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Transcript of DSR€¦ · top 10 dividend growth stocks dividend stocks rock page 4 legal term of use the...
DSR
A list of 10 companies every dividend growth investor should consider
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Table of Contents
Legal Term of Use .................................................................................................. 4
Introduction ........................................................................................................... 5
3M Co (MMM) ....................................................................................................... 6
What Makes MMM a Good Business ................................................................. 6
Dividend Growth Perspective ............................................................................. 7
Stock Valuation .................................................................................................. 8
Walt Disney (DIS) ................................................................................................. 10
What Makes DIS a Good Business .................................................................... 10
Dividend Growth Perspective ........................................................................... 11
Stock Valuation ................................................................................................ 12
Genuine Parts (GPC) ............................................................................................ 14
What Makes GPC a Good Business................................................................... 14
Dividend Growth Perspective ........................................................................... 15
Stock Valuation ................................................................................................ 16
Johnson & Johnson (JNJ) ...................................................................................... 18
What Makes JNJ a Good Business .................................................................... 18
Dividend Growth Perspective ........................................................................... 19
Stock Valuation ................................................................................................ 20
BlackRock (BLK) .................................................................................................... 21
What Makes BLK a Good Business ................................................................... 21
Dividend Growth Perspective ........................................................................... 22
Stock Valuation ................................................................................................ 23
Apple (AAPL) ........................................................................................................ 24
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What Makes AAPL a Good Business ................................................................. 24
Dividend Growth Perspective ........................................................................... 25
Stock Valuation ................................................................................................ 26
Lockheed Martin(LMT) ......................................................................................... 27
What Makes LMT a Good Business .................................................................. 27
Dividend Growth Perspective ........................................................................... 28
Stock Valuation ................................................................................................ 28
Chevron(CVX) ....................................................................................................... 30
What Makes CVX a Good Business ................................................................... 30
Dividend Growth Perspective ........................................................................... 30
Stock Valuation ................................................................................................ 31
Hasbro (HAS) ........................................................................................................ 33
What Makes HAS a Good Business ................................................................... 33
Dividend Growth Perspective ........................................................................... 34
Stock Valuation ................................................................................................ 35
Wells Fargo(WFC) ................................................................................................ 36
What Makes WFC a Good Business .................................................................. 36
Dividend Growth Perspective ........................................................................... 37
Stock Valuation ................................................................................................ 38
What’s Your Next Step ......................................................................................... 39
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Legal Term of Use
THE CONTENTS OF THIS MANUAL REFLECT THE AUTHOR’S VIEWS ACQUIRED
THROUGH HIS EXPERIENCE ON THE TOPIC UNDER DISCUSSION. THE AUTHOR
AND/OR PUBLISHER DISCLAIM ANY PERSONAL LOSS OR LIABILITY CAUSED BY THE
UTILIZATION OF ANY INFORMATION PRESENTED HEREIN. THE AUTHOR IS NOT
ENGAGED IN RENDERING ANY LEGAL OR PROFESSIONAL ADVICE. THE SERVICES
OF A PROFESSIONAL ARE RECOMMENDED IF LEGAL ADVICE OR ASSISTANCE IS
NEEDED.
WHILE THE SOURCES MENTIONED HEREIN ARE ASSUMED TO BE RELIABLE AT THE
TIME OF WRITING, THE AUTHOR, PUBLISHER AND THEIR AFFILIATES ARE NOT
RESPONSIBLE FOR THEIR ACTIVITIES. FROM TIME TO TIME, SOURCES MAY
TERMINATE OR MOVE AND PRICES MAY CHANGE WITHOUT NOTICE. SOURCES
CAN ONLY BE CONFIRMED RELIABLE AT THE TIME OF ORIGINAL PUBLICATION OF
THIS MANUAL.
