The Three Companies: Philip Morris (PM), Altria (MO), and Verizon (VZ) all recently paid out the same dividend for the 4th consecutive quarter, which means we are looking at an increase in dividend from these companies very soon. PM and MO are expected to make their new payment in September, while Verizon's is expected in October.
Why This Article: This article is intended to alert investors who have been waiting to add/initiate a position in these stocks at a particular yield level, which might be reached when these stocks increase their dividends soon. We also look at some of the recent concerns in these companies and whether investors should really be worried about those.
The Expected Increase: The table below shows the current yield as well as the expected yield after the upcoming increase. PM has been around only since 2008 and the upcoming dividend increase is going to be the 5th consecutive. The average dividend growth rate listed above is for the past 4 years increase.
(Click to enlarge)
Source: Yahoo finance
Philip Morris' Recent Concerns: Though the stock has acted well along with the rest of the market recently, there is a growing concern about the strength in U.S dollar. PM has already alerted the investors that this is going to have an impact on its earnings for 2012. However, this is obviously a problem for all companies dealing with international markets. Europe weakness is not helping PM either. However, it's usually a good idea to stick with good companies and ignore the macroeconomic weakness, even adding to these kinds of stocks on pullbacks.
Altria's Recent Concerns: The main concern for investors with Altria recently does not have much to do with the business itself (Everyone is aware of the issues faced by U.S tobacco companies already). But rather, the concern has been on the stock getting overvalued by more than one metric. We wrote about the yield falling below 5% for the first time since the spin offs in 2007/2008. The payout ratio is a concern as well. The valuation, defined by the PE ratio, is stretching out as well as shown below. Paying 21 times earnings for a company expected to grow at 6% at best does not appear lucrative. Granted, the dividends have been great so far but it's hard to ignore this combination of red flags: increasing valuation reduces the yield while earnings aren't growing fast enough to keep up with the payout ratio. Altria might still not be a "sell" here but it's certainly not the "great buy" it used to be.
Verizon's Recent Concerns: Verizon has had more positive developments like the spectrum deal making some progress towards approval. However, there have been valuation concerns with VZ and AT&T (T), prompting claims of a dividend bubble involving these stocks. While VZ seems to be stretched technically, the duopoly it shares with AT&T would still make VZ a good stock to buy and DRIP.
More Numbers: Check out these articles (Philip Morris, Altria, and Verizon) to see how an investment in these companies today will increase your future yield on original cost as well as your dividend income. Only Altria's increase might be in jeopardy based on the factors mentioned above.
To Conclude, A Simple But Powerful Message: In a recent article, Tim McAleenan conveyed a simple but powerful message that captures the essence of dividend growth investing. Companies like Philip Morris, Coca-Cola (KO) make investing appear like a simple task wherein even the average Joe can estimate his expected returns with a fair level of accuracy. Though the dividend growth rate has slowed down considerably for Altria and Verizon, they have so far been companies from which investors can expect frequent and predictable dividend increases. However, be careful if you get into Altria right here. Past may not be the prologue always.
