Saturday, December 21, 2013

Dividends Aren't Evil

Matt Yglesias has a post called "Dividends Are Evil", he is right in some ways, but mostly wrong. Let's count the ways:

1. Yglesias begins by saying that dividends are a "triumph of short term thinking"; I could not disagree more. Dividend investing requires long term thinking. No one cares about a 3% current yield, but if you can grow it into a double digit yield on cost you have a pretty interesting investment. This will take ten years, so you are automatically oriented to a) quality and b) long term. Thinking a decade plus out is vastly longer term than 99.9% of Wall St, and that's a good thing.

2. Yglesias leads off the piece criticizing GE and AT&T for raising their dividends. He is singularly unimpressed by AT&T's track record of 30 straight years of dividend increases. Please re-read above point #1. A 1984 investor in AT&T got paid $0.11/share dividend and today the yield is $1.76. I doubt long term holders are complaining too much. If anything AT&T shareholder might wish for better growth, the 25 year annualized dividend growth rate is 5.9%. Did all these payments hurt shareholder returns as Yglesias is concerned about?

If you bought $1,000 in AT&T in December 1984, today you would have $22,866, an annualized return of 11.4%. I don't see that AT&T shareholders have been hard done by with regard to AT&T's dividend policy.

3. Yglesias: "When a firm such as GE flushes cash out in this way (dividends), the good news for shareholders is that they get money...The advantage, of course, is that you can use money in the bank to buy a car or make a down payment on a house."

Yes, that is an advantage! Far from being a negative, its simple, relatively efficient way to return cash to shareholders. As Morningstar's Josh Peters says, "dividends are always a positive." This is worth keeping in mind, because Yglesias goes on to state that buybacks are a better way to return cash to shareholders. That can be true, but not always.

4. Yglesias goes on to make the case for buybacks. A lot of income investors eschew buy backs, preferring say Shell's 5% dividend yield versus Exxon's 3% yield plus buybacks. I think there's plenty of reasons to like buybacks in some circumstances. Some of the great capital allocation track records in history, like John Malone's, have been built up through judicious buybacks.

Aye, but there's the rub. There are not many John Malones out there! Michael Jordan played by the "Jordan Rules", what is good strategy for the best of the best is often a recipe for disaster for the average, i.e most management teams. If you have a John Malone at the helm, then buybacks are a wonderful way to return cash to shareholders, and Yglesias is right to say that they are more tax efficient than dividends. But this is only the case when you have a master capital allocator at the helm with talent and integrity. Otherwise, buybacks can absolutely destroy shareholder value. Look no further than HP where various managers bought back 1/3 of shares outstanding in last decade at prices well above today's, and at the same time earnings per share went way down and debt went way up. So whereas dividends are always a positive, buybacks can be good or they can be a way to light money on fire.

5. Skills. Yglesias says "the only real disadvantage is that buybacks look unattractive when stock market prices are relatively high", CEO skills are around operating their business. Making airplanes or jet engines or running restaurants or mobile networks, is it reasonable to expect a CEO that can do all the things necessary to operate effectively and on top of that be a great judge of when is a good time to buy? Given that mutual fund managers as a group underperform the S&P 500 when that is their only job, its unreasonable to think any CEO can do this as a second job in addition to running their company.

Let's say you are CEO of Caterpillar. Every day you have find a way to widen your moat, compete with Komatsu, watch for new upstarts from China, deeply understand the global infrastructure cycle, and ensure the business operates at maximum efficiency. If you do all of this you are in the top 10% of CEOs. Now on top of that is it fair  to think you are also a clear thinker about investment value, objective, unemotional and rational about your own business, and can allocate capital like Buffett, Singleton or Malone? Doubtful.

6. Incentives. Dividends align shareholder and management incentives. Everyone gets paid. Buybacks can be a good or a bad thing here with regard to incentives. Many companies use buy backs as a fig leaf to cover up the fact they are also issuing shares to enrich management.