THIS MANUAL IS A GUIDE ONLY AND, AS SUCH, SHOULD BE CONSIDERED SOLELY
FOR BASIC INFORMATION. EARNINGS OR PROFITS DERIVED FROM PARTICIPATING
IN THE FOLLOWING PROGRAM ARE ENTIRELY GENERATED BY THE AMBITION,
MOTIVATION, DESIRE AND ABILITIES OF THE INDIVIDUAL READER.
NO PART OF THIS MANUAL MAY BE ALTERED, COPIED, OR DISTRIBUTED WITHOUT
PRIOR WRITTEN PERMISSION OF THE AUTHOR OR PUBLISHER. ALL PRODUCT
NAMES, LOGOS, AND TRADEMARKS ARE PROPERTY OF THEIR RESPECTIVE
OWNERS WHO HAVE NOT NECESSARILY ENDORSED, SPONSORED, OR APPROVED
THIS PUBLICATION. TEXT AND IMAGES AVAILABLE OVER THE INTERNET AND USED
IN THIS MANUAL MAY BE SUBJECT TO INTELLECTUAL RIGHTS AND MAY NOT BE
COPIED FROM THIS MANUAL.
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Introduction
Hello!
My name is Mike McNeil and I’m the author of
The Dividend Guy Blog along with the owner
and portfolio manager over at Dividend Stocks
Rock. I earned my bachelor degree in finance-
marketing, own a CFP title along with an MBA
in financial services. Besides being a passionate
investor, I’m also happily married with three beautiful children. I started my
online venture to educate people about investing and to be able to spend more
time with my family.
I used to struggle with the same issues millions of small investors deal with on a
daily basis. Which stocks to buy? When to sell them? How to find the time to
manage my portfolio? How to diversify? I wasn’t into dividend investing until I
looked in depth at my portfolio returns and realized I was having difficulty
keeping up with the market.
The root of the problem was a very poorly built portfolio that lacked structure and
the components required to build a sturdy base. I made good money from the
stock market but I was taking unnecessary risk to achieve my investing goals.
From that point on, I was determined to create a portfolio strategy that would
allow me to benefit from dividend growth stocks as a solid foundation. Since
then, I manage my portfolio with a stress free method that enables me to cash
out dividend payments even when the market goes sour.
The purpose of this guide is to create a list of 10 very strong dividend growth
stocks that I can buy and sleep on. I didn’t want to make an exhaustive list as
there are several great companies to buy. I didn’t want to make a classic list
either, this is why I tried to avoid classics such as Coca-Cola (KO) in this list… but I
couldn’t help including Johnson & Johnson (JNJ) hahaha!
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3M Co (MMM)
What Makes MMM a Good Business
The strongest reason why you should add MMM to your portfolio is related to its
incredible ability to generate cash flow on a constant basis. Most 3M products are
consumable and generate repeat purchases. MMM makes sure to keep its
competitors behind it by spending over 2 billion in R&D annually while using
another 2 billion for acquisitions each year. However, 3M Co doesn’t forget about
its shareholders either. MMM has a strong history of dividend growth and stock
repurchases. The business evolves in 5 different segments:
Industrial Business (34%): This is the largest segment in terms of sales. The
division provides adhesives, abrasives, filtration systems, fasteners and specialty
materials to a variety of industries.
Safety and Graphics (18%): This business offers films, reflective materials,
projection systems, and the like. I bet you didn't know much about this part of 3M
Co, right?
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Electronics and Energy (17%): This is 3M’s biggest business operation in Asia with
two-thirds of its revenue coming from this region. Electronics and Energy provides
products for businesses including films for LCD screens and splicing products for
signal cables.
Healthcare (17%): The Healthcare business focuses on products offered to more
developed countries such as the US and Europe. It makes products in the areas of
wound care, oral care, drug delivery systems, etc.
Consumer and Office (14%): This is probably the division we know best as
consumers; 3M offers a variety of home office products in developed countries.
Over half of these segment revenues come from the US.
Dividend Growth Perspective
The company has posted a double digit annual dividend growth rate over the past
5 years (10.89%). Since both revenues and earnings continue to increase even
considering currency headwinds, dividend investors should expect more dividend
increases in the upcoming years.
