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Sneak Peek: 5 Dividend Hikes on the Horizon - views
BALTIMORE (Stockpickr) -- If there's one thing that a correction is good for, it's reminding investors why dividends matter.
Even if yesterday's bounce in the S&P 500 was the first brick in another wall of the rally that's propelled stocks for seven months, investors are going to think twice about shedding their defensive income-paying names -- at least for a week or two. For some reason, dividends are associated with boring, low-return names. The big idea is that those paltry returns are the trade-off for the defensive properties of an income portfolio.
But in fact, dividends and total returns go hand in hand.
According to research from Wharton Professor Jeremy Siegel, reinvested dividends account for as much as 97% of total market performance. Better yet, dividends even impact how big your capital gains are. Over the last three and a half decades, dividend stocks have 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, based on data compiled by Ned Davis Research.
With companies sitting on record corporate cash and profits, it's going to be crucial to keep looking ahead for the companies most likely to dish out dividend hikes. In recent months we've had some stellar success in finding future dividend increases 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 whether or not 2013's rally will be able to hang on.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
Coca-Cola (KO) is part of the reason that income stocks have the reputation for being big, defensive names. Coke is big, at a market capitalization of $181 billion, there's no doubt about it. It's also defensive thanks to one of the widest economic moats in the consumer staples sector. But the 14% year-to-date returns that Coke has wrung out of its stock between capital gains and dividend payouts in 2013 certainly isn't stodgy. Right now, KO pays out a 28-cent quarterly dividend for a 2.76% yield; I think that payout is due for a raise.
Atlanta-based Coca-Cola is the largest non-alcoholic beverage company in the world. Just to put that in perspective, around 3% of all the beverages served every single day sport one of Coke's uber-valuable brands. That impressive statistic comes thanks to an equally impressive distribution network that touches more than 200 countries. That sort of distribution is hugely capital intense to establish, a fact that gives Coke a huge advantage over potential rivals. While top competitor PepsiCo (PEP) does boast a pretty impressive distribution network of its own, Coke has managed to keep PEP at bay for decades in the number-two beverage spot.
Emerging markets are, by far, Coke's most attractive growth opportunity in the near-term, as increasingly affluent populations consume more servings of Coca-Cola's products each day. At home, novel products such as the touch screen-powered Freestyle fountain machine give Coke a leg up on its stickiest customer base: fast food restaurants.
Coke's balance sheet is what you'd expect for a blue chip of its size: It's big, and it's replete with plenty of liquidity. The firm earns enough cash to justify a dividend hike in the near-term.
From one giant, and onto another: Nike (NKE).
Nike is the largest athletic apparel company in the world, with sales of more than $24 billion. Nike's products are sold in more than 50,000 retail locations, as well as a geographic footprint of more than 700 company-owned stores. Like Coke, Nike's brand is universally recognized and hugely valuable. That branding, and its ability to court premium dollars for apparel with the firm's signature "swoosh" isn't likely to lose its luster anytime soon.
Nike has done well by not ignoring its roots. By keeping its reputation as a performance shoe maker, Nike is able to earn more for premium lines, and it's able to drive sales for less proprietary merchandise such as T-shirts. Deals like the apparel contract that Nike started with the NFL in 2012 should continue to support the brand's price tag for the foreseeable future.
As with Coke, emerging and developing markets currently offer the most attractive growth story for Nike, particularly as smaller competitors remain focused on stealing Nike's share in the West. A burgeoning middle class in some of the world's most populous countries should continue to pay for the firm's growth -- and its dividend payout. Right now, Nike's 21-cent quarterly dividend works out to a 1.25% yield, but the firm is due to give investors a raise.
2013 is panning out to be a good year for the Ford Motor (F): Shares of the $60 billion automaker have rallied 20% year-to-date, even more when the firm's 2.59% dividend yield is factored in. Ford currently pays out a 10-cent quarterly dividend check, but the firm's improving operations mean that number is likely to move higher in the next quarter or two.
Ford was the sole Detroit automaker that made it through the Great Recession without declaring bankruptcy, but now new black clouds are forming overhead in the form of European sales. The Eurozone contributes more than 21% of Ford's total revenues, no small chunk. Even so, I think that improvements here at home should more than offset any weakness in Ford's Eurozone numbers. Ford is still in the process of transitioning itself from the firm that had investors on the edges of their seats in 2008. Greatly improved build quality and reliability have done leaps and bounds for the firm's reputation in recent years.
So has an improved stable of cars. Ford's revamped line up is one of the most attractive the firm has posted up in years, and perhaps just as importantly, it's finally managing to carve out an identifiable niche with its premium Lincoln nameplate. Ford has done a good job of returning yield to shareholders in the form of debt, with dividends as a secondary priority. But increased free cash generation gives the firm the ability to hike its dividend payout in 2013.
Starbucks (SBUX) has seen some amazing growth in the last decade. If "a Starbucks on every corner" has been the punch line of choice for the last few years, then SBUX investors have been laughing all the way to the bank. Starbucks' network of retail locations has grown more than 18,000 strong, on top of the presence that the firm has already carved out on grocery shelves. Right now, the firm pays out a 21-cent dividend for a 1.34% yield.
SBUX has made an important transition from being "merely" the standard-bearer coffee chain to become a grocery staple with packaged coffee and processed food offerings. That change is attractive largely because of how aggressive SBUX has historically been at cutting out the middle man in its high-growth channels: it did it the first time with Kraft (KRFT) when it scrapped the product distribution partnership it had formed, opting to handle the business internally and keep more of the profits. Then, it did it again to Green Mountain Coffee (GMCR) when Starbucks announced the Verismo, a competing home brewing system.
SBUX's renewal of its Keurig contract indicates Verismo has been less successful at taking share from GMCR. Even so, SBUX is clearly the power player in the relationship. Facing a nearly saturated market for coffee shop locations, SBUX needs to continue to be aggressive about its flourishing foods businesses. While this firm is far from a core income holding with a sub-2% yield, Starbucks has the wherewithal to grow its payout near-term.
If you've eaten out lately, you may have tried some of Sysco (SYY) offerings, even if you didn't know it. After all, Sysco is the largest food service distribution company in North America, providing everything from ingredients to par-cooked entrees to services such as menu analysis to 400,000 restaurants, hotels and institutional dining facilities.
The most obvious advantage of being the biggest player in the foodservice distribution business is supply chain. Because distribution costs are potentially crippling, SYY's ability to spread costs across the entire system makes it more competitive than smaller firms. From a food service standpoint, it makes sense to turn to a supplier such as Sysco; after all, the firm can take many of the costs and food safety concerns off of a restaurateur's plate, helping profitability down the line as well.
Sysco's balance sheet currently carries $331 million in cash, not a jaw-dropping number, but enough to cover any bumps that free cash flows don't. With a reasonable debt level and a free cash flow yield above 5%, Sysco is in good shape to hike its dividend payouts in 2013. Investors should look for an increase to SYY's 28-cent dividend in the next couple of quarters.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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.
Follow Jonas on Twitter @JonasElmerraji