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5 Dividends Set to Get Bigger as Plan B Falls Through - views
BALTIMORE (Stockpickr) -- I could think of a better way to start the Christmas weekend. Stocks are getting hammered this morning after John Boehner's "Plan B" bill failed to come to a vote yesterday; instead, market participants are voting with their trades today.
Politics aside, the bill's failure adds a lot of uncertainty on what's been a pretty muted process on Capitol Hill so far. Despite the scary name of the Fiscal Cliff, investors have taken things in stride -- until today, anyway.
For income investors, one of the biggest dangers of the cliff has been increased tax on unearned income. Sustained benchmark interest rates near zero have already punished savers by keeping yields exceptionally low during a time when inflation is modest at best. But there is a silver lining to this black cloud: I'm talking about dividend stocks.
Dividend-paying equities have been ramping up returns in the face of low rates in the bond market. In fact, the S&P 500 pays a higher average yield today than it has for most of the last two decades. With record corporate cash and record corporate profits, the stage is set for even bigger dividend payouts in 2013. 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 the New Year.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
Dividends and utilities go together like peanut butter and jelly -- but without the allergy warning. With consistently predictable earnings and government-sanctioned monopolies, utility stocks are purpose-built income-generation machines; NextEra Energy (NEE) is a perfect example of that.
NextEra is the incumbent power company in Florida, with its Florida Power & Light subsidiary providing regulated power to 4.5 million customers in the Sunshine State. Not all of this firm's operations are regulated however -- NEE also lays claim to a sizable merchant generation business, with 41.3 gigawatts of generation capacity. While generation adds a bit of amped up risk/reward to NEE's profile, the fact that generation assets are heavily weighted towards dirt cheap technologies like nuclear, natural gas, and wind is attractive. In fact, wind makes up around half of NextEra's generation capacity, giving the firm exceptional exposure to green tech and decouples margins from commodity prices.
Those margins are impressive too. NextEra consistently sports net margins in the double digits, with revenues pretty evenly split between the Florida Power & Light business and NEE's generation arm. While this firm's shiny new generation assets (particularly in wind power) haven't been cheap, the NextEra sports a decent balance sheet that should only get better as those cheap energy sources throw off bigger piles of cash. Right now, NEE pays out a 60-cent quarterly dividend for a 3.4% yield. I think that payout could get amped up in the next quarter as CapEx drops off and profitability continues higher.
State Street Corporation
With a market capitalization of $21.6 billion, State Street Corporation (SST) is a big bank. But it's not that kind of big bank. The firm doesn't earn its keep by lending or by taking in deposits at branches -- and that's why investors should like it. Instead, State Street is one of the biggest trust banks in the world, meaning that the firm's focus is on asset management, custody, and administration rather than retail or commercial banking. As a result, the majority of State Street's revenues come from fee-based sources rather than underwriting volume.
Scale matters for trust banks, and State Street has scale in spades. As a result, the firm can afford to charge smaller fees for its services, and its able to court the biggest of institutional investors. Higher stock prices are a big tailwind for STT: with an equity rally that's already sent the S&P more than 15% higher this year, State Street has more assets in its custody -- and since the firm is paid on the size of the assets it's watching, a climbing market is a good thing for investors.
Exchange traded funds are another tailwind for STT. As one of the larger ETF sponsors in the market, State Street benefits by having more niche products out there drawing more investor cash. Right now, the firm pays out a 24-cent quarterly dividend for a 2.06% yield. As fee cash continues to get drawn off of the firm's operations, management should have enough dry powder to up STT's dividend payout in the next quarter. Earnings on January 18 could come with an announcement…
Mead Johnson Nutrition
Mead Johnson Nutrition (MJN) is one of the biggest manufacturers of pediatric nutrition products, both through its Enfamil baby formula and nutrition products for older children. While that doesn't sound like a particularly interesting business, it is.
With more than $3.1 billion in sales last year, Mead Johnson takes home approximately 40% of the formula market, a huge business that's income independent.
Here at home, low-income families on the WIC program are able to buy MJN's Enfamil products without watching the price of formula. That's a major factor in this stock's recession resistance. And the trend is picking up abroad too. MJN has been working on capturing a growing chunk of emerging market countries, where formula use isn't as prevalent, but where a growing trend of two-income households in middle class families could make formula a more popular option in the years ahead.
Brand reputation matters to parents, so the strength of the flagship Enfamil formula label is a critical component of MJN's success -- and its pricing power on grocery shelves. Despite a scare a year ago over the possibility of tainted formula (the CDC determined that it wasn't the formula), the brand's dominance will continue to give rivals big barriers to growth in the years ahead. A solid balance sheet and big margins are our catalysts for a dividend boost in Mead Johnson in the next quarter.
Right now, the firm pays out a 30-cent quarterly dividend for a 1.81% yield.
Last minute holiday shoppers are still pouring into Ross Stores' (ROST) 1,125 stores this week, tacking onto the already impressive financial performance that this chain has managed to turn out in 2012. Ross is one of the biggest off-price retailers in the country, with efforts split between its namesake store locations and around 100 dd's Discounts stores.
Off-price retail has been a strong performer over the past several years, taking a bigger chunk of consumers' apparel and housewares budgets as the Great Recession prompted people to start trading down. At the same time, increased inventory turnover needs at manufacturers have upped the level of merchandise that stores like Ross are able to stock. Those two forces have been enormous growth catalysts for Ross, giving the firm a stair-step sales chart over the last handful of years. It's not just sales that are improving -- net margins have been making a similar climb, ticking higher as the firm's scale increased and fixed costs got spread across bigger revenue piles.
Those margins could continue getting bigger. Ross has big plans for expansion over the coming years, ultimately seeing an almost doubling of its store footprint in the U.S. as an attainable goal. The firm's ability to open new stores without deteriorating its balance sheet will get put to the test as that plan unfolds. In the meantime, Ross Stores has been a stellar provider of shareholder yield, paying out respectable dividends and spending cash on share buybacks. As long as that emphasis on returning cash to shareholders continues, ROST should outperform the broad market.
The firm's 14-cent quarterly dividend looks primed for a hike in the near-term.
It's been a strong year for Foot Locker (FL) -- shares of the $5 billion sports apparel retailer have rallied almost 40% since the first trading day in January. Right now, the firm pays out an 18-cent quarterly dividend for a 2.2% yield. I think that number could climb in the next quarter as FL drags even more cash onto its balance sheet.
Foot Locker is one of the biggest athletic apparel retailers in the world, boasting more than 3,350 stores spread across seven different brands. At first glance, I'll admit that there's not a lot to like about Foot Locker's business; it's extremely competitive, it's contingent on mall traffic, it's beholden to massive suppliers like Nike (NKE), and it's hardly flying under Wall Street's radar. But a glimpse at this firm's operations gives a more compelling story.
For starters, Foot Locker churns out much deeper margins than the rest of the apparel industry, driving a bigger chunk of every dollar in the register directly to the firm's bottom line. Even though the recession knocked some wind out of FL's income statement, the firm posted new revenue highs last year, eclipsing pre-recession sales. On the balance sheet side, the firm looks even better -- Foot Locker's $133 million debt load is offset by an $853 million cash position that accounts for a material chunk of the firm's total market capitalization. While FL is hardly a deep value play, shares do look pretty cheap right now, and they could look even cheaper after a dividend hike. Keep an eye on late February earnings.
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.