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Jonathan Weber
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I am a student (Industrial Engineering), I am interested in Value, Growth and Dividend Investments. Disclosure: I'm not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional... More
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  • Microsoft Is A Great Income Investment Trading At A Good Price

    Microsoft's (NASDAQ:MSFT) stock performed good in 2014, year to date the company's shares are up 33%. Nevertheless it is not too late to buy into this dividend growth stock at today's price.

    Microsoft's business is divided into the following segments:

    - Devices & Consumer Licensing (18% of revenues)

    - Computing & Gaming Hardware (11% of revenues)

    - Phone Hardware (11% of revenues)

    - Devices & Consumer Others (8% of revenues)

    - Commercial Licensing (43% of revenues)

    - Commercial Other (10% of revenues)

    Microsoft is headquartered in Redmond, Washington, employs 128,000 people and has a market capitalization of $403 billion.

    Latest results

    On October 23, 2014, Microsoft reported First Quarter 2015 results: Revenues were $23.2 billion (up 25% yoy), gross income was $14.9 billion (up 12% yoy) and operating income was $5.8 billion (down 8% yoy). Earnings per share fell 13% yoy to $0.54.

    The strong revenue growth as well as the lower earnings can be attributed to Microsoft's purchase of Nokia's devices division, which does attribute to the top line but affects Microsoft's bottom line negatively so far. Management is positive that it will turn around the Phone and Devices businesses, so the negative short term impact of the Nokia acquisition shouldn't worry investors too much.

    Fundamentals

    Microsoft is one of the biggest and most profitable businesses in the world: The company's (trailing) revenue is $91.5 billion, (trailing) net income is $21.4 billion and (trailing) EPS are $2.55.

    Microsoft's business is highly profitable: The company's operating margin is 31.2%, its profit margin is 23.4%. This is the result of efficient operations and an industry that offer high margins in general (for Microsoft's software business). Microsoft also reports high returns on capital, ROI is 19.5%, showing that the company's management is able to allocate shareholder's money in a profitable way. Microsoft's return on equity is 24.3%, making the company very attractive for investors: High ROE businesses tend to outperform low ROE businesses on the long run.

    Microsoft's financials look good as well: The company's leverage is low (debt/equity ratio of 0.26) and Microsoft's liquidity is high (current ratio of 2.50, quick ratio of 2.40). With low debt and high liquidity Microsoft is a very secure and low risk investment. Microsoft owns a cash pile of $89 billion and holds a AAA rating.

    Valuation

    MSFT PE Ratio (<a href=

    Microsoft has a (trailing) earnings multiple of 19.2. Apple (NASDAQ:AAPL) has a slightly lower P/E multiple (16.9), Google (NASDAQ:GOOG)(NASDAQ:GOOGL) has a clearly higher P/E multiple (29.2). The earnings multiples of all three company's have expanded over the last twelve months, but the proportion is basically the same as one year ago: Google has a much higher valuation than the other two, Apple's valuation is slightly below the one of Microsoft.

    MSFT EV to EBITDA Chart

    Although Microsoft's valuation has expanded over the last months, the company is still inexpensive: Microsoft's EV/EBITDA ratio is just 10.0. Microsoft's other valuation metrics look good as well: The company's forward P/E ratio is just 15.5 (showing that Microsoft is very inexpensively priced based on the company's future outlook), its Price/Book ratio is 4.5 and its price to cash ratio is 4.5, too.

    If we use the Graham formula to determine Microsoft's fair value, we are led to a similar conclusion:

    V= EPS*(8.5+2*G)*4.4/Y

    wherein

    EPS = earnings per share in the last twelve months

    G = estimated EPS growth rate over the next 5 years

    Y = yield on AAA corporate bonds

    If we apply Microsoft's numbers, we receive the following intrinsic value:

    $2.55*(8.5+2*6.6)*4.4/4.1 = $59.38.

    The Graham formula suggests Microsoft has upside of 21% to its intrinsic value.

    Dividend

    Microsoft pays a quarterly dividend of $0.31, this equals a dividend yield of 2.6%, higher than the dividend yield of the broad market (S&P500's yield is 1.9%) and also higher than the dividend yield of its peers (Apple's yield is 1.7%, Google does not pay a dividend at all).