7. James Montier's August 2010 paper "A Man from a Different Time"
    Dividends still matter
    To those who charge around in markets trying to guess
    the next quarter’s make-believe earnings number, the
    concept of dividends seems wholly irrelevant. However,
    to those with an attention span measured in longer than
    milliseconds – who are few and far between, to judge
    from today’s markets – dividends are a vital element
    of return. Exhibit 2 illustrates this point graphically.
    Looking at the U.S. market since 1871, on a 1-year time
    horizon, nearly 80% of the return has been generated by
    fl uctuations in valuation. However, as the time horizon
    is extended, “fundamentals” play an increasing role in
    return generation. For example, at a 5-year time horizon,
    dividend yield and dividend growth account for almost
    80% of the return.

The chart above shows the opposite of Yglesias' assertion. Dividends only matter for long term (5 year), and share price movement matters on a short term (one year) basis.

8. Buybacks rely on management being focused on the stock market and share prices, but this approach is pretty limited. Benjamin Graham: "Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."

Yglesias raises some good points in his piece and its always good to hear contrary points of view. Most of his points around buybacks are fine so long as your CEO is an all time great investor, but that's a shaky assumption. There are way more Chuck Princes than there are Tom Gayners. Buybacks are fine if your CEO is John Malone, for everyone else there's dividends.

Friday, December 20, 2013

Innophos - Can Phosphates Deliver Dividend Growth?

Innophos is in a range of pretty boring businesses, the cover the phosphate waterfront - Specialty Ingredients, Asphalt Modifiers, Fire Suppressants, Water Treatment, Bakery Leavening, Deli Meats (hungry yet?), Toothpaste Abrasives, and more. I have followed the company for awhile, Todd Wenning wrote it up in his search for dividend growers, and Barron's profiled the company this week and there is a lot of interesting pieces to this puzzle.

The Barron's article highlights some recent issues and a potential catalyst:

The company's manufacturing facility in Mexico has been the source of recurring equipment failures, which has hurt productivity and resulted in high maintenance costs. As recently as the September quarter, a planned maintenance outage took longer to complete than expected, due to the extensive repairs required.

For the past few years, management has been upgrading the facility, and on its Oct. 29 conference call, CFO Mark Feuerbach said that he believes the plant "has turned the corner." Indeed, the plant generated higher production yields in the quarter.

Overall, the key dividend growth qualities looks to be in place.
  • Forward yield 3.3%. 
  • 1 Year Dividend Growth: 24%
  • 5 Year Dividend Growth: 13% 

The balance sheet is not subject to much leverage with a 0.3 Debt/Equity ratio.

The company's price is not that cheap. The P/E is 22 on trailing basis and the P/CF is 14.

Last month, I looked Clorox and it appeared to be quality company at a reasonable price. Innophos stacks up pretty well alongside Clorox.

CompanyFwd Yield1 Yr Div Growth5 Yr Div GrowthP/CF

(Source: Morningstar)

Innophos beats Clorox across the boards, and whereas Clorox debt to equity ratio is a stratospheric 26, Innophos operates much, much more conservatively (0.3 Debt/Equity). Clorox has excellent brands and great long term track record, but on the metrics that matter for dividend growth investors, Innophos looks to be a better buy today.

Thursday, December 5, 2013

Samuel Lee on Quality at a Reasonable Price

Samuel Lee's recent article discusses Warren Buffett and the Time Horizon Arbitrage. In it, he describes the implications of Buffett's conversion from a Graham-style deep value, bargain hunter to a Munger-style quality oriented approach. Since Graham pioneered value investing, this distinction is not trivial and some of the implications challenge the basic tenets that people associate with value investing, focusing on quality over price. This is distilled down to Munger's Three Great Lessons of Investing:

Focusing on business quality is something that is not that hard to understand, but the knock on effect here is that outside a global financial crisis, you are never going to get Coca Cola at a bargain basement price. That's where time horizon matters, in order for this strategy to work the investor has to think long term.

