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Stock Screen: Companies with Significant Estimated Dividend Growth - January 4, 2012
Dividends have historically been an important component of the total return of the broader market and of individual stocks. These corporate payments are, essentially, a way of paying out cash flows to the owners of a company, in other words its shareholders. The way in which a company handles dividends can say a great deal about management and the company itself. A dividend distribution that is increased over time suggests a company that is growing and a management team that cares about returning money to its shareholders.
Not only does a growing dividend distribution say something about the company and its leaders, but it also allows shareholders who are using the income stream for current expenditures to maintain their purchasing power. Inflation is an insidious destroyer of value, as rising prices can, over time, significantly diminish the amount of goods a static amount of money can purchase. As an example, simply look at the trajectory of stamp prices. Two cents used to get a letter delivered, but now it costs many multiples of that amount. So, a growing dividend is an important consideration for more than just the corporate strength and care that it suggests.
There is sound logic, then, to seeking out companies that are expected to have material growth in their dividend distributions. To help investors quickly find such companies, we have screened our database for those in the 90th percentile and above in regard to estimated dividend growth rates over the next three to five years. CF Industries (CF), Mead Johnson Nutrition (MJN), and National Oilwell Varco (NOV) all stood out for their investment merit. Subscribers can replicate and, perhaps more important, customize this screen using Value Line’s online stock screening tool.
CF Industries engages in the manufacture and distribution of nitrogen and phosphate fertilizer products in North America. It operates through two segments, nitrogen fertilizer and phosphate fertilizer. The nitrogen fertilizer segment provides ammonia, urea, and urea ammonium nitrate solution. The phosphate fertilizer segment provides diammonium phosphate and monoammonium phosphate.
CF Industries probably finished 2011 with strong top- and bottom-line results. Low producer and distributor inventories and a favorable pricing environment likely benefited autumn demand for North American crop nutrients. What’s more, long-term growth prospects remain favorable, from our perspective. Demand for crops might well continue to be boosted by global population growth and increased per-capita income in developing nations. What’s more, low global grain stocks might well drive high plantings over the next several years. Crop nutrients are expected to remain in heavy demand moving ahead. As a result of the promising outlook, the board of directors has recently quadrupled the quarterly dividend to an average annual rate of $0.60 a share. We look for the payout to continue climbing in the years ahead. The company earns a high mark for Financial Strength and has a fairly low debt-to-total capital ratio. This allows for financial flexibility that will likely result in further dividend hikes down the road.
Mead Johnson Nutrition
Mead Johnson provides infant formula and children’s nutritional products. It offers formula for routine feeding as well as a range of specialty formulas for mild to severe intolerance, and premature and low birth weight infants. Nutrition products include powdered milk and milk modifiers. Its other products include pre- and post-natal nutritional supplements.
The company is making big strides in emerging economies, where revenue gains have exceeded 25% in each of the past three quarters. MJN has been particularly successful making inroads into China, which might well become the company’s largest market down the road. Furthermore, management is still in the early stages of entering other new markets, including India, Russia, and Saudi Arabia.
Elsewhere, the top line for the segment comprising North America and Europe took a step back in recent months. Successful product introductions have helped lift results on the domestic front, though a sluggish economy and a decline in the U.S. birth rate may constrain near-term progress. Going forward, we look for the positive momentum to continue, overall. Savings resulting from general and administrative cost reductions will probably offset higher dairy costs in the U.S., and progress overseas should help lift profits over the coming 3 to 5 years. We look for the annual dividend payout to double by that time frame from its current level.
Worth noting: U.S. regulators recently stated that they hadn’t found any connection between the company’s Enfamil formula and an infant's death in late 2011. However, some consumers may have switched brands temporarily due to the scare, which could hinder short-term results. The company is investing in a marketing campaign to raise awareness that it played no role in the travesty, which will likely lower earnings by a few cents. This, combined with MJN's still lofty valuation, may dissuade some investors from jumping in before the company releases earnings on January 26.
National Oilwell Varco
National Oilwell Varco is the dominant provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration to the upstream oil and gas industry. Segments include Rig Technology (76% of 2010 operating income): designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells; Petroleum Services & Supplies (21%): provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service pipelines; and Distribution Services (3%): provides maintenance, repair and operating supplies (“MRO”) and spare parts to drill site and production locations worldwide. Customers include oil and gas producers, national oil companies, drilling contractors, well servicing companies, manufacturers and distributors, other rig fabricators, and pressure pumping companies. Demand for NVO’s products is highly dependent upon capital spending plans of oil and gas companies and drilling contractors, as well as the level of oil and gas well drilling activity. The company has made over 40 acquisitions in the past five years.
National Oilwell is hitting on all cylinders lately. All three segments have benefited from better operating conditions in recent months, with the Petroleum Services and Supplies unit leading the way. We expect the Rig Technology division to perform admirably moving forward, thanks to a bigger order backlog, over 80% of which is for international offshore rigs. Increased deep water and shale formation activity should benefit the company down the road. Recent acquisitions have allowed National to supply up to $250 million of the more-than $600 million total price of a drillship. It also can supply a good portion of the $180 million cost of a jackup rig. Horizontal drilling in shale deposits puts more strain on just about everything involved, including premium pipe, drill bits, and other equipment made by National Oilwell. This augurs well for solid annual earnings growth over the 3 to 5 years ahead. Hence, we look for the board of directors to significantly expand the company’s annual payout over that time period. Conservative accounts should note, however, that NOV’s Beta coefficient is roughly one-and-a-half times the broader market average.
At the time of this writing, the author did not have any positions in any of the companies mentioned.