Dividends always have been welcome cash returns for investors, but they have become even more important elements in picking stocks in tough economic times. But a word of advice: In scouting for dividend plays, what’s essential is focusing on dividend-growth companies — companies with a potential of consistently increasing their payouts over the next three to five years.
It isn’t enough that the dividend yield is relatively high. What matters is whether a company will have the will and resources to steadily raise them year after year.
“There is sound logic in seeking out companies that are expected to have material growth in their dividend distributions,” says Alan House, analyst at independent investment research outfit Value Line. Dividends that are increased over time suggest a company that’s growing and a management that cares about returning money to shareholders, he adds.
In searching for such companies, the analyst screened Value Line’s database for companies in the 90th percentile or higher in estimated dividend growth rates over the next three to five years. Three companies stood out in Value Line’s search, which are in the diverse businesses of making fertilizer, infant milk and oil-drilling equipment. They aren’t currently paying lofty dividend yields, such as the 9.6% from specialty finance firm Apollo Investment (NASDAQ:AINV), or the 7.4% yield from investment adviser AllianceBernstein Holding (NYSE:AB). The Value Line picks, however, are among the most likely to elevate — in a big way — their currently small dividend yields in the years ahead.
They are CF Industries (NYSE:CF), which makes nitrogen and phosphate fertilizer products in North America; Mead Johnson (NYSE:MJN), which provides infant formula nutritional products; and National-Oilwell Varco (NYSE:NOV), a major supplier of equipment and components for the oil-and-gas drilling and production companies.
CF Industries, which produced strong sales and earnings in 2011, is likely to continue performing well.
“The company’s balance sheet looks solid,” says Michael A. Camp, president of Northwest Criterion Asset Management, which recently has accumulated shares.
Now trading at $182 per share, Camp says a price of $334 is quite possible based on his projected earnings of $22 per share for 2012. The outlook for CF Industries’ long-term growth is favorable, he says, with the strong demand for its products expected to continue.
Value Line’s Alan House says global population growth and increased per-capita income in developing and emerging nations will drive up demand for agricultural crops. What’s more, low global grain supply might well drive high plantings over the next several years. Because of this promising outlook, CF Industries’ board recently quadrupled the quarterly dividend to an average annual rate of 60 cents a share, or a dividend yield of 0.87%.
“We look for the payout to continue climbing in the years ahead,” House says.
Mead Johnson is making great strides in emerging markets, where revenue gains exceeded 25% in each of the past three quarters, notes House. In particular, MJN has been making big inroads into China, which he expects might well become Mead’s largest market down the road. So he looks for the positive momentum to continue and predicts the company will double its annual payout in the next three to five years, from the current 1.4% dividend yield. The stock currently is trading at $74 a share.
National-Oilwell Varco is running strong on all cylinders, House says, benefiting from better operating conditions in recent months, helped by a large order backlog — 80% of which is for international offshore rigs. The company’s low dividend yield of 0.64% is expected to be significantly expanded by the board during the next three to five years. Now trading at $77 per share, analysts expect the stock to climb to $85 to $99 per share during the next 12 months.
Kurt Hallead, analyst at RBC Capital Markets, says National-Oilwell is “one of the best ways to play the various positive trends currently driving oilfield services.” He rates the stock as outperform with a 12-month target of $85 per share.
For investors looking for solid investment bets in good or bad markets, there’s nothing like stocks that combine sturdy growth with potentially robust dividend yields. That’s the promise and potential of CF Industries, Mead Johnson and National-Oilwell over the long haul.
As of this writing, Gene Marcial did not hold a position in any of the aforementioned securities.