Dividends Value » LOW

Lowe’s Companies, Inc. (LOW) Dividend Stock Analysis *

D4L — Mon, 14 Feb 2011 07:30:40 +0000

This article originally appeared on The DIV-Net February 7, 2011.

Linked here is a detailed quantitative analysis of Lowe’s Companies, Inc. (LOW). Below are some highlights from the above linked analysis:

Company Description: Lowe’s Companies, Inc. sells retail building materials and supplies, lumber, hardware and appliances through more than 1,700 stores in the U.S. and Canada.

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

LOW is trading at a discount to only 1.) above. The stock is trading at a 7.4% discount to its calculated fair value of $26.68. LOW 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%

LOW earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. LOW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 48 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

LOW earned a Star in this section for its NPV MMA Diff. of the $1,474. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 15.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: The Home Depot, Inc. (HD) with a 2.6% yield, KingFisher plc (KGFHY.PK) with a 2.7% yield and Rona Inc. (RON.TO) with a 1.0% yield.

Conclusion: LOW 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 LOW as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $34.63 before LOW’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 1.21%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 12.0%. This dividend growth rate is below the 15.0% used in this analysis, thus providing a margin of safety. LOW has a risk rating of 1.00 which classifies it as a low risk stock.

As the second-largest home-improvement retailer in the world, LOW enjoys tremendous enables purchasing power enabling it to provide low prices to its customers. The company is a well-managed company with a highly automated distribution network. The housing slump has hurt LOW, and will likely to do so in the near-term. However, its strong balance sheet, including a relatively low debt level, and impressive free cash flows should provide ample cushion to see LOW through the downturn. Even though LOW is trading below my $26.68 fair value price, I hesitate to initiate a position due to its low yield. 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 LOW (0.0% of my Income Portfolio). See a list of all my income holdings here.

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- Nucor Corporation (NUE) Dividend Stock Analysis
- More Stock Analysis

Who Owns The Top Dividend Stocks? *

D4L — Wed, 12 Jan 2011 07:30:51 +0000

The internet provides investors with so much useful and interesting information. I could not imagine going back a decade or so and trying to analyze stocks without the internet – waiting for quarterly reports to be mailed for owned companies and calling the investor relations contacts for information on unowned companies. One of my job responsibilities is the statutory reporting for the corporation I work for. Filing 10-Ks, 10-Qs and other such required reports is often tedious, but it gives me a great appreciation of what information is available, including who owns some of the top dividend stocks…

In the U.S., the Securities and Exchange Commission (SEC) requires institutional investment managers who exercise investment discretion over $100 million or more in Section 13(f) securities to report their holdings on Form 13F with the SEC. Because of this required filing we can analyze the holdings of Berkshire Hathaway (Warren Buffett’s holding company) or any other large institution. However, once the Form 13Fs are aggregated, we can see who the large shareholders are for any public company, including these high profile dividend growth companies:

Johnson & Johnson (JNJ) | Yield: 3.5%
- 62.44% Institutional Ownership (%)
- 20.20% Top 10 Institutions (%)
- 00.79% 5%/Insider Ownership (%)
- 4.9% State Street Global Advisors (US)
- 3.8% Vanguard Group, Inc.
- 3.3% BlackRock Institutional Trust Company, N.A.
- 1.6% Berkshire Hathaway Inc.
- 1.4% State Farm Insurance Companies

The Coca-Cola Company (KO) | Yield: 2.8%
- 62.87% Institutional Ownership (%)
- 29.60 Top 10 Institutions (%)
- 04.68% 5%/Insider Ownership (%)
- 8.6% Berkshire Hathaway Inc.
- 3.7% Vanguard Group, Inc.
- 3.6% State Street Global Advisors (US)
- 3.2% Fidelity Management & Research
- 3.1% BlackRock Institutional Trust Company, N.A.

