Tuesday August 07, 2012
by Richard Moroney, editor Upside Stocks
Rather than chasing stocks with the highest yields, income-minded investors are likely to do better focusing on companies positioned to extend a record of strong dividend growth.
One useful tool for finding likely dividend growers is our Big, Safe Dividends (BSD) rating system. The BSD system uses 10 factors to rank stocks from 0 to 100, with 100 the highest.
BSD considers such dividend-specific metrics as payout ratio, yield, and three-year growth rate. It also considers a company’s operating growth and outlook, while applying quality checks for the balance sheet and earnings.
Below, we review three picks that seem capable of both outperforming the market and continuing to grow their dividend.
By delivering annualized growth of 17% for sales, 25% for net income, and 48% for cash provided by operations in the past three years, Ensign (ENSG) has been able to expand its quarterly dividend at an annualized rate of 11%.
Ensign supports its operating momentum with a steady diet of acquisitions, often of underperforming health-care facilities. Among U.S. public companies, Ensign ranked ninth last year for the most deals completed, according to Dealogic.
Although Ensign has no formal dividend policy, the payout has equaled 5% to 15% of annual net income every year since its initiation in 2002.
Through nine months of 2011, dividend distributions represented 9% of net income. In November, Ensign assured investors that its newly established share-repurchase program will not replace nor reduce the dividend.Ensign, yielding 0.9%, is a Best Buy.
MTS Systems (MTSC) has paid a quarterly dividend without interruption for the last 30 years. In the past decade, the dividend has advanced at an annualized rate of 14% and earnings per share 16%, consistent with management’s strategy of pacing the dividend with profit growth.
Dividend growth has accelerated in the past couple years, with a 25% hike announced in August on top of a 33% increase in November 2010.
Management tries to keep its long-term payout ratio at roughly 40% of net earnings per share. The current payout ratio is 30%, leaving room for a generous hike in the year ahead.
A leading supplier of test systems, MTS holds a 20% share of the test market, valued at roughly $2 billion. At less than 14 times trailing earnings, the stock trades at a discount to its five- and 10-year average P/E ratios near 18. MTS, yielding 2.2%, is a Best Buy.
RPC (RES) ranks in the top 10% of our research universe for both five-year dividend growth and current yield relative to the three-year median yield. It also scores a 99 in the Big, Safe Dividends (BSD) rating system.
It is one of few midsized companies in the oil and gas equipment and services industry that pays a dividend. And the cyclical natural of its industry can occasionally hinder RPC’s quarterly distribution.
RPC slashed its dividend 43% in September 2009. But the company has aggressively rebuilt its dividend since then. In January, RPC boosted its dividend 20% for the March quarter, on top of hikes of 25% and 14% in the prior two quarters.
Recent dividend growth signals RPC’s robust balance sheet and management’s confidence in long-term performance.
While profit margins seem likely to be under pressure in the near term, the stock seems unduly cheap at eight times the lowest 2012 estimate of $1.90. Also, the new quarterly dividend of $0.12 per pre-split share equates to a yield of 3.1%. RPC is a Best Buy.
Learn more about this financial newsletter at Richard Moroney's Upside Stocks.