The summer's here. Investment Underground took a preview of the dividend investing scene to see if any new dividend kings are worthy of being crowned. Here's what we uncovered:
Verizon (NYSE:VZ): We think this once sleepy telecom has the potential to enter a new growth phase as it grabs market share from competitors with its adoption of the iPhone handset. The company should be able to handle the new services demanded by customers, and on a relative basis, outperform its peers. Average revenue per customer should get a shot in the arm over the next few years as Verizon rolls out higher revenue bundled plans and increases smart phone penetration.
The company is worth $37 per share using a 10% discount rate. Though the AT&T (NYSE:T) deal does throw a curve ball into Verizon’s plans, should the deal be approved, we think it’s very likely VZ will make strategic acquisitions to maintain market share in the face of new competition. We think the recent pullback gives investors an opportunity to grab a piece of this telecom giant ant its 5.5% yield.
If AT&T's pending purchase of T-Mobile (OTCQX:DTEGY) is approved, we think T is the better bet because of it's growth prospects in the smart phone market given the added bandwidth that will come to T from the deal.
General Electric (NYSE:GE): This dividend king doesn’t need much introduction, but here it is anyway: Based in Fairfield, Connecticut, this technology/media/energy conglomerate has products in planes, trains and microwaves, not to mention the staples of everyday life such as water, gas, light, appliances and software.
GE had a long and stable history of paying dividends for over 25 years, but you won’t see this “symbol of American business,” as Warren Buffett calls it, on any dividend aristocrat or champion list. In February of 2009, GE announced a severe quarterly dividend cut from $0.31 to $0.10, citing a precautionary move to insure liquidity. Today the company has ramped its dividend back up; and shares now yield 3.3%.
Combine the recovering economic times with the 39.61% payout ratio and GE is starting to paint a more acceptable picture. The 1.66 beta might seem a bit high for such a well-established company, but we still see this stable name as a long term buy. We recommend interested investors take a look at shares at this level or employ a put-selling strategy to acquire shares.
Vodafone (NASDAQ:VOD): With 346.8 million total customers, Vodafone is the second-largest wireless phone company in the world after China Mobile. Also it’s the most ubiquitous carrier in terms of the number of countries served. In FY 2010 through March, the company grew revenues by 8.42% to $44.47 billion GBP ($71.34 billion), after rising by +15.86% in FY 2009. EBT margins also improved to 19.5% from 10.21%. EPS grew by 181.58% to 1.64 GBP ($2.63), after falling by 53.52%.
The company expects operating profit to be toward the upper end of the 11.8 to 12.2 billion GBP range ($18.93 billion to $19.57 billion) that was communicated in November. In FY 2010, operating profit was 9.48 billion GBP ($15.2 billion), which was +61.86%, after -41.58% in FY 2009.
Through Q3 2011, revenues are up 3.57%. The company reports FY 2011 results on May 17. VOD shares trade with a P/S of 2.1. The best multiples were from 2002 to 2006 with multiples near 3. The company has a debt to equity ratio of 0.35. We expect VOD to continue to trade 2.0-2.2 times sales per share for the rest of FY 2011.
Aside from its tremendous cash flows and truly global presence, another reason we like Vodafone is because it's not an incumbent telephone operator and it doesn’t face major underfunded pensions or US-specific regulations enforcing telephone service like many of the other big names in the industry that are attached to one country. Along with the general market, shares have been weak as of late, giving income seeking an opportunity to snag a piece of the company's 7.4% yield. We think Vodaphone shares make a solid core position in any portfolio.
Abbott Laboratories (NYSE:ABT): This Illinois based drug manufacture has increased dividend payouts for 39 straight years and has a current yield of 3.77%. The 62% payout ratio is in line and the dividend growth rate has been quite stable hovering around 10% for the 1, 3, 5 and 10 year averages. Further ABT has slightly increased its dividend payout growth rates as of late. If Abbott can keep it up for the next 10 years it’ll come in with a yield on cost just under 10%; do it for 20 years and it’ll be closer to 25%. The company is no stranger to the dividend arena. Long deemed a “dividend champion” (David Fish) having not only paid but also increased its payouts for 39 straight years.
In recent years the dividend growth rate has slowly been increasing, from an 8.8% average increase in the 10 year average to the 10.6% average increase in the 3 year average. It might not be poised for huge growth, but ABT does allow for a strong combination of a high current yield and steadily increasing payouts. If you believe the heath care sector has been left behind, it could be an opportune buy.
