Quick Ideas

In the initial screening process for new investments, it helps to review quick information for multiple companies. I provide regular articles to highlight groups of dividend-paying companies under various themes and concepts so that you can help find investments you're interested in, and you can find them below.
 
Dividend Newsletter:
For convenience, you can get monthly dividend stock ideas and market updates via my free dividend growth newsletter. I'll point out individual stocks and sectors that I believe are trading at appealing valuations:

QUALCOMM (QCOM) is a BUY

Qualcomm has been on my radar for a while now. More recently, a legal lawsuit coming from Apple (AAPL) made QCOM stock price drop by over 10% since the beginning of the year. It seems a great entry point for any investors looking to had a techno dividend paying company.

Business model:

Qualcomm Inc develops digital communication technology called CDMA (Code Division Multiple Access), & owns intellectual property applicable to products that implement any version of CDMA including patents, patent applications & trade secrets. The company derived most of its income from the smartphone business selling chips for power and network connectivity.

Main strengths:

QCOM rides naturally on the smartphone wave as 90% of its revenues is derived from this industry as it drives royalty from 3G and 4G utilization. We see another great year for the smartphone industry in 2017, therefore, Qualcomm should continue to benefit from this profitable business niche. QCOM has implemented both buybacks and dividend payment increases at the same time.

Potential risks:

On top of China, other governments are eyeing QCOM business model under the anti-monopoly regulations. This could hurt future royalty earnings and therefore reduce QCOM growth potential. QCOM owns near to a monopoly in CDMA technology patent which is why it can charge such high royalty fee (3-5%). Worst case scenarios include a diminution of royalty fees which would affect QCOM future earnings growth.

Dividend growth perspective:

QCOM business model benefits from very strong royalty generated through patents. Those patents will generate strong cash flow for the next decade to come. This money will definitely results in additional dividend increase in the future. The company has a great window to find other opportunities while it enjoys its royalties. The dividend payment should continue to grow steadily in the upcoming years.

Investment thesis:

As we believe royalties will continue to bring in the dough for a decade, QCOM is sitting on a sustainable business model giving it the possibility to grow even bigger. In 2016, the company has gained strong momentum on the stock market and we believe this uptrend will persist in 2017. Its strong relationships with smartphone makers gives QCOM an edge about what is coming in the newest technology needs. You can bet QCOM will also own patents in the future mobile industry.

Valuation:

Source:Dividend Monk Toolkit Excel Calculation Spreadsheet

I’ve used the double stage dividend discount model to determine QCOM fair value. I believe in the strong potential of the company and the DDM shows there is a clear opportunity at the moment. Once the legal lawsuit with Apple (AAPL) is resolved, QCOM could rise again.

disclaimer: Long AAPL, no position in QCOM yet.

Seaspan Corporation – High Yield, Tough Earnings Growth

 

Summary:

Seaspan is the world’s largest major shipping line company with alternatives to vessel ownership.

Investors benefit from a generous 8%-9% yield, why would you ignore it?

The company’s fleet is increasing in size leading to higher revenues, but earnings are not following.

Regardless a nice business model, the company will have to bring more cash flow to the table to become interesting.

DSR Quick Stats

Sector: Industrial

5 Year Revenue Growth: 15.00%

5 Year EPS Growth: -0.68%

5 Year Dividend Growth: 26.71%

Current Dividend Yield: 8.94%

What Makes Seaspan (SSW) a Good Business?

Seaspan provides many of the world’s major shipping lines with alternatives to vessel ownership by offering long-term leases on large, modern container ships combined with industry leading ship management services.

The company owns over 100 ships with over 3,000 employees working. The company has successfully signed several long term contracts with major clients the size of Costco (COST) for example. Their role is to become the solution for transportation for many retail clients selling merchandising across the world.

Ratios

Price to Earnings: 12.74
Price to Free Cash Flow: N/A
Price to Book: 1.972
Return on Equity: 10.50%

Revenue

ssw1

Revenue Graph from Ycharts

Seaspan revenues keep increasing year after year which is a good thing. Their fleet is expanding at the same rate (more on this later). So far, I like what I’m seeing.

How SSW 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.

ssw2

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 come with dividend growth and this is what I am seeking most.

ssw3

Source: data from Ycharts.

The company’s yield seem attractive to many investors, but you have to dig deeper to see what is happening behind it. As you can see, the company ran into some serious difficulties back in 2009 and cut their dividend significantly. Since then, investors have yet to receive a paycheck as big as it was prior to the dividend cut. This is the first warning signal right there. SSW doesn’t meet 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?

ssw4

Source: Ycharts

I have mixed feelings when I look at this graph. If I had only considered the past 6 years of dividend history, I would been thrilled to continue my analysis. Since 2010, the dividend is increasing like clockwork each year. However, it is after a huge dividend cut in 2009. SSW fails to meet 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.

ssw5

Source: data from Ycharts.

