Bottom-Fishing For Companies Growing Their Dividends

by: Kevin Quon

Dividend growth matters. This is especially so when one considers that the fundamental value of a stock is inherently based upon the eventual participation in the growing wealth of the underlying equity. For companies that have dedicated themselves to the distribution of such wealth, the ability to sustain and eventually grow their yields often becomes the most critical indicator of financial well-being.

Symbols of American corporate strength, like Procter & Gamble (NYSE:PG) and International Business Machines (NYSE:IBM), have managed to grow their dividends annually for decades. This was even true throughout recent Great Recession, which cut deep into even the most secure of pockets. Even General Electric (NYSE:GE), which once prided itself as a consistent dividend grower, managed to take a hit during this time period, as witnessed in the following graphic:

Yet for investors who enjoy bottom fishing, finding companies that that are growing their dividends is a good sign towards sustained growth. The following are a few companies with share prices trading below their book values, despite having recent increases to their dividend yields.

It does bear mentioning that the market must've been spooked in order to offer such discounts to these companies. In some cases, the dividend itself might have been issued prior to the event that scared away investors. Thus for that matter, each of the companies should be analyzed on a case by case basis. All of the following companies are offering greater than a 4% trailing dividend, have a market capitalization over $5 Billion, and have book values larger than their current share price as of 1/19/2012.

Name Price BV/share Div% MCap.
Transocean (NYSE:RIG) $45.04 $65.10 5.4% $14.41 B
Ameren (NYSE:AEE) $31.56 $33.02 4.8% $7.65 B
Veolia Environnement (VE) $10.52 $18.70 16.3% $5.32 B
Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) $8.74 $10.28 7.5% $41.34 B
Telecom Italia (NYSE:TI) $10.67 $17.36 7.7% $20.57 B

Undoubtedly, fear is a factor in a majority of these companies. For Telecom Italia and Veolia for instance, the recent downgrades of European financial health are certain to play a large role in the current determination of prices. As for Transocean, despite its ongoing troubles with possible litigation and regulation restrictions, the company initiated a dividend this past year and holds on to the prospect of increasing it down the road.

Fishing for stocks near the bottom of their trading range isn't for the faint of heart. A greater degree of volatility exists, and the possibility of trouble could lie in wait. For this reason, I attempted to mitigate this risk ever so slightly by only displaying companies that have shown their ability to grow their companies beyond a $5 Billion market capitalization. For investors looking for a more stable approach to high-dividend yield, they may want to consider taking a look at the following article for an example of a diversified portfolio offering a yield of over 5% and a bit more stability.

Disclosure: I am long RIG, VE.