MMM was able to keep a payout ratio under 50% during the past 5 years leading
us to think that future dividend increase is sustainable even if the company faces
a global economic slowdown in the next couple of years.
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Stock Valuation
In my opinion, MMM should be part of most conservative (or core) dividend
portfolios. While you shouldn’t expect incredible growth from this company,
dividend payment increases will always be there each year. In order to verify if it’s
the right time to buy MMM, we will look at the company’s 10 year PE history
along with a Dividend Discount Model calculation.
As you can see, the strong dividend increase in the past 5 years hasn’t been
ignored by the market. The P/E ratio has continuously increased over the past 3
years. However, the current market slump generated a buying opportunity as the
PE ratio dropped from 23 to under 19.
It seems the company hasn’t been highly valued as right now. Let’s use the
dividend discount model to see how much the company is worth according to its
dividend payment ability.
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Source: Dividend Toolkit
I’ve used a dividend growth rate of 10% for the first 10 years and reduced it to
7.5% afterward. Then, I used a discount rate of 9% since the company shows
stellar numbers.
According to the DDM, the company trades at a discount over 20% or so with a
fair value of $179.
Considering MMM’s product portfolio and the fact the company is making the
bulk of its sales from consumable products in a business-to-business model,
MMM seems fairly attractive at the current price. This is a “long-term-dividend-
growth” stock for patient investors.
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Walt Disney (DIS)
What Makes DIS a Good Business
For a while, Disney’s revenue growth was saved by its media networks division
including the highly profitable ESPN. The company is currently facing more
headwinds in that sector as cable distributors are losing customers to internet &
streaming providers. Fortunately, the company has greatly improved its other
divisions over the past 5 years. The US economy rebound combined with a low
price for gasoline have improved the typical American budget for entertainment.
Disney also went from one success to another with its new Character movie film
Frozen. In December, we will witness another attempt by the beginning of a new
Star Wars trilogy while the entertainment company is already working on a sequel
to blockbuster Frozen.
Walt Disney is divided into five different segments:
Media Networks: ESPN is by far the most valuable asset in the division. While
ESPN’s operating income decreased slightly due to higher production costs and
lower advertising revenue, the Disney family compensated for the small shortfall.
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Overall, this is a well-diversified segment split between kids and grown-up sports
fans.
Parks & Resorts: The Park division went through a very tough period when US
parks suffered from the previous recession while Euro Disney has been in a
continuous struggle for several years. While it's not getting any better in Europe,
US parks' profits soared by 20% in the last quarter, betting on a strong economy.
The new park in Shanghai should bring more to the table in the upcoming years.
Studio Entertainments: Disney's movie studios published a 33% surge in profits
led by three blockbusters: Frozen, Guardians of the Galaxy and Maleficent. They
now announced a sequel to their most recent success Frozen and the new Star
Wars Trilogy will make its on screen debut with its first movie in December.
Consumer Products: In my opinion, Disney's biggest strength lies in its business
model and the ability to integrate and cross-sell their ideas. Their most recent
success with Frozen is probably the best example. Disney hit the box office big
time with this movie and then went on to produce several derivative consumer
products. Strong with a licensing agreement with Hasbro (NASDAQ:HAS), Frozen
toys will sell for several years. Then, you can bet on new Frozen attractions to be
included in Disney Parks.
Interactive: The interactive segment is the virtual extension of Disney's products.
It creates and markets video games both online and for consoles. Many, if not all
of them, are derived from Disney characters and movies.
Dividend Growth Perspective
Income seeking investors will tell me that the DIS dividend yield is not high
enough to be considered. However, you should not only look at its yield, but also
at its growth rate. In the past 5 years, the company has increased its payments by
19.70% CAGR. In other words, the dividend payment doubled in 5 years.
