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Stock Screen: Companies with Significant Estimated Dividend Growth - October 17, 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, