Reports of the Best Dividend Stocks

This category contains listings of the most recently published stock analysis reports.

For the full list, see the alphabetical listing of stock reports.

Aflac – Steady As She Goes

 

Summary:

  • Aflac revenues have suffered from the strong US currency over the past 3 years. Now that the biggest part of the USD impact is behind us, AFL might post some interesting numbers.
  • Aflac benefits from a strong core business in Japan, but sales growth won’t be astonishing in the upcoming years due to low interest yield in that country.
  • Aflac shows all the characteristics of a strong core dividend growth portfolio holding. However, it looks overvalued.

DSR Quick Stats

  • Sector: Financial (Financial Services)
  • 5 Year Revenue Growth: 0.13%
  • 5 Year EPS Growth: 3.51%
  • 5 Year Dividend Growth: 6.75%
  • Current Dividend Yield: 2.67%

What Makes Aflac (AFL) a Good Business?

AFLAC Incorporated (NYSE: AFL) is a large international supplemental insurer. They provide cash that can cover several types of expenses to those receiving payouts due to illness or death. This is supplementary to primary medical insurance which helps cover medical expenses but leaves other expenses without a solution. This Fortune 500 company was founded in 1955, and has a large presence in Japan and the US. AFLAC stands for the American Family Life Assurance Company.

The company made a big move in Japan in the 1970s by selling insurance against the risk of cancer when people were becoming particularly mindful of cancer. Decades later, approximately three-quarters of Aflac’s diverse premiums now come from Japan.

Aflac primarily targets places of employment for its insurance products, rather than individuals outside of work. The company offers plans to employers that allow them to provide Aflac insurance as part of their benefits package to employees without paying any cost themselves.

The premise behind an insurance company is that they spread risk out over a wide number of people and businesses. They collect premiums (payments) from clients and in return those clients are covered in case of serious loss. From an insurance business standpoint, it’s ideal to collect more in premiums than you pay out for losses. This is not the primary form of earnings, though. An insurance business, after collecting all of the premiums, hold a great deal of assets that, over time, are paid out for client losses. An insurance company constantly receives premiums and pays out for losses, so as long as they are prudent with their business, they get to constantly keep this large sum of stored-up assets. As any investor reading this knows, a great sum of money can be used to generate income from investments, and that’s how an insurance company really makes money. Aflac invests its collected of assets primarily in fixed income securities to receive upwards of $3.4 billion in annual investment income.

Ratios

Price to Earnings: 10.21
Price to Free Cash Flow: 3.7
Price to Book: 1.418
Return on Equity: 14.24%

Revenue

afl1

Revenue Graph from Ycharts

It is no surprise that revenues are down since 2013. The company makes 75% of its revenue in Japan. The USD/YEN has just been terrible for Aflac:

afl2

Source: ycharts

We can expect a lower currency impact moving forward.

How AFL fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

afl3

Source: Ycharts

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many income seeking investors’ rule: I try to avoid most companies with a dividend yield over 5%. Very few investments like this will be made in my case (you can read my case against high dividend yield here). The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly comes with dividend growth and this is what I am seeking most.

afl4

Source: data from Ycharts.

Aflac has kept a dividend yield between 2.50% and 3.50% since the financial crisis. At the same time, the dividend payment has never stopped increasing. This is a very good sign to see a company showing a relatively stable yield with a strong trend of payment increases. There are no signs the dividend payment is at risk for now.

AFL meets my 1st investing principle.

Principle#2: Focus on Dividend Growth

My second investing principle relates to dividend growth as being the most important metric of all. It proves management’s trust in the company’s future and is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything else but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?

Aflac is part of the selective group of dividend aristocrats. These companies have successfully increased their dividend for at least 25 consecutive years. AFL is now showing 33 years of consecutive dividend increases. Over the past 5 years, the company has increased its payout by 6.75% CAGR making its dividend payment double every 10 years on average.

AFL meets my 2nd investing principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what happened with a company. As investors, we are more concerned about the future than the past. this is why it is important to find companies that will be able to sustain their dividend growth.

afl5

Source: data from Ycharts.

With a loyal client base, this company is an impressive cash flow machine. You can see how the company is keeping a very low payout ratio, but an even lower cash payout ratio. The dividend payment is set for continuous growth for many years. It’s not by chance that AFL became a dividend aristocrat. The management team is very cautious with its cash flow and makes sure the dividend growth will continue.

