Financial Services Attributes

The Financial Services Sector includes insurance companies, banks, brokerages, mutual fund companies, and other similar companies. Before the 2008-09  financial meltdown, financial services stocks were the cornerstone on many dividend income portfolios. They offered relatively high yields and good dividend growth rates, for the perceived small risk of the stock. Unfortunately, things are not always as they seem. Under the surface banks were making questionable loans , while investment firms were creating and peddling exotic financial instruments. In effect, their CEO’s were building a house of cards in a hurricane – it was destined to fail, and it did.

This should be a warning when investing in the Financial Services Sector – not a stop sign. Many of these companies are in very lucrative positions. With interest rates as low as they are, banks are enjoying decent spreads, not to mention all the new fees they are dreaming-up to charge their customers.  With the advent of electronic banking, we have so much tied to our accounts. The pain threshold of changing banks is high, and they know it.

Have you ever filed an insurance claim and were satisfied with the outcome? I have not spoke with many people that have. Recently, a hail storm hit my neighborhood causing damage to several roofs, including mine. My insurance company (a name that everyone would know if I mentioned it) paid less than 10% of the damage I incurred – then raised my rates. They will recoup their payment to me in about 20 months. What a business model! You can complain about it, or invest in the industry and profit from it. I’ve chosen the latter.

Financial Services Companies

Below are several leading Consumer Goods companies that I follow. The companies selected have a dividend yield in excess of 2.25% and have raised their dividends for at least 10 years.

People’s United Financial Inc. (PBCT) | Yield: 5.9% | Growth: 11.3% | Years: 13
People’s United Financial Inc. provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.

Old Republic International (ORI) | Yield: 5.7% | Growth: 15.0% | Years: 29
Old Republic Intl writes property and liability, mortgage guaranty, title and life, and disability insurance.

Mercury General Corp. (MCY) | Yield: 5.5% | Growth: 1.1% | Years: 23
Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.

Hudson City Bancorp Inc. (HCBK) | Yield: 5.4% | Growth: 1.7% | Years: 10
Hudson City Bancorp Inc. operates over 100 branches in the New York metropolitan area. It caters to high median household income counties and focuses on jumbo mortgage loan funding, largely through time deposits.

Cincinnati Financial Corp. (CINF) | Yield: 4.8% | Growth: 1.0% | Years: 50
Cincinnati Financial Corp. markets primarily property and casualty coverage. It also conducts life insurance and asset management operations.

Arrow Financial Corp. (AROW) | Yield: 4.2% | Growth: 2.2% | Years: 17
Arrow Financial owns Glens Falls National Bank & Trust Company and Saratoga National Bank & Trust Company, which offer commercial and consumer banking and financial products in U.S.

Community Trust Bank Corp. (CTBI) | Yield: 4.2% | Growth: 0.8% | Years: 30
Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.

Harleysville Group Inc. (HGIC) | Yield: 3.8% | Growth: 8.0% | Years: 24
Harleysville Group Inc. underwrites a broad array of personal and commercial coverages. These insurance coverages are marketed primarily in the Eastern and Midwestern United States.

First Financial Corp. (THFF) | Yield: 2.9% | Growth: 1.1% | Years: 22
First Financial Corporation provides various financial services from 48 branch offices in west-central Indiana and east-central Illinois (Dec. 31, 2008).

Chubb Corporation (CB) | Yield: 2.5% | Growth: 5.7% | Years: 46
Chubb Corporation is one of the largest U.S. property-casualty insurers, Chubb has carved out a number of niches, including high-end personal lines and specialty liability lines coverage.

Conclusion

The Financial Services sector is the second largest sector in my database of dividend stocks. Of the 198 stocks that I track, it currently is represented by 33 stocks (17%). This is a sector many dividend growth investors are hesitant to own. The perceived higher risk brings higher yields and with potential growth to the income investor. Even after the melt-down, many income and value portfolios continue to be over-weighted in Financial Services, including Warren Buffett’s Berkshire Hathaway (BRK.A) at 41%. As for my portfolio, I will continue to enjoy what the Financial Services Sector brings to the table, but I will limit my exposure to no more than 10%.

Full Disclosure: Long CINF, HGIC. See a list of all my income holdings here.

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Below are several stocks using real cash to raise their dividends:

A. O. Smith (AOS) produces electric motors and residential and commercial water heaters. July 23rd the company increased its quarterly dividend 8% to $0.21/share. The dividend is payable on August 16, 2010, to shareholders of record July 30, 2010. The ex-dividend date is July 28, 2010. Yield on the dividend is 1.6%. AOS is a Dividend Achiever and has raised its dividend for 17 consecutive years. The yield based on the new payout is 1.50%.

General Electric (GE) sells products ranging from jet engines and gas turbines to consumer appliances, railroad locomotives and medical equipment. It also owns NBC Universal, and is a leading provider of consumer and commercial financing. July 23rd the company raised its quarterly aividend 20% to $0.12/share. The dividend is payable October 25, 2010 to shareowners of record at the close of business on September 20, 2010. The ex-dividend date is September 16, 2010. The yield based on the new payout is 2.97%.

Enbridge Energy Partners (EEP) owns the U.S. portion of the world’s longest crude oil pipeline. A natural gas transportation business was acquired in late 2001. July 23rd the partnership increased its quarterly distribution 2.5% to 1.0275/unit. The distribution is payable August 13, 2010 to unitholders of record on August 5, 2010. The ex-dividend date is August 3, 2010. The yield based on the new payout is 6.91%.

Boardwalk Pipeline (BWP) engages in the interstate transportation and storage of natural gas. July 26th the company raised its quarterly distribution 1% to $0.51/unit. The distribution is payable on August 9, 2010, to unitholders of record as of August 2, 2010. The ex-dividend date is July 29, 2010. The yield based on the new payout is 6.37%.

Alliance Holdings GP (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. July 26th the company increases its quarterly distribution to $0.4825/unit. The distribution is payable on August 19, 2010, to AHGP’s unitholders of record as of the close of trading on August 12, 2010. The ex-distribution date is August 10, 2010. The yield based on the new payout is 5.32%.

Crane Co. (CR) is a diversified manufacturer and distributor of engineered products for the fluid handling, aerospace, construction and automatic merchandising industries. July 26th the company raised its quarterly dividend 15% to $0.23/share. The dividend is payable on September 10, 2010 to shareholders of record as of the close of business on August 31, 2010. The ex-dividend date is August 27, 2010. The yield based on the new payout is 2.57%.

International Flavors & Fragrances (IFF) is a leading producer of flavors and fragrances, used in a wide variety of consumer goods, derives over 70% of annual sales from operations outside the U.S. July 27th the company increased its quarterly dividend 8% to $0.27/share. The dividend is payable on October 6, 2010 to all IFF shareholders of record as of September 22, 2010. The ex-dividend date is September 20, 2010. The yield based on the new payout is 2.36%.

Norfolk Southern (NSC) operates 21,200 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada. July 27th the company raised its quarterly dividend 5.9% to $0.36/share. The dividend is payable on Aug. 6 to shareholders of record on Sept. 10. The ex-dividend date is Aug. 4. The yield based on the new payout is 2.55%.

Community Trust Bancorp (CTBI) provides commercial banking services in Kentucky andWest Virginia; and a trust company. July 27th the company increased its quarterly dividend 1.7% to $0.305/share. The dividend is payable on October 1, 2010, to shareholders of record on September 15, 2010. The ex-dividend date is September 13, 2010. CTBI is a Dividend Achiever and has raised its dividend for 30 consecutive years. The yield based on the new payout is 4.46%.

Williams Partners (WPZ) engages in gathering, transporting, processing, and treating natural gas, as well as fractionating and storing natural gas liquids. July 27th the partnership increased its quarterly distribution 2% to $0.6725/unit. The distribution is is payable on August 13, 2010, to unitholders of record at the close of business on August 6. The ex-dividend date is August 4, 2010. The yield based on the new payout is 5.82%.

Sealed Air Corporation (SEE) is a leading global manufacturer of a wide range of food and protective packaging materials and systems. July 27th the company raised its quarterly dividend 8% to $0.13/share. The yield based on the new payout is 2.33%.

PF Chang’s (PFCB) owns and operates the P.F. Chang’s China Bistro and PeiWei Asian Diner restaurant chains. July 28th the company increased its quarterly dividend to $0.25/share. The yield based on the new payout is 2.26%.

Newmont Mining (NEM) is one of the world’s largest gold producers, and is also engaged in the production of copper. July 28th the company raised its quarterly dividend 50% to $0.15/share. The dividend is payable on September 29, 2010 to holders of record at the close of business on September 8, 2010. The ex-dividend date is September 6, 2010. The yield based on the new payout is 1.08%.

