Low Sweat Investing's  Instablog

Trash talk: Your mama’s so ugly when she walks by the zoo all the animals cover their eyes.

Oh no! Did I blurt out the wrong kind of trash talk again?

I meant to jump right into an update on the nation’s largest trash business, Waste Management Inc. (WM), a company that’s getting a little more attention than usual lately.

So I hope you’ll accept my apologies to you and your mama. I’m sure all the zoo animals look right at her every time she walks by.

OK. If we’re still friends, let’s dive in and talk some real trash.

As they did last year, WM recently ‘pre-announced’ the upcoming year’s dividend increase, a nearly 9% jump their board intends to declare in February. At the stock’s recent price, that represents a yield-on-cost of about 3.8% for a new buyer.

This increase for 2010 is a step up from the 7% boost shareholders got in 2009, while WM’s accompanying press release was level headed as ever:

“This announcement reflects our continued commitment to returning cash to our shareholders. Waste Management continues to produce consistent and strong cash flows, as evidenced by the dividend increase.”

By my count, 2010 rings up seven straight years of dividend increases, though WM says six, apparently not counting a huge jump in 2004 that marked the beginning of the company’s current approach to dividends.

And if you’re known by the company you keep, WM is hanging around with some of the best lately.

It recently grabbed attention as one of the best ideas for 2010 from investment guru Mario Gabelli’s firm, and The Bill and Melinda Gates Foundation just doubled its WM stake, according to Barron’s.

What might these folks see? Big cash flow from a real trash king whose earnings will turn around with the economy, a decent 15% ROE, and dividend growth that’s been averaging about 10% over the past three years, for starters.

WM’s debt is about 120% of equity, but that didn’t dissuade Morningstar from recently boosting the company’s Financial Health Grade to ‘A’. Valuations are still reasonable, though no longer at the bargain lows hit during the economic downturn.

Which leads to a quick word about how the economy affects WM, because it definitely does.

Most of WM’s business is recession-resistant: residential and commercial trash collection and disposal. But there are also some other, highly cyclical revenue streams. One is the heavy-duty trash collection that comes and goes with construction activity. Others are scrap recycling and a waste-to-green-energy division.

As the economy improves, so will results in these business segments. In the meantime, WM has been managing its business adeptly, with price increases in the baseline trash collection business, as well as a significant cost cutting program. But with a payout ratio of over 60% of earnings, WM will need the benefit of some cyclical growth.

The company’s October earnings release showed profits beat estimates, but continued to drop. Management chimed in with some upbeat trash talk about business conditions stabilizing, and WM’s stock gained about 10% since then.

The stock outperformed the market and the Industrial Sector ETF (XLI) in the roughly three months following the earnings release, as well as over the trailing 2-years and 5-years, but has also suffered periods of underperformance.

Like most investments WM isn’t for everyone. Investors might want to consider their own views on the economy as part of their homework on this company. But with strong cash flows, a decent yield and shareholder-friendly dividend growth, for some investors WM might have a nice smell about it.

For those who’d like a little more trash talk, including a deeper dive into WM’s business, check out my Seeking Alpha article “Waste Management's Rising Dividends,” published in late September.

Finally, for readers clicking in from Yahoo Finance or other outside sites, and who might not be familiar with Seeking Alpha, if you hit the “Follow” button (beneath that handsome photo) and register, the site will send an e-mail that warns you every time I publish an article here. Also, there are lots of good authors on the site, so look around, especially if you like dividend articles.

Reference and Links

Press Release “Waste Management Announces Plan to Increase Quarterly Dividend Payments by 8.6%,” December 17, 2009. http://finance.yahoo.com/news/Waste-Management-Announces-bw-3514200411.html?x=0&.v=1

Press Release, “Waste Management Announces Diluted Earnings per Share of $0.56 for the 2009 Third Quarter,” October 29, 2009. http://finance.yahoo.com/news/Waste-Management-Announces-bw-3861751034.html?x=0&.v=1

Morningstar, “Waste Management Grades and Key Stats,” December 2009. http://quote.morningstar.com/stock/s.aspx?t=wm

Seeking Alpha “Waste Management's Rising Dividends,” September 29, 2009. http://seekingalpha.com/article/163833-waste-management-s-rising-dividends

Through Wednesday of this week, The Wall Street Journal reported dividend news from several companies. Here’s a fast look at what seemed super and what caused stupor, at least for me.

Packaged food giant General Mills (GIS), which reports earnings Thursday, announced a 4% dividend increase, the company’s second increase this year, bringing the yield to 2.9% and year-over-year dividend growth to 14%.

