DGI Adventure – 03-06-2016 Dividend Growth Blogosphere Watch List

There are a lot of dividend growth investing blogs out there, and a lot of them publish their portfolios. I had the idea to do a watch list based on “popular” dividend growth stocks a while ago, but I was admittedly too lazy to do the leg work of compiling the list of stocks. And then someone did it for me. Awesome! So I’m piggybacking on their work, and running my typical quantitative analysis on the most popular stocks among DGI bloggers.

At the end of 2015 FerdiS over at DivGro compiled the top 60 stocks in the DGI blogosphere. Well okay…the top 60 stocks that were also on David Fish’s CCC list. There were 21 stocks that were equally “popular” (i.e. occurred in 6 or more portfolios) but weren’t Champions, Contenders or Challengers. Ferdi included a table of the non-CCC stocks in his post, but left them out of the analysis. I will also leave them out of my analysis for two reasons:

1) Most of them are foreign stocks. Go ‘Merica.

2) The 1, 3, 5 and 10 year DGR metrics are pretty important to this process, and I don’t feel like going back and trying to calculate them (especially if a lot of those dividends are paid in foreign currency.) The CCC spreadsheet calculates the DGR values for me.

My 2016 watch lists are all published back at the mothership; each tab represents a different month’s watch list. An easier to read, standalone copy of the google sheet is available here.

The 2016 Dividend Growth Blogosphere Watch List

First a few quick notes about structure and format. The stocks are sorted in order of their “popularity”, with the second column identifying how many DGI blog portfolios held each stock as of the end of 2015. Way off to the right, I’ve pasted in the data from March’s CCC sheet. Then I use a lookup function to match the value of the annual dividend and the dividend growth rates to the ticker, so if there are any errors with those variables, they’re in the CCC sheet. KMI, BBL and COP aren’t in the CCC sheet anymore because they’ve cut their dividends in the last couple months. They’re also probably not in as many portfolios anymore, since so many of the DGI disciples will automatically sell any stock that cuts its dividend. Oh well.

The current share price is automatically retrieved using the googlefinance function. This function also pulls in the “total shares” and EPS values. With these “live” columns, the yield, market cap and P/E are automatically updated based on the most current share price. Also, the payout ratio in terms of EPS is based on the most recent quarter’s EPS. The CCC sheet goes stale quickly; this one should stay fresh a lot longer.

For as much of this sheet that’s automated, there is still a lot of manual entry. I have to look up and enter the 5-year avg P/E, 5-year avg yield, 3-year avg P/cash flow, total cash, total debt, cash from ops, cash invested, capex, and dividends paid. I’m sure there’s a way to write some code to automatically retrieve all that data, but I’m not that technologically savvy. If you’re reading this, and know how to do that, please show me.

I use conditional formatting to highlight which stocks “pass” the target metric for the following 11 variables: 

  1. Payout ratio (free cash flow) – Free cash flow is defined as net cash from operations minus  cash invested in property, plant and equipment (capex). Target is less than 60% but greater than 0. A negative value here means FCF is negative. That’s not good.
  2. 1-year DGR – target greater than 8%
  3. 3-year DGR – target greater than 8%
  4. 5-year DGR – target greater than 8%
  5. 10-year DGR – target greater than 8%
  6. Debt/market cap – target less than 33%
  7. Cash position – if you have $1B in cash I’m good. If you don’t have $1B, you can still pass this metric if total cash is more than total debt.
  8. Dividend Cushion Ratio – This metric was invented by Valuentum. If you’re unfamiliar, you should read their white paper on the subject and follow them on Tumblr. I wouldn’t know how to project a company’s future cash flows, so my version assumes that cash flow (in and out) will be flat for the next 5 years, but cash spent on dividends will grow at the “market DGR” (growth rate needed to make current share price “fair” based on DDM with a 10% discount rate). I figure this is a pretty conservative scenario. I discuss this a little more here and here. Target is 1.0 or greater.
  9. 5-year avg P/E minus current P/E – target greater than 0.
  10. 5-year avg yield minus current yield – target less than 0.
  11. 3-year price/cash flow minus current price/cash flow – target greater than 0. 

The Best of the Best?

I don’t know if you can really say this list comprises “the best” dividend growth stocks, but they’re popular with DG investors for a reason. It’s a pretty good list. 

The dividend cushion ratio is obviously an extremely conservative metric, since only 11 out of these companies passed with a 1.0 or better. Of those only four stocks passed all 11 metrics (it would have been six but CSCO and SBUX are only challengers and don’t have 10-year dividend growth rates yet…I’m going to include them in the “winners” anyway). So here we go:

Target Corporation (TGT) – Current share price: $81.13, held in 18 DGI portfolios

Target made January’s watch list too. And in spite of a meteoric rise of 22% since the share price set its recent 52 week low, the price is STILL a bargain in terms of “average” P/E, yield and P/CF over the last few years. Wow. I didn’t buy any stocks last month. I probably should have bought some TGT.