The best part is the company’s payout ratio stands under 25% right now. I
personally can appreciate a low dividend yield if the payout ratio is at the same
level but the dividend growth perspective is through the roof.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values DIS:
While the company has been traded at lower levels in the past, the current
growth perspective explains the higher PE ratio. The recent drop in the stock price
represents a great entry point.
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I also use a DDM model to consider DIS as a dividend paying machine:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $72.34 $53.78 $42.67
10% Premium $66.31 $49.30 $39.12
Intrinsic Value $60.28 $44.82 $35.56
10% Discount $54.25 $40.34 $32.00
20% Discount $48.22 $35.85 $28.45
Source: Dividend Toolkit
The fact that Disney doesn’t pay a high yield doesn’t give a good perspective to
value the company with a dividend discount model. I used a discount rate of 11%
as it is a volatile business that goes with the economy. Then, I considered a 10%
dividend growth rate for the first 10 years and 7% after. However, if I do the math
with this year’s dividend increase rate (15%) for the first 10 years and drop it to
9% afterward, I get the following chart:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $289.69 $142.34 $93.34
10% Premium $265.55 $130.48 $85.56
Intrinsic Value $241.41 $118.62 $77.78
10% Discount $217.27 $106.76 $70.00
20% Discount $193.13 $94.90 $62.22
Source: Dividend Toolkit
As you can see, we are getting closer to a “real” value for the company. Overall,
Disney is probably the perfect combination of both strong dividend growth and
stock price growth at the same time.
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Genuine Parts (GPC)
What Makes GPC a Good Business
Genuine Parts benefits from a marvelous position: it’s the biggest player in a
highly fragmented playground. This means the company benefits from the
leader’s position in terms of visibility and brand power while it can buy its
competitors one at a time. This is exactly how GPC’s business growth model is
built: the company is highly effective at growing by acquisition. Its integration
process is well streamlined and generates high scales of economy.
The automobile market is growing at the moment and there is nothing better for
an automotive parts seller. More cars on the road will eventually leads to more
cars to be repaired.
The automotive segment is the most important with 53% of overall sales. The
company offers over 427,000 different parts through its UAP NAPA stores. They
also market and distribute their replacement parts. GPC is also present in Asia
under GPC Asia Pacific.
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The industrial segment is operated under the Motion Industries brand. They
distribute a variety of industrial parts such as bearings, mechanical and electrical
power transmission, hose and hydraulic components. They are present in all kinds
of industries from food and beverage to forest as well as healthcare industries.
The Office Products segment is headquartered in Atlanta and operates under the
name of S.P. Richards Company. The company is engaged in the wholesale
distribution of a broad line of office and other business related products through
a diverse customer base of resellers.
The Electrical / Electronic Materials Group is the smallest GPC business division
with only 4% of overall sales. It provides distribution services to OEM's, motor
repair shops, specialty wire and cable users, and a variety of industrial assembly
markets.
Dividend Growth Perspective
GPC’s dividend growth potential has been proven a long time ago. In fact, this
dividend aristocrat has successfully increased its payment for 52 consecutive
years.
This company is not an aristocrat by pure luck. It has controlled its dividend
growth in order to keep a payout ratio in the range of 50% most of the time. This
ensures enough room for more increases in the future.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values GPC:
As you can see, GPC is trading at a relatively high PE ratio compared to the
market’s evaluation over the past 10 years. However, the recent drop in the
market makes it interesting.
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The DDM calculations give the following result:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $113.29 $84.70 $67.56
10% Premium $103.85 $77.64 $61.93
Intrinsic Value $94.41 $70.59 $56.30
10% Discount $84.97 $63.53 $50.67
20% Discount $75.53 $56.47 $45.04
Source: Dividend Toolkit
I’ve used a 6% dividend growth rate for the first 10 years and reduced it to 5%.
The reason why I’ve picked a higher rate at first is because the company is
currently showing strong numbers and I believe it could give its dividend
payments a push.