Procter & Gamble Co. (PG) | Yield: 3.0%
- 57.01% Institutional Ownership (%)
- 20.00% Top 10 Institutions (%)
- 00.34% 5%/Insider Ownership (%)
- 3.9% State Street Global Advisors (US)
- 3.8% Vanguard Group, Inc.
- 3.5% BlackRock Institutional Trust Company, N.A.
- 2.7% Berkshire Hathaway Inc.
- 1.5% Fidelity Management & Research

For the above I used MSN MoneyCentral, but many other services provide the same information. Obviously, large index mutual funds, such as the Vanguard Group, Inc. and Fidelity, will hold significant positions in S&P 500 companies, and those in other indexes. Insurance companies, such as Berkshire Hathaway Inc. and State Farm, will always have large sums invested in equities. The above three popular dividend growth stocks are all held by Berkshire Hathaway Inc. (BRK.A). As you can see from BRK.A’s latest 13F on the SEC’s website, they are also holding these other dividend growth stocks:

Buffett is a renowned value investor. As such, BRK.A’s 13F is one of the most viewed each quarter when it is filed. Investors want to know what the Oracle has bought and sold. Many websites use this information to set up a Buffett Tracking Portfolio, along with other respected investors. There is a great deal of information freely available to investors. Sometimes we just need to detour from our familiar paths to discover it.

Full Disclosure: Long JNJ, KO, PG, WMT. See a list of all my income holdings here.

(Photo Credit)

Four Stocks Raising Dividends and Expectations *

D4L — Fri, 04 Jun 2010 07:30:13 +0000

I am not a stock trader; I am a dividend and value based long-term buy-and-hold investor. When I add a stock to my dividend portfolio, it is my intention to hold the stock forever. I am not smart enough to time the daily gyrations of the stock market. When stock prices start dropping, our primal instinct of flight kicks in and we want to sell. In many cases that is the time to be buying. However, sometimes selling a stock is the right thing to do. In determining when to sell a dividend stock, I have one hard and fast rule: When an individual stock held as a dividend investment lowers its dividend, immediately sell it.

Below are four companies making the case not to be sold by raising their cash dividends:

Lowe’s (LOW) retail outlet for building materials and supplies, lumber, hardware and appliances through more than 1,700 stores in the U.S. and Canada. May 28th the company increased its quarterly dividend 22% to $0.11/share. The dividend is payable on August 4 to shareholders of record on July 21. The ex-dividend date is July 19. LOW is a Dividend Aristocrat and has raised its dividend for 48 consecutive years. The yield based on the new payout is 1.80%.

Greif (GEF) produces industrial packaging products with manufacturing facilities located in over 45 countries; produces containerboard and corrugated products; and sells timber. June 1st the company raised its quarterly dividend to $0.42/share. The dividend is payable on July 1 to shareholders of record on June 18. The ex-dividend date is June 16. The yield based on the new payout is 3.03%.

DuPont Fabros Tech (DFT) develops, operates and manages wholesale data centers used by technology concerns to power the computer servers that support their critical business processes. June 3rd the company increased its quarterly dividend 50% to $0.12/share. The dividend is payable on July 9, 2010 to shareholders of record as of June 29, 2010. The ex-dividend date is June 25, 2010. The yield based on the new payout is 1.91%.

Rockwell Automation (ROK) primarily manufactures automated industrial equipment and power generators (formerly Rockwell International). June 3rd the company raised its quarterly dividend 21% to $0.35/share. The dividend is payable on Sept. 10, 2010 to shareowners of record at the close of business on Aug. 16, 2010. The yield based on the new payout is 2.56%.

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 securities. See a list of all my income holdings here.

(Photo Credit)

The Secret To Finding The Best Dividend Stocks *

D4L — Wed, 12 May 2010 07:30:42 +0000

Is a stock with a 3% yield and a 9% dividend growth rate better than one with a 7% yield and a 1.5% dividend growth rate? Last week we looked at yield-on-cost (YOC) and how it can be used to track the progress of a growing dividend of an individual stock. However, it is not a good metric for comparing multiple dividend stocks with each another. For this I devised a metric I call NPV MMA Differential.

