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6 Dividend Stocks for Earnings Season - 13511 views
BALTIMORE (Stockpickr) -- Dividends are front-and-center again this week, grabbing the spotlight as earnings releases flood Wall Street. The slew of new dividend data that accompanies earnings is significant, particularly now.
That’s because uncertainty remains incredibly high in the market right now; coupled with a record low-rate environment, investors are clamoring for a share of corporations’ record cash reserves right now. Dividends do that. And the Wall Street consensus is that they’ll continue to do so for the foreseeable future.
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With few low-risk ways to deploy cash right now, companies are opting to return it to shareholders through dividends and distributions rather than invest it in risks assets. As a result, investors are expecting Dow component stocks to have hiked their year-to-date payouts by almost 12% after earnings season is completed.
There’s good reason to pay attention to those dividend increases right now: Over the last 36 years, dividend stocks outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.
With that, here’s a look at our list of recent dividend-increasers.
2011 has been a tough year so far for chemical maker Albemarle (ALB); the $4 billion firm has slid more than 19% year-to-date in spite of the sequential uptick in sales that the firm has managed to eke out. While the firm’s decision to hike dividend payouts by 6% last week does help, this stock is still only yielding 1.5% at current levels. The tide is going to have to turn among investors for shareholders to regain their lost ground.
Albemarle manufactures a wide range of niche chemical products, from drilling fluid and petroleum catalysts to pharmaceuticals like ibuprofen. In recent years, Albemarle has carved out an attractive niche for itself, but lately, the firm has been a victim of its own plans. The company has excessive exposure to the drilling and manufacturing industries, two areas that have been hit in recent years.
Despite that positioning, Albemarle is well suited to benefit from a broad market recovery. While its niches are languishing a bit now, the firm holds attractive and defensible positions in them, and should see cyclical demand tick higher in the mid-term. Financially, Albemarle is in good shape, with limited leverage on its balance sheet and solid cash flow generation abilities. Even so, the stock’s small yield means that it’s hardly a core income holding right now.
As of the most recently reported period, Albemarle was a holding in TPG-Axon Capital's portfolio.
On the other side of the spectrum is power and natural gas utility Ameren (AEE), one of the highest-yielding utility stocks. This firm has seen shares rally double digits in 2011, buoyed by increased demand for high-yield equities right now. It’s arguable that we’re on the early side of the business cycle right now; as such, interest-rate-sensitive stocks are going to be the biggest beneficiaries of market tailwinds.
Ameren’s regulated utilities serve more than 2.4 million customers in Missouri and Illinois, giving it a stable geographic footprint with fairly consistent operations. For dividend investors, that’s a very desirable profile. Ameren’s generation assets are primarily lower-cost plants, which ensures that the firm is able to maintain respectable levels of profitability even if power rates in its service area are comparatively low.
The regulated utility business is capital intensive, and Ameren’s balance sheet is no exception for the industry. That said, the firm remains in sound financial health right now, and it should be able to maintain its dividend payouts for the foreseeable future. Incidentally, those dividends got hiked at the end of last week, climbing 3.8% to 40 cents per share.
That’s a 5.2% dividend yield at current prices. That makes Ameren an attractive core income holding right now.
Visa’s (V) another stock that’s been thriving despite this environment. Shares of the $75 billion payment processor have rallied 30% in 2011. In the payment business, Visa has no equals -- this firm’s logo currently graces more than 60% of the world’s payment cards, a statistic that carries over into its acceptance rate at retailers worldwide.
The resulting network is essentially a self-perpetuating cycle: Customers pick up Visa cards because they’re accepted everywhere, and stores accept Visa cards because everyone carries them. That sort of a barrier to entry to new comers gives Visa a solid economic moat.
One of the firm’s biggest coups was its decision to embrace the debit card business. By being a first adopter in debit cards, Visa’s competitors are still playing catch up. That said, regulators continue to be a concern for Visa right now.
The fact that Visa offers exposure to overall consumer spending without carrying the credit risks of a card issuer is particularly compelling. Trends are pushing consumers worldwide away from cash; that means that Visa should continue to see top line improvements even with black clouds over the economy.
Last week, the firm announced a 47% dividend hike, bringing its payout to 22 cents for the quarter. While that only amounts to just shy of a 1% yield, income isn’t the primary reason for buying this momentum name.
Enterprise Products Partners
At 1.2%, the dividend hike in Enterprise Products Partners (EPD) was the smallest of this group, but the tiny hike is getting heaped onto the biggest yield. EPD currently doles out a 5.6% yield at current levels -- that’s a head-turning payout.
Enterprise is an energy MLP that transports and processes natural gas products through its network of pipelines centered on the Gulf Coast. The $38 billion partnership is one of the largest of its class, and in this industry, size carries significant advantages. The firm has significant project cash flows coming into shares in the next couple of years.
Enterprise’s MLP structure makes it a particularly attractive income holding. The firm pays out the vast majority of all income directly to its partners (aka shareholders) without paying taxes first. While that may make your tax return a bit more complicated, it means that those with lower tax burdens get to take home more of this firm’s payouts.
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Uniform rental firm Cintas (CTAS) announced a 10.2% dividend increase on Tuesday, bringing the firm’s payout to 61.25 cents per share, a 1.87% yield. The firm is the biggest player in the uniform rental business, with more than 900,000 customers. That massive customer Rolodex provides the firm with an enviable list of clients to sell ancillary services to, a trend that Cintas has been embracing with both arms in 2011.
The company’s other services include everything from fire protection to document management -- and that disparate group of offerings is providing stable, attractive growth for Cintas right now. Still, the uniform rental business remains Cintas’ most important one; it’ll be key for management not to neglect their cash cow in pursuit of growth in new business lines.
Cintas is another example of a firm that’s not a core dividend holding but has a management team that’s still attempting to send investors a positive message through dividend hikes. At this point, though, I think that higher-yielding names look more attractive -- especially with unemployment teetering above 9%.
Last week, natural gas company Kinder Morgan (KMI) announced that it would be undertaking a $38 billion acquisition of El Paso (EP), a deal that makes the former the largest midstream energy company in the country by a long shot. By itself, the deal is the biggest corporate action in the energy sector this year. The deal should carry considerable upside for Kinder Morgan, particularly because the firm plans on unloading the parts of El Paso’s business that it has no use for.
Kinder Morgan already owns the general partner plus more than 11% of Kinder Morgan Energy Partners (KMP), another MLP that provides significant dividend income to its partners at a tax-advantaged rate. KMI changes that tax situation by offering a more traditional corporate structure -- one that’s potentially more attractive to investors who’d rather not be directly taxed on KMP’s distributions.
On Wednesday, management announced a 3% dividend hike for KMI, a move that ratchets the firm’s total payout to 4.21% right now. While this stock isn’t cheap by most standards, the benefits added by the EP acquisition make it more than attractive as a core income holding in 2011.
To see these dividend plays in action, check out the Dividend Stocks for the Week portfolio on Stockpickr.
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-- Written by Jonas Elmerraji in Baltimore.
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.