Overall, its got a lot overlap with dividend growth investing. After all, what do Buffett and Munger's largest holdings IBM, Coca Cola, Wells Fargo, and Exxon have in common? Excellent dividend growth track records:

Company Fwd Yield 1 Yr Div Growth 3 Yr Div Growth 5 Yr Div Growth
Coca Cola 2.8% 8.5% 7.6% 8.5%
Exxon Mobil 2.7% 17.8% 9.5% 9.7%
IBM 2.1% 13.8% 15.4% 17.1%
Wells Fargo 2.7% 90.2% 16.7% -7.9%
(Source: Morningstar)

Samuel Lee gets to the heart of the quality at a reasonable price and why its so hard for institutional managers to follow this simple approach:

Both Buffett and Munger declare their favorite holding period is forever. This seems to contradict the fact that at a high enough price, even the most wonderful business in the world will produce less-than-wonderful returns. No doubt part of their hesitance to sell wonderful businesses at any price reflects a philosophical aversion to "gin rummy" investing. I think, though, the main reason they hold on is because they truly believe wonderful businesses are persistently undervalued by the market, even when common valuation metrics suggest otherwise.

This suggests to me that much of Buffett and Munger's edge rests in the ability to engage in time-horizon arbitrage: buying assets with long-term value underappreciated by the market.

Of course, many managers claim they take the long view, shunning Wall Street's quarterly earnings game. It sounds great in theory, but the nature of the investment-management industry makes time-horizon arbitrage nearly impossible. Few managers can live through more than a few years of massive underperformance, but beyond 10 years? Forget it. You've long since been fired.

This is a critical flaw of the investment-management industry, because the real value of most firms is not in their next 10 years of earnings, but the 20 years after that. The real time arbitrage is beyond what most investors can stomach.

In dividend growth investing we see the same dynamic play out. Who cares about a 2.9% current yield? its a rounding error. But compound it at double digit rate over a decade plus and watch the yield on cost rise. Its practically impossible for Wall St firms to think in decades. Of course, what's impossible for institutions and funds creates a major opportunity for individual investors for high total returns at relatively low risk.

Monday, December 2, 2013

Manual of Ideas Book Review

Manual of Ideas is a great title and the book delivers on that promise. This is a different kind of investing book. Its not wedded to one approach, rather its a survey of many different techniques across the value investing spectrum.

Its very useful to practitioners because the author John Mihaljevic covers a lot of different value investing techniques. In this sense its kind of a cookbook. There are not many books like it, one that comes to mind is Joel Greenblatt's You can be a Stock market Genius, which does an excellent job of showing how special situations result in mispricings.

The Manual of Ideas is a very good cookbook but it adds two things that make it even more helpful for investors. First, the author shows not just how a specific technique works, but also describes when and how a technique may fail. For example, there's extensive coverage on screening, but this approach has its limitations and Mihaljevic goes into lots of detail as to what things the screens will miss. The chapter on Deep Value gives a good description on Graham's approach but shows its limitations for an investor looking for long term and low turnover.This shows "time in cockpit" and more importantly can help investors avoid mistakes.

The second thing, the Manual of Ideas does beyond a cookbook is that it puts each technique into a context of where and how the analytical tools may be useful. In this way, it helps to highlight the right tool for the right job.

The Deep Value chapter is one of the best, its at the intersection of quantitative and qualitative analysis. A good example - is finding a Net Net in a non-capital intensive business an oxymoron or an opportunity?

There are second and third level questions to push Graham "bargains" through to a more in depth understanding. Once your Deep Value screen uncovers "bargains" - is their value growing, staying flat or shrinking? As to the famed liquidation value, the text rightly observes that "In reality, a liquidation scenario would most likely play out in conditions of industry distress, in which it might be exceedingly difficult to find buyers." That's an important model flaw to account for. What you paid for your seat on the ship doesn't matter to buyers if the ship is sinking.

The book is a good source of ideas from many investors. I particularly enjoyed this one from Josh Tarasoff of Greenlea Capital, "One of the most powerful ideas I have ever encountered is the one-decision stock: a company you can simply hold for a decade or two and receive an outstanding outcome. My ideal investment would be to purchase a company like this at a significant discount to intrinsic value, and then hold it for a very long time. This approach is a combination of letting the economics of a great business play out, while opportunistically  taking advantage of market inefficiencies." Great idea, easier said than done of course, but the book goes on to connect the dots as to how an investor may achieve this - look for businesses with pricing power, specifically those that can raise prices higher than the rate of inflation.