Calculating A Dividend Stock’s NPV MMA Differential

The basis of this calculation is a hypothetical $1,000 investment in a stock and a Money Market Account (MMA) earning earning a 20 year average rate (I use a 20 year Treasury as a proxy). The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. Other assumptions include: 1.) dividends grow at the calculated dividend growth rate, 2.) dividends are reinvested, 3.) share price appreciation is not considered, 4.) interest income is reinvested in the MMA. The dividend growth rate used is calculated as the minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.

Interpreting The NPV MMA Differential

The calculation takes into account the time value of money, thus if it takes too long for the stock’s dividend yield to exceed the MMA rate, then the calculation will return a negative value. This means you are financially better off to put your money in the MMA. If the dividend stock is a better investment then the NPV MMA Diff. calculated will be positive. Like dividend yield, it is desirable to have a higher NPV MMA Diff. But also like a dividend yield, if it is too high, you need to start asking why? The NPV MMA Diff. can be used to compare two or more investments.

Comparing Various Dividend Stocks NPV MMA Differential

Like all calculations, the value of the output is directly tied to the quality of the input (garbage in, garbage out). For the sake of the illustration let us consider the calculated inputs are correct and sustainable.

Which of these would you rather purchase:

- Vector Group Ltd. (VGR) with a 9.99% yield and a 3.61% dividend growth rate
- Chevron Corp. (CVX) with a 3.68% yield and a 5.95% dividend growth rate
- McDonald’s Corporation (MCD) with a 3.23% yield and a 15.00% dividend growth rate

Based on the NPV MMA Diff. they would be ranked like this:

1. McDonald’s Corporation (MCD) | NPV MMA Diff: 8,429
2. Vector Group Ltd. (VGR) | NPV MMA Diff: 6,640
3. Chevron Corp. (CVX) | NPV MMA Diff: 780

As you can see neither yield nor dividend growth is the sole determinant of value. Below are several other companies in ascending order of their NPV MMA Diff:

General Dynamics (GD)
NPV MMA Diff: (339) | Yield: 2.16% | Growth: 2.01%

3M Company (MMM)
NPV MMA Diff: (260) | Yield: 2.47% | Growth: 2.00%

Clorox Company (CLX)
NPV MMA Diff: 171 | Yield: 3.12% | Growth: 4.35%

Consolidated Edison (ED)
NPV MMA Diff: 537 | Yield: 5.37% | Growth: 0.85%

Lowe’s (LOW) | Analysis
NPV MMA Diff: 748 | Yield: 1.38% | Growth: 15.00%

The Coca-Cola Company (KO) | Analysis
NPV MMA Diff: 890 | Yield: 3.34% | Growth: 7.32%

National Retail Properties, Inc. (NNN)
NPV MMA Diff: 972 | Yield: 6.91% | Growth: 0.00%

Johnson & Johnson (JNJ) | Analysis
NPV MMA Diff: 1,245 | Yield: 3.33% | Growth: 8.42%

Raven Industries (RAVN) | Analysis
NPV MMA Diff: 1,855 | Yield: 1.87% | Growth: 15.00%

TC PipeLines, LP (TCLP)
NPV MMA Diff: 2,255 | Yield: 8.01% | Growth: 1.74%

And if you believe all the underlying inputs (which I don’t), the top stock on the list is:

Courier Corporation (CRRC)
NPV MMA Diff: 54,801 | Yield: 5.56% | Growth: 15.00%

As with any projection based on historical information, the analyst must determine the sustainability of the inputs going forward. Put another way, past performance is no indication of future results. I have always heard the luckiest people in the world are those who work the hardest. In the same vein, the secret to finding the best dividend stocks often involves rolling up our sleeves and doing our homework.

Full Disclosure: Long CVX, MCD, MMM, CLX, ED, KO, NNN, JNJ. See a list of all my income holdings here.

(Photo Credit)

20 Dividend Stocks With A 20% Yield In 20 Years *

D4L — Wed, 05 May 2010 05:01:00 +0000

There are income investors and Dividend Growth investors. While the distinction is rather simple, it slips past many casual observers. Income investors are investing for maximum current income, while dividend growth investors are looking to maximize income over an extended period of time — usually sacrificing current income for potential greater future earnings.