AFL meets my 3rd investing principle.

Principle #4: The Business Model Ensure Future Growth

Aflac has a notable business model. Rather than targeting individuals, Aflac insurance agents target businesses. Aflac works with employers to give employees the option to purchase Aflac Insurance via payroll deductions, similar to their other benefits. This “cluster-selling” technique keeps costs comparatively low, and gives the company a major competitive price advantage. It creates a win-win situation with employers it does business with.

By focusing on supplemental insurance for illnesses such as cancer, the company has hit an ever growing niche for now. The company enjoys strong cash flow coming from Japan as it enjoys a great brand recognition. This should help the company to increase its presence in the USA in the upcoming years. Growing in the States will ultimately hurt its margin, but the company need to find another growth driver.

In my opinion, Aflac doesn’t own the strongest business model. Other competitors could hit AFL on the cancer insurance playground to slow the company down. Because of its expertise in its niche, AFL currently meets my 4th investing principle but it needs to be on the watch list.

Principle #5: Buy When You Have Money in Hand – At The Right Valuation

I think the perfect time to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you have some savings put aside. There is valuation work to be done. In order to achieve this task, I will start by looking at how the stock market valued the stock over the past 10 years by looking at its PE ratio:

afl6

Source: data from Ycharts.

As you can see, there used to be a hype around AFL a few years ago in terms of stock valuation. The market used to pay a higher multiplier (up to 19 at its peak) over the past 10 years. After 2012, this is another story as the USD currency gained strength and hurt AFL revenues over the past 3 years. The stock price looks cheap overall if we compared to its multiple prior to 2008. However, this doesn’t tell me much about its current and future value. This is why I’m also using a double stage dividend discount model:

 

 

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $1.64
Enter Expected Dividend Growth Rate Years 1-10: 6.75%
Enter Expected Terminal Dividend Growth Rate: 5.00%
Enter Discount Rate: 9.00%

 

Since the company evolves in a very stable environment, I use a 9% discount rate. I’ve selected a 6.75% growth rate for the next 10 years which is a similar rate to what the company showed in the past 5 years. However, I reduced it to 5% afterward to keep a conservative valuation.

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
  Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $79.78 $59.51 $47.37
10% Premium $73.13 $54.55 $43.42
Intrinsic Value $66.48 $49.59 $39.47
10% Discount $59.84 $44.63 $35.53
20% Discount $53.19 $39.68 $31.58

 

Source: Dividend Monk Toolkit Excel Calculation Spreadsheet

Unfortunately, the company stock appears to be overvalued by 20% at the moment. I would need to increase my dividend growth rate after 10 years from 5 to 6% in order to have a fair value. If the company shows a stronger dividend growth potential, then it seems to be at best fairly valued.

AFL doesn’t meet my 5th investing principle.

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found one of the biggest investor struggles is to know when to buy and when to sell their holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by the fact that the company confirms or not my investment thesis. Once the reasons (my investment thesis) why I purchased shares of a company  are not valid anymore, I sell and never look back.

Investment thesis

Aflac works in a very interesting niche. A while ago, AFL specialized in supplemental policies for specific diseases and illnesses. Since it was a side product for many insurers, Aflac was able to developed an expertise and grow this business under the radar of many. Today, the company benefits from cheaper pricing and strong underwriting margins since they know their markets and are able to assess their risk better than any other companies in this specific niche.

Second, Aflac’s main core business comes from Japan. This country generates 75% of its revenue. What is interesting is that 95% of Japanese keep their policy and the average “client’s life” with Aflac products is 20 years. This means a lots of premiums paid each month! More recently, Aflac was able to enter into banks and post offices to sell their products, two places where the Japanese are used to purchasing such products. This should help support their sales in the upcoming years.

Risks

The deregulation in Japan that enabled AFL to enter banks and post offices doesn’t only bring sweet candies. There is a sour taste to it. In fact, this deregulation also enabled other insurance companies to compete directly with Aflac on its own ground. While the company has built a strong expertise in its niche, it won’t be long before other businesses will do the same.

While the company is pretty strong in Japan, it is another story in the US. It is harder for AFL to keeps its client (75% of Americans tend to switch policies at one point in time). This leads to inevitable margin reduction.

Aflac has a sound business model and meets my 6th investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements. The second part is called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

Having both segments helps me to categorize my investments into a “conservative” or “core” section or into a “growth” section. I then know exactly what to expect from it; a steady dividend payment or greater fluctuations with an improved growth potential.

