. This is a subjective determination, but I'm looking to be able to recognize basic competence that I expect to be evident in the transcripts.
For "High Current Yield", I require a current yield of 2.40 %, which is 150 % of the SEC yield of the Vanguard Mid-Cap Index Fund (MUTF: VIMAX) of 1.62 % (7/5/16). For dividend coverage, I require earnings per share in the last twelve months to be 1.25 times or greater than the current dividend, and the next year expected earnings to be 1.50 times the current dividend.
For the "High Growth of Yield", I require that income should rise at least as fast as inflation. The "all items" inflation rate increased by 1.02 % over the last 12 months, as of May 2016 (CPI Reports). I require a dividend growth rate of 3 % or greater for the prior five years and a dividend growth rate of 4.0 % or greater for the current versus the prior year.
Not in Lowell's equation, but of utmost importance as demonstrated by the Seeking Alpha contributor Chuck Carnevale (Carnevale), is to consider for purchase an equity that is fairly valued or even undervalued. To establish that an equity's value, I use the current price to earnings ratio compared to the equities historic price-to-earnings ratio. Also, I may accept a rating of 3 or higher in the S&P Capital IQ Fair Value ranking for each equity. S&P Capital IQ ranks stocks for fair value in five categories from most overvalued (1) to most undervalued (5).
Performance of My Previously-Selected 10 Mid-Cap Companies
An equal-weighted investment in ten companies I recommended for your consideration in January 2015 exhibited a change in investment (change in equity price plus dividends received) in the first year of minus 0.1 % versus a change in the S&P 500 of minus 5.5 % (This is the price change of SPY plus a 2.06 % dividend for SPY). Currently, the selection exhibits an increase of 10.5 % from January 28, 2016.
The Hanford Group (NYSE:THG) hosted the largest return of 13.5 % in the first year and currently a 25.7 % increase from the date of publication. The Mercury General Corporation (NYSE:MCY) and the limited partnership, TC Pipelines (NYSE:TCP), exhibited the greatest decreases with losses of 21.9 % and 31.6 %, respectively, for the year and, to date, losses of 4.0 % and 7.3 % respectively.
Eight of my ten recommendations from last year are now overvalued, and I would not recommend them today. Only the Vector Group Ltd (NYSE:VGR) and The Hanover Group remain fairly valued or undervalued; however, the investment case for these equities have changed and the equities do not meet criteria that would persuade me to recommend them today.
I have been invested with equal weights in AVA and BMS since publication of my selection. These equities exhibited an annual increase of 4.8 % for the year since publication and currently show a 15.5 % increase in value (equity price plus dividend). This is an early snapshot of performance; it may take years for positive developments or mistakes to manifest themselves fully.
The remaining four companies I recommended last year are ERIE, MGEE, SON, and VVC, all now overpriced.
A Few Good Mid-Cap Companies
In this article, I hope that I've developed good prospects and reviewed previous work for some mid-cap companies for a dividend growth investment. I am actively seeking additional candidates and solicit your ideas for common stock investments that meet the Miller criteria.
Here, I've identified six mid-cap companies worthy of your consideration for dividend growth investing. The companies meet the initial requirements for dividend growth investing identified by Lowell Miller. I will focus my initial due diligence on the MSC Industrial Direct Company and Steelcase Incorporated that can be held for a long period, in my opinion.
Disclaimer: I provided analysis in this document for informational and educational purposes. My recommendations are a starting point for stock selection and should not be construed as a definitive position to buy or sell the stocks mentioned. The information in this document is believed to be accurate, but you should independently verify the status of a company before making a buy or sell decision. My commentary does not constitute investment advice. The information should only be factored into your overall opinion forming process.
Aka: Marty Seitz
Disclosure: I am/we are long AVA, BAH, BMS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.