Often when I write about a stock that is yielding 2%, 3% or even 4%, I get a question that goes something like, “Why would you buy that stock when there are better options like ‘Amalgamated Risk?’ Its currently yielding 7%, 8%, 9% or more?” With this statement the reader has possibly identified themselves as an income investor, and but definitely established the fact that they are not a dividend growth investor.

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

Recently, I modified my D4L-Data model to include projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

20 Dividend Stocks With A 20% Yield In 20 Years

Sorting the stocks in my D4L-Data model by their 20 Year YOC and throwing out some bad apples, we are left with these 20 stocks that are projected to have a 20% YOC in 20 years:

Lowe’s Companies (LOW) | Analysis
- Current Yield: 1.29%
- Dividend Growth: 15.0%
- 20 Year YOC: 21.12%

McGrath RentCorp (MGRC) | Analysis
- Current Yield: 3.32%
- Dividend Growth: 10.26%
- 20 Year YOC: 23.40%

Fastenal Company (FAST)
- Current Yield: 1.46%
- Dividend Growth: 15.00%
- 20 Year YOC: 23.94%

Colgate-Palmolive (CL) | Analysis
- Current Yield: 2.41%
- Dividend Growth: 12.48%
- 20 Year YOC: 25.34%

C.H. Robinson (CHRW)
- Current Yield: 1.61%
- Dividend Growth: 15.00%
- 20 Year YOC: 26.32%

Canadian National (CNI)
- Current Yield: 1.75%
- Dividend Growth: 15.00%
- 20 Year YOC: 28.69%

Walgreen Company (WAG) | Analysis
– Current Yield: 1.57%
- Dividend Growth: 15.72%
- 20 Year YOC: 29.14%

Raven Industries (RAVN) | Analysis
- Current Yield: 1.81%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.65%

Eaton Vance (EV)
- Current Yield: 1.82%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.72%

HCC Insurance (HCC)
- Current Yield: 1.91%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.30%

Becton, Dickinson (BDX) | Analysis
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

IBM (IBM)
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

United Technologies Corp. (UTX) | Analysis
- Current Yield: 2.05%
- Dividend Growth: 15.00%
- 20 Year YOC: 33.63%

Praxair, Inc. (PX)
- Current Yield: 2.15%
- Dividend Growth: 15.00%
- 20 Year YOC: 35.17%

Owens & Minor (OMI)
- Current Yield: 2.25%
- Dividend Growth: 15.12%
- 20 Year YOC: 37.55%

Linear Technology (LLTC)
- Current Yield: 2.93%
- Dividend Growth: 15.00%
- 20 Year YOC: 47.94%

McDonald’s Corp. (MCD) | Analysis
- Current Yield: 3.12%
- Dividend Growth: 15.00%
- 20 Year YOC: 51.01%

Nucor Corporation (NUE) | Analysis
- Current Yield: 3.18%
- Dividend Growth: 15.00%
- 20 Year YOC: 52.00%

Cardinal Health, Inc. (CAH) | Analysis
- Current Yield: 2.02%
- Dividend Growth: 17.65%
- 20 Year YOC: 52.06%

Meridian Bioscien (VIVO) | Analysis
- Current Yield: 3.40%
- Dividend Growth: 15.00%
- 20 Year YOC: 55.67%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that all the above stocks are yielding well under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 20 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 20 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long CNI, UTX, MCD, NUE. See a list of all my income holdings here.

(Photo Credit)

Four Dividend Stocks Stepping Up In The Downturn *

D4L — Wed, 14 Apr 2010 10:30:39 +0000

I have often heard that a person’s character is determined by how they behave when no one else is looking and during difficult times. In much the same way, we can learn a lot about a company’s management when they face adversity. One metric I look at closely during a downturn is cash generation relative to earnings.