    MSFT Dividend Chart

    Microsoft is raising its dividend annually since 2003, over the last five years the dividend grew at an annual rate of 19.0%. With a current yield of 2.6% Microsoft's Chowder number thus is 21.6, making Microsoft a very attractive option for dividend growth investors (and one of the best ones in the IT industry).

    Microsoft's payout ratio is rather low (45%), in combination with the company's vast cash reserves and ongoing EPS growth it is likely that Microsoft will be able to increase its dividend substantially for a long time.

    In addition to its dividend payments, Microsoft is also buying back its own shares:

    MSFT Shares Outstanding Chart

    Over the last ten years Microsoft reduced the number of shares outstanding by more than 25%, the current buyback program authorizes up to $40 billion in share repurchases.

    Growth outlook

    Apart from its cash cows Office and Windows, Microsoft is pushing into high growth markets such as cloud services (Azure, Office 365, etc.), where Microsoft achieved outstanding revenue growth of 128% in the last quarter. Once NDS is fully integrated and starts contributing to Microsoft's bottom line we will see another step up in earnings. Nadella also announced that Bing (Microsoft's search engine, which already holds a 20% market share in the U.S.) will become profitable in the next fiscal year.

    Microsoft is also expanding its devices business, for example with its new wearable Microsoft Band: In addition with the Microsoft Health app this wearable will allow users to track all kinds of data tracked by 10 sensors (including heart rate monitor, GPS, etc.).

    With Microsoft's acquisition of Mojang (the developer of Minecraft), the company has also shown it is willing (and able) to buy auspicious businesses.

    Ongoing share repurchases, that increase each shares portion of the company's net income, will also attribute to growing earnings per share.

    Bottom line

    Microsoft's dividend yield is 2.6%, well above the market and its peers, and Microsoft has shown it is able to grow its dividend at a high pace. Although Microsoft's current valuation is not especially cheap, it is still trading below intrinsic value according to the Graham formula, and with its good growth outlook and outstanding fundamentals I think it is still a very attractive option for dividend growth investors.

    Nov 11 1:33 PM | Link | Comment!
  • Pfizer Is Comparatively Cheap And Offers A Good Dividend

    Summary

    With revenues of $50 billion and earnings of $10.4 billion in the last twelve months, Pfizer (NYSE:PFE) is one of the biggest pharma companies in the world. The market capitalization is $186 billion at a share price of $29.39. So far, the shares of the company are up 8% over the last twelve months and down 1.5% year to date.

    Margins

    PFE Gross Profit Margin (Quarterly) Chart

    PFE Gross Profit Margin (Quarterly) data by YCharts

    Pfizer reports high margins on its sales, with higher gross, operating and net profits than the company's peers on each dollar in revenue. This indicates a strong portfolio and brand as well as good management and efficient operations.

    Valuation

    PFE PE Ratio (<a href=

    PFE PE Ratio (NYSE:TTM) data by YCharts

    Compared to its peers, Pfizer seems undervalued, with a PE ratio of 18.5 it is cheaper than Novartis (NYSE:NVS) at 22.8, Sanofi (NYSE:SNY) at 25.9 and Merck (NYSE:MRK) at 31.7. Based on these PE ratios, Pfizer would have upside of 40% to an average pharma PE multiple of 27.

    Other metrics for a company's valuation also indicate a discount compared to Pfizer's peers, as seen in the above panels for PE10 (where Pfizer has a multiple of 18) and EV to EBITDA, where Pfizer's multiple is a low 9.2. Since the average EV/EBITDA for the other three pharmaceutical companies here is 14, Pfizer could have potential upside of 50% to the industries average EV/EBITDA ratio.

    Pfizer is not only cheaper than its peers, but also cheaper than the broad market: The S&P500 PE is 19.9 and its PE10 is 26.5.

    Dividend

    PFE Dividend Yield Chart

    PFE Dividend Yield (TTM) data by YCharts

    Pfizer's dividend yield comes in at 3.5%, along with Sanofi's, yielding higher than its peers Novartis (3.0%) and Merck (2.9%). All of these company's yield clearly higher than the S&P500 (1.9%).

    Pfizer has no dividend aristocrat status due to a dividend cut in 2009, but since then the company has raised the dividend every year.

    PFE Dividend Chart

    PFE Dividend data by YCharts

    From $0.16 in 2009 to $0.26 each quarter, the company has raised its dividend at an CAGR of 10%.