The chapter on Small Caps illustrates the importance of bottom up research. Eric Khrom reflects on lessons learned from Patient Safety Technologies 8-K, "There is a lot of time pressure in the operating room, and there are 32 million procedures done annually...there are about 4,000 retained sponges (at a cost to the industry of $1.7 billion)...the hospitals that have used their system have had zero retained sponges...Reading the 8-K was very interesting because they pretty much announced in one sentence that they signed  on the second largest hospital operator in the United States. They went from having about 80 hospitals to immediately having 255 hospitals."

One criticism is the chapter on International Investing. The author lists some sources for global investing such as the FT's global equity screener, and includes a long list of investors to follow by country. So if you are interested in Japan or New Zealand or the Czech Republic to name a few, there are names to check into. But would be maybe more helpful to talk about these markets and investors in greater detail to give a fuller picture. That may be too much to ask or it may be book in itself. Beyond that quibble, the International Investing chapter is worthwhile and talks about key questions for certain reqions (Europe: how global is the business?) and advocates for excluding countries from analysis based on downside risk.

The Manual of Ideas brings together in one place many valuable insights found elsewhere, some unique analysis, and delivers the context that shows how the ideas hang together. Most practically, the book gives sober guidance on where the ideas may not work and this alone separates its from 90% of the books on the investing bookshelf. Worth your time.

Saturday, November 23, 2013

Is Clorox a Buy?

All time market highs make bargain hunting hard graft (in the US markets at least). Where can we find a safe harbor to invest at current prices?

Over at Morningstar, Josh Peters makes the case for Clorox. I really like finding companies like Clorox when they sell at a good price. Is Clorox a good buy today? We'll get to that in a minute, but first here is the main reason why companies like Clorox are such interesting investing candidates, courtesy of Morgan Housel's Why Simple Investments Win:

"There's probably never been a time of such staggering technological change as the period from the end of World War II through the early 2000s. Nowhere is that more apparent than the computer industry.

There were no personal computers in 1950. By 1983 there were 13 million. By 2005, 800 million. In 1950, the editors of Time magazine wrote: "Modern man has become accustomed to machines with superhuman muscles, but machines with superhuman brains are still a little frightening." They had no idea.

But the single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense. It was Altria (NYSE: MO  ) , the maker of Marlboro cigarettes, which returned nearly 20% a year for 50 years. During a period when new industries transformed the lives of nearly everyone in the developed world, the most money was made in a company that stuffed tobacco into paper tubes the way it had for more than a century.

This wasn't a fluke, as more recent years offer a similar example. Measured by the number of PCs added annually, computer growth really took off in the mid-1990s as the Internet became mainstream. There are about 800 million more PCs worldwide today than there were in 1995. One of the biggest winners from this explosion should have been Microsoft (Nasdaq: MSFT  ) , whose operating system the majority of those computers run on. Indeed, Microsoft's profits have grown 16-fold since 1995.

Yet once again, the best stock returns may surprise you. With dividends, Microsoft has returned 511% since mid-year 1995. But Clorox (NYSE: CLX  ) returned 560% during that time -- so bleach actually bested the last leg of the computer revolution. Colgate-Palmolive (NYSE: CL  ) returned 651% over the same period, so toothpaste did, too. As did garlic powder: McCormick returned 642%. Ditto for hamburgers, with McDonald's (NYSE: MCD  ) adding a 540% gain. Hormel Foods produced a 544% gain over the same period, so Spam was actually more profitable than computers during the big boom. Our old friend Altria scored a 1,300% gain, nearly trebling Microsoft's return."

Simplicity is a virtue, and Clorox has this in spades with its bleach, Kingsford charcoal, Glad trash bags and other consumer "have to" brands. One weakness is that international sales only amount to 20% of sales. It could be looked at as an opportunity, too, but right now consumer defensive stalwarts like P&G, Unilever, and Tupperware get the majority of their revenue overseas. Would be good for Clorox to get on this train too. Outside of that the business model looks sound, and Morningstar recently raised Clorox to Wide Moat status. Once we are over that hurdle let's look at the numbers.