When looking at payout ratios, I prefer using a free cash flow payout instead of the traditional dividend payout based on GAAP earnings, which contains a lot of non-cash “noise.” Some sectors, such as consumer staples and pharmaceuticals, are expected to do well during a downturn. For example, stocks such as Kimberly Clark Corp (KMB) and Abbott Laboratories (ABT) that sell products less dependent on economic conditions were able to grow both earnings and free cash flow between 2007 and 2009. What about industrials and other cyclical stocks whose results are tied to the economy?

One sign of a great management team is the ability to increase free cash flow when earnings are falling. Below are some companies that accomplished this feat over the last couple of years:

Commerce Bancshares (CBSH) | Yield: 2.20%
- Earnings (2007/2009): $2.56/$2.07
- Free Cash Flow (2007/2009): $3.68/$5.74
- Years of Consecutive Dividend Increases: 42

Emerson Electric Co. (EMR) | Analysis | Yield: 2.24%
- Earnings (2007/2009): $2.66/$2.27
- Free Cash Flow (2007/2009): $2.90/$3.37
- Years of Consecutive Dividend Increases: 53

Lowe’s Companies, Inc. (LOW) | Analysis | Yield: 1.40%
- Earnings (2007/2009): $1.99/$1.49
- Free Cash Flow (2007/2009): $0.38/$0.58
- Years of Consecutive Dividend Increases: 47

3M Co. (MMM) | Yield: 2.50%
- Earnings (2007/2009): $5.06/$4.89
- Free Cash Flow (2007/2009): $3.51/$4.33
- Years of Consecutive Dividend Increases: 51

The ability of a company to grow its dividend throughout the economic cycle is highly dependent on the management’s ability to generate cash in a downturn. This doesn’t just happen. Management must be proactive and guide the company down a path that it otherwise would not go. Working capital must be a focus with inventories lowered, receivables aggressively pursued and payables stretched out to their maximum term. Another focus is deferring replacement capital without jeopardizing safety and long-term viability. It is all a delicate balancing act, requiring intimate knowledge of the company.

Often running a business for cash is detrimental to short-term GAAP earnings. For example, when when you produce less inventory than you are selling, you experience lower fixed cost absorption which increases current expenses, but also increases cash flow. Smart analysts understand this and focus on cash, not GAAP earnings.

Full Disclosure: Long ABT, EMR, KMB, MMM. See a list of all my income holdings here.

(Photo: Steve Woods)

Lowe’s Companies, Inc. (LOW) Dividend Stock Analysis *

D4L — Mon, 12 Apr 2010 10:30:32 +0000

This article originally appeared on The DIV-Net April 4, 2010.

Linked here is a detailed quantitative analysis of Lowe’s Companies, Inc. (LOW). Below are some highlights from the above linked analysis:

Company Description: Lowe’s Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.

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

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

LOW is trading at a discount to only 1.) above. The stock is trading at a slight discount to its calculated fair value of $24.84. LOW 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:

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

LOW earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. LOW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 47 consecutive years.

NPV MMA Diff.
Years to > MMA

LOW earned a Star in this section for its NPV MMA Diff. of the $880. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 15.0% per year, it will take 9 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

Other: LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $28.44 before LOW’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.23%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 13.6%. This dividend growth rate is less than the 15.0% used in this analysis, thus providing a margin of safety. LOW has a risk rating of 1.00 which classifies it as a low risk stock.

LOW is a stock that I have watched for some time. It is a well-managed company with a highly automated distribution network. The short-term weakness in the housing market is countered with LOW’s long-term prospects given the U.S.’s aging homes and relatively high home ownership. LOW has an excellent balance sheet with low debt and strong free cash flows – which more than doubled in 2009. Even though LOW is trading below my $24.84 fair value price, I hesitate to initiate a position due to its low yield. For additional information, including the stock’s dividend history, please refer to its data page.

