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Stock Screen: Companies with Significant Estimated Dividend Growth – March 9, 2011
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 of companies for those with the highest estimated dividend growth rates over the next three to five years. Ensco (ESV), Jarden (JAH), and Starbucks (SBUX) all rose to the top of the list in this screen. Subscribers can replicate and, perhaps more important, customize this screen using Value Line’s online stock screening tool.
Ensco is a U.K.-based company that provides offshore contract drilling services to the oil and gas industry. It owns and operates a fleet of 46 drilling rigs, including 40 jackup rigs, five ultra-deepwater semisubmersible rigs, and one barge rig. Its business is concentrated in the Asia Pacific area (Asia, Australia and the Middle East), but it also has operations in Europe, Africa, North America, and South America. In 2010, 75% of the company’s revenues were generated outside of the United States. Ensco services major international, government-owned, and independent companies on a “day rate” contract basis. Under these agreements, Ensco provides drilling rigs and crews and receives a fixed payment per diem for drilling a well, but customers are responsible for the ancillary costs of the project.
The contract driller has been hard hit over the last few quarters. Lower drilling demand and harsh operating conditions persisted over the course of the past year. Government interference weighed on its position in the Gulf of Mexico. Too, a contract dispute with Nexen hurt results during the back half of the year. In all, revenues slid 10% and share net declined more than 30% in 2010.
Even so, we think that Ensco is poised to rebound this year. Rising oil and gas prices should lead to a pickup in its business. Recovering drilling demand, coupled with management’s improvements to its deepwater and jackup rig fleet ought to help the company secure drilling contracts in the coming months. What’s more, the provider of drilling services offers a healthy dividend yield. It raised its quarterly payout fourteen-fold in mid-2010. Looking ahead, we think that Ensco will continue to reward shareholders at a healthy clip over the next 3 to 5 years.
Jarden manufactures and sells niche consumer products. It operates in three primary business segments through a number of well-recognized brands, including: Outdoor Solutions (42% of 2010 sales): Aero, Coleman, K2, Marker, Marmot, Rawlings, and Volkl; Consumer Solutions (31%): Crock-Pot, Health o meter, Mr. Coffee, Oster, Rival, and Sunbeam; and Branded Consumables (22%): Bee, Bicycle, Billy Boy, Crawford, Diamond, Dicon, Fiona, and First Alert.
Although the conglomerate posted mixed results last year, we think that the consumer goods manufacturer is well positioned for long-term gains. Jarden has had a long history of acquisitions, and we think that its large roster of offerings, most of which sell at low-price points, will continue to capture market share. Though the company faces an inflationary input cost environment, ongoing efforts to manage expenses should help alleviate some of the margin pressure.
Even though we look for the company’s initiatives to strengthen the top and bottom lines in the coming years, much of the good news we anticipate is already factored into the current quotation. Nevertheless, the board instituted a dividend at the end of 2009, and we think that it will continue to use free cash flow to increase its annual payout.
Starbucks Corp. is the leading retailer, roaster, and brand of specialty coffee in the world. It sells whole bean coffees through its specialty sales group, mail-order business, supermarkets, and online. The company has 6,706 company-owned stores in the U.S. and 2,164 in international markets. Starbucks also owns 8,139 licensed stores worldwide. Last year, retail sales contributed 84% to the top line (Specialty sales, 16%).
The company has been widening its footprint. Efforts to extend its market reach (specifically in the Chinese market) have already helped bolster results during the first quarter of fiscal 2011 (years end in September). Moreover, we anticipate that now that the company’s distribution agreement with Kraft (KFT – Free Kraft Stock Report) has expired (the exclusive contract ended in February), Starbucks will increase its presence in the supermarket aisle. It already began to penetrate the consumer products category with the introduction of its instant coffee line, Via, last year. In the meantime, we think that the board will use the cash flow generated from the new business lines to help fund the dividend (which the company initiated in March of last year).
At the time of this article's writing, the author did not have positions in any of the companies mentioned.