    PFE Payout Ratio (Annual) Chart

    PFE Payout Ratio (Annual) data by YCharts

    Pfizer has a low payout ratio of 30%, leaving a lot of room for future dividend increases. The dividend payout ratio has been sinking over recent years.

    Growth prospects

    EPS for next fiscal year are expected to be $2.24, compared to the EPS in the last twelve months of $1.59 that's an increase of 40%, and projected earnings of $2.24 result in a forward PE of just 13.1. Nevertheless, growth rates after next year are expected to be relatively low, finviz.com reports an average estimate of just 3.1% for the next five years. Pfizer's pipeline is not as promising as those of some other pharma and especially biotech companies, and Pfizer couldn't report a lot of earnings growth in the last couple of years.

    Pfizer could use its large amount of cash (more than $30 billion) to buy companies with promising drug developments, the way Gilead (NASDAQ:GILD) did when they bought Pharmasset for $11 billion and thus got hold of blockbuster drug Sovaldi.

    For example it is possible that Pfizer will make another bid for AstraZeneca plc (NYSE:AZN). Pfizer made an offer to buy AstraZeneca in May, but the offer got rejected. Given AstraZeneca's strong pipeline with drug developments in oncology (leukemia, ovarian cancer, gastric cancer, ...) as well as in treatments for infections (e.g. pneumonia), it is not unlikely that Pfizer will try to buy the company again. UK laws allow Pfizer to make a new offer after November 26. Buying AstraZeneca would also be a tax inversion move for Pfizer, shareholders would benefit from lower corporate tax rates in the future.

    If we take current consensus EPS estimates for the following years and we assume that the PE (TTM) multiple will stay at today's level of 18.6, we get to the following share price forecast:

     Dec 2015Dec 2016Dec 2017
    Consensus EPS in $2.252.312.54
    Share price at PE of 18.6 in $41.8542.9747.24

    This equals potential upside of roughly 40% until Dec 2016 and roughly 60% upside until Dec 2017 from current share prices at $29.60. In the mean time investors who buy right now receive a yield of 3.5% with expectable dividend increases.

    Risks

    Like every other equity, an investment in Pfizer bears some risks, although I think Pfizer is, due to its size, low beta, huge cash position and low debt, a relatively safe investment.

    The company is not very dependent on one drug, it offers a basket of different products, so if one patent expires or a competitor comes up with a better drug for a specific condition, Pfizer doesn't have to fear huge declines in sales.

    Bottom line

    Pfizer looks cheap compared to its peers and the market as a whole and it offers a nice yield of 3.5% with ample room for future dividend increases. Pfizer is an investment with low risk (low beta, not dependent on one single product, huge cash position), but also low growth prospects. Pfizer might be a buy for you, if you are looking for a stable investment with low risk and a high yield, but if you are looking for strong growth, it is probably better to look elsewhere.

    If we assume that the company's PE ratio will be relatively constant, share price could increase to $47 over the next 3 years (up 60% from today's price, CAGR of 16%).

    Sep 08 10:23 PM | Link | Comment!
  • What Is The Best Restaurant Company For Dividend Growth Investors?

    In this article I will compare the companies in the restaurant industry to assess which one would be the best choice for a dividend growth investor.

    I will only consider the following companies which currently pay a dividend: McDonald's (NYSE:MCD), Burger King (BKW), Yum! Brands (NYSE:YUM), Starbucks (NASDAQ:SBUX), The Cheesecake Factory (NASDAQ:CAKE), Domino's Pizza (NYSE:DPZ), Papa John's (NASDAQ:PZZA) and Texas Roadhouse (NASDAQ:TXRH).

    Company Overviews:

    McDonald's is the world's largest restaurant company (by market capitalization). There are more than 35,000 McDonald's restaurants in 120 countries. McDonald's was founded in 1940 and is headquartered in Oak Brook, Illinois. McDonald's reported sales of $28 billion and earnings of $5.5 billion over the last twelve months.

    Burger King Worldwide was founded in 1953 and is headquartered in Jacksonville, Florida. The company has more than 13,000 restaurants in 80 countries. Burger King reported sales of $1 billion and earnings of $270 million over the last twelve months.

    Yum! Brands is the world's biggest restaurant company by the number of restaurants, with more than 40,000 units of its brands Taco Bell, Pizza Hut and KFC in more than 120 countries. Yum! Brands is headquartered in Louisville, Kentucky and was founded in 1997. In the last twelve months the company reported revenues of $14 billion and earnings of $1.2 billion.

