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Two Dividend-Growth Stocks, One Year Later 10 comments
Me. As I noted last month, I’ve been writing on Seeking Alpha about a year now, so after the anniversary date of articles, I’m scribbling quick updates on fundamentals, dividend growth, total returns and so forth – along with a link to the original article so you can keep me honest.
Here’s anniversary update number two.
Last September, I wrote five articles, which is a lot for me. These included profiles of Dividend Aristocrat and Warren Buffett stock Becton Dickinson (BDX), a big-cap leader in medical, diagnostic and other healthcare products, and dividend-grower Waste Management (WM), the nation’s largest trash company.
Let’s see how they’ve done so far.
As was true in September 2009, BDX is definitely my favorite stock with a funny name, though I’m warming up to J.M. Smucker (SJM). Since last year’s article, BDX bumped its dividend 12%, continuing nearly four decades of increases. And though its 2% yield still won’t excite pure income investors, you can count on BDX to boost the dividend again later this year.
More good news: BDX valuations and fundamentals still look attractive. The P/E sits near a 10-year low, cash is gushing and return on equity weighs in at 24%, with only 30% debt-to-equity.
The lukewarm news? Revenue barely budged over the past year, and while earnings growth topped double digits, some BDX results fell short of expectations.
So the reason those BDX valuations still look attractive is because the stock didn’t go up much: less than 9%, plus the small dividend. This compares to 12% for the S&P 500, though it’s about in line with the S&P Healthcare Sector ETF (XLV), which also climbed nearly 9%. Both these benchmarks were cited in the original article.
WM is a whole different story, so let’s get to it.
Since my September 2009 article WM hiked its dividend 9%, marking half a dozen consecutive years of increases, and management affirmed its commitment and capacity to “return cash to shareholders.” Current yield: 3.4%
The article (and a follow-up in December) pointed out that most of WM’s business is recession-resistant residential and commercial trash collection and disposal. But there are also cyclical revenue streams from construction debris collection, scrap recycling and waste-to-green-energy generation.
With the economy exiting the dumps, those cyclical businesses bottomed, giving the stock a boost. WM climbed over 23%, plus dividends, vs. about 12% for the S&P 500. WM slightly lagged the S&P Industrial Sector ETF (XLI), however. Both these benchmarks were cited in the original article.
The stock likely moved in anticipation of a WM business recovery. WM revenues and operating income began turning up this year, but net income is still depressed. This pushed WM’s P/E toward a 5-year high of 18 and kept its payout ratio near 60%.
WM’s return on equity is a solid 17%, but debt is higher than equity. Despite increasing its debt load, WM scores good grades for financial health from both Morningstar and the new SA MarketGrader app.
As it stands, I’m holding onto my positions in BDX and WM. Both report earnings in the next two to three weeks. Pay particular attention to whether revenue and earnings outlooks stay sluggish or start stepping up.
In addition to my BDX and WM articles, September 2009 brought “9 Great Excuses to Be Stubbornly Bullish,” a rundown of research that suggested optimists should stay optimistic. The stock market didn’t go straight up since then, but is double-digits higher now, about 12%.
Next, “This Market to Workers: ‘Welcome to the Jungle’” described why our horrific unemployment problem could persist, and why stocks might be completely cold-hearted about it. The job market still stinks, but profits and stock prices have moved higher anyway.
“Stocks That Raise Dividends Outperform,” my first of several articles on that theme, summarized a dividend-growth research study, and discussed some popular dividend ETFs. The benefits of rising dividends are as evident now as then, but the specific ETF’s in the article didn’t stick to the script I outlined.
Finally, those who like reading happy stories might check out last month’s update on Factset Research Systems (FDS) and Harris Corp. (HRS).
Disclosure: Long BDX, FDS, HRS, WM
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This post has 10 comments:
WM's business intrigues me because there's a steady-eddie portion and a cyclical kicker. Plus the landfills make a tough barrier against competive entry.
BTW, am punching in this comment on that new iPad we were discussing. Definitely a fun piece of work. Kudos to AAPL. But am trying to figure out why SA did not publish this post as an article. They published the first update "Four ... One Year Later" but I guess " Two ... One Year Later" is a completely different animal. Will contact them again Monday to try to determine the problem.
Thanks again for commenting.
As noted in the Instablog post, this is the second accountability update I’ve written. I’ve asked SA why the second update wasn’t published as an article, but they have not responded to my request for information or my offer to edit the piece.
The next update in the series would have been PAYX and UPS, two ‘dividend strugglers’ when I wrote about them about year ago.
But regrettably, I cannot justify continuing to write these accountability updates if SA won’t publish them. (Instablog posts often don’t get much notice from readers.)
So here’s a final accountability quickie, for PAYX and UPS, a month early.