T. Rowe Price Group, Inc. (TROW) – Current share price: $72.78, held in 13 DGI portfolios

Huh…TROW also made January’s watch list. I’m a little worried about paying for past performance rather than future potential here. I think the mutual fund industry is facing some serious headwinds, but hot damn those are strong quantitative metrics. Hell, the diplomats just dropped six dimes on it. I think I might get really greedy with this one though. I want to start out with at least a 3.5-4% yield.

Starbucks Corporation (SBUX) – Current share price: $58.70, held in 8 DGI portfolios

As I mentioned, SBUX only has 6 years of dividend increases, so technically they didn’t pass all 11 tests. But with a dividend cushion ratio over 2, I’m going to go ahead and spot them the next 5 years. As a frequent customer who only buys one drink and then sits for hours working, I’m not thrilled about the changes to their rewards program. But it’s a good move from the company’s point of view. They’re going to sell a lot more shit, and give away less free shit. That’s good if you’re trying to boost growth even though there’s literally a store on every corner already. Also moving into China is going to keep things humming for a while. The share price’s relentless march upwards has paused since general market volatility started up in August of last year. I think it represents a great buying opportunity.

Cummins Inc. (CMI) – Current share price: $102.24, held in 7 DGI portfolios

I’ve actually been watching Cummins for a while now. It showed up in November of 2015 on one of the first watch lists I compiled for this blog. Then I bought 16 shares in early December. In that purchase summary, I said I would back the diesel truck up if it got down in the $86/share range. Mr. Market called my bluff, and gave me several opportunities in January, but I didn’t pull the trigger. I will be watching very closely if the price dips again.

Cisco Systems, Inc. (CSCO) – Current share price $26.80, held in 6 DGI portfolios

Again, a dividend cushion ratio over 2 is enough to overlook a short growth history. No 10-year DGR needed. Cisco has over $60B in cash, and they’ve generated over $12B in free cash flow over the last 12 months. For some reason they don’t have a 5-year history on the CCC spreadsheet either, but the quarterly payout has gone from $0.06/share in 2011 to $0.26/share today. That’s a 66% 5-year CAGR by my calculation…

QUALCOMM Incorporated (QCOM) – Current share price $52.66, held in 6 DGI portfolios

QCOM was an honorable mention in November of last year. Then it made the next one in December. Competition in the smartphone hardware business is cutthroat, and to make things worse, Samsung and Apple are starting to develop a lot of technology in house. Add a dash of regulation risk to the company’s ability to collect royalties in Asia, and there’s a lot of risk tied up in that 3.5%+ yield. Still…they could pay off all of their debt tomorrow and still have $5.5B in cash left over. It’s certainly a stock worth watching, which is the whole point of a watch list right?

Honorable Mentions

There were 5 stocks that had a dividend cushion ratio over 1.0, but missed on one or more of the other metrics. Those stocks were JNJ, AFL, MSFT, ADM and PFE. They’re all still worth watching. Their balance sheets are obviously very strong; they’re just a little pricey compared to historical valuations, or they have DGRs slightly below 8%, which is a tall order. ADM had some weirdness going on with their cash flow in Q4 of 2014. You’ll notice it’s on each of the other two tabs of the 2016 watch list sheet with a payout ratio at 129% of free cash flow, and the dividend cushion was negative. Now all of a sudden it’s free and clear? Weird. Just goes to show the limitations of looking at quantitative metrics in a vacuum.

Watching the Watch List

IBM, V and DIS passed all the metrics except the dividend cushion. Their payout ratios are all below 40% of free cash flow, and compared to average valuations, they’re attractively priced. Again, the dividend cushion is an extremely conservative metric. All they need to do is grow their free cash flow a little bit, or not pay off all of their debt in 5 years, and the projected cash would exceed the dividends.

My REIT crisis of faith continues, as I don’t see how their cash flow situation is any different from the MLPs. They have to borrow money and/or dilute shares in order to afford both growth and the distributions to shareholders. What am I missing? Lot’s of DG investors proudly own O, HCP, OHI and WPC. I’m already very long HCP, and somewhat long OHI. Not ready to go deeper until I’m warm and fuzzy with the business model. If everyone was jumping off a cliff, would you do it too? Would I land on a fat kid?

CVX still makes me nervous. XOM and BP aren’t in much better shape. They’ll need to borrow money if they intend to continue raising their dividends through this oil downturn. That might be psychologically important to income investors, but it’s not the best thing for the overall health of those companies.

There’s a lot of intriguing stocks on this list, and a lot of food for thought. Our last stock purchase was back in January, so we’re definitely feeling the investment itch. Mr. Market’s been popping happy pills though, so too much green to buy now. When it turns again, these stocks should help focus our resolve amid the chaos.

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