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BALTIMORE (Stockpickr) -- It's earnings season -- and that means that investors are in store for some big dividend hikes this summer.
Dividends have kept climbing higher in 2013. In the last year, S&P 500 companies have hiked their dividend payouts by more than 14%, ratcheting out their shareholder profit sharing to a new record high this quarter. And as earnings climb in kind, investors should expect more upside potential in the cash their portfolios generate.
So far, 77 S&P 500 constituents have reported their numbers to Wall Street this quarter, and on average, they've beaten estimates by 5%. That means that year-over-year, earnings are up a full 14% at this stage of the game. To be clear: That's breakneck fundamental growth for a broad market index.
With companies sitting on record corporate cash and profits right now, it's easier than it sounds to pick out names getting ready to hike their dividend payouts. In large part, it's because they have little choice. With lots of dry powder on corporate balance sheets and few options to generate meaningful internal returns, management teams who want to stay employed are returning cash to shareholders in record numbers. In recent months, we've had some stellar success in finding future dividend increases 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 whether or not 2013's rally will be able to hang on.
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 Cisco Systems (CSCO), the $139 billion IT networking giant. Cisco is having a good year in 2013; shares of the firm have rallied more than 32% since the first trading session of the year. And while that's overshadowed Cisco's 2.62% dividend payout, investors shouldn't ignore the income right now -- they could be due for a raise.
Cisco Systems is the 800-pound gorilla in the IT infrastructure business; the firm is the world's biggest supplier of routers, switches and software used to network devices. With Internet traffic still growing at a breakneck pace, demand for Cisco's mission-critical tools remains strong sellers for enterprise customers. Size matters for Cisco. Because Cisco's gear is designed to plug-and-play with other Cisco components, IT departments that buy Cisco products can often see much lower integration and ongoing technical support costs.
All of that translates into a fortress balance sheet. Currently, Cisco sports more than $33 billion in net cash, a balance that accounts for almost a quarter of the firm's total market capitalization. That gives Cisco plenty of wherewithal to hike its dividend payout to counter the increased share price in 2013 and keep its yield stable.
If Cisco is having a stellar year in 2013, heavy vehicle maker Paccar (PCAR) isn't that far behind. Year-to-date, shares of the truck builder have rallied more than 27%. Paccar manufactures light to heavy-duty trucks under the well-known Peterbilt, Kenworth, and DAF names.
As consumption continues to grow green sprouts in the economy, Paccar is benefitting. An aging global fleet of trucks is providing sales opportunities at PCAR, particularly given the gradual upward growth of oil prices over the last several years. Because Paccar's new generation of trucks are more fuel-efficient than previous generations, customers that upgrade their fleets are able to capture considerable cost savings. That, in turn, closes the gap between PCAR's truck transportation offerings and rail, which typically wins out among shippers when oil prices rise.
Paccar boasts a well-capitalized balance sheet, with around $2.5 billion in cash that helps to offset a $7.8 billion debt load. Truck building is capital intense, but PCAR has ample liquidity right now. Consistent profit margins and a relatively low payout ratio leave room for PCAR to hike its 1.39% dividend yield. Right now, the firm pays a 20-cent quarterly dividend. That could change when the firm announces numbers on July 24. Stay tuned.
Republic Services Group
Republic Services Group (RSG) is a garbage stock. The $13 billion firm ranks as the No. 2 trash collection company in the country, with 334 individual subsidiaries, close to 200 active landfills and a trash-to-energy business. Historically, trash collection and dividends go hand in hand thanks to recession resistant income, but 2013's rally has taken some of the punch out of RSG's 23.5-cent quarterly dividend. Currently, the firm pays out a 2.7% yield.
Republic has room to hike its payout in the next quarter. For starters, the firm is benefiting from the increased economic activity that's been warming up for the past few years. As trash volumes increase, so too do Republic's profits. And because the firm is one of two major national garbage collection companies, it's able to grab big national contracts that smaller, more localized rivals can't.
While a history of acquisitions has left Republic with around $7 billion in long-term debt, the firm has enough cash generation to afford a modest hike in the near-term. Republic announces its second-quarter numbers on July 25. That's as good a time as any to announce a dividend raise for investors.
The last few years have been a challenging year for Best Buy (BBY), never mind the stock's explosion in share price this year. BBY is undergoing a transformation -- and it's about time. After all, as the country's biggest electronics retailer, Best Buy has a big target on its back. As the firm works to shake off the threats from online rivals, it's making big strides to fix itself.
Until recently, Best Buy was little more than a physical showroom for online competitors. While the convenience benefits of its brick-and-mortar locations were hard to beat, its prices weren't -- especially on big-ticket items that historically offered the biggest margins. The "Renew Blue" turnaround plan aims to change that by boosting web sales, cutting costs at brick-and-mortar locations, and finding margin boosters like services to sell to customers.
Despite the huge benefits of online shopping, for many consumers there's still something to be said for talking to a salesperson and walking out with a product. That fact presents Best Buy's biggest opportunity to de-commoditize its sales experience right now. Margins should expand as BBY does away with earnings drags in its property portfolio. Along the way, investors should expect a boost to BBY's already solid balance sheet.
Currently, Best Buy pays out a 17-cent dividend that adds up to a 2.36% yield. As major concentrated shareholders look to get paid, that number looks likely to get boosted in the next quarter.
Wall Street just doesn't get Garmin (GRMN). In fact, they hate it -- Garmin has consistently sported a short interest ratio of 10.4 for the last year, a number that means it would take more than two weeks of nonstop buying just for short sellers to exit their bets against shares. And while Garmin can't directly control its share price, the company does have control over a different driver of returns: its dividend.
Currently, the GPS-maker pays out a 45-cent quarterly dividend that adds up t a 4.9% yield.
Garmin makes global positioning devices for cars, boats, planes and fitness enthusiasts. While the firm's detractors have pointed to the commoditization of the consumer GPS device as a potential business-killer for Garmin, that investment thesis just hasn't played out. In fact, that exposure to all corners of the GPS market means that Garmin is able to pour R&D into big-ticket electronics (such as the $50,000 G1000 avionics suite for small planes) and then transition the tech to the more margin-sensitive consumer market.
As Garmin continues to generate massive growth in niche devices for outdoor and fitness users, the firm should be able to keep its engines spinning -- all while subsidizing the biggest development costs in its bigger-ticket product lines. Meanwhile, a debt-free balance sheet with around $3 billion in cash and investments means that this bargain name effectively trades for a 41% discount right now. As management looks to put some of that cash to good use, a dividend hike makes all the sense in the world.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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.
Follow Jonas on Twitter @JonasElmerraji
Follow Jonas on Twitter @JonasElmerraji