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7 Stocks Dishing Out Bigger Dividends - 12870 views
BALTIMORE (Stockpickr) -- Stocks are looking to end the week on a high note today, a welcome change given Wednesday’s massive low note in the S&P 500.
While most investors’ attention has been fixated on capital gains this earnings season, dividends have been consistently flowing in. In the past five trading sessions, a total of 35 companies announced dividend hikes -- a significant chunk, particularly when investor anxiety is as high as it’s been. Dividend increases have been a major theme this year; not only did companies surpass 2010’s hikes early on in 2011, but they’ve also helped to ratchet the dividend yield of the S&P 500 to the highest levels it’s seen since the 1990s.
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That’s a big deal -- after all, dividends aren’t just window dressing. Historically, cash payouts to shareholders have a critical impact on the total returns those investors realize. How critical?
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.
That’s why we pay close attention to the firms that are shoveling more corporate cash to shareholders each week. With that, here’s a look at seven of the stocks that hiked payouts in the last week.
The biggest firm to hike its dividend payout last week was Starbucks (SBUX), the $32 billion coffee shop chain that has more than 17,000 worldwide locations under its belt. 2011 has been a strong year for Starbucks, and shares have reflected that -- this stock has rallied more than 35% year-to-date. Last week, the company announced a 30.77% dividend increase, bringing its yield to 1.58%.
In a very saturated market, Starbucks has been expert at squeezing out growth. To find it, the firm has increased its focus on grocery store shelves, growing its presence in packaged coffee, tea and branded foods. One of the highest-profile partnerships of the year was the teaming up of Starbucks and Green Mountain Coffee Roasters (GMCR), arguably one of the most dramatic stocks on the Nasdaq.
While GMCR has had some major challenges this week (like the earnings miss that spurred a 39% single-day drop in shares yesterday), Starbucks expects sales of its K-Cup portion packs to be constrained only by production capacity this quarter. The company has said that it envisions Starbucks’ K-Cups becoming a $1 billion business by itself -- part of the reason for the attention that this deal has garnered.
While Starbucks’ dividend yield doesn’t exactly put it in the core income category, management’s emphasis on dividend growth should be a welcome value added for growth investors.
Starbucks is one of TheStreet Ratings' top-rated restaurant and hotel stocks.
Insurance and asset management firm Prudential Financial (PRU) hasn’t exactly had the same successes as Starbucks in 2011. Shares of the firm have slid around 10% so far this year, dragged lower by poor performance in the whole financial sector. The company’s 26% dividend hike this week should at least help to take some of the sting out of PRU’s performance -- the move makes the firm’s yield 2.8%.
Prudential’s bread and butter is the life insurance business. As one of the largest life insurers in the world, Prudential has scale benefits that smaller firms can’t afford -- particularly under the diminished risk profiles companies are seeking in this post-recession environment. In many ways, Prudential’s experience in the investment business helps to drive their focus on delivering shareholder returns. Prudential’s massive investment portfolio is yield-centric, so the firm knows how to court like-minded investors.
Financially, Prudential is in sound shape, with ample liquidity and leverage that’s in line with the rest of the industry. The company’s ramping up of its Asian business through acquisitions of AIG’s (AIG) pacific life insurance arms should improve the balance sheet further, offering a stickier, higher-margin customer to its roster. The combination of a stayed insurance business and a fee-based asset management arm makes Prudential a solid income pick for investors looking for financial sector exposure.
I also featured Prudential recently in "5 Breakout Trades to Avoid Eurozone Fallout."
Automatic Data Processing
In the last 50 years, the name Automatic Data Processing (ADP) has become synonymous with “jobs.” The HR administration firm services more than a half-million clients worldwide, providing everything from payroll processing to outsourced HR services. Lately, exposure to the jobs market wouldn’t have been seen as a positive -- unemployment is at 9%, after all -- but ADP has actually managed to growth throughout the recession.
Part of the reason for that success has been ADP’s skill at providing complementary services for its clients, growing its top line through expanded offerings when expanding its customer Rolodex isn’t a viable strategy. In the long run, that success at growing the business in tough times should provide accelerated growth when the economy turns the quarter. A low-rate environment has been another challenge for ADP. Like other payroll firms, ADP earns interest on its float (the money ADP holds between the time it’s paid by the companies and withdrawn by employees); around 6% of the firm’s profits come from interest income alone.