Hawkins (HWKN) formulates, blends and distributes bulk and specialty chemicals in the U.S. It operates in three segments: Water Treatment, Industrial, and Pharmaceutical. July 28th the company increased its semi-annual dividend 7.1% to $0.30/share. The dividend is payable on October 8 to shareholders of record on September 24. The ex-dividend date is September 22. The yield based on the new payout is 2.00%.

Barrick Gold (ABX) is the world’s largest gold company in terms of both production and reserves. July 29th the company raised its quarterly dividend 20% to $0.12/share. Barrick expects to move from a semi-annual dividend to a quarterly dividend going forward. The quarterly dividend is payable on September 15, 2010 to shareholders of record as of the close of business on August 31, 2010. The ex-dividend date is August 27. The yield based on the new payout is 1.20%.

Republic Services (RSG) became the second largest U.S. provider of solid waste services in North America when it acquired AlliedWaste Industries in December 2008. July 29th the company increased its quarterly dividend 5% to $0.20/share. The dividend is payable on October 15, 2010 to shareholders of record on October 1, 2010. The yield based on the new payout is 2.50%.

Maxim Integrated (MXIM) designs, develops and manufactures linear and mixed-signal integrated circuits used mainly in signal processing applications. July 29th the company raised its quarterly dividend to $0.21/share. The yield based on the new payout is 4.67%.

Health Care REIT (HCN) invests in health care facilities, including senior housing, specialty care, and medical office buildings. July 29th the REIT increased its quarterly dividend 1.5% to $0.69/share. The dividend is payable August 20, 2010, to stockholders of record on August 9, 2010. The ex-dividend date is August 4, 2010. The yield based on the new payout is 6.10%.

DTE Energy (DTE) is involved in the development and management of energy-related businesses and services nationwide. July 29th the company raised its quarterly dividend to $0.56/share. The yield based on the new payout is 4.65%.

Selecting stocks with increasing dividends is critical for an income growth strategy. The above list contains stocks that recently raised their dividends; it is not a list of recommend buys. As always, due diligence should be performed before buying or selling any stock. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

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

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When many investors think of dividend growth stocks, large-caps like Johnson & Johnson (JNJ) [Analysis], The Procter & Gamble Company (PG) [Analysis], The Coca-Cola Company (KO) [Analysis] and 3M Co. (MMM) [Analysis] come to mind first.  Often small/mid-cap stocks are associated with growth stocks, and since the underlying companies are looking to grow there is little or no cash available for dividends. Not all small/mid-cap stocks fall under the growth category, many are considered value stocks and quite a few of these consistently increase their dividends.

For a stock to be included on my Stock Ideas list it must have increased its dividend for at least 10 consecutive years (10 years for Achievers, 25 years for Aristocrats and Champions).  Below is a representative sample of several small/mid-cap dividend stocks included on the list, along with the number of years of consecutive dividend increases:

Genuine Parts Co. (GPC) Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. This company has increased its dividend for 53 consecutive years and is currently yielding 4.43%. [Analysis]

The Clorox Company (CLX) is a manufacturer and marketer of consumer products. The Company markets brand names, including Clorox bleach, Armor All, STP, Fresh Step/Scoop Away, Kingsford, Hidden Valley, KC Masterpiece, Brita , Glad, etc. This company has increased its dividend for 32 consecutive years and is currently yielding 3.20%.

Integrys Energy Group, Inc. (TEG) operates as a regulated electric and natural gas utility company in the United States and Canada. It purchases, generates, and distributes electric power; and purchases and distributes natural gas. This company has increased its dividend for 51 consecutive years and is currently yielding 7.13%.

Courier Corporation (CRRC) publishes, prints and sells books. Founded in 1824, Courier has two lines of business: full-service book manufacturing and specialty publishing. This company has increased its dividend for 16 consecutive years and is currently yielding 6.34%.

Community Trust Bank Corp. (CTBI) owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company. This company has increased its dividend for 29 consecutive years and is currently yielding 5.22%. [Analysis]

HCC Insurance Holdings Inc. (HCC) is a multi-line insurer that specializes in aviation, marine, medical stop-loss, offshore energy and property and casualty insurance in the U.S. and the U.K. This company has increased its dividend for 13 consecutive years and is currently yielding 1.99%.