GIS had a spotty history of increases until 2004, when it began raising dividends in earnest, often more than once a year. What a difference. Reuters shows average 3-year and 5-year increases of about 9%, with revenue and earnings growth to support the dividend growth. Payout ratio: 41%.

And how about giving some extra points to GIS for saying the right thing? “Our company strongly believes in returning cash to shareholders through dividends, and increasing those dividends as our business grows.”

Super. Note, however, that GIS does have slightly more debt than equity and its recent cash flows were surprisingly uneven. But with a P/E of 16 and ROE at 25%, long-term dividend-growth investors could do a lot worse than considering a hearty helping of this low beta (.28) breakfast of champions.

Realty Income (O), a retail REIT (that’s a scary two-word combination), also raised its dividend again, nudging the year-over-year increase to just under 1% and the yield to 6.5%. And O kept up its increases when less-than-super REITs were cutting and running.

O has been a core holding for dividend investors for years, and rightly so. It’s a high quality Dividend Achiever that increases dividends quarterly and pays monthly.

Even so, as with many REITs, you don’t have to look far to see the cracks. Compared to less than 1% this year, O’s annual dividend increase last year was about 3.6%, and it’s been double that in prior years.

The general problem, of course, is those two words ‘retail REIT.’ But more specifically, O’s 2009 cash flow from operations simply has not been covering its dividends.

Too soon to worry? Probably. But soon enough, O will need to start growing more than just its dividend, so keep a sharp eye.

For a perplexing puzzle of ‘super and stupor,’ try figuring out Dividend Achiever WP Carey, LLC (WPC). It’s way over my pay-grade.

WPC has a variety of interests in real estate, real estate financing and investment funds. The company raised its regular distribution again this quarter, a move that upped it about 2% year-over-year and pushed the yield from regular quarterly distributions to 6.9%. WPC also added a special distribution that tacks on another 1%. The company is organized as a partnership, so K-1 filings and other IRS considerations come into play.

WPC has lots of cash on hand from investment sales. Cash from operations did not cover distributions in 2007, 2008 or so far in 2009, though I suspect that may be a reflection of what looks to me like a fairly complex business model.

To its credit, WPC seems to believe in dividend growth for the long haul, stating in the FAQs on its website its “philosophy to grow our distributions, however slight, in a prudent manner, so that we can continue to do so over the long run.”

An opportunity? I’m quite sure there are experienced high-yield investors out there who fully understand this stock and have made money on it over the years.

But I’m not one of them. Complete stupor.

This final dividend news is a twisted tale of two formerly super dividend divas, pharmaceutical legends Pfizer (PFE) and Eli Lilly (LLY).

And maybe another reason people ‘just say no’ to drugs.

PFE sunk its Aristocrat status, four decades of increases, by halving its dividend roughly six months ago to help fund its acquisition of Wyeth. Now PFE is doing a flip-flop, not only raising the dividend nearly 13% but also announcing “we currently believe that we can support future annual dividend increases, barring significant unforeseen events.” Yield: 3.9%. Weirdness: 100%.

Meanwhile LLY, still hanging on as a Dividend Aristocrat and also with over four decades of annual increases, decided to go with the placebo next quarter by maintaining its dividend at the current level. Yield: 5.5%. Outlook: Cloudy.

There’s more to the twisted tale, of course. PFE cited expected integration benefits with Wyeth, while LLY is struggling with upcoming patent expirations that will result in about 40% of its current sales being hit by generic competition between 2011 and 2013.

So there’s plenty more homework for investors in assessing both these stocks, but to paraphrase an old saying, it’s difficult to predict what might happen, especially in the future.

That said, PFE has easily outperformed LLY over every trailing time period you can chart during the past two years, including since its dividend cut. And with these recent announcements, it’s not clear why that would change any time soon.

And that’s it for now, the latest dividend news that seemed super and caused stupor, at least for me. Several other companies also increased their dividends recently, with more to come. You’ll find good profiles on them in other Seeking Alpha articles, so look around.

Finally, for a Dividend Aristocrat that lives up to its very funny name, check out my Seeking Alpha article “With a Name Like Becton Dickinson . . .” (BDX)

References and Links

Press Release, “General Mills Board of Directors Declares Dividend Increase,” December 14, 2009. http://finance.yahoo.com/news/General-Mills-Board-of-bw-3613294490.html?x=0&.v=1

Yahoo Finance, “Realty Income Quarterly Cash Flow,” 2009. http://finance.yahoo.com/q/cf?s=O

Yahoo Finance, “WP Carey Quarterly Balance Sheet,” 2009. http://finance.yahoo.com/q/bs?s=WPC

Press Release, “Pfizer Declares an 18-Cent First-Quarter 2010 Dividend,” December 14, 2009. http://finance.yahoo.com/news/Pfizer-Declares-an-18Cent-bw-3244678246.html?x=0&.v=1

Wall Street Journal, “Lilly Sees Good Results Despite Patent Issues,” December 10, 2009. http://online.wsj.com/article/SB10001424052748703514404574587583812542894.html

Seeking Alpha, “With a Name Like Becton Dickinson . . .” September 17, 2009. http://seekingalpha.com/article/161980-with-a-name-like-becton-dickinson

As usual, The Wall Street Journal noted a number of dividend increases over the past week or so. Here’s a quick take on the best and worst of them.