Aflac is a dividend aristocrat evolving in a relatively conventional market.  I believe the company will be able to grow its revenues and earnings but will definitely not explode at one point in time. This why I believe AFL should be part of a core portfolio.

Final Thoughts on AFL – Buy, Hold or Sell?

Overall, I think a purchase of AFL is a purchase of a solid and increasing dividend. However, do not expect anything else from AFL for the upcoming years. In comparison, the stock price rose 10% over the past 5 years while the S&P 500 rose 52%.

Then again, AFL is a very strong core portfolio holding showing clockwork dividend increase potential. I think that at this point, AFL is a hold.

Disclaimer: I hold AFL in my DividendStocksRock portfolios.

Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

Procter & Gamble – Don’t Get Fooled by the High PE Ratio; This Company Has Potential

 

Summary:

PG’s brand cutting plan will start to pay off in 2016 with stronger earnings.

The brand portfolio and distribution network improvements show better than expected results so far.

The recent stock price drop brings the yield to 3.50% and makes the company very interesting to buy.

DSR Quick Stats

Sector: Consumer Defensive

5 Year Revenue Growth: -0.68%

5 Year EPS Growth: -2.82%

5 Year Dividend Growth: 7.56%

Current Dividend Yield: 3.51%

What Makes Procter & Gamble (PG) a Good Business?

Procter & Gamble (NYSE:PG) is one of the largest and best-known companies in the world. It operates in over 180 countries, and the company has divided its widely-diversified operations into 5 divisions:

PG1

 

(Source: PG Investor Relations)

pg2

The company had made the decision to cut its brand portfolio and “reshuffle” its product categories for a better focus. They now have 10 products categories (baby, feminine, family, fabric, home, hair, skin & personal care, grooming,  oral and personal health care) that include 65 brands.

Since the global economy is slowing down and the USD is strengthening every day, the company has focused heavily on improving its productivity over the past three years. This focus will result in $7 billion saved between 2012 and 2016 (expected) (source: PG investor presentation). They have made important efforts to simplify their distribution channels as they show in their presentation:

pg3

Ratios

Price to Earnings: 29.16
Price to Free Cash Flow: 18.45
Price to Book: 3.332
Return on Equity: 12.25%

Revenue

pg4

Revenue Graph from Ycharts

Changing major brand management is being done without hurting results. The company shows lower revenue volumes over the past three years for two good reasons: #1) PG is exiting underperforming brands. While this has a positive effect on profitability, the gross sales numbers are down. #2) the company makes 41% of their sales in North America, the rest of their sales are in foreign currencies. The currency impact on the September 30th closing quarter was -9% and ***** on December 31st closing quarter.

How PG fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

pg5

Source: Ycharts

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many income seeking investor rule: I try to avoid most companies with a dividend yield over 5%. Very few investments will be made in my case (you can read my case against high dividend yield here). The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly ever comes with dividend growth and this is why I am seeking most.

pg6

Source: data from Ycharts.

Procter & Gamble’s dividend yield has always been under the 5% bar where I define the line to consider a “high dividend yield stock”. In fact, the company has been paying a healthy 3%-3.5% yield since 2009. When you combine the dividend growth year after year, you notice the company is able to maintain the same yield. This shows that the stock price is also increasing. PG meets my first principle.

Principle#2: Focus on Dividend Growth

My second investing principle relates to dividend growth as being the most important metric of all. It doesn’t only prove management’s trust in the company’s future but it is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything else but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?
pg7

source Ycharts

When you think of a dividend growth stock, PG should be at the top of your list. The company has been paying a dividend for the past 125 years and successfully increased its payment for 59 consecutive years. The company has been increasing its dividend with a CAGR of 7.5% of the past 5 years leading to a dividend payment doubling every 10 years or so.

It is very rare to see such a “perfect dividend stairway”. The dividend is being increased like clockwork for decades now. PG definitely meets my second principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what happened with a company. As investors, we are more concerned about the future than the past. this is why it is important to find companies that will be able to sustain their dividend growth.

pg8

Source: data from Ycharts.

As previously mentioned, the company has gone through major restructuring in both its distribution channels and product offerings. This had affected its earnings (hence the payout ratio) but not its cash flow by much. This is the reason why I find interesting to cross reference both data. The cash dividend payout ratio is  more than reasonable at 66%.