The current forward yield is 3% which is just about the minimum that's interesting for income investing.  So its ok, but just ok. The 5 year dividend growth rate is around 10%, however the payout ratio has increased from 42% in 2004 to 61% today. Its FCF cover is under 2x, down to 68%.  The near future looks more like mid to high single digit percent dividend growth and less like double digit dividend growth.

The valuation is a tad on the high side as well P/E is 21. The P/FCF is 17 versus a five year average of 13. That means a fairly rosy future is already baked into the price.

The thing that's most concerning about Clorox is the balance sheet. The Debt/Equity ratio is off the charts - 26! If you did not know anything else about the company, you might think they are insolvent. The good news is the majority of this is long term debt. But the combined effect of the high-ish Earnings and FCF cover and the debt repayments means that prospects for high dividend growth are not likely.

Conclusion, I do agree with Josh Peters that Clorox can likely clear the 5+5 hurdle of a combination of 3% yield and then we just need 7% dividend growth to get over the hurdle. Last year's dividend growth was 6.7% Clorox's future is probably way more like that than it is 10% growth of the last five years. That's good enough to basically clear the 5+5 hurdle just barely. Its not a great buy, certainly not the kind of bargain we have repeatedly seen in the post 2008 world, but a 5+5 simple idea is good enough and good enough is what passes for an interesting candidate these days.

Monday, November 11, 2013

Dividend Compass Cup Final - Microsoft v Baxter

We started with 16 companies, and here we are at the Dividend Compass Cup Final. Among the sixteen were some of the all time great dividend payers like Procter & Gamble, McDonald's, Coca Cola, and IBM. But now we are down to two. Its not a surprise that the two companies left standing represent very attractive industry sectors - software and pharmaceuticals. Both of these industries feature robust profit margins, healthcare and pharma has been paying out dividends for a long time, and now tech is joining the party too.

In fact, one of our finalists, Microsoft was one of the bell cows paving the way for tech giants like Cisco and Apple to institute shareholder friendly dividend policies. It goes to show you that Sherlock Holmes was on to something when he said "There is nothing more deceptive than an obvious fact"; back in the dotcom days tech companies were derided as overpriced, unprofitable and unfriendly to shareholders. yet, Microsoft is here in the Dividend Compass Cup final with an excellent dividend track record.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Microsoft initiated its dividend in 2003 at $0.24/share. Since then its grown 4x over the decade to a $1.12/share forward yield. Granted they started off a low base, but as Sherlock Holmes reminds us, Microsoft is one of the stealth dividend stories of the past decade. And the Dividend Compass shows the stealth dividend story has room to run.

Microsoft metrics
Microsoft delivers on every Dividend Compass category. We've known for decades that software was mega profitable, but Microsoft led the way for its tech peers - turning those profits into dividend income for its shareholders.

Microsoft scores

If we went back a decade and told a group of investors that tech dividends would be a major factor in 2013, I suspect we would have been laughed at. Not so with pharma and healthcare. Dividends have been a big part of that sector for decades.

Over the least decade, Baxter grew its dividend +10% annually, from $0.58/share in 2003 to a forward yield of $1.96/share today. Baxter first paid a dividend in 1980, at that time the PC industry was a curiosity, not the global force it is today. Baxter is a  dividend powerhouse.

Baxter metrics
Baxter is nothing but Good to Excellent from the Dividend Compass point of view.  Its only slip up is the recent FCF coverage issue. Other than that, Baxter is raining perfect 5s.

Baxter score

Baxter has a stellar record, a very strong five year average, but Microsoft is playing a whole different game. Steve Ballmer is retiring, but he can always look back and know that through all the struggles, the Zune, heated competition, mobile, Apple, and all the rest, he closed out his career bringing home the Dividend Compass Cup.

Game, Set, Match Winner: Microsoft.

Sunday, November 10, 2013

Dividend Compass Final Four- Walmart v Baxter

We are down to the second to last match, the second Final Four matchup. In the first match, Microsoft beat out Tim Horton's. Next up, its Walmart versus Baxter.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Walmart had to beat McCormick Spice and Exxon Mobil. Baxter took down Novo Nordisk and CH Robinson. Let's see who emerges victorious and wins the rights to face Microsoft in the Cup final.