Drum roll goes here . . .

Midwest utility DPL Inc. (DPL) takes the prize for best recent dividend hike, though it wasn’t against the toughest competition you’ll ever see. Still, DPL deserves applause with at least one hand clapping.

No doubt there’s no shortage of other utilities with fine dividend records, but DPL’s recent increase put them in the news, so a quick peek seems worthwhile.

The company raised its dividend for the fifth straight year, a 6% hike to bump the yield to a quite nice 4.2%. And management spoke up, putting their mouth where their money is, saying their board “remains committed to providing a competitive dividend” and expressing “confidence in DPL’s future outlook.”

Exactly what I like to hear. And according to Reuters, DPL’s 1-year, 3-year and 5-year revenue and earnings growth have easily supported their past dividend growth.

Return on equity is positively electrifying at nearly 25%, valuations are not bad, and the dividend payout on earnings is a manageable 54%. Also, like most utilities DPL generates piles of cash.

Of course, they also have a pile of debt, though it’s not out of line with their industry. And a recent credit rating upgrade from Fitch will be helpful.

Anything to be careful about? Always. According to Morningstar, some upcoming state regulatory moves could bring both good and bad changes for the company. Also, DPL burns lots of coal, so the Feds could give them a dousing on that.

And the worst among recent dividend hikes?

A toss up between insurer Horace Mann Educators (HMN) and money transfer icon Western Union (WU), who both broke out the big numbers with dividend boosts of 52% and 600%, respectively.

But HMN chopped its dividend in half in 2008 and until last week hadn’t raised it since 1999.

Who needs that? There are plenty of other 2.6% yielders and insurance stocks to choose from. Look around, they’re easy to find. For example, insurer Erie Indemnity (ERIE) is about a 5% yielder and a Dividend Achiever that recently raised its dividend by about 7%.

ERIE’s growth, return on equity and payout ratio didn’t make the grade against DPL for this dividend hike review, but it far outclasses HMN as a dividend-grower in the insurance industry. And based on their Q3 conference call transcript ERIE’s results are starting to improve, so I wouldn’t debate experienced income investors who might like the stock as a turnaround play.

What about WU, my runner-up for worst? The annual dividends they’ve paid since 2006 are so small their 600% increase takes the yield to about 1.2%, with dividends now paid quarterly. Credit them for telegraphing the right message, but they haven’t wired a track record quite yet.

So that’s it, at least for this time around. The best and worst of recent dividend hikes, on the quick.

Incidentally, I’ve found the WSJ and Barron’s listings of recent dividend increases are prime spots to find emerging dividend-growers that haven’t hit the Achievers list yet. You can use your own methods to decide which ones deserve more research and tracking, and which ones can safely be ignored.

Several other companies also increased their dividends recently. You can find good profiles of them in other Seeking Alpha articles, so take a look, you just might find something worth your follow-up efforts.

Finally, if you didn’t get enough insurance talk, check out my Seeking Alpha article on yet another Dividend Achiever in that industry, “Mercury General: 6% Dividend Deal or Total Wreck?”

References and Links

Press Release, “DPL Board of Directors Announces Increase to Quarterly Dividend,” December 9, 2001. http://finance.yahoo.com/news/DPL-Board-of-Directors-bw-1755310081.html?x=0&.v=1

Dayton Business Journal, “Fitch upgrades DPL debt ratings,” November 4, 2009. http://dayton.bizjournals.com/dayton/stories/2009/11/02/daily35.html?ana=yfcpc

Morningstar, “DPL Inc. Profile and Take,” 2009. http://quote.morningstar.com/stock/s.aspx?t=dpl

Seeking Alpha, “Erie Indemnity Co. Q3 2009 Earnings Conference Call,” October 30, 2009. http://seekingalpha.com/article/170254-erie-indemnity-co-q3-2009-earnings-conference-call

Seeking Alpha, “Mercury General: 6% Dividend Deal or Total Wreck?” November 18, 2009. http://seekingalpha.com/article/174036-mercury-general-6-dividend-deal-or-total-wreck