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

3 Styles Of Sucessful Dividend Investing *

D4L — Wed, 09 Dec 2009 10:30:48 +0000

There are certainly many ways to categorize the different styles of investing in dividend stocks, including yield, risk, growth, etc. An investment strategy based on any of these could be successful, if implemented within the framework well-crafted plan. Over the years, I have found that most dividend investing styles fall into one of the three major categories listed below:

High Yield/Low Growth

I would classify dividend stocks with a yield over 5% and dividend growth less than 2% in this group. This is probably the most popular group, particularly among those new to income investing. It is human nature to want it now and lots of it, and high yield stocks appear to deliver that desire. However, there is often a reason the stock’s yield is so high and many times the investor learns the hard way the yield is not always sustainable. Examples of stocks in the high yield/low growth group include:

National Retail Properties, Inc. (NNN) – Yield: 7.12 – Dividend Growth: 1.4%
Integrys Energy Group, Inc. (TEG) – Yield: 6.63 – Dividend Growth: 1.5%
Realty Income Corporation (O) – Yield: 6.61 – Dividend Growth: 2.1%
CenturyTel Inc. (CTL) – Yield: 5.97 – Dividend Growth: 0.0%

Low Yield/High Growth

I would classify dividend stocks with a yield less than 2.5% and dividend growth greater than 7.5% in this group. Low yield and high growth dividend stocks are the other extreme of high yield and low growth stocks. Their long-term risk is associated with growing the yield-on-cost over time. If the dividend growth rate is cut, the investor’s future earnings and yield will also be cut. Stocks in this group would include:

Aflac Incorporated (AFL) – Yield: 2.44 – Dividend Growth: 16.7% [Analysis]
United Technologies Corp. (UTX) – Yield: 2.25 – Dividend Growth: 15.0% [Analysis]
Eaton Vance Corp. (EV) – Yield: 2.05 – Dividend Growth: 15.0%
Colgate-Palmolive Company (CL) – Yield: 2.02 – Dividend Growth: 10.3%
Wal-Mart Stores, Inc. (WMT) – Yield: 2.01 – Dividend Growth: 11.3% [Analysis]
Canadian National Railway Company (CNI) – Yield: 1.63 – Dividend Growth: 15.0%
Lowe’s Companies, Inc. (LOW) – Yield: 1.53 – Dividend Growth: 15.0% [Analysis]

Moderate Yield/Moderate Growth

I would classify dividend stocks with a yield between 2.5% to 5% and a dividend growth rate between 2% to 7.5% in this group. This is a good compromise between the above too extremes. It is an approach focusing on a moderate yield and dividend growth rate. Keeping these two metrics at a reasonable level will help reduce the likelihood of either being cut. Companies in this group are your traditional dividend growth stocks, as seen from the list below:

Chubb Corp. (CB) – Yield: 2.88 – Dividend Growth: 6.1% [Analysis]
The Procter & Gamble Company (PG) – Yield: 2.81 – Dividend Growth: 7.3% [Analysis]
Johnson & Johnson (JNJ) – Yield: 3.00 – Dividend Growth: 7.5% [Analysis]
Automatic Data Processing Inc. (ADP) – Yield: 3.09 – Dividend Growth: 5.5% [Analysis]
Emerson Electric Co. (EMR) – Yield: 3.13 – Dividend Growth: 6.4% [Analysis]
Chevron Corporation (CVX) – Yield: 3.41 – Dividend Growth: 5.1%
SYSCO Corporation (SYY) – Yield: 3.39 – Dividend Growth: 4.3% [Analysis]

In my personal investing strategy, I incorporate measured participation in each of the above groups. My primary focus is on the Moderate Yield/Moderate Growth stocks, believing that over time this group carriers the highest probability of success. The remaining two groups offer the potential for above average returns – as long as they continue to perform at the estimated level, which is often difficult to do over time.

Full Disclosure: Long NNN, TEG, O, CTL, AFL, UTX, WMT, CNI, CB, PG, JNJ, ADP, EMR, CVX, SYY. See a list of all my income holdings here.

(Photo Credit)

Dividend Payout vs. Free Cash Flow Payout *

D4L — Wed, 14 Oct 2009 10:30:29 +0000

I am a firm believer in keeping things simple. However, you can simplify things to the point they no longer have value. In my opinion, a lot of the commonly used financial metrics can be very misleading unless you understand what is behind them. I would put EBIT, EBITDA and Dividend Payout in this category. As an investor in dividend stocks, I see Dividend Payout used a lot, so let’s take a closer look at it.