My mid-October 2009 PAYX article focused on PAYX’s cash flow as an indicator of dividend safety, rather than its high payout ratio on earnings. The article also looked back to PAYX’s dividend behavior during the tech-bust recession, which suggested the next dividend increase could be in October 2010.
Not exactly. PAYX has maintained their dividend, and noted in a recent conference call that their cash flow would easily allow them to continue doing so. But they also announced a flat dividend (again) for October 2010, ending a two-decade streak of higher consecutive annual dividend payments.
PAYX continues to get hit by the tough employment market for its small business client base, as well as by low interest rates (which hurt its ‘float’ income). The company recently announced new sales initiatives they believe will help them grow.
PAYX yields about 4.5% but the stock price slid almost 5% since my article, while the S&P 500 and XLK sector gained about 9% and 13% respectively, plus dividends.
PAYX article link
seekingalpha.com/artic...
UPS, profiled in late October 2009, left its downturn struggles behind, its business, dividend and stock price rebounding with the global economy.
UPS runs a hugely cyclical operation and likes to remind investors that it has either increased or maintained its dividend every year for four decades. My article outlined the reasons 2009 would be a “maintain” year and February 2010 would see the increase. UPS cooperated exactly with that bit of crystal-balling, holding the dividend steady in Q4 2009, then hiking it, though only 4%, this past February.
Investors who were “willing to ride out the bumps” were rewarded with more than that small dividend increase. UPS stock gained over 24%, plus the dividend, since last year’s article. That walloped the S&P’s roughly 9% gain and bested the XLI sector’s 18% (dividends not included).
Due to the length of this comment, I won’t update these stocks’ fundamentals, which readers can find easily enough. But in summary, PAYX remains in a tough spot for growth, while UPS has shot up on a big earnings bounce. Both are high quality companies, and I still own them.
UPS article link
seekingalpha.com/artic...
Please keep posting your efforts as I think they provide valuable information to investors. Why SA fails to turn some into articles is anyone's guess...possibly related to the volume of submissions. I ran into the same thing myself this month when my "main" instablog spelling out the changes to the Champions posting failed to be turned into an article (even after a second submission!) whereas my "secondary" Smackdown instablog quickly got turned into an article. Just be persistent.
The issue I'm having on the accountability updates is that if SA doesn't publish them as articles, for timing or other reasons, many readers simply don't see them, so the accountability is essentially invisible to most who read my articles.
And because I write purely for publication (no investment-related business venture) and there's no market for SA updates except SA, I can't submit the piece for publication anywhere else.
And, yep, how about that, PAYX bites the dust after something like 20 years.
Another one I'm watching: MCY. As I mention below, they made a good re-start after their tough 2008-2009, but their upcoming earnings and dividend announcement are worth a look.
Their something like 23-year streak won't die if they maintain in Q4 (total annual payment will still be higher) but Q4 2009 was their latest increase, so it will be interesting to see whether they 'stretch' into 2011 or go for it now.
I haven't followed MCY closely, so I don't know what the likelihood of them "stretching" it all through 2011. But, owning PAYX, I was surprised that they passed up so many (quarterly) chances to increase, even just a little.
Investors who don’t believe quality dividend-growth stocks can be superb capital appreciation investments might check the stock price results for all eight stocks I’ve updated.
No cherry picking from me, these eight include all stocks mentioned in my articles with one-year anniversaries (i.e., articles published in Aug., Sept., Oct., 2009, though I wanted to update PAYX and UPS in an article next month, not in a comment now).
Stock price changes were: FDS +39%, CAH +25%, HRS +24%, UPS +24%, WM +23%, BDX +9%, JKHY +6% PAYX (-5%). None of this includes dividends.
Average stock price gain (equally weighted): +18%.
Matched buys of the S&P 500, over the same time periods, would return +10%, plus dividends.
In fairness, I don’t own Dividend Achiever CAH, and my article said I’d watch it, not buy it. (I strained my neck watching it go up.) Take out the above-average CAH gains and you still get +17% for the other seven stocks, but the bigger point about dividend-growth stocks remains either way.
Further fairness: I’m not painting myself as a genius here, the stocks did the work; my own portfolio holds way more than eight stocks; it has never outpaced the S&P by nearly double; and I had no clue these eight stocks would do so well when I wrote the articles.
But my portfolio has generated stellar results over the decade I’ve invested in dividend-growth stocks, and good research says dividend-growth is an excellent long-run strategy.
Final fairness: Future one-year updates likely would have shown more winners and more losers, and all these results will change over time. Based on a quick look at articles written at least a few months ago AMJ, MCY and TRP seem to have started in the right direction, OMI and VIVO stand out as laggards, and there are plenty more in-between.
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