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Stock Screen: Low Risk Stocks for Dividend Growth Investors - August 6, 2012
In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project to continue providing investors with dividends that are likely to increase at above-average rates.
We began our search for stocks with dividends that have advanced at a compounded annual rate of at least 7% over the last five years. Similarly, we narrowed the list to equities with projected annual dividend growth rates of at least 7% over the next three to five years. We also set a minimum estimated yield for the year ahead of 3.0%, which is 100 basis points (100 basis points equals one percentage point) higher than the current median for all dividend-paying stocks under our review.
We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better). Companies with shares that earn high marks for these metrics generally fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.
The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that have and are likely to advance at a rate exceeding the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Indeed, other industries, such as healthcare, had a strong showing. Not surprisingly, our list is dominated by large-cap industry leaders, several of which are Dow 30 components. The names of the companies making the list can be seen below. We have chosen to highlight one: CA, Inc. (CA)
CA is a leading information technology management software and solutions company focusing on the enterprise space. Its expertise varies from mainframe and physical to virtual and cloud. The company’s software and services help organizations accelerate, transition, and secure their IT infrastructures and allows them to respond faster to business demands for new services, manage the quality of services, increase efficiency, and reduce risk. The primary industries CA serves include banks, insurance companies, other financial services providers, government agencies, telecommunication providers, manufacturers, technology companies, retailers, educational organizations and health care institutions.
The Company defines “renewal yield” as the percentage of the renewable portion of prior contracts (e.g., the maintenance value) realized in current period bookings. The baseline for calculating renewal yield is an estimate affected by various factors including contractual renewal terms, price increases, and other conditions.
CA’s results for the June quarter left much to be desired, with the top line growing an anemic 1% in constant currency terms. New product sales fell in North America and Europe, offsetting gains in Asia and continued momentum in Latin America. Looking ahead, emerging markets should be the primary drivers of operating performance as uncertainty in Europe looms. The company also implemented a customer segmentation initiative in the first fiscal quarter; three distinct customer segments were created: large existing enterprise customers; large new enterprise customers; and growth market customers. This caused distractions within the sales force and a steep drop in renewal activity. Specifically, moving people to new territories, creating new coverage models, and extensive training took time away from customers. In fact, the number of large renewals worth more than $10 million was half last year's tally.
Still, the worst is probably behind CA as renewal activity is expected to accelerate in the coming quarters. If renewals do pick up, the company should be able to sell more new products and mainframe capacity. Also, CA has moved all its resources associated with growth markets under one general manager, allowing regional executives to focus on execution.
CA has entered a strong new product cycle thanks to prior R&D efforts and acquisitions. CA Mainframe Chorus and CA Database Management help customers increase innovation and productivity. Elsewhere, CA now has the ability to rapidly analyze massive quantities of performance data, providing customers with insight into improving their quality of service and customer experience. Specifically, service providers will be able to use new solutions to simplify and accelerate 4G network roll outs.
Management reported that its directors are committed to a $2.5 billion capital allocation plan that includes a $1.00 per share annual dividend (currently yielding 4.2%) and extensive share repurchases. Indeed, CA is on track to return an average of 80% of its cumulative free cash flow to shareholders through fiscal 2013.
|AstraZeneca PLC (ADS)||AZN|
|Automatic Data Proc.||ADP|
|Canon Inc. ADR||CAJ|
|Owens & Minor||OMI|
|South Jersey Inds.||SJI|
|United Parcel Serv.||UPS|
|Vodafone Group ADR||VOD|
At the time of this article's writing, the author did not have positions in any of the companies mentioned.