A return to higher rates would also dramatically improve ADP’s profitability on a longer-term timeframe. Meanwhile, the firm continues to pass performance onto its shareholders -- this week, ADP announced a 9.72% dividend hike that brings the firm’s total yield to 3.11%. ADP’s exposure to jobs and interest rate upside (and its success during the downside) makes it an ideal core holding for dividend investors’ portfolios.
ADP, one of the top-yielding computer software and services stocks, shows up on a recent list of 8 Stocks With Solid Dividend Growth.
Estee Lauder (EL) is the $23 billion cosmetics company behind a portfolio of brands that includes Clinique, M-A-C, Origins and the firm’s namesake Estee Lauder line. Estee Lauder has seen enviable growth in the last three years, growing the top-line by 20% to $8.8 billion, and driving net margins to 11.25% in the firm’s latest quarter. Clearly, trepidation over consumer discretionary spending hasn’t impacted Estee Lauder.
Part of the reason for that is the firm’s geographic exposure: Only 40% of sales come from the U.S., the balance coming from approximately 150 other countries. The fact that Estee Lauder already has exposure to a number of other markets means that the firm is better able to react to growth trends in specific countries. Another major factor in EL’s bottom-line boost has been the aggressive cost cutting measures that have eliminated unnecessary spending. The new, low-profile operating structure is a welcome shift for investors.
So is Estee Lauder’s dividend hike. Last week, management announced a 40% increase in its dividend payout, bringing the stock’s total yield to 0.91%. While Estee Lauder’s growth has been attractive, it looks more than priced-in right now. A dividend hike is a commendable move, but there are cheaper options for investors looking for exposure to consumer spending right now.
Estee Lauder is one of TheStreet Ratings' top-rated personal products stocks.
Archer Daniels Midland ompany
Agricultural processing and distribution giant Archer Daniels Midland (ADM) is another firm that announced a dividend increase last week. The firm’s 9.4% dividend hike brings its quarterly payout to 17 cents per share, a 2.42% yield at current prices.
ADM is a monolith in the soft commodities business, a position that gives the firm certain advantages in capturing arbitrage opportunities and generating returns even when commodity prices aren’t cooperating. Agricultural processing and distribution is a business where scale matters, and ADM certainly has it -- the firm’s integrated operations give it more negotiating power with customers and provide thicker margins for investors.
Financially, ADM is also in a very capital-intense business. As a result, the firm is constantly turning to the marketplace for working capital funding, particularly as commodity prices continue to tick higher. For the moment, a low-interest-rate environment is benefitting the firm, as exposure to commodities offsets inflation on its balance sheet and makes real rates on the firm’s commercial paper effectively zero.
That combination of commodity exposure and a high yield should continue to look attractive to shareholders in 2012.
Starwood Hotels & Resorts
Luxury hotelier Starwood Hotels & Resorts (HOT) owns some of the most well-know lodging names in the business, St. Regis, W and Le Meridien among them. While it owns the names, by and large it doesn’t own the 350 hotels in its pipeline. Around 95% of its properties are franchised to other owners.
But it’s that other 5% that matter. Starwood’s owned hotels generate approximately three-quarters of its operating income, providing a clear benefit for hoteliers who are willing to take the balance sheet risk of picking up more owned properties. To be sure, owned properties are a risk -- hotel chains that own their own properties got shellacked when the floor fell out of the property market in 2008. Still, owner-operators who can maintain positive cash flows can afford to ignore market-induced hiccups.
For now, excessive balance sheet leverage should preclude Starwood from trying to increase its owned hotel portfolio. Longer-term, management should be looking toward buying more properties. Last week, the firm announced a 66.67% dividend increase, bringing its yield to 1.03%.
Snap-on (SNA) is one of the most popular names in auto repair technicians’ toolboxes. The tool and diagnostic equipment maker produces everything from wrenches to electronic vehicle service databases -- a wide-ranging set of offerings that most of SNA’s peers can’t match. Another factor that Snap-on’s competitors can’t match is the company’s control over its products.
While many tool companies outsource production or distribution functions to others, Snap-on controls the manufacturing process from start to finish and then takes on distribution straight to customers’ shops with a fleet of 3,200 specially outfitted vans. That level of control affords SNA hefty margins and a level of quality control that mechanics are looking for in their tools.
Snap-on’s business stands to benefit immensely from emerging market growth, particularly in China. While the company’s unique business model means that it may take longer to reach sales scale in China, it also means that exposure to the People’s Republic will come with bigger margins once they mature.
Snap-on announced a 6.25% dividend hike last week, bringing the firm’s yield to 2.53%.
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.