PG started to see its productivity efforts paying off in 2015 and it should continue into 2016. The company expects its EPS rising back to original post productivity plan levels in 2016 as the batteries & transitioning beauty businesses is being accounted for as discontinued operations.  Therefore, we should see the payout ratio going back to a more acceptable level. PG’s dividend growth is not at risk and it will continue to pursue its path to a 60th consecutive increase. PG meets my third principle.

Principle #4: The Business Model Ensure Future Growth

PG sells consumable products all over the world. Its brand portfolio is more diversified than most mutual funds. With 65 brands and sales in 180 countries, PG owns and masters its economic moat. The short term future comes with its load of uncertainties and challenges.

About 38% of PG’s revenues are coming from developed markets. The global economic slowdown will definitely affect this important revenue segment (in addition to the currency impact). Growth perspectives for 2016 are very limited, but the business is currently working on its profitability during this tough period. The mid term perspectives seem promising as the company will be in a very good position to tap any economic rebound with an enhanced distribution network and a better managed brand portfolio.

What Procter & Gamble does with its cash?

pg9

The company’s main focus is to remain a shareholder friendly company. PG intends to buyback shares with 8 to 9 billion dollars and to distribute 7 billion in dividends for 2016. Overall, they expect to return between 15 – 16 billion to shareholders in the upcoming year.

Their focus on cash flow and productivity make such numbers possible. This also shows management’s great confidence in the company’s cash flow generating ability. PG has a solid business model that is designed to generate cash flow month after month ensuring a great stability for dividend payments. PG meets my fourth principle.

Principle #5: Buy When You Have Money in Hand – At The Right Valuation

I think the perfect time to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you have some savings put aside. There is valuation work to be done. In order to achieve this task, I will start by looking at how the stock market has valued the stock over the past 10 years by looking at its PE ratio:

pg10

Source: data from Ycharts.

I can appreciate the fact that the EPS dropped drastically over the past 2 years considering the business reductions. However, a PE ratio over 22 always seem a high price to pay, even for a top notch dividend grower. It seems here that the company is on the radar of too many income seeking investors and this is why its valuation is going up. I will need to dig deeper to see if the company shows some value at this price…

Using a second method, I will use a double stage dividend discount model. I will use a 9% discount rate as the company shows a very stable and strong business model. As far as dividend growth goes, I will use a 5% for the first 10 years and then 6% afterwards. The reason why I don’t use the past 5 years CAGR of 7.5% is that I believe harsher economic conditions will lead management to be more cautious about their dividend policy. Over time, the modifications they have made will improve the earnings and I think the company can maintain a 6% dividend growth in the future.

 

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $153.90 $102.96 $77.47
10% Premium $141.08 $94.38 $71.01
Intrinsic Value $128.25 $85.80 $64.56
10% Discount $115.43 $77.22 $58.10
20% Discount $102.60 $68.64 $51.65

 

Source: Dividend Monk Toolkit Excel Calculation Spreadsheet

As you can see, the company is currently undervalued by about $10. This is quite interesting even though the PE ratio seems pricy, if you consider the company for what is it; a dividend cash generator, there is still room for the stock to grow. At a 3.5% yield, the company almost looks like a bargain! PG meets my fifth principle.

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found one of the biggest investor’s struggles is to know when to buy and when to sell his holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by the fact that the company confirms, or not, my investment thesis. Once the reasons (my investment thesis) why I purchase shares of a company  are not valid anymore, I sell and never look back.

Investment thesis

I think that PG should be at the center of any core dividend growth portfolio. This company shows a perfect combination of diversification and dividend growth potential. This is not an exciting stock, but it is a company that will generate ever increasing distributions in your portfolio.

Out of its 65 brands, 23 generate over $1 billion in sales per year and 14 generate between $500 million and $1 billion in sales. Owning shares of PG is definitely like owning 65 companies at the same time. This is a perfect match for any smaller portfolio you wish to start without taking on too much volatility.

The current stock drop of 16% over the past 12 months and the yield at 3.50% makes it very appealing. The PE ratio is a small concern as this number will greatly drop once 2016 numbers will show the “new lean and improved” business.

Risks

Thinking that PG is a perfect company is being naive. There are still some concerns around the company’s business. For the long haul, it will be a great challenge to show sales growth over 3%. There is a limit to the shampoo, razors and diapers one household can buy throughout the year. Therefore, once all markets are well penetrated, there is little room for more growth.