Pundits say the recession recovery has been good for Costco shoppers but not so good for Walmart shoppers. Still if this is bad, I am sure most companies would trade for Walmart's operating metrics

Walmart metrics
FCF Cover, dividend growth and ROE are all excellent. About the only important category where Walmart struggles is operatin margin, but here we have the source of Walmart's moat in the first place. Quoting Jeff Bezos "you margin is my opportunity." And that 5% margin is the reason Walmart is one of the very few retailers to withstand the Amazon onslaught.

Walmart scores

Walmart racks up 4.57 five year average. Better yet for its investors, its weak operating margin scores can be seen as a source of enduring competitive advantage.

Baxter delivers strong metrics across the board with a sole but important exception. FCF cover dropped down to under 2x. This is the highest weighted category in the Dividend Compass Cup.

Baxter metrics

The FCF Cover slowdown shows up in bringing Baxter's most score all the way down to 4.45. Still its five average is impressive.

Baxter scores

Baxter did not finish strong, its weakening FCF cover put its most recent period below Walmart's five year average, still Baxter's long term track record is well above Walmart's and that is good enough to get Baxter through to the final where Microsoft awaits.

Saturday, November 9, 2013

Dividend Compass Cup Final Four - TIm Horton's v Microsoft

We started with sixteen companies competing for the Dividend Compass Cup. We are now down to the Final Four. Expect two competitors to bring their A game to this match between Tim Horton's and Microsoft. Both have faced stiff resistance to make it this far. TIm Horton's beat out two all time greats - McDonald's and Coca Cola. Does Timmy's have what it takes to beat yet another titan?

Microsoft's path has giant-laden as well - IBM in round 1 and Procter & Gamble in round 2 - two of the all time great dividend payers with dividend roots back to the 19th century.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Tim Horton's sports robust dividend growth backed by wide FCF cover. This means that investors can reasonably expect the growth to continue.

Tim Horton's metrics

That all translates into a close to perfect score from the Dividend Compass - a 4.95 five year average.

Tim Horton's scores

TIm Horton's numbers speak for themselves. Of course, this is the Final Four. You  do not get this far by accident and Microsoft on the other side has its own strong statement to make including FCF coverage in the 3x-4x range.

Microsoft metrics

This brings Microsoft in to a 4.99 five year average which shows a business hitting on all cylinders.

Microsoft scores

Its hard to see Tim Horton's score and think they could lose, but Microsoft's 4.99 out of 5, carries the day. On top of that Microsoft has 3% forward yield versus Tim Horton's 1.7% yield. In the past, I felt it was a bit unfair to McDonald's and Coca Cola which have much higher yields than Tim Horton's but ultimately lost out. In the future I may restrist the Cup to yields north of a higher percentage. Still, with Tim Horton's in the Cup at all, I could hardly ignore its near perfect score and just like the NCAA final four, its fun to have an underdog make it this far. Beating Tim Horton's requires a near perfect score and Microsoft managed to pull it off today. 

Microsoft is through to the final to play the winner of Walmart and Baxter.

Tuesday, November 5, 2013

Dividend Compass Cup Match 12- CH Robinson vs Baxter

For the final match to determine our Final Four its CH Robinson versus Baxter.  The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

CH Robinson shows dedication to growing its dividend, however its FCF cover is slowing as of late. The company has software-like ROE numbers and a clean balance sheet.

CH Robinson metrics
CH Robinson puts up good marks across the last five years but there is some wear and tear showing. ITs FCF cover is stalled for last two years and this account for a quarter of the Dividend Compass score leaving CH Robinson a notch below a 4.0 score for 2012. Its five year average still clocks in at a respectable 4.27

CH Robinson scores

Over on the Baxter side of the ledger, we see only one area that looks problematic with slowing FCF cover. Otherwise, Baxter is knocking it out of the park on double digit dividend growth and other key areas of the Dividend Compass.

Baxter metrics

Baxter scores many perfect 5s, its five year average is a robust 4.86. Great margins and ROE. Its on a very good run, though investors should continue to pay attention to FCF Cover and slowing earnings cover to see if that is a canary in a coalmine. Other than that, this is a business that reliably delivers the goods for income investors.

