1. Declining Shares

Many companies sell stock to raise cash. The important question is what is the company going to do with the cash? Is it for an acquisition or “general corporate purposes?” The latter is code for the business is not generating enough cash to stay afloat on its own. I am wary of a company that consistently has more shares outstanding in the current year when compared to the prior year. As I enter updates to my database, equal or lower shares outstanding is a sign of a healthy business.

2. Declining Debt

When companies need to raise cash and selling shares is not a good option, they often will issue debt. Once again, the important question is what is the company going to do with the cash? Like issuing shares, debt for a strategic acquisition is much more palatable than for “general corporate purposes.” I am wary of a company that consistently has more debt outstanding than the year before. As I enter updates to my database, I make note of companies with a declining debt balance and see that as a sign of a healthy business.

3. Rising Equity

Changes in shareholder’s equity are a result of earnings, dividends paid, treasury stock purchased, stock options exercised and stock issued. If shares outstanding aren’t increasing, and equity is rising then the business is generating sufficient earnings to cover dividends and share repurchases. Increasing the value of the company by running the business well is a sign of a healthy company.

4. Rising Free Cash Flow/Share

Ultimately, we want our investments to generate more free cash flow so they can pay us higher dividends. Free cash flow is an important metric in that it excludes cash generated from issuing stock or issuing debt or selling off parts of the business. Free cash flow is limited to only the cash generated from running the business.

Dividend Stocks Headed In The Right Direction

Combining the equity and debt metrics, I looked for companies with a declining Debt to Total Capital ratio, and combining the free cash flow and shares outstanding metrics, I looked for a rising free cash flow per share. Below are several companies I noted that exhibited each of the above characteristics:

Automatic Data Processing Inc. (ADP) is one of the world’s largest independent computing services companies, providing a broad range of data processing services.
Debt to Total Capital | 2005: 1%, TTM: 1%
Free Cash Flow/Share | 2005: $2.10, TTM: $3.06
Yield: 2.84%

Cullen/Frost Bankers, Inc. (CFR) is one of the largest multi-bank holding company headquartered in Texas, has more than 110 offices in various cities in the state.
Debt to Total Capital | 2005: 30%, TTM: 15%
Free Cash Flow/Share | 2005: $2.13, TTM: $5.23
Yield: 2.98%

Erie Indemnity Co. (ERIE) provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States.
Debt to Total Capital | 2005: 0%, TTM: 0%
Free Cash Flow/Share | 2005: $4.33, TTM: $6.93
Yield: 2.77%

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
Debt to Total Capital | 2005: 16%, TTM: 15%
Free Cash Flow/Share | 2005: $2.03, TTM: $3.57
Yield: 2.97%

Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Debt to Total Capital | 2005: 29%, TTM: 20%
Free Cash Flow/Share | 2005: $1.75, TTM: $3.08
Yield: 2.25%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries.
Debt to Total Capital | 2005: 38%, TTM: 33%
Free Cash Flow/Share | 2005: $2.65, TTM: $3.46
Yield: 3.00%

RPM International Inc. (RPM) makes specialty coatings and products for the structural waterproofing and corrosion control markets, as well as products for the consumer, do-it-yourself, and hobby markets.
Debt to Total Capital | 2005: 44%, TTM: 43%
Free Cash Flow/Share | 2005: $0.81, TTM: $1.34
Yield: 3.47%

J.M. Smucker Co.’s (SJM) products include coffee, fruit spreads, peanut butter, shortening and oils, ice cream toppings, health and natural foods, and beverages. The Folgers coffee business was acquired in November 2008.
Debt to Total Capital | 2005: 21%, TTM: 19%
Free Cash Flow/Share | 2005: $1.84, TTM: $3.69
Yield: 2.61%

Sonoco Products Co. (SON) makes paper and plastic packaging products serves various industries and markets in more than 85 countries.
Debt to Total Capital | 2005: 38%, TTM: 29%
Free Cash Flow/Share | 2005: $0.98, TTM: $1.68
Yield: 3.10%

Suburban Propane Partners LP (SPH) is a limited partnership that markets propane gas and other refined fuels to residential, commercial, industrial, and agricultural customers.
Debt to Total Capital | 2005: 88%, TTM: 44%
Free Cash Flow/Share | 2005: $0.33, TTM: $3.67
Yield: 5.88%

AT&T Inc. (T) provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.
Debt to Total Capital | 2005: 42%, TTM: 39%
Free Cash Flow/Share | 2005: $2.10, TTM: $2.50
Yield: 5.88%

V.F. Corp. (VFC) is a global apparel company, with leading shares in denim and daypacks. It is transforming itself into a designer and marketer of lifestyle apparel brands.
Debt to Total Capital | 2005: 22%, TTM: 20%
Free Cash Flow/Share | 2005: $4.11, TTM: $9.46
Yield: 2.71%