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Johnson & Johnson (JNJ)
What Makes JNJ a Good Business
Before we delve into the details, let's review some of the major JNJ milestones:
Dividend aristocrat with 52 consecutive years with a dividend increase;
31 consecutive years with adjusted earnings increases;
AAA credit rating
24 strong brands where 70% of them are #1 or #2 in sales in their market
We are talking here about a world class company. Their operations are divided
into 3 segments: Consumer includes baby care, skin care, oral care, wound care,
women's health and over the counter pharmaceutical products. The consumer
segment did well last quarter showing 3.4% growth without the currency
exchange factor. The only sub-segment that was hit was the Wound/Care
department as Benecol's rights were sold to a UK interest.
Pharmaceuticals include products for infection prevention, antipsychotics,
contraceptives, dermatology, gastrointestinal, hematology, immunology,
infectious diseases, neurology, oncology, pain management, thrombosis and
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vaccines. The impact of slower sales expected for hepatitis C products due to
more competition was not enough to slow down the entire division. In fact, the
pharmaceutical sales show a strong growth of 10.2% or 3% once converted into
US dollars.
Medical Devices & Diagnostics includes all kinds of hospital equipment ranging
from diabetes care to spinal care. Unfortunately, stellar results from the pharma
are shadowed by disappointing results in Medical Devices with a sale decrease of
4.6% currency neutral. High competition and the sale of diagnostics products are
the reason of these results.
We rarely expect such important companies to show massive EPS growth as they
sell products everybody knows and has used for ages. These types of companies
are not in the habit of creating a boom. But JNJ has since 2012.
Dividend Growth Perspective
The company is a respected Dividend Aristocrats that has never let its
shareholders down for the past 52 years. JNJ has always been reasonable with its
dividend increases and this is why the payout ratio is still under 50% today.
JNJ has maintained an annualized dividend growth rate over 7% for the past 5
years meaning it has the ability to double its payment every 10 years. The
company show a steady revenue and earnings uptrend that will ensure the
dividend increase sustainability for many years from now.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values JNJ:
As you can see, the earnings multiple is reducing since 2012 until it has reached
by its previous level post 2008.
I use a DDM with a 7.5% dividend growth rate (matching the past 5 years) for the
first 10 years and reduce it to 6% afterwards:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $217.24 $144.13 $107.60
10% Premium $199.14 $132.11 $98.63
Intrinsic Value $181.04 $120.10 $89.67
10% Discount $162.93 $108.09 $80.70
20% Discount $144.83 $96.08 $71.73
Source: Dividend Toolkit
The company is currently trading at close to a 20% discount.
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BlackRock (BLK)
What Makes BLK a Good Business
It is THE asset manager in the U.S. with the largest market share (AUM) with its
iShares division. With over $1 trillion invested in its ETFs, BLK shows more than
double the AUM of the second-place State Street Corp. (NYSE:STT). Considering
investors' ever growing appetite for ETF investments; this is definitely an
interesting economic moat to develop.
But BLK is more than the largest ETF provider; it is also the largest investment-
only defined contribution plan provider. Their business covers all investments
types from fixed income to equities and as specific as alternative investment
products. In other words, as long as investors keep investing, no matter if they are
looking for equities or a safe place to protect their gain, BlackRock is the major
player they will be looking for.
Their third segment, retail, benefits from a very effective distribution system as
they essentially sell their ETFs and mutual funds. BLK focuses on product
innovation to make sure their retail business grows over time.
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The business now shows total assets under management of $4.65 trillion, up 7.6%
from last year. Even better, this is not only coming from the current bullish
market as AUM net increase for the last quarter only was standing at 105 billion.
The company shows a small debt of 4.9 billion compared to shareholders equity
standing at 27.4 billion.
Dividend Growth Perspective
BlackRock’s business model is the perfect definition of a cash generator: the more
money it manages, the more it generates. The best part is BLK makes fees on its
assets under management, regardless if they perform well or not. Even better:
BLK is the largest ETF manufacturer and this kind of product is not made to beat
the market but simply replicate it. In other words; the product can’t go wrong if
well built.