Altria (NYSE:MO): This "King of Dividend Kings" has not only paid but also increased dividend payments for 42 straight years and has a current yield of 5.63%. Many refuse to hold this smoking giant due to its ‘sinful’ business; and afterall, conventional wisdom holds that a bad reputation and price add-ons, or “sin taxes,” cannot be good for business.
We think conventional wisdom is wrong on this one. With over a billion smokers consistently providing inelastic demand for products, MO continues to exercise significant pricing power. The 77.42% payout ratio would normally be worrisome, however, the 5 year average dividend growth rate nearing 15% and strong payout history are promising. If Altria can keep the same dividend growth rate for the next five years, its yield on cost would double to over 11%; and that’s before any price appreciation. The company has recently been downgraded by Stifel Nicolaus, Credit Suisse and Argus, but we think it like a long term buy opportunity.
France Telecom (FTE): proposed a dividend of 1.40 euros ($1.94) per share for 2010, 2011 and 2012. This is a current yield of 9.4% at today's share price. This is a very solid and sustainable yield in our opinion, and FTE has the cash to make it happen. Also, the 52 week trading range is $15.71 - $23.20. Shares are now trading just above $20.
The company is a France-based telecommunications operator that serves 203.4 million clients around the world. FTE shares trade below our fair value estimate, and therefore offer good capital appreciation and dividend opportunities. We believe this is a safe and reasonable buy for income investors, and a dividend king for the summer season.
Intel Corporation (NASDAQ:INTC): Intel Corporation has been designing and developing integrated circuits since 1968. With a market cap of $118.3 billion, Intel is a behemoth of a company and easily the world's largest producer of computer chips. Intel has a P/E ratio of 10.5 and an impressive 3.22% dividend yield. In its Q1 earnings report, Intel announced that year-over-year revenue grew an impressive 25%, up $2.5 billion to $12.8 billion on the quarter. The company also boasts a 61% gross margin, and price target estimates are averaging around $26.00.
Despite its growing competition, we believe Intel ultimately holds onto its title as king chip maker and a dividend king for this summer. According to CEO Paul Otellini, the impressive first quarter revenue growth was fueled by "double digit annual revenue growth in every major product segment and across all geographies." Clearly, Intel has been doing something right. For one, it holds more than its share of the market. Intel still produces around 80% of the world's CPUs. Also, Intel's extremely strong cash flow and large dividend (3.93%) are extremely attractive to investors.
AMD is Intel's most similar competitor, but Intel has exponentially greater funds to sink into research and development, which should ultimately allow Intel to continue to push the boundaries of technological innovation. And while ARMH has currently taken over the tablet and smart phone market, Intel will be getting in on mobile computing with its Atom processor through Google's (NASDAQ:GOOG) upcoming cloud-based Chrome netbooks. Additionally, Intel has a longstanding relationship with Apple's line of MacBook laptops. However, Intel's largest flaw is, perhaps, its premium pricing. Nonetheless, the competition from niche developers and up-and-coming companies has fueled Intel's innovation, and while AMD and ARMH easily present the biggest potential threats to Intel's dominance, INTC has money to allocate towards research and development of products that should enable it to push back against its challengers and maintain its supremacy.
We think INTC is looking for growth through acquisition. Maxim Integrated (NASDAQ:MXIM) Linear Technology (NASDAQ:LLTC) and Analog Devices (NASDAQ:ADI) are likely candidates given their niche markets that would compliment Intel's strategies.
Expeditors International of Washington (NASDAQ:EXPD): This newly annointed dividend king is a logistics service company based in, you guessed it, Washington. This Seattle supply chain specialist comes in with a current yield of just 1.6%. This is not impressive yet, but EXPD has been deemed a “dividend contender” (by David Fish), having increased its payouts for 16 consecutive years. We concur, and we think EXPD's dividend growth prospects are both enormous and underappreciated.
The lowly payout of $.0125 in 1999 has since ballooned to $.40 today, a 32 times multiple creating a praise-worthy average 10 year dividend growth nearing 28%. EXPD did have a hiccup recently, increasing its dividend by just 5.3% in the last year. Still, with a recovering economy, wouldn’t it be nice to have shares in a company with a durable, competitive advantage in the logistics business? Bill Gates, owning 1.8 million EXPD shares appears to answer in the affirmative, and the 22% payout ratio suggests future increases will continue. We like EXPD both as a income growth opportunity, and a long term buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.