Verizon Communications Inc. (VZ) offers wireline, wireless and broadband services primarily in the northeastern United States. It acquired MCI Inc in 2006 and has since sold or spun off non-core assets. Alltel was acquired in early 2009.
Debt to Total Capital | 2005: 50%, TTM: 39%
Free Cash Flow/Share | 2005: $2.37, TTM: $6.07
Yield: 5.22%

Businesses can pay dividends with cash generated from many sources. They can generate cash by issuing shares, which dilutes our ownership. They can generate cash by issuing debt, which burdens the company with interest payments. Or, they can generate cash by running the business well, which neither dilutes the current shareholders’ interest or burdens them with future cash payments. Which would you rather have?

Full Disclosure: Long ADP, GPC, OMI, PG, T. See a list of all my income holdings here.

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(Photo Credit)

Linked here is a detailed quantitative analysis of Southside Bancshares Inc. (SBSI). Below are some highlights from the above linked analysis:

Company Description: Southside Bancshares Inc. primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

SBSI is trading at a discount to all four valuations above. The stock is trading at a 34.6% discount to its calculated fair value of $31.01. SBSI earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

SBSI earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. SBSI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1969 and has increased its dividend payments for 12 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

SBSI earned a Star in this section for its NPV MMA Diff. of the $32,940. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as SBSI has. The stock’s current yield of 4.07% exceeds the 3.9% estimated 20-year average MMA rate.

Memberships and Peers: SBSI is a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Cullen/Frost Bankers, Inc. (CFR) with a 2.9% yield, First Financial Bankshares Inc. (FFIN) with a 2.7% yield and International Bancshares Corp. (IBOC) with a 2.0% yield.

Conclusion: SBSI earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks SBSI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $49.23 before SBSI’s NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.68%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 8.5%. This dividend growth rate is significantly below the 16.6% used in this analysis, thus providing only a margin of safety. SBSI has a risk rating of 2.25 which classifies it as a medium risk stock.

SBSI has assets of approximately $3.0 billion and operates 48 community-banking facilities in Texas including two branches in Fort Worth, one in Arlington and a loan production office in Austin. SBSI offers a full range of financial services including consumer and commercial loans, loans to municipalities, deposit accounts, trust, personal banking, safe deposit boxes, brokerage services, credit cards, ATM’s and an array of electronic services. I have been looking for a bank to add to my portfolio and have been watching SBSI for some time. By every metric that I track, SBSI is trading at a discount. For the most part, it has good dividend fundamentals. My hesitation comes from its level of debt. At 77%, SBSI’s debt to total capital well in excess of the 45% maximum that I look for, so I will stay on the sidelines at this time. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in SBSI (0.0% of my Income Portfolio). See a list of all my income holdings here.

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Though I prefer quarterly dividends, there is something more important than frequency — dividend increases. Below are several companies satisfying their shareholders desire for more cash by increasing their dividends:

Travelers (TRV) is a leading provider of commercial property-liability and homeowners and auto insurance. April 23rd the company increased its quarterly dividend to $0.36/share. The dividend is payable June 30, 2010, to shareholders of record as of the close of business June 10, 2010. The ex-dividend date is June 8, 2010. The yield based on the new payout is 2.85%.

Costco Wholesale (COST) operates about 565 membership warehouses in the U.S., Puerto Rico, Canada, the U.K., Taiwan, Japan, Korea, and Mexico. April 23rd the company raised its quarterly dividend 14% to $0.205/share. The dividend of $.205 per share is payable May 21, 2010, to shareholders of record at the close of business on May 7, 2010. The ex-dividend date is May 5, 2010. The yield based on the new payout is 1.39%.

Holly Energy Partners (HEP) operates refined product pipeline and terminal facilities. April 23rd the partnership raised its quarterly distribution to $0.815/unit. The distribution will be paid May 14, 2010, to unitholders of record May 4, 2010. The ex-distribution date is April 30, 2010. The yield based on the new payout is 6.98%.

International Paper (IP) is a leading worldwide producer and distributor of printing papers and packaging products. On April 26th the company increased its quarterly dividend to $0.125/share. The dividend is payable June 15, 2010 to shareholders of record on May 17, 2010. The ex-dividend date is May 13, 2010. The yield based on the new payout is 1.85%.

Alliance Holdings GP, L.P. (AHGP) produces and markets coal primarily to utilities and industrial users in the U.S. It offers a range of steam coal with varying sulfur and heat contents. April 26th the partnership increased its quarterly distribution 2.8% to $0.465/unit. The distribution is payable on May 20, 2010, to AHGP’s unitholders of record as of the close of trading on May 13, 2010. The ex-dividend date is May 13, 2010. The yield based on the new payout is 5.49%.

