Warner Chilcott A Buy For Dividend Lovers

| About: Warner Chilcott (WCRX)
This article is now exclusive for PRO subscribers.

Just like most financial data concerning stocks, dividend yield can be interpreted differently and has no one answer for what is the precise amount. Let us start off with the definition of dividend yield from Investopedia.

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Dividend Yield

Read more: Investopedia

The price per share is relatively straight-forward but even what is a dividend is not necessarily well defined. Take for example, Warner Chilcott Public Limited Company (NASDAQ:WCRX) that paid a dividend of $4.00 for an ex-dividend date of August 29, 2012. Using the above calculations that would make the dividend yield at over 33% assuming a price of $12. But that would be wrong for dividend investors as that is the past yearly rate and not what would be expected forward returns as that ex-dividend event was defined as a "Special Dividend".

A good data provider can have more than 30 different classifications of dividends including Special, Undefined, Extra, Stock Dividend or even non-cash payouts. But for dividend investors they want the cold hard cash that are declared on a regular basis and hopefully going forward indefinitely. They would be looking for regular payouts like quarterly, yearly, half-yearly (semi-annual), monthly, thrice yearly or even weekly. I have not seen any of the last two classifications but they are conceivably possible.

For our example of WCRX, they recently declared a half-yearly dividend of $0.25 on the ex-dividend date of November 28,2012. Since that would be the first regular dividend, to calculate dividend yield it would be necessary to annualize the last dividend (or declared in the near future) and divide by price. In this case it is 2*$0.25/$12 ≈ 4%. Declaring initiation of dividend payments is a positive sign of a growing, maturing business that correlates with price growth for the medium to long term periods.

While dividend investors love consistency in long-term dividend payers, we should not ignore stable profitable businesses that initiate dividends. This will be the first half-yearly dividend payer that Rock Solid Dividends has recommended. From my simple observations, many half-yearly dividend payers are ADRs or foreign domiciled companies and also can be highly volatile in the payouts. Something that will need to be monitored going forward.

Why I Recommend WCRX

In addition to the fact of initiating dividends, analysts have been upgrading projected earnings across the board for a broad bench of analysts. Obviously helped by the company recently raising its earnings outlook and by beating its last Capital IQ Consensus Estimate by over 27%. It has also beat its consensus estimates of the prior 3 quarters by similar amounts, making a full year of wildly beating estimates.

Thus it is showing nice growth potential in the intermediate time frame. But it also has high marks as a value investing stock. Its earnings valuation indicates low down-side risk while having potential for huge upside gains. Its projected earnings going forward looks great and it contains attributes of strong financial health going forward. Free cash flow also shows every sign of improving this year after gaining marginally for fiscal year 2011.

One area of concern going forward is weak top-line sales growth over the fiscal year of 2012 and every quarter in 2011 was down from 2010. But the 5 year growth rate is still over 18.5% per year since 2008. But given its overall great quantitative scoring, I recommend a buy of 600 shares of WCRX based on a portfolio of $100,000.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WCRX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This pick will be added to the Rock Solid Yields portfolio.