All three metrics (revenue, earnings and dividend growth) are aligned perfectly
and BLK will continue to raise its dividend for several years to come.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values BLK:
As you can see, the company is now trading at a relatively low PE ratio. This is the
first indication that the stock could be a deal right now.
BLK shows an incredible dividend growth rate of 19% over the past 5 years. In
order to use the DDM, I used an 10% CAGR for the first 10 years and dropped it to
8% for the years after:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $669.70 $443.70 $330.84
10% Premium $613.89 $406.73 $303.27
Intrinsic Value $558.08 $369.75 $275.70
10% Discount $502.27 $332.78 $248.13
20% Discount $446.46 $295.80 $220.56
Source: Dividend Toolkit
BlackRock continues to show as a great buying opportunity.
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Apple (AAPL)
What Makes AAPL a Good Business
While it may seem like that everything has been said about Apple, it is not the
case from a dividend growth investing perspective. This is why today, I’ll not only
take a look at the fast growing and innovative company that Apple is but more
about the future cash distribution machine it will become over the next 10 years.
The strongest asset Apple has is definitely its brand. Apple’s brand is known
across the world and for a good reason; all of their products are well designed,
well thought out and, most importantly, they interact perfectly in the most
beautiful product ecosystem ever created. In this ecosystem, we find the
following products: iPhone, iPad, iPod, Mac, iTunes & App Stores, iCloud, Apple
Pay, Apple Watch & Apple TV and Operating System Software. As you can see,
Apple wouldn’t be the biggest company by market capitalization if it didn’t sell
iPhones:
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Dividend Growth Perspective
Apple is at the beginning of its dividend growth history. While it is very hard to
predict its future growth rate as the company is still reluctant to share its bank
account with shareholders, we know the best is yet to come.
The payout ratio is very low and the company’s ability to generate higher income
quarter after quarter is phenomenal. At best, the company will continue to post
astronomical numbers and both dividend and stock values will rise and at worst,
AAPL will become another Microsoft (MSFT) increasing its payment year after
year as steady as a clock.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values AAPL:
In order to have a better idea of its valuation, I’ll use the Dividend Discount
Model. I use the table found in my Dividend Toolkit to determine the value based
on the dividend paid by Apple. I use a discount rate of 9% since it will become a
very stable business in the future and there is lots of cash flow generated by its
business model. I expect the dividend to grow by 10% over the first 10 years and
then it should reduce its pace to 7%. This gives me a fair value of $127.90.
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Lockheed Martin(LMT)
What Makes LMT a Good Business
Lockheed Martin (LMT) is the world’s largest defense contractor earning 61% of
its sales from the US Department of Defense, 21% from other US government
agencies and 18% from international clients. Heavy regulation, years of symbiosis
with the US Defense department and their know-how are three key elements
protecting most of LMT’s business. Let’s just say you can’t start building military
aircraft and missiles in your basement to compete with this defense behemoth.
The company recently designed the most advanced fighter aircraft (F-35), made
important advances in light tactical vehicles and continues its work in space
exploration. These are costly industries where not many competitors can
compete.
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Dividend Growth Perspective
While Lockheed Martin saw its revenue decline in 2014 and the spectre of
Government military budget cuts is always there year after year, the company
manages to become more profitable year after year.
The company continues to reward its shareholders with strong growth in dividend
payments. The past 5 years show an 18% annualized dividend growth. I don’t
think the company will keep this rate for long, but still, LMT is praised for
increasing its payments significantly.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values LMT:
In order to have a better understanding of the company’s value, I used the
dividend discount model calculation spreadsheet with two stages. I used a 10%
dividend increase for the next 10 years and dropped it down to 5% afterward. I
think the company will continue to hike the dividend as high as it can until
revenues come back up. They have a strong cash flow machine in hand and can
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play this game for a few more years. Since the business is relatively stable and the
worst may have already happened to LMT, I use a 10% discount rate.
Source: Dividend Toolkit
The stock is currently trading near $210 and my fair value calculation stands at
$170. In other words; the stock is trading at a 20% premium.