Community Bank System (CBU) provides financial services in upstate New York, and in northeastern Pennsylvania as First Liberty Bank & Trust. April 26th the company raised its quarterly dividend 9.1% to $0.24/share. The dividend is payable on July 9, 2010, to shareholders of record as of June 15, 2010. The ex-dividend date is June 11, 2010. CBU is a Dividend Achiever and has paid a higher dividend for 17 consecutive years. The yield based on the new payout is 3.89%.

Inergy Holdings (NRGP) operates a retail and wholesale propane supply, marketing and distribution business. April 26th the company increases its quarterly distribution 3.7% to $0.975/unit. The distribution will be paid on May 14, 2010, to unitholders of record as of May 7, 2010. The ex distribution date is May 5, 2010. The yield based on the new payout is 5.31%.

EarthLink (ELNK) is one of the largest U.S. Internet service providers, based on paying subscribers. April 27th the company increases it quarterly dividend to $0.16/share. This increase will be reflected in the next quarterly dividend to be paid on June 28, 2010 to shareholders of record on June 14, 2010. The ex-dividend date is June 12, 2010. The yield based on the new payout is 6.88%.

Williams Partners (WPZ) engages in gathering, transporting, processing, and treating natural gas, as well as fractionating and storing natural gas liquids. April 27th the company increases its quarterly distribution 3.5% to $0.66/unit. The distribution is payable on May 14, 2010, to unitholders of record at the close of business on May 7, 2010. The yield based on the new payout is 6.31%.

IBM (IBM) products and services include information technology services, software, computer hardware equipment, fundamental research, and related financing. April 27th the company raised its quarterly dividend 18% to $0.65/share. The dividend is payable June 10, 2010 to stockholders of record May 10, 2010. The ex-dividend date is May 6, 2010. This is the 15th year in a row that IBM has increased its quarterly cash dividend, and 7th year in a row of double-digit percent increases. With the payment of the June 10th dividend, this Dividend Achiever will have paid consecutive quarterly dividends every year since 1916. The yield based on the new payout is 2.02%.

Sunoco Logistics Partners LP (SXL) owns and operates a group of refined product and crude oil pipelines and terminal facilities. April 27th the company increases its quarterly distribution 2.3% to $1.11/unit. The yield based on the new payout is 6.54%.

WW Grainger (GWW) is the largest global distributor of industrial and commercial supplies such as hand tools, electric motors, light bulbs and janitorial items. April 28th the company raised its quarterly dividend 17% to $0.54/share. April 28th the company raised its quarterly dividend 17% to $0.54/share. The dividend is payable on June 1 to shareholders of record on May 10. The ex-dividend date is May 6. GWW is a Dividend Aristocrat and has paid a higher dividend for 39 consecutive years. The yield based on the new payout is 1.99%. See recent analysis.

Exxon (XOM) is the world’s largest publicly owned integrated oil company. April 28th the company raised its quarterly dividend 4.8% to $0.44/share. The dividend is payable on June 10, 2010 to shareholders of record of Common Stock at the close of business on May 13, 2010. XOM is a Dividend Aristocrat and has paid a higher dividend for 28 consecutive years. The yield based on the new payout is 2.54%.

Chevron (CVX) is a global integrated oil company that has interests in exploration, production, refining and marketing, and petrochemicals. April 28th the company increased its quarterly dividend 5.9% to $0.72/share. The dividend is payable June 10, 2010, to holders of common stock as shown on the transfer records of the Corporation at the close of business on May 19, 2010. The ex-dividend date is May 17. The amount represents a 5.9 percent increase in the company’s quarterly dividend. CVX is a Dividend Achiever and has paid a higher dividend for 23 consecutive years. The yield based on the new payout is 3.37%.

Sturm, Ruger & Co. (RGR) designs, manufactures, and sells firearms to domestic customers; it offers products in four industry product categories: rifles, shotguns, pistols, and revolvers. April 28th the company raised its quarterly dividend 55% to $0.093/share. The dividend will be paid on May 28, 2010 to stockholders of record as of May 14, 2010. The ex-dividend date is May 12, 2010. The yield based on the new payout is 2.16%.

TransAlta Corp. (TAC) is an independent power producer and wholesale marketing company owns a portfolio of generation assets in Canada, the United States, Mexico, and Australia. April 29th the company increased its quarterly dividend to $0.29/share. The dividend is payable July 1, 2010 to shareholders of record at the close of business June 1, 2010. The ex-dividend date is May 28, 2010. The yield based on the new payout is 5.59%.