Cincinnati Financial Corp. (CINF) markets primarily property and casualty coverage; it also conducts life insurance and asset management operations. This company has increased its dividend for 49 consecutive years and is currently yielding 6.23%

Leggett & Platt Inc. (LEG) makes a broad line of bedding and furniture components and other home, office and commercial furnishings, as well as diversified products for non-furnishings markets. This company has increased its dividend for 37 consecutive years and is currently yielding 5.21%. [Analysis]

RLI Corp. (RLI) provides selected property, casualty and surety insurance. This company has increased its dividend for 35 consecutive years and is currently yielding 2.12%. [Analysis]

The above is not a buy list, but does demonstrate the availability of small/mid-cap dividend growth stocks to potentially help meet this portion of your asset allocation. Sometimes smaller companies are still run my the original founders’ or their families and there is a pride in these companies that is not always found in those run by “professional managers”.

Full Disclosure: Long JNJ, PG, KO, MMM, GPC, CLX, TEG. See a list of all my income holdings here.

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Linked here is a detailed quantitative analysis of Community Trust Bank Corp. (CTBI). Below are some highlights from the above linked analysis:

Company Description: Community Trust Bank Corp. owns and operates Community Trust Bank, Inc. of Pikeville, KY, which provides commercial banking services in Kentucky and West Virginia; and a trust company.
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

CTBI is trading at a discount to 1.), 3.) and 4.) above. The stock is trading at a 6.2% discount to its calculated fair value of $24.99. CTBI 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%

CTBI earned three Stars in this section for 1.), 2.) 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, and another Star was earned as a result of its most recent Debt to Total Capital being less than 45%. The stock 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 1950 and has increased its dividend payments for 29 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

CTBI earned a Star in this section for its NPV MMA Diff. of the $830. This amount is in excess of the $600 target I look for in a stock that has increased dividends as long as CTBI has. The stock’s current yield of 5.12% exceeds the 3.9% estimated 20-year average MMA rate.

Other: CTBI is a member of the Broad Dividend Achievers™ Index.

Conclusion: CTBI earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CTBI as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $25.85 before CTBI’s NPV MMA Differential decreased to the $600 that I like to see for a stock with 29 years of consecutive dividend increases. At that price the stock would yield 4.64%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $600 NPV MMA Differential, the calculated rate is 1.5%. This dividend growth rate is less than the 2.6% used in this analysis, thus providing a margin of safety. CTBI has a risk rating of 1.25 which classifies it as a low risk stock.

CTBI is an interesting stock.  Its debt position and cash flow are excellent. Though revenue and earnings were down in 2008, free cash flow was up. On a trailing twelve month basis most metrics have improved since 2008.  Although the stock is trading below my buy price of $24.99, I will wait for CTBI’s next dividend increase (scheduled for December) before deciding to buy or not. 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 CTBI (0.0% of my Income Portfolio). What are your thoughts on CTBI?

I haven’t found the perfect dividend stock yet. However, here are several stocks that recently raised their raised their cash dividends:

• Community Trust Bancorp (CTBI) Boosts Qtr. Dividend by 3.45% to $0.30/Share (4.11%)
  
• Baxter International (BAX) Raises Qt Dividend 20% to $0.26/Share (1.76%)
• Automatic Data Processing (ADP) Increases Qtr. Dividend 13% to $0.33/Share (3.88%)
• Massey Energy (MEE) Boosts Qtr. Dividend 20% to $0.06/Share (1.43%)
• Bob Evans Farms (BOBE) Raises Qtr. Dividend by 14.3% to $0.16/Share (3.83%)
• Equity LifeStyle Properties (ELS) Increases Qtr. Dividend by 25% to $0.25/Share (2.29%)
  
• CNB Financial (CCNE) Boosts Qtr. Dividend by 3% to $0.165/Share (5.28%)
• BorgWarner (BWA) Raises Qtr. Dividend 9% to $0.12/Share (2.80%)
• New Jersey Resources (NJR) Increases Qtr. Dividend by 10.7% to $0.31/Share (3.15%)
• Adams Resources & Energy (AE) Boosts Annual Dividend by 6% to $0.50/Share (2.82%)

After running these companies through my D4L-PreScreen.xls model, none of the above stocks qualified as the perfect dividend stock or even justified a more complete evaluation. CTBI, ADP and BWA had positive NPV of MMA Differentials, but below the level that would warrant a more detailed evaluation. I guess I will have to keep looking for the elusive perfect dividend stock.

Disclosure: No position in any of the aforementioned stocks.

(Photo: Steve Woods)

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