BALTIMORE (Stockpickr) -- These five household name stocks are about to boost dividends. They just don’t know it yet.
Household name stocks, the companies whose names most consumers recognize immediately, have a certain cachet with retail investors. After all, folks are more likely to pile money into stocks of companies that they know intimately, or firms whose products they use every day. For that reason, I’m a fan of looking at what’s happening with household names from time to time.
And this summer, there’s some interesting stuff going on in a handful of them -- I’m talking about possible dividend hikes.
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The biggest, most stable companies are paying out bigger dividends than ever right now, so investors looking to earn part of their annual returns in cash are getting some stability versus the broad market from household name stocks. Getting cash dividends is great, but finding stocks that can continually pay you bigger dividends is even better.
So how do we spot payers in the future? For our purposes, our "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 two, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about stock performance in 2012.
In other words, fundamentally solid companies realize that they need to hike returns for shareholders if they want to keep demand for their stock high. And studies show that, historically, a dividend-centric strategy from management means much bigger returns for your portfolio.
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So far this summer, our track record is pretty good. In the last week alone, the four biggest dividend hikes came from stocks that had appeared in this column. So let’s see what else has bigger dividends on the horizon with five new household name stocks that could be about to increase their dividend payments in the next quarter.
Walgreen
As the nation’s biggest retail pharmacy, Walgreen (WAG) boasts a network of around 7,900 drugstores spread across the U.S. That scale provides the firm with certain advantages, especially as convenience is a driving force in consumers’ pharmacy choices.
That size means that Walgreen is also able to pay out a strong dividend right now, weighing in at 22.5 cents per quarter -- a 2.84% yield. With that payout static for the past four quarters, WAG is in line for a dividend hike in the next quarter.
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The drugstore business has changed a lot in the past few years, and Walgreen has done an admirable job of keeping up. The firm has been adding clinics to its store locations, a move that should generate bigger margins and get more bodies into Walgreen’s stores, boosting top line numbers on convenience items. Still, Walgreen generates close to two-thirds of its revenues on prescription drugs, so it has to present consumers with a reason to use its pharmacy versus those of big-box stores such as Target (TGT) that are willing to sacrifice pharmacy margins to get more eyes on other products in the store.
Hubris has also been a problem for Walgreen management recently. The firm’s spat with pharmacy benefit manager Express Scripts (EXRS) ended by terminating the companies’ relationship, reducing the number of patients who buy their medications through WAG.
Still, despite the unpleasantries, stair step sales growth should help WAG turn out a dividend hike in the near-term. Watch out for third-quarter earnings on June 26.
CBS
CBS (CBS) has certainly earned household name status -- the firm owns a deep portfolio of entertainment and media assets that consumers see every day, from its namesake TV network to pay TV channel Showtime, CBS Radio, publishing house Simon & Schuster, and King World Productions.
CBS currently pays out a 10-cent quarterly dividend, and it has for the last five quarters. I think there’s a possible dividend hike for shareholders in the next quarter.
The CBS network is a powerful brand that owns popular shows and has rights to air in-demand content (like NFL games). That positioning means that CBS is able to earn more advertising revenues than cable networks that get broadcast to a smaller audience, and that it’s earning better ratings than most right now. A strong content library is also coming in handy for CBS now that streaming services are eager to cut bigger checks for its shows.
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Showtime is a nice feather in CBS’ cap -- the pay TV network has won plenty of critical acclaim in the past several years, generating provocative hit shows that rival those at standard-bearer HBO. Not all of CBS’ businesses are as attractive; its book publishing business is facing industry headwinds, for instance.
Still, a strong balance sheet and a history of dividend hikes make an increase likely in the next quarter.
As of the most recently reported quarter, CBS was one of Greenlight Capital's holdings.
American Eagle Outfitters
American Eagle Outfitters (AEO) has one of the strongest brands in young apparel, a lucrative but tough market to crack. The firm’s more than 900 North American stores can be found at most major malls, marketing to the teenager through twentysomething demographic.
AEO used to have a bigger target market. The firm’s now-defunct Martin + Osa was designed to be a label for mass-affluent folks in their twenties, thirties and forties, but the brand folded under the price pressures of the economy in 2010. Next on the chopping block is the 77kids brand of children’s clothing.
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Both brands were relatively small chunks of AEO’s sales, so they won’t be missed. Hopefully, management has learned its lesson and will stick with its core demographic for the next few years.
Financially, the brand flubs have left American Eagle none the worse for wear. The firm boasts more than $722 million in cash and no debt, meaning that around 20% of AEO’s market capitalization is paid for in cold, hard cash. Dividend raises have been somewhat haphazard, and the firm’s 11-cent dividend has been in play since 2010 (including an announced payout this month). I think the next quarter is prime time for a modest hike in AEO’s 2.3% yield.
Stanley Black & Decker
Father’s day is just a few days away, and tool ads seem to be everywhere. That’s a good thing for tool giant Stanley Black & Decker (SWK) -- the firm’s primary business is making construction tools for professionals and do-it-yourselfers, with a security device business rounding out SWK’s offerings.
The 2010 merger of Stanley and Black & Decker created a massive force in tools, one that should continue to squeeze efficiency out of its combined operations as merger costs stop flowing to the income statement and redundancies slowly disappear. By the end of next year, those savings should approach $400 million, making way for a material improvement in profitability. As the North American construction and DIY market slowly warms back up, international growth is going to be a key growth avenue to target for SWK.
Ample free cash flow generation should help to boost the firm’s 41-cent dividend in the next quarter; SWK has kept its payouts flat for the last six quarters, so it’s due for a dividend hike. That would mean a boost to SWK’s 2.64% yield in 2012.
Activision Blizzard
Activision Blizzard (ATVI) is one of the biggest video game makers in the world, with franchises such as Call of Duty, World of Warcraft and Diablo under its belt. Revenue generation is more attractive at ATVI than at most rivals -- after all, its most popular franchises feature a service component, like the subscription fees that World of Warcraft’s 10 million subscribers pay each month. ATVI’s introduction of a service component into the hugely popular Call of Duty franchise with Call of Duty Elite shows that the firm is working to replicate that model beyond traditional titles.
Subscription revenues are an immensely logical way for ATVI to earn money on great games. Because gamers have a massive sunk cost in building characters and attaining status, they’re a lot less likely to switch to a competing franchise and restart the process. The result is a sticky revenue stream with exceptionally high margins -- every investor’s dream.
Activision Blizzard’s balance sheet is immaculate too: the firm has more than $3.4 billion in cash on hand, and zero debt. That’s close to 30% of ATVI’s market capitalization paid for in cash during a time when the firm sports an unadjusted P/E of just 13.8. ATVI is looking pretty cheap right now, especially if it hikes its dividend in the next quarter. Massive cash generation could bring an increase to its quarterly payout, currently at 18 cents per share.
To see these dividend plays in action, check out the Potential Blue Chip Dividend Stocks portfolio on Stockpickr.
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-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