A premium paid for strong dividend growth in the past years, a strong economic
moat where competitors won’t play very long against LMT and a premium paid
for a dividend stocks showing a yield of 3%.
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Chevron(CVX)
What Makes CVX a Good Business
The investment thesis in this case is quite simple; buy CVX for the high dividend
yield and the possibility of seeing the stock head back over $100 once oil prices
reach better levels. Many analysts expect the barrel to climb back around $60 in a
near future. This should help the business show better numbers and get back over
the $100 price level.
The company has always rewarded its shareholders with juicy dividend increases.
This part of the deal will take a pause (I still think CVX will increase its dividend
but barely). However, a 5% yield should be enough to keep you waiting for a
while.
Dividend Growth Perspective
I have currently a mixed feelings about Chevron’s dividend growth perspectives.
The company has always placed its distribution at the center of its cash flow
management focus. Even during these rough days, CVX has made sure to talk
about sustainability of its dividend payment. For the next two years, the company
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has planned its cash flow and the dividend will not be reduced. However, it is very
possible that if oil prices stay this low, the distribution won’t be increased either.
Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values CVX:
The 10 year PE history tells me how the market has valued CVX through time. We
can see the last time it was valued “as high” was when profits were hurt due to
low oil prices back in 2008-2009. Unfortunately, as long as the production of oil
will remain at this level worldwide, CVX will suffer and nothing can be done.
Therefore, the PE history doesn’t tell me much.
The second model will give me a better idea of CVX's value as a dividend paying
machine. I’ll use a 2 level dividend discount model with a first dividend growth
rate of 3% for ten years and then 8% after. I expect the company to keep
increasing its dividend ever so slightly and will get back to its 8% growth rate once
the storm is over. Since the situation is quite hectic right now, I will use a discount
rate of 12% as this investment is riskier than usual.
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Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 11.00% 12.00% 13.00%
20% Premium $122.34 $93.35 $75.88
10% Premium $112.15 $85.57 $69.55
Intrinsic Value $101.95 $77.79 $63.23
10% Discount $91.76 $70.01 $56.91
20% Discount $81.56 $62.23 $50.59
Source: Dividend Toolkit
The company still looks overvalued at the moment considering a very high
discount rate. However, if I had chosen a discount rate at 11%, the price would be
trading at a 20% discount. This demonstrates very well the risk premium required
in this investment. If oil prices recover, you will be making 20%+ return in no time.
However, if it remains at these very low levels, chances are the walk down the
plank is not done yet.
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Hasbro (HAS)
What Makes HAS a Good Business
Hasbro (NASDAQ:HAS) has divided their operations into four different segments
that all share the same goal: offering the best family entertainment possible,
which Hasbro calls the "Best Play Experience." Their four segments are listed as
follows:
Toy & Game Product Innovation
Digital Media
Immersive Entertainment Experiences
Lifestyle Licensing
But what really makes Hasbro interesting for me lies in its unique ability to renew
and manage its franchise brands. In 2014, its franchise brands sales grew by 31%.
While Hasbro has created its own blockbusters such as Monopoly (and I must
mention that I'm a huge fan of RISK), most of their creations are part of the "old
ways of playing" as many board games don't catch today's kids' attention like they
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used too. Nonetheless, HAS continuously finds a way to make their toys attractive
and gather more kids around.
On the other hand, their ability to generate numerous toys from partner brands
such as Marvel (Avengers) or most recently Frozen from Disney is spectacular.
Now that we have a new Star Wars trilogy coming and Hasbro will be part of the
adventure, we can expect additional growth over the years to come.
Dividend Growth Perspective
Hasbro has increased its dividend payment by 16% annually over the past 5 years.
Its recent success with licensing toys will definitely push revenues and earnings to
another level. Therefore, we can expect the company to keep increasing its
dividend.
