2 Dividend Growth Companies Poised To Beat Earnings In January

|
Includes: GK, HAR
by: Brad Kenagy

Summary

I searched for companies that are reporting earnings in January that have the potential to beat estimates and raise dividends.

From the finalists of my screen, I examined each company based on dividend growth and earnings history.

I found two companies that beat earnings estimates, and grow dividends, and are worth considering prior to earnings.

In this article, I will be searching for dividend growth stocks that are reporting earnings in January and have a history of beating earnings estimates. For my initial list of companies, I used the Fidelity stock screener to find companies that are reporting earnings in January, pay a dividend, have a low dividend payout ratio, and have had positive earnings surprises. I found eleven stocks that passed my screen criteria, and they are listed in the table below my criteria.

Screen Criteria

  • Exchange: NASDAQ, NYSE, AMEX
  • Market Cap: > $1 billion
  • PE: >1 [Profitable]
  • Earnings Announcement: Within 19 days
  • Positive Earnings Surprise last 90 days: >10
  • Dividend: >.01
  • Dividend Payout %: 1-60%
  • PEG ratio: < 2
  • EPS Growth [This quarter vs same quarter last year]: >5
  • Sector: Not Financials

(NYSE:CE)

Celanese Corporation

(CSC)

Computer Sciences Corporation

(NYSE:DST)

DST Systems Inc.

(NASDAQ:GK)

G&K Services Inc.

(NYSE:HAR)

Harman International Industries, Incorporated

(NYSE:KNX)

Knight Transportation Inc.

(NYSE:MA)

MasterCard Incorporated

(NASDAQ:MKSI)

MKS Instruments, Inc.

(NYSE:MTX)

Minerals Technologies Inc.

(NYSE:PH)

Parker-Hannifin Corporation

(NYSE:TER)

Teradyne Inc.

Dividend Growth

Once I had my initial list, I looked at each company individually to see which of the companies on my list have increased the dividend at least twice in the last eight quarters. I went to the DividendChannel.com dividend history page for each company, and found that out of the eleven stocks, five have increased their dividends at least twice in the last eight quarters.

CE

Celanese Corporation

GK

G&K Services Inc.

HAR

Harman International Industries, Incorporated

MA

MasterCard Incorporated

PH

Parker-Hannifin Corporation

Positive Earnings Surprise

For the next step, I went to the Estimize page for each of the above five companies to examine their history of beating Wall Street consensus estimates over the last four quarters. I wanted to include only companies that have beat Wall Street estimates at least three out of the last four quarters. I found that Celanese, G&K Services, and Harmon International have eachbeat estimates in the last four quarters, while MasterCard & Parker-Hannifin beat estimates three out of the last four quarters. Therefore, all five companies passed my first earnings surprise test.

My second earnings surprise test consists of examining whether the current quarter estimates for each company were projected to have a larger EPS than the previous quarter. I found that only G&K Services and Harmon International had estimates for the current quarter that was higher than the previous quarter.

G&K Services

For GK there are two reasons why I believe they will beat earnings estimates once again this quarter, and those reasons are an improvement in the labor market, and increased margins from focusing on cost management.

GK provides uniforms and facility services for industries ranging from retail to healthcare, and everywhere in between. For the current quarter [October-December], the US economy added 865,000 jobs, and the last time there was a quarter with at least that many jobs added was the first quarter of 2006. With this large increase of new workers in the last quarter, GK should benefit because many of the added workers most will need a uniform for their new job.

The second reason why I believe GK will beat earnings this quarter is that GK has been focused on increasing margins, through keeping costs under control. For the trailing twelve months, GK posted its highest operating margins in the last 10 years. In addition, during the financial crisis GK initiated a "game-plan" with the goal of bringing the company back to 10% operating margins and ROIC. The table below shows that while revenue growth is lower than prior to the "game-plan" GK has been able to get its costs under control and now revenue is growing at a faster rate than COGS, and is nearly inline with growth in SG&A. These cost improvements along with revenue growth, will once again lead to higher margins in the upcoming quarter that will be reported later this month.

5 Years Prior to Game Plan

Last 5 Years After Game Plan

Revenue Growth Rate

4.37%

1.96%

COGS Growth Rate

6.84%

0.54%

SG&A Growth Rate

7.61%

2.28%

Over the last five years, GK has been a dividend growth machine. As the chart below shows, GK has increased its dividend by 241.18% over the last five years. In addition to this strong dividend growth, GK paid a $6/share special dividend in 2014 and a $6/share special dividend in 2012.

GK has consistently beat earnings estimates over the last two years as the chart below shows. Based on its history of outperforming estimates, I expect GK to do so once again this quarter.

Harmon International

There is one major reason why I believe HAR will beat earnings estimates again this quarter -- increased auto sales.

In the last earnings report, HAR reported significantly revenue gains because of increased auto sales. As the following statements from the most recent earnings report show, auto sales have been and will continue to be the growth driver for HAR going forward. As is noted below, HAR received $2 billion in new auto awards in the previous quarter alone, and overall they have a $20.5 billion backlog. With continued growth in auto sales at a 16+ million annualized rate, I believe HAR is poised to beat earnings for the current quarter, and many quarters to come. [Earning Slides]

"Infotainment net sales increased 17 percent due to expansion of recently launched platforms, stronger automotive production, and higher take rates."

"Lifestyle net sales grew 27 percent driven by strong demand for the Company's home and multimedia product lines and an increase in automotive production and higher take rates in car audio."

"Looking further out, demand from automakers for innovative embedded infotainment and car audio solutions remains robust as evidenced by over $2 billion of new automotive awards that we secured in the first quarter of this fiscal year."

HAR has shown dividend growth over the last four years that has been parabolic. During the financial crisis, HAR suspended its dividend for 2009-2010, however, since reinstating its dividend in 2011, it has increased by 530%.

HAR earnings for the most part have been stable, but like most other consumer products companies, the quarter that holds the holiday shopping season is the largest quarter of the year, and the most unpredictable. As the chart below shows, HAR last year had a significant earnings beat for its "holiday quarter," and I expect HAR will once again easily beat estimates again this year.

Closing Thoughts

In closing, I believe G&K Services and Harmon International are worth considering prior to earnings because each has a history of beating earnings estimates, and each has the possibility of increasing its dividends this quarter as well. G&K Services reports earnings January 27th before the open, and Harmon International reports earnings January 28th before the open.

Disclaimer: See here.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.