Dividend payout is expressed as a percentage and is calculated by dividing annual dividend per share by annual earnings per share (EPS). This tells the investor what percentage of earning the company is paying out as a dividend. At first blush this may seem to make a lot of sense, but it suffers from the following potential problems:

I. Earnings Does Not Equal Cash

As an accountant, I can tell you our profession in its pursuit of theoretical perfection has adulterated the financial statements to the point that it has become very difficult for non-accountants to understand what’s behind the numbers. Accounting pronouncements such as SFAS No. 143 “Accounting for Asset Retirement Obligations” (ARO) that requires a company to recognize expenses today for cash payments that may not occur for decades or even centuries widens the gap between earnings and cash. Applying “fair value” principles allowed under GAAP, financial institutions (and others) can mark to market debt on their books and create non-cash income or expense, depending on the direction of interest rates. Many point to mark to market accounting as one of the major contributors to the 2008 financial melt-down.

II. Quality of Earnings

Would you rather a company that you are invested in to increase its earnings by 1.) increasing sales and holding cost down or 2.) sell a fully depreciated plant. Obviously, you would rather have the former since it has the possibility of being duplicated over and over again. You can only sell a specific asset once. In addition to cash and non-cash earnings, a statement of earnings also contains operating and non-operating earnings.

A Better Dividend Payout Calculation

A dividend payout ratio is supposed to provide the investor with an indication of how much cash as a percent of earnings the company is paying its investors. As you can see from the above discussion, a payout ratio based on GAAP net earnings could potentially have a lot of noise in it and not provide a clear picture of the economic condition of the business.

What the investor is really wanting to know is what percentage of cash is the company paying as a percentage of cash generated from running the business. The irony here is that operating cash is readily available on the Statement Of Cash Flows in the Operating section. This section focuses on the cash generated by running the business. It excludes cash generated by selling pieces of the business – these are shown in the investing section. It also excludes cash generated from selling stock or issuing debt – these are shown in the financing section.

In calculating a payout ratio, I prefer Free Cash Flow over Operating Cash Flow. Free Cash Flow is Operating Cash Flow less normal capital expenditures (normally the first line in the investing section). For a business to remain viable, it must replace capital assets when they wear out.

The formula for Free Cash Flow Payout is simply Annual Dividend Per Share divided by Free Cash Flow Per Share. I like to see a percentage of 70% or less. The 70% is somewhat higher than many people look for with a traditional payout ratio. I am comfortable with the higher number since we are talking about real cash generated from running the business vs. accounting earnings that may or may not be there. So how do the two ratios compare?

Needless to say, the variances are all over the place. In many companies I looked at the traditional dividend payout ratio was within 10 percentage points higher than a free cash flow payout. This means the GAAP earnings was lower than the calculated Free Cash Flow. Here are some example of this situation:

Chubb Corp (CB) – Traditional: 28% – FCF Payout: 21% – Analysis
Clorox Company (CLX) – Traditional: 50% – FCF Payout: 50%
Emerson Electric Co. (EMR) – Traditional: 53% – FCF Payout: 45% – Analysis
Family Dollar Stores Inc. (FDO) – Traditional: 25% – FCF Payout: 22%
Hormel Foods Corp. (HRL) – Traditional: 34% – FCF Payout: 33%
International Business Machines (IBM) – Traditional: 23% – FCF Payout: 18%
3M Co. (MMM) – Traditional: 50% – FCF Payout: 45% – Analysis
Microsoft Corp. (MSFT) – Traditional: 32% – FCF Payout: 29%
SYSCO Corporation (SYY) – Traditional: 52% – FCF Payout: 48% – Analysis
United Technologies Corp. (UTX) – Traditional: 35% – FCF Payout: 30% – Analysis

Sometime the gap is much larger. This could have resulted from significant non-cash charges on the income statement. Companies with large gaps include:

Aflac Incorporated (AFL) – Traditional: 44% – FCF Payout: 10% – Analysis
CenturyLink Inc. (CTL) – Traditional: 87% – FCF Payout: 46%
Diebold Inc (DBD) – Traditional: 74% – FCF Payout: 30%
Illinois ToolWorks Inc. (ITW) – Traditional: 76% – FCF Payout: 31% – Analysis
Leggett & Platt Inc. (LEG) – Traditional: 262% – FCF Payout: 34% – Analysis
Nucor Corporation (NUE) – Traditional: 88% – FCF Payout: 29% – Analysis
Pitney Bowes Inc. (PBI) – Traditional: 73% – FCF Payout: 38%
PPG Inds Inc (PPG) – Traditional: 158% – FCF Payout: 48%
RLI Corp (RLI) – Traditional: 158% – FCF Payout: 48% – Analysis
RPM International Inc (RPM) – Traditional: 84% – FCF Payout: 49% – Analysis
AT&T Inc. (T) – Traditional: 81% – FCF Payout: 49%

Sometimes the gap is not only large, but goes the other way. This is potentially the most dangerous since focusing on the traditional dividend payout may lead you to believe the dividend is covered better than it actually is. Examples of this situation would include:

Air Products and Chemicals Inc. (APD) – Traditional: 56% – FCF Payout: 172%
Franklin Resources Inc. (BEN) – Traditional: 23% – FCF Payout: 48%
BP Plc (BP) – Traditional: 50% – FCF Payout: 114% – Analysis
Lowe’s Companies, Inc. (LOW) – Traditional: 27% – FCF Payout: 57% – Analysis
Exxon Mobil Corp (XOM) – Traditional: 27% – FCF Payout: 54%

Although Free Cash Flow Payout is a better payout ratio than the traditional dividend ratio, the investor should look at both and understand the differences. Taking an expense for impairing goodwill is much different than recognizing an expense for losing a lawsuit. The former will not directly involve cash out the door, but the latter will if the company loses on appeal.

Full Disclosure: Long CLX, EMR, MMM, SYY, UTX, AFL, CTL, ITW, NUE, BP. See a list of all my income holdings here.

(Photo Credit)

Lowe’s Companies, Inc. (LOW) Dividend Stock Analysis *

D4L — Mon, 14 Sep 2009 10:30:54 +0000

This article originally appeared on The DIV-Net September 7, 2009.

Linked here is a detailed quantitative analysis of Lowe’s Companies, Inc. (LOW). Below are some highlights from the above linked analysis:

Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
Graham Number

LOW is trading at a discount to only 1.) above. The stock is trading at a 8.4% premium to its calculated fair value of $19.95. LOW did not earn any Stars in this section.

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:

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

LOW earned two Stars in this section for 2.) and 3.) above. LOW earned a Star as a result of its most recent Debt to Total Capital being less than 45%. LOW earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2000-2003, 2001-2004, 2002-2005, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 47 consecutive years.

NPV MMA Diff.
Years to > MMA

LOW earned a Star in this section for its NPV MMA Diff. of the $1,285. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 15.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Other:LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a sharp slowdown in the economy, a large rise in long term interest rates and the inability of LOW to execute its expansion strategy.

Conclusion:LOW did not earn any Stars 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 three Stars. This quantitatively ranks LOW as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $28.86 before LOW’s NPV MMA Differential fell to the $500 that I like to see for a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.21%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 12.4%. This dividend growth rate is lower than the the 15.0% used in this analysis, thus providing a margin of safety. LOW has a risk rating of 1.50 which classifies it as a low risk stock.

LOW has been a consistent performer and continued to raise its dividend during the economic downturn. It has held up much better than its chief rival Home Depot (HD), which hasn’t raised its dividend since November 2006. The stock would have rated a 4-Star Buy except for 3 years of negative cash flow between 2000 and 2002. I have followed LOW for some time, but have been hesitant to initiate a position in a cyclical company with such a low dividend yield. I calculate LOW’s buy price at $19.95. For additional information, including the stock’s dividend history, please refer to its data page.

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

What are your thoughts on LOW?

The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a sharp slowdown in the economy, a large rise in long term interest rates and the inability of LOW to execute its expansion strategy.