However, thinking the company will continue at this pace is dreaming in
technicolor. Since the payout ratio is relatively low, we can see the company
reducing its growth rate into the low double digits (around 10%). Still, this is a
very good growth rate.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values HAS:
Due to its recent success, Hasbro has benefitted from a better valuation over the
past two years. Using the DDM will tell us more about its real value. I used a 10%
growth rate for the first 10 years and reduced it to 7.5% afterward:
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 10.00% 11.00% 12.00%
20% Premium $117.02 $82.96 $64.07
10% Premium $107.27 $76.05 $58.73
Intrinsic Value $97.52 $69.14 $53.39
10% Discount $87.77 $62.22 $48.05
20% Discount $78.02 $55.31 $42.72
Source: Dividend Toolkit
The fact I’m using a discount rate of 11% makes this stock slightly overvalued
right now. However, I think you can benefit from a good margin of safety.
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Wells Fargo(WFC)
What Makes WFC a Good Business
Wells Fargo & Co is a diversified financial services company. It provides retail,
corporate and commercial banking services through banking stores and offices,
the internet and other distribution channels to individuals, businesses and
institutions.
Wells Fargo had put customer service amongst its top business priorities a while
ago. It is known for its sustainable & responsible business approach and was
recently voted #1 best bank in customer service for the past two years. According
to a study made by the AMA (American Marketing Association), top customer
service businesses top the market all the time (full research here).
But the bank is not only friendly to its customers, it’s also everywhere across the
United States and has a very strong sales force:
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Source: Wells Fargo Investors Relation Website
They are now #1 for mortgages, middle market commercial loans, small business
loans and auto financing. On the flip side of things, they are “only” #3 for
brokerage services and #4 for wealth management (based on AUM).
Dividend Growth Perspective
Now that 2008 is well behind WFC, you can expect to see more dividend increases
in the upcoming years. Since Americans’ balance sheets have been cleaned, WFC
will benefit from a strong and solid revenue growth.
Wells Fargo has lots of deposits that will earn more money upon interest rate
incresses. In fact, the company owns over a trillion in short term deposits. As soon
as interest rates rise, the company will see its revenues follow the same trend.
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Stock Valuation
Let’s take a look at the past 10 years’ PE ratio history to see how the stock market
values WFC:
The company took a big hit back in 2008 but it is now back to its historic
valuation. While using the DDM, I considered the bank’s low payout ratio to
justify a growth rate of 10% for the first 10 years and scaled it back to a more
reasonable level of 6% afterwards.
Calculated Intrinsic Value OUTPUT 15-Cell Matrix
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $136.35 $89.80 $66.58
10% Premium $124.98 $82.31 $61.03
Intrinsic Value $113.62 $74.83 $55.48
10% Discount $102.26 $67.35 $49.93
20% Discount $90.90 $59.86 $44.38
Source: Dividend Toolkit
There are still lots of wounds to be healed before investors can trust banks again
and this is reflected in the current WFC value. This is why the company is
currently a bargain on the market.
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What’s Your Next Step
This list is only the beginning of a long journey toward dividend growth investing.
In the end, the true power of dividend investing is materialized through time. The
longer you keep your dividend growth stocks, the higher the return you will earn
from your investments. And this is how you will succeed in building a solid
retirement portfolio.
In order to help you out while building this portfolio, I’ve created a dividend
growth investing platform called Dividend Stocks Rock. This is an online
membership site that gives you access to all the tools and techniques you can
personally use to build a rock solid portfolio. This is not about stock
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decisions made based on solid stock research. And 95% of the work is done for
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Dividend Stocks Rock will build your knowledge, skills, and investment capability
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drives portfolio growth and individual stock growth to build the portfolio you
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want. Most importantly, it will give you the data at your fingertips to allow you to
put the process into action from day 1.
Dividend Stocks Rock is more than a premium investing newsletter:
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We have priced this product for the individual investor! Personally, I am sick and
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I sincerely hope this guide will help you build a stronger retirement portfolio and
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Good luck with your investments,
Mike McNeil - Founder of Dividend Stocks Rock