Baxter scores

CH Robinson has a good track record, but Baxter is nothing less than great and Baxter is through to the Final Four to face Wal-mart

Saturday, November 2, 2013

Dividend Compass Cup Match 11- Microsoft vs Procter & Gamble

Last match, we had dueling blue chip behemoths Exxon Mobil falling to Wal-mart. This match is old economy versus new economy. Soap versus SOAP. Detergent versus databases. Can Procter & Gamble's heritage which dates to the 19th century fend off the techies from Redmond?

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

History? No contest. Procter & Gamble has paid a dividend since 1890, raising it 57 straight years. Microsoft has paid its dividend since 2003. If its close this will matter, but mainly the Dividend Compass Cup is going to be about the ast five years. Note, this is pretty helpful these days since we're focusing in on ability to weather a generational storm. 

Let's get started - first up please put down your Jolt cola, look up from your debug window, and let's see what kind of metrics Microsoft brings to round 2.

Microsoft metrics:
Microsoft has miles of FCF and Earnings cover, rock solid balance sheet, double digit dividend growth, and lofty ROE. I am not sure what else an income investor could want, and the scores sure show this:

Microsoft score:
Well folks, 4.99 out of 5 is near perfect. I think we can call Microsoft the Nadia Comaneci of the Dividend Compass. How will Procter & Gamble respond? Will its legions of MBAs be able to compete with the creativity and efficiency of Microsoft's army of talented software engineers?

Procter & Gamble is no slouch when it comes to dividends, and they clearly take their dividend policy very seriously.

Procter & Gamble metrics:

Whereas the dividend policy is firmware for P&G, its overall growth is less impressive. Coverage metrics are somewhat tepid. Dividend growth is marching on, but we saw that it will take near perfection to see off Microsoft in this match, let's see the tale of the tape.

Procter & Gamble scores

The P&G performance is plenty good and good enough to beat the vast majority of companies out there, but its not good enough to deal with Microsoft.  A company who is playing on a whole other level these days - margins, ROE, and balance sheet are things Microsoft has always had in its history.  But its decade long dividend track record makes it a formidable candidate for the Dividend Compass Cup. Microsoft is through to the Final Four to play Tim Horton's

Friday, October 25, 2013

Moats Matter for Dividend Investors

"Why Moats Matter for Equity Income" Josh Peters, Morningstar

"The first thing you have to remember about dividend investing is that dividends are paid out slowly, though, relentlessly, and they really add up over time. But if you're going to actually buy a stock for its dividend, then this is going to be probably a five-, 10-, or 20-year-type of relationship. That means you have to think about their earnings potential and growth potential of the company, five, 10, 20 years, or longer into the future.

Now most of Wall Street focuses on those short-term news events. What will [the companies] make this quarter? Will they beat estimates? Will they raise forecasts? But again, if you're hanging around for the dividend over the long run, then you have to think about the long-run earnings power, and that is almost entirely going to be shaped by the company's competitive position in its industry. What's the industry structure like? Can the company actually preserve a good level of profitability and be able to grow in its field over the long term without competitors coming in and slashing away prices and ruining the game for everybody.

So, to have an economic moat and to be able to identify what it is that protects this business and its profits and its future growth potential from competition, is absolutely essential. It may not seem like it has a lot to do directly with dividends, but it really does."

Josh Peters nails the intersection of quality and dividends. I wrote about a similar concept - One Reason Why Dividend Investing Works So Well - who cares about a 3% yield? Its chump change on a short term on a basis, but not a long term basis its anything but. You want to see the dividend grow over time. If you want your 3% yield to grow to 10% yield on cost, even if it grows by 10%+ per year, you are still going to be holding the stock for a decade to get there. And longer to realize the long run benefits. So you're automatically re-oriented to businesses with staying power. Criteria should focus on identifying marathon runners not sprinters.