Cullen/Frost Bankers (CFR) is the largest multi-bank holding company headquartered in Texas, has more than 80 offices in various cities in the state. April 29th the company increases its quarterly dividend 4.7% to $0.45/share. The dividend is payable June 15, 2010 to shareholders of record on June 1, 2010. The ex-dividend date is May 28, 2010. CFR is a Dividend Achiever and has paid a higher dividend for 16 consecutive years. The yield based on the new payout is 3.02%.

Duff & Phelps (DUF) is an independent financial advisory company operates worldwide in two segments, Financial Advisory and Investment Banking. April 29th the company raised its quarterly dividend by 20% to $0.06/share. The yield based on the new payout is 1.50%.

Frequency of dividends increases is one of the most important things to consider when adopting a dividend growth investment strategy. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: Long MCD, AOD, CVX, O, PG, JNJ. See a list of all my income holdings here.

(Photo Credit)

Last Tuesday, IBM stood up and was counted as a leader. At a time when the ill-prepared and the fearful are cutting dividends and hoarding cash, IBM increased its quarterly dividend 10% to $0.55/share and announced a $3 billion share repurchase program. The company has increased its quarterly dividend by 175% percent since 2006 and this is the 14th consecutive increase. The dividend is payable June 10, 2009 to stockholders of record May 8, 2009.  based on the new rate, IBM is currently yielding: 2.10%

Below are many other companies joining IBM as leaders andrewarding their shareholders with higher cash dividends:

• Cullen/Frost Bankers (CFR) increased its qtr. dividend 2% to $0.43/share. Yield 3.54% (analysis)
• Donegal Group (DGICA) raised its qtr. dividend to $0.112/share. Yield: 3.07%
• Valmont Industries (VMI) ups its qtr. dividend 15.4% to $0.15/share, Yield: 0.95%
• Bemis (BMS) boosts qtr dividend to $0.225/share. Yield: 3.72%
• Costco Wholesale (COST) increased its qtr dividend to $0.18/share. Yield: 1.50%
• BOK Financial (BOKF) raised its qtr. dividend 6.7% to $0.24/share. Yield: 2.48%
• W.W. Grainger (GWW) ups its qtr. dividend 15% to $0.46/share. Yield: 2.22%
• Talisman Energy (TLM) boosts its semi-annual dividend 12.5% to $0.1125/share. Yield: 1.47%
• ExxonMobil (XOM) increased its qtr. dividend to $0.42/share. Yield: 2.45%
• UGI Corporation (UGI) raised its qtr dividend 4% to $0.20/share. Yield: 3.35%
• Safeway (SWY) ups qtr. dividend 21% to $0.10/share. Yield: 1.56%
• Occidental (OXY) boosts qtr. dividend 3.1% to $0.33/share. Yield: 2.23%
  

Hopefully, this is just the beginning and in the coming weeks we will continue to see more dividend increases. For more companies with a long string of consecutive dividend increases, see this list.

Full Disclosure: No position in the aforementioned securities.  See a list of all my income holdings here.

(Photo: Steve Woods)

Linked here is a detailed quantitative analysis of Cullen/Frost Bankers, Inc. (CFR). Below are some highlights from the above linked analysis:

Company Description: Cullen/Frost Bankers, Inc., through its subsidiaries, provides banking and financial services primarily in Texas.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CFR is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, CFR is trading at a 9.8% discount. CFR earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

CFR earned one Star in this section for 3.) above. CFR has paid a cash dividend to shareholders every year since 1993 and has increased its dividend payments for 14 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

CFR earned both of the available Stars in this section. The NPV MMA Diff. of the $7,820 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as CFR has. CFR’s current yield of 3.75% exceeds the 3.54% estimated 20-year average MMA rate.

Other: CFR is a member of the Broad Dividend Achievers™ Index. While other financial institutions are lining up for a cash infusion from the Troubled Assets Relief Program (TARP), CFR took a line from Nancy Reagan and, ‘Just said no.’

“Cullen/Frost is well capitalized now and for the foreseeable future, with sufficient capital to grow our business and take advantage of acquisition opportunities,” said Dick Evans, Cullen/Frost’s chairman and CEO in a 2008 statement. Operating in a robust and growing Texas economy, CFR exhibits strong credit quality in its loan portfolio and tends to produce relatively stable financial results. Trading at a discount to it historical P/E, some view CFR as an attractive takeover candidate. Risks include unfavorable changes in the slope of the yield curve, operational performance and additional deterioration of the credit market.

Conclusion: CFR earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks CFR as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $44.95 before CFR’s NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 3.69%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 7.6%. This dividend growth rate is virtually the same as the the 7.8% used in this analysis.

By not accepting TARP funds CFR is in a position to continue to raise its dividend. With a risk rating of 1.25 (low), it is a stock that I will consider adding to my portfolio below its buy price of $44.95. For additional information, including CFR’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CFR (0.0% of my Income Portfolio) .

What are your thoughts on CFR?

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