We are already at 2 strikes and are just starting to look into the company’s fundamentals. The payout ratio is set to the maximum and the company is still bleeding cash at the moment with a negative cash flow. I hope you start to understand why the company is paying such a high dividend yield by now. SSW doesn’t meet my 3rd investing principle.

Principle #4: The Business Model Ensure Future Growth

This is where is starts to get interesting. While the first principles are not met, there is still something interesting with this company. The thing is that maritime transportation is not going to slowdown in the future. Plus, the company shows the largest fleet of private vessels.

Seaspan’s business model is interesting as it is fueled by long term contracts with solid clients. This should translate in a strong cash flow generation in the future.

What Seaspan does with its cash?

ssw6

Source: SSW FACT sheet

So here’s the problem with SSW; the company is growing its fleet significantly, but it’s requiring lots of money. I’m not too worried at the moment because Seaspan’s fleet utilization rate is over 97%. In other words; the company is doing well to grab market share by increasing its fleet. Now is the time to generate higher margins to show more profits. Seaspan has a good business model and meet my 4th investing 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 aside. There is evaluation 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:

ssw7

Source: data from Ycharts.

This is one of the hardest PE ratio trends to analyze that I’ve seen in recent years. The company goes from extremes and often doesn’t generate a profit to even show a valid PE ratio. Right now, the PE ratio seems interesting for an entry point.

By using the dividend discount model, we will see if the dividend payment is worth what you pay for. Since payout ratios are very high, I’ve used a small 3% dividend growth rate and an 11% discount rate:

 

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $1.52
Enter Expected Dividend Growth Rate Years 1-10: 3.00%
Enter Expected Terminal Dividend Growth Rate: 3.00%
Enter Discount Rate: 11.00%

 

 

 

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
  Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $26.84 $23.48 $20.87
10% Premium $24.60 $21.53 $19.14
Intrinsic Value $22.37 $19.57 $17.40
10% Discount $20.13 $17.61 $15.66
20% Discount $17.89 $15.66 $13.92

 

Source: Dividend Monk Toolkit Excel Calculation Spreadsheet

Considering the DDM, the stocks seems quite undervalued. I guess this is linked with its risk level. SSW meets my 5th principle.

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

I’ve found that one of the biggest investor struggles is to know when to buy and 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

An investment in SSW is an investment in future profitable growth. The company has successfully grown its business and their revenues. It is now time to generate stronger margins to make sure the company can continue to pay its generous dividend.

I like their business model around long term contracts with important clients. As they are growing their fleet, it makes it difficult for their clients to switch and use another vessel provider. SSW is able to answer important workload needs and can support a growing global economy.

Risks

Speaking of growing global economy, this is probably one of the biggest risks SSW could face. It sells well when you show that your fleet is growing faster than the grass in your background, but it’s another story if the economy stalls and your fleet stays at port. Without making bad jokes, this could sink the company.

Therefore, I would remain cautious about this company and the investment thesis is not strong enough to support a strong buy.

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 higher fluctuations with a greater growth potential.

In the light of my analysis, SSW would fit in a conservative portfolio as long as the other holdings show very strong fundamentals. This is the kind of company that can do well and pay a high yield if it is blended into a solid asset allocation portfolio. A big position in this company and you would be at risk.

Final Thoughts on SSW – Buy, Hold or Sell?

Overall, I think SSW can be attractive for income seeking investors. It is a good example of a company that looks attractive at first sight (interesting business model, steady revenues, high dividend yield), but is the kind of company that implies a certain amount of risk too. I think there are other very interesting companies with less risk you could pursue.

Disclaimer: I hold SSW 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.

Should You Buy McDonald’s Now…  Or Wait?  

 

This is a guest contribution from Ben Reynolds at Sure Dividend.  Sure Dividend simplifies the process of dividend growth investing with The 8 Rules of Dividend Investing.

In August of 2015 McDonald’s (MCD) stock traded for a low of $85/share.  The company is now trading for around $128/share.

McDonald’s stock is up around 50% since its August lows.  Has the company’s recent stock price moves made the company a stronger buy, or should you sell McDonald’s now to lock in gains?

McDonald’s Competitive Advantage

McDonald’s has paid increasing dividends for 39 consecutive years.  The company’s long dividend streak makes McDonald’s a Dividend Aristocrat.  There are currently only 50 Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases.

The company’s long dividend streak speaks to its strong competitive advantage.  A business simply cannot pay increasing dividends for so long without having a strong competitive advantage.

McDonald’s competitive advantage comes primarily from three factors:

  • Well-known brand
  • Industry leading size and scale
  • Capital efficient franchise business model

The golden arches are recognized globally.  McDonald’s continues to build its brand with sizeable advertising expenditures.  McDonald’s regularly spends around $900 million a year on advertising.