Thursday, October 24, 2013

Dividend Compass Cup Match 10 - Exxon Mobil vs Wal-mart

Here in match 10, we are in the second round of the Dividend Compass Up, the winner will go on to the Final four. We have two formidable companies, with real earnings power- a Texarkana border battle - Exxon Mobil vs Wal-mart.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

First up Exxon Mobil, basically no debt, increasing dividend growth and solid ROE.

Exxon Mobil Metrics
Biggest worrying sign for Exxon is the slowing FCF cover which is a big concern for income investors and so counts for a lot in the Dividend Compass. A solid 4.3 five year average, is a respectable outing for Exxon.

Exxon Mobil scores

Wal-mart is no dividend slouch. Its dividend is double covered both on FCF and Earnings. Plenty of room to grow and/or absorb slowdown. On the plus side, there is still slow but steady growth, and excellent dividend growth.

Wal-mart metrics

Put it all together and you get a sizzling 4.57 five year averages. About the only area Wal-mart struggles is margins, and frankly -  how concerned should we be about that? After all, its the Bentonville business model.

Wal-mart score:

Exxon Mobil has a great track record, but Wal-mart is simply playing at a different level here, even their negatives, in my view, are not really that negative and their positives are super impressive. Todd Wenning  highlighted a great quote from Neil Woodford - "In the short-term, share prices are buffeted by all sorts of influences, but over longer-time periods fundamentals shine through. Dividend growth is the key determinant of long-term share price movements, the rest is sentiment." Based on their cover, and their commitment to raises, looks like plenty of dividend growth ahead for Wal-mart. They are through to the Final Four where they await the winner of Baxter and CH Robinson

Wednesday, October 23, 2013

Dividend Compass Match 9 - Coca Cola vs TIm Horton's

The Dividend Compass Cup moves to the Elite Eight (Equity Eight?) round. The first match in this round is Coca Cola versus Tim Horton's.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Let's get this started and revisit Coca Cola's metrics:
The FCF cover is good but could be better. The margins and ROE are solid. Unlike some of the blue chips in the Dividend Compass, Coca Cola's sales growth remains in tact. Unfortunately, its dividend growth is only mild.

Coca Cola score:

This results in a steady, workhorse-like 4.19 five year average. Its easy to see why Buffett says to think about Coca Cola as owning a bond.

TIm Horton's has a stellar set of metrics, lower debt than Coca Cola. Much better dividend growth and coverage (albeit off a much lower base).

Tim Horton's metrics:

Those numbers are hotter than a cup of Tim Horton's coffee and they are good for a near perfect 4.95 five year average from the Dividend Compass.

Tim Horton's score:

Coca Cola has the higher yield, but Tim Horton's has the higher score from Dividend Compass (~20% better on five year average) and that's good enough to get Tim Horton's through to the Final Four where they will face the winner of Microsoft and Procter and Gamble.

Wednesday, October 16, 2013

Dividend Compass Cup Match 8- Baxter vs Novo Nordisk

In the last match, Procter & Gamble beat out Unilever to advance in the Dividend Compass Cup.

This match in the healthcare division is between two heavyweights - Baxter and Novo Nordisk.

The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

Baxter is a company that really understands R&D - share Repurchases and Dividends. From 656 million shares outstanding in 2006, Baxter has trimmed its share count down to 552 million today. Luckily from our perspective it has not done this at the expense of its dividend. Baxter has a steady track record of double digit dividend growth

Baxter metrics

Baxter's only cause for concern is its recent FCF cover, this is a high priority item for the Dividend Compass, but other than FCF cover and a good not great sales growth number its a sea of 5 point scores for Baxter. That will be tough to beat.

Baxter scores

Novo Nordisk has built a wide moat business through its diabetes treatments. Its operatin metrics show a company that is well run from all the key perspectives.

Novo Nordisk metrics
That is as good a set of numbers are you will see, acres of coverage, high growth and Return on Equity. The recent scores are all 5s

Novo Nordisk scores

And so in the last match of Round 1, we have a tie based on 5 year average. Both Baxter and Novo Nordisk come in at 4.86. These are two deserving companies, but we will hand the match to Baxter, Baxter's 3% forward yield is good enough to get the edge over Novo Nordisk's 1.3% yield

That's a wrap on round one and we look forward to round 2.