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5 Dividends That Are About to Get Bigger - views
BALTIMORE (Stockpickr) -- Earnings season keeps dumping dividends at investors' doorsteps this quarter, a welcome boost given the correction course that Mr. Market's been stuck in for the last month and change.
Regardless of how most investors feel about stocks right now, companies have more cash and bigger profits than ever before -- two facts that help ensure bigger dividend payouts for income-seekers. That's significant, especially given interest rates at historic lows right now. As corporate dividends keep beating the returns investors can find on "safer" alternatives like treasuries or even bonds.
The contrast is pretty extreme: many firms now have higher yields on their stock price than they do on their own debt.
But this week, instead of chasing yield, we'll focus on stepping in front of dividend hikes for the coming quarter. In other words, these five firms are getting ready to boost dividends; they just don't know
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 rally.
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 cable giant Comcast (CMCSA). This $100 billion cable provider is having a standout year in 2012, up more than 58% since the first trading day in January. As the biggest cable firm in the country, Comcast reaches 53 million households, with around half of them paying TV subscribers. The firm also boasts 19 million internet customers and 10 million phone subscribers. Comcast boosted its presence in the content business last year when it bought 51% of NBCUniversal.
When it comes to Comcast's upside potential, the three most important factors are: network, network, and network. Comcast's cables span 40 states and Washington, D.C., reach that gives Comcast significant advantages over its rivals. Because cable has significant bandwidth, Comcast has been able to ramp up its offerings without having to lay new cable -- compare that to Verizon's (VZ) FiOS program, which has spent mountains of cash to lay fiber optic cable to every house it serves. That makes the breakeven time a whole lot shorter for Comcast, and it gives the firm more leeway in its pricing.
The decision to buy the controlling stake in NBCUniversal should pay off for Comcast. It gives the firm a tighter integration between content creation and distribution that should help to boost margins and increase promotional opportunities for new films and shows. A big pile of cash on Comcast's balance sheet helped to finance the deal, and the firm's liquidity continues to look attractive, even if debt did increase
in the process. That's why a boost to Comcast's 16.25-cent quarterly dividend looks likely.
Currently, Comcast pays a 1.73% yield.
Coca-Cola (KO) is another name that looks likely to announce a dividend hike in the next quarter. Right now, the world's biggest beverage company pays out a 25.5-cent quarterly dividend, giving Coke a 2.73% yield at current price levels. But a portfolio of brands that includes Coca-Cola, Sprite, Fanta, and Dasani should help to pay for a raise for investors.
For Coke, scale matters. As the biggest nonalcoholic beverage company in the world, the company's distribution network reaches more than 200 countries, as well as a market share that gives Coke claim to around 3% of all the drinks served every day worldwide. As burgeoning middle class populations in emerging market countries start upping their consumption of soft drinks and bottled water, Coke should continue to see impressive growth abroad.
At home, innovations like the Freestyle fountain machine should help wring some growth out of markets that have remained stagnant. Frankly, there isn't much that's "fun" about pouring a fountain drink, but the touch-screen Freestyle changes that with more than a hundred customizable drink options. As the machine becomes more ubiquitous, it should give Coke a big edge in the food service market -- and it will provide Coke's marketing team with customer favorites that it can put on store shelves. I'm looking for a dividend hike in the next quarter for Coke.
I'll admit that the industrial gas supply business is boring. But more often than not, boring businesses generate exciting income growth for investors. That's why we're looking to Praxair (PX), the world's biggest industrial gas supplier. Praxair's customer list ranges from hospitals to restaurants to welding shops, diversification that spares the firm from the cyclical headwinds that normally entangle industrials.
While it's true that industrial gasses tend to be relatively low-cost, the capital needed to bottle and transport them isn't -- a factor that enables Praxair to collect double-digit net margins for their trouble. Extremely low customer turnover helps too. Generally, packaged gas isn't a material cost for Praxair's customers, so the company pushes hard to get very long-term contracts that typically renew at very high rates. The contracts keep commodity risks off of Praxair's plate, but they mean that the firm is hugely entrenched against competition.
Financially, Praxair is in solid shape, with adequate liquidity on its balance sheet and hefty cash generation abilities. The firm generates enough cash to cover its debt obligations and leave enough left over to pay out its 55-cent dividend and then some. That's why this stock looks likely to boost its payout in the next quarter. Currently, that 55-cent dividend translates into a 2% yield for shareholders.
Oil and gas exploration and production firm Occidental Petroleum (OXY) may seem like a strange addition to the list today -- after all, energy companies have been hit hard by slipping commodity prices in 2012. But share prices have gotten punished more severely than the fundamentals have warranted for many energy stocks, and OXY still looks primed for a boost to its quarterly 54-cent dividend payout as a result.
Occidental Petroleum is a pure play on oil and gas production. The firm doesn't own refinery assets, and it doesn't own gas stations. Lately, though, that proven to be a very good thing as downstream assets struggled to earn their keep on integrated firms' balance sheets. As a result, Occidental enjoys much deeper net margins than its integrated supermajor peers, and it's able to pay more cash to its owners.
It helps that OXY is expert at getting the most bang from its buck. Much of its growth comes from squeezing every last drop out of oil and gas wells that are approaching the far end of the production curve. While those alternative oil recovery strategies are costlier than traditional approaches, they're paying off in spades for Occidental's projects right now. The company's knack for acquiring bargain-priced older wells with mediocre production and make them economically viable again should help keep its top line trending higher in 2013.
Right now, Occidental pays out a 2.73% dividend yield. Share price notwithstanding, I expect that number to increase in the next quarter.
Consolidated Edison (ED) is having a tough week. As the resident power company in New York City and much of New Jersey, some of ConEd's most critical infrastructure got hit hard by Hurricane Sandy's impact on the region. But even though
costs are likely to move higher this quarter, the firm is still well positioned for a dividend hike.
Regulated utilities and dividends go together like peanut butter and jelly. These firms sport huge dividend yields, consistent earnings, and legal monopoly status. When it comes to generating predictable income, that's the trifecta that income investors should be shooting for. ConEd's presence in a high-demand region (the firm's operations also include Pennsylvania and New York state) give it exposure to
favorable rate hikes and predictable revenues.
While the repair costs for Sandy are likely to be material for the next quarter, they don't change this stock's longer-term outlook. And since the firm has given its investors a dividend raise every year for almost four decades, the trend is unlikely to get bucked because of one-time charges hitting the income statement. Consolidated Edison pays out a 60.5-cent quarterly dividend per share, which translates into a
4.05% yield at current price levels.
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.