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5 Dividend Stocks to Fight Off the Fiscal Cliff - views
BALTIMORE (Stockpickr) -- The Fiscal Cliff is having a real impact on firms that want to maximize shareholder returns right now. That's showing through in dividend payouts this month.
Just on Wednesday, for instance, wholesale club Costco (COST) announced a special $7 per share dividend payout for investors that prompted 6.3% rally in shares that day. Clearly, investors are rewarding companies that opt to give them cash ahead of the looming possibility of a tax hike on dividend income. Costco isn't alone, even if its $3 billion special dividend is the biggest of the bunch -- a handful of firms have announced special dividend payouts to reward investors before the cliff.
But even if you bought shares of Costco now to take advantage of your $7 payout, you've already missed out on the capital gains benefits from the announcement. That's why we're trying to step in front of the next set of dividend hikes this week.
In other words, these five firms are getting ready to boost dividends; they just don't know it yet.
In the past few months we've had some stellar success in finding future dividend hikes just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.
For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, a low payout ratio, and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about this late-2012 correction.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
First up is beverage giant Coca-Cola (KO). While Coke is ubiquitous, it's hard to get a grasp on just how massive the company's reach really is; but think about this: Coke's products make up an astounding 3% of the 55 billion beverages served worldwide each day. Much of Coke's success is due to an amazing distribution network that spans more than 200 countries. The beverage business is cheap -- the fountain soda you drink at lunch has infinitesimally small ingredient costs. Transportation is less cheap, however. Coke's efficient network is key to the firm's massive net margins.
Brand doesn't hurt either. The firm's namesake soda enjoys the number-one spot in the soft drink market, with the Coke brand one of the best recognized and most valuable in the world. Emerging markets like China hold the keys to growth for Coca-Cola -- as consumers' wealth increases, the amount of cash that they're willing to spend on luxury food products like soft drinks increases as well. In more mature markets, innovations like the Freestyle fountain machine should help wring some growth out of markets that have remained stagnant.
Financially, this firm is in strong shape, with $28 billion in cash and investments largely offsetting Coke's $32.7 billion debt load. Much of that debt is the result of the firm's acquisition of its U.S. bottling operations -- while pricey, the purchase made sense for Coke. And it still leaves ample room for a dividend hike in the coming quarter.
As the world's largest home improvement retailer, Home Depot (HD) has been enjoying some strong tailwinds in 2012. An improving housing market is leaving consumers feeling the wealth effect, and hiking spending on home improvements, and prompting leaps and bounds in housing starts. Because of that, HD has seen its share price rally by more than 52% year-to-date. Still, investors could be in for more upside at the hands of a dividend hike.
With more than 2,250 big box stores spread across the globe, the firm has a reach that enables it to enjoy economies of scale in distribution, purchasing, and marketing. That wasn't always the case, however -- leading up to the Great Recession in 2008, HD overextended itself by opening too many stores and racking up too much debt. Since then, though, the firm has restructured aggressively, and it's now reaping the rewards in the form of huge profitability numbers for a mass retailer.
While the vast majority of stores are located in the U.S. and Canada, markets like Mexico have been offering Home Depot stellar growth rates for over a decade now (the firm's foray into China has been less successful). With twin growth engines abroad and with the recovering housing market in the U.S. and Canada, this stock should be able to keep up its trajectory. Right now, HD pays out a 29-cent quarterly dividend for a 1.8% yield. With cash generation looking strong, investors should be on the lookout for a near-term dividend boost in HD.
Oilfield servicer Schlumberger (SLB) hasn't caught as many headlines now that oil prices have been lingering sideways for much of 2012. It hasn't caught much of a bid either -- shares of SLB are only up around 3% since the start of the year, underperforming the broad market by a big margin. But investors shouldn't ignore what's going on in this energy play right now.
The Schlumberger logo is a familiar site at oilfields. The firm provides specialized services like seismic surveys and well drilling and positioning. In other words, Schlumberger's expertise lies in helping E&P firms pull their oil out of their prospects. Even though oil prices have been slugging it out sideways, the important thing is that they've been lingering near historical highs, prices that make more projects economically feasible right now. More projects means more revenue-producing jobs for Schlumberger.
While the firm has a presence in more than 85 countries, it's not surprising that some of Schlumberger's biggest customers are U.S.-based oil companies. But the firm has been courting E&P's based elsewhere in recent years, focusing primarily on deals in Russia and China. That diversifications helps to shed some political and commodity risk. As a service provider, SLB generates considerable cash -- but recently, that cash has been growing at a faster clip than the firm's dividend. That leaves the way for a hike to Schlumberger's 27.5-cent quarterly dividend.
Currently the firm offers investors a 1.56% yield.
BlackRock (BLK) knows a thing or two about income investing -- and not just because it yields 3% right now. BlackRock is the biggest investment manager in the world, with around $3.7 trillion in assets under management. Originally, BlackRock was best known as a skilled fixed-income shop, but the acquisition of Barclays Global Investors in the wake of the recession dramatically boosted BLK's exposure to equities. Despite the change, the firm's reputation as a fixed-income powerhouse helped it to take full advantage of the treasury rally that's been roaring as risk-averse investors poured all of their assets into risk-free government debt.
Right now, BlackRock boasts attractive asset allocations across the firm. Currently, less than half of BLK's funds are in equities, around a third is in fixed income, and the rest sits in alternatives. That's less equity exposure than most conventional investment managers hold, a good thing when investors are anxious about investing in stocks -- but at the same time, it's big enough exposure to materially boost assets under management (and fee income) if stocks do rally from here.
BLK gets most of its assets from other institutions, a fact that should help keep those assets in-house; institutional money managers tend to be less fickle and more willing to stay in a fund than nonprofessionals. That said, if BlackRock is willing to court more retail investors (a trend from the BGI acquisition) it'll have a big growth avenue ahead of it in the next few years. The firm generates cash to cover obligations 17 times over, a fact that gives BLK the wherewithal for a dividend hike in the near-term.
As of this writing, the firm's payout stands at $1.50 per quarter. BLK's expertise as a money manager should make them especially sensitive to the benefits of a dividend hike.
The TJX Companies
It's been a stellar year for shareholders in The TJX Companies (TJX): the stock has rallied more than 37% since the first trading day in January. Much of that performance has come from consumers looking to get more bang for their buck. TJX owns off-price chains such as T.J. Maxx, Marshall's and HomeGoods.
Part of TJX's success comes from its positioning in between manufacturers and consumers. The firm is critical to apparel and housewares makers because it helps them clear out huge swaths of older inventory without having to discount their own sales channels. On the consumer side, TJX provides a way to get name brands at a substantial discount. By straddling those two groups, TJX can command pricing power on both sides and earn margins that most retailers would kill for.
The firm's deep net cash balance sheet position and hefty quarterly cash generation make a dividend hike look likely right now. Currently, the firm's 11.5-cent quarterly payout represents a 1.04% yield -- a return that's been watered down by the stellar price performance TJX has seen long-term. As the dividend pays catch-up, investors benefit.
To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.