MCD Advertising

McDonald’s is much larger than its competition.  This give the company a size and scale advantage.  McDonald’s has a market cap of $116 billion.  The 2nd largest restaurant in the world – Yum! Brands (YUM) – has a market cap of $36 billion.

The company’s massive size relative to its peers allows it to buy commodity food products from suppliers at the lowest possible price.  McDonald’s has historically offered extremely affordable “value menu” and “dollar menu” offerings.

McDonald’s has more than 35,000 locations in over 100 countries.  In Europe, North America, and increasingly Asia, McDonald’s is very easy to find.

The franchise business model allows McDonald’s to grow quickly.  Only about 20% of McDonald’s locations are company operated.  The remaining 80% are operated by entrepreneurs who pay to use the McDonald name and products.  Franchising minimizes the cost of opening a store for McDonald’s and spreads risk to the franchise owner rather than McDonald’s corporation.  It results in a highly capital efficient business that is easy to scale.

McDonald’s is an excellent business…  But is it priced to buy?

McDonald’s Valuation

McDonald’s average price-to-earnings ratio since 2000 is 16.1.  The company is currently trading for a price-to-earnings ratio of 26.6.

McDonald’s stock would have to fall by around 40% to reach its historical average price-to-earnings range.

Of course this doesn’t mean the company’s share price is about to fall 40% – that is very unlikely.

For a company to trade far above its historical average price-to-earnings ratio it must have better growth prospects than it did in the past.

This does not appear to be the case with McDonald’s over the long run.  With that said, short-term results have been very impressive.  Relevant financial information from the company’s latest quarter is shown below:

  • Comparable store sales up 5.0%
  • Earnings-per-share growth of 16.0%
  • Constant-currency earnings-per-share growth of 26.0%

These are the type of numbers that do command a premium price-to-earnings multiple.  Growth at this rapid rate will not persist over the long-run for McDonald’s.

McDonald’s has compounded its earnings-per-share at 8.5% a year over the last 15 years.  This is a very respectable growth rate – especially considering the company paid out around 50% of its earnings as dividends over this period.

If McDonald’s continues to grow at 8.5% a year and continues to pay its dividend (current yield of 2.8%) shareholders can expect total returns of around 11.3% a year going forward.

This is greater than the S&P 500’s long-term historical average return of around 9% a year.  An argument could be made that McDonald’s commands a price-to-earnings ratio greater than the S&P 500.

The historical average price-to-earnings ratio of the S&P 500 is 15.6.  It is currently at 22.6.  The stock market needs to fall by about 31% to fall in line with its historical price-to-earnings average.

Based on these numbers it appears that McDonald’s is not terribly overvalued.  It is trading at a premium to the S&P 500 – but that should be expected for an excellent business.

McDonald’s:  Buy, Hold, or Sell?

But just because a business is not extremely overvalued does not make it a buy.

While McDonald’s isn’t excessively overvalued, it is very likely trading above fair value.  I would put the company’s stock into the ‘somewhat overvalued’ category.

Intelligent investors wait to purchase high quality businesses until they trade at fair or better prices.  Here’s a quote from Warren Buffett on the matter:

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

McDonald’s may sell inexpensive burgers, but the price of its stock is anything but marked down.

I am currently long McDonald’s.  While the company is a bit overvalued, I don’t believe it is a sell at current prices either.  The company will very likely continue growing per-share value through:

  • Share repurchases
  • Comparable store sales growth
  • Continued store expansion internationally

This growth will bring about continued dividend increases.  I don’t want to ‘cash out’ the dividend income my McDonald’s investment brings.

Selling the company’s stock now would incur capital gains taxes (in taxable accounts).  Investors should deduct this lost tax money from any investment they make with funds from a sale.  Allowing money that would be paid out in taxes to compound is one of the advantages of long-term investing.

McDonald’s is not so absurdly overvalued that it should be sold.  For investors who currently own McDonald’s, the stock is a hold.

In summary, McDonald’s is:

  • A hold at current prices
  • Probably somewhat overvalued
  • Will very likely continue growing its dividend far into the future

 

Dividend Monk’s Note:

Back in April of 2015, I’ve reviewed MCD with a similar approach. I determined the fair market value at $98 considering a 5.5% dividend growth rate. If I adjust the numbers today and consider a 5% dividend growth rate for the first 10 years and then 6% for the years after, I get a higher value, but still, MCD is overvalued:

 

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $3.56
Enter Expected Dividend Growth Rate Years 1-10: 5.00%
Enter Expected Terminal Dividend Growth Rate: 6.00%
Enter Discount Rate: 9.00%

 

Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $207.54 $138.84 $104.47
10% Premium $190.24 $127.27 $95.76
Intrinsic Value $172.95 $115.70 $87.06
10% Discount $155.65 $104.13 $78.35
20% Discount $138.36 $92.56 $69.65

 

Source: Dividend Monk Toolkit Excel Calculation Spreadsheet