The other factor to consider is local competition. In many developing markets, we see the arrival of local competitors that makes PG’s life harder to sell and margins smaller at the same time. This is far from being a threat to the business model, but it may be harder to repeat the past 10-15 years of growing revenues while all consumer companies were developing emerging markets.

PG definitely shows a strong investment thesis and meet my sixth investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements. The second part is called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

Having both segment helps me to categorize my investments into a “conservative” or “core” section or into the “growth” section. I then know exactly what to expect from it; a steady dividend payment or greater fluctuations with a higher growth potential.

Procter & Gamble is definitely not part of any growth segment (besides the “dividend one”!). I don’t see how the company could crank up its revenues and earnings by double digits for several years in a row. but this doesn’t make it a bad investment. In fact, PG is a perfect candidate for a core dividend growth portfolio. You will earn steady and increasing dividend payments while the company as a whole will remain relatively stable. Short term price slump creates buying opportunities and I believe we are currently in one.

Final Thoughts on PG – Buy, Hold or Sell?

Overall, PG will always remain on the best dividend growth stock list of many investors and there are many reasons why. First, their stellar dividend payment history make a point of buying this company by itself. The impressive brand portfolio and its wide diversification (products and geography wise) makes it a very stable company through time. Most of their products have and will always be bought by households and the company has the ability and the will to follow and initiate any innovations. PG is a buy.

Disclaimer: I hold PG in my DividendStocksRock portfolios.

Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

 

Baxter Vs Baxalta – Where is the Dividend?

Last year, Baxter International (BAX) announced it will spin-off its pharmaceutical division into Baxalta (BXLT) in order to unlock value to shareholders. While BAX used to pay a healthy dividend, it seems the distribution got lost during the spin-off as both companies are not offering interesting dividend perspectives at the moment… Let’s take a deeper look at both companies:

Baxter overview:

After the spinoff, Baxter will focus on its two segments: hospital products and renal products. The hospital products business manufactures equipment used in the delivery of fluids and drugs to patients across the continuum of care. Baxter’s Renal portfolio addresses the needs of patients with kidney failure & disease, and their healthcare providers, with a comprehensive range of therapeutic options across home, in-center, and hospital settings for better individualized care.

baxter at a glance

The company generated $10.7 billion in 2014 for net earnings of $760M. The company therefore shows high sales volume combined with low margins. The company expect to grow its revenue by 4% CAGR over the next 5 years. BAX shows a strong brand portfolio where most of its products are #1 and #2 in terms of market share.

When the spin-off occurred. BAX kept 19% of Baxalta shares. The idea is to sell this position over time to refund BAX’s underfunded pension plan and increase liquidity. Baxter’s payout ratio guidelines are now around 35% and management hasn’t mentioned anything about dividend growth yet. BAX current dividend yield stands at 1.22%. Not much of interest for a dividend growth investor. At this point in time, we are left with a vague promise from management to increase the dividend in step with earnings growth while keeping a payout ratio around 35%. I like companies with low payout ratios, but the dividend growth potential must be there. It is not that obvious with BAX right now.

Baxalta overview:

Baxalta is the biopharma division of Baxter. They focus their R&D toward three businesses; hematology, immunology and oncology:

baxalta overview

BXLT seems more profitable than Baxter with $6B in revenue but $1.18 billion in net earnings. The company shows some great potential with roughly 20 products to be launched by 2020. They currently use their strong free cash flow to build their third segment; oncology. They expect to post growing revenue of 8% CAGR over the next 5 years.

Overall, it seems the company will focus on R&D and creating its new oncology business. Then again, these are great perspectives for investors, but no mention on the dividend policy was issued clearly.

Looking Forward

Baxter is expected to earn $1.29/share in 2015, and to grow earnings to $1.91/share by 2018. This means that the stock is selling for 31 times estimated earnings and yields 1.15%.

Baxalta on the other hand is expected to earn $1.94/share in 2015, and to grow earnings to $2.35/share by 2018. This means that the stock is selling for 20.50 times expected earnings and yields 0.70%.

Both companies show relatively high valuations at first glance. My favorite stock valuation tool is the dividend discount model and it can’t be used at the moment. There isn’t enough information about the future use of cash flow to determine both companies’ value. I find their growth perspectives interesting, but it seems both companies don’t fall within a dividend growth portfolio.

Personally, I will leave both companies aside and focus on companies being more generous with their shareholders!