Dividend Analysis: State Street Corporation

State Street Corporation, through its subsidiaries, provides a range of products and services for the institutional investors worldwide. It operates in two divisions, Investment Servicing and Investment Management. These divisions provide a range of products and services, which include mutual funds and other collective investment funds, corporate and public retirement plans, insurance companies, foundations, endowments and other investment pools, and investment managers.

State Street is a dividend aristocrat as well as a component of the S&P 500 index. It has been increasing its dividends for the past 27 consecutive years. From the end of 1997 up until August 2008 this dividend growth stock has delivered an annual average total return of 9.40 % to its shareholders. Click to enlarge:

 

 

 

 

 

 

 

 

 

 

 

 

 

At the same time the company has managed to deliver an 11.20% average annual increase in its EPS since 1998. Click to enlarge all charts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The ROE has decreased from the 19%-27% range to 14%-17% range over the past 10 years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual dividend payments have increased over the past 10 years by an average of 14.90% annually, which is higher than the growth in EPS. A 15% growth in dividends translates into the dividend payment doubling almost every 5 years. If we look at historical data, going as far back as 1987, STT has indeed managed to double its dividend payment every five years on average. State Street is the only Dividend Aristocrat that has consistently managed to increase its quarterly dividends twice per year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If we invested $100,000 in STT on December 31, 1997 we would have bought 3492 shares (Adjusted for a 2:1 stock split in May 2001). In March 1998 your quarterly dividend income would have been $209.52. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $937.20 by June 2008. For a period of 10 years, your quarterly dividend income would have increased by 300%. If you reinvested it though, your quarterly dividend income would have increased by 347%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The dividend payout has slowly increased from upper teens to mid twenties over our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I think that STT is attractively valued with its low price/earnings multiple of 16 and low DPR even though the yield is below my 2% threshold. The historical dividend yield has not even gone close to 2% over the past ten years however. The strong dividend and earnings growth justify the lower current yield.

 

 

 

 

 

I believe that STT is a buy and could be accumulated on dips below $69 based off P/E and especially below $48 based off yield as it provides some dividend growth diversification potential for any income portfolio.

Disclosure: I do not own shares of STT

Comments

[GregT:]

STT is a great example of why dividend growth is much more important than dividend yield.

2008 Aug 18 10:39 AM

[ryefool:]

Until State Street settles the various bond fund lawsuits, I don't know how anyone can recommend the stock. If your business is managing pensions and you have numerous conservative companies suing you for mis-management of pensions then how can it be a "buy." In addition, the amount involved in the lawsuits would seem relatively minor but maybe State Street is not settling because they have less liquidity than they claim.

2008 Aug 18 04:27 PM

[mikemichaelson:]

ryefool - STT is not solely in the business of managing pensions. back office administration for financial companies is a HUGE business and they control this industry.

2008 Aug 19 04:26 PM