    Starbucks was founded in 1971 and is headquartered in Seattle, Washington. There are more than 23,000 restaurants in 65 countries. Over the last twelve months the company reported revenues of $16 billion and earnings of $250 million (affected by a one time charge of $2.8 billion at the end of 2013).

    The Cheesecake Factory was founded in 1978 and is headquartered in Calabasas Hills, California. There are 180 restaurants in 6 countries. In the last twelve months the company reported revenues of $2 billion and earnings of $110 million.

    Domino's Pizza was founded in 1960 and is headquartered in Ann Arbor, Michigan. There are more than 10,000 restaurants in more than 70 countries. Over the last twelve months the company reported revenues of $2 billion and earnings of $150 million.

    Papa John's was founded in 1984 and is headquartered in Jeffersontown, Kentucky. There are more than 4,000 restaurants in over 30 countries. Over the last twelve months the company reported revenues of $1.5 billion and earnings of $70 million.

    Texas Roadhouse was founded in 1993 and is headquartered in Louisville, Kentucky. There are more than 400 restaurants, all of them in the U.S. Over the last twelve months the company reported revenues of $1.5 billion and earnings of $80 million.

    Current yield

    The dividend yield at the closing price on the 5th of September:

    CompanyDividend YieldRank
    MCD3.5%1
    BKW0.9%8
    YUM2.1%3
    SBUX1.3%6
    CAKE1.5%4
    DPZ1.3%6
    PZZA1.4%5
    TXRH2.2%2

    McDonald's offers by far the highest yield (3.5%), more than one and a half times the yield of Texas Roadhouse (2.2%), which offers the second highest yield. Yum! Brands is a close third (2.1%), with The Cheesecake Factory, Papa John's, Domino's and Starbucks coming in at relatively similar yields around 1.5%. Burger King closes last with a yield slightly below 1%.

    MCD Dividend Yield (<a href=

    MCD Dividend Yield (NYSE:TTM) data by YCharts

    Dividend growth

    In this following table I compare the dividend growth rate over the last 12 months as well as 3 and 5 years (if available).

    CompanyGrowth Rate (YOY)Growth Rate (3 years)Growth Rate (5 years)
    MCD5%10%10%
    BKW33%--
    YUM10%14%14%
    SBUX24%26%-
    CAKE18%--
    DPZ25%--
    PZZA12%--
    TXRH25%23%-

    It is not easy to decide which of these dividend growth patterns one likes the most, since it obviously is easier to raise the dividend substantially if the yield is low (and the company just started paying a dividend) as it is the case for Domino's or Burger King, whereas companies like McDonald's or Yum! Brands have it much harder to raise dividends as fast.

    I personally prefer the growth pattern of Yum! Brands the most, consistent growth at a CAGR of 14% over the last five and three years. Starbucks' dividend growth looks great as well, with a CAGR of 26% over the last three years.

    Payout Ratio

    In the following table I will compare the payout ratios of the eight restaurant companies. A lower payout ratio is preferable since it suggests room for future dividend increases.

    CompanyPayout RatioRank
    MCD58%8
    BKW36%4
    YUM55%7
    SBUX40%5
    CAKE25%1
    DPZ32%3
    PZZA31%2
    TXRH45%6

    As one could expect, payout ratio is the highest (58%) for McDonald's, which is the most mature company that also offers the highest yield. The Cheesecake Factory offers the lowest Payout Ratio (25%) with ample room for future dividend increases. All in all it seems none of the restaurant companies has reached a level where future dividend increases are hard to maintain.

    MCD Payout Ratio Chart

    MCD Payout Ratio (TTM) data by YCharts

    Conclusion

    Different investors may have different goals for their DG investments. For everyone who emphasizes a high yield right now, McDonald's is the favorite. Investors who don't emphasize current yield, but prefer good growth prospects in the future (indicated by a low payout ratio and recent considerable increases) may prefer The Cheesecake Factory (lowest payout ratio, still better yield than some others) or Starbucks (highest growth for all companies which paid a dividend over the last three years).

    Texas Roadhouse and Yum! Brands look like good alrounders with good growth over the last three years, a yield higher than the S&P500 and payout ratios which still allow future increases.

    Burger King and the two Pizza Chains seem to offer poor value to dividend growth investors at current price levels.

    Sep 07 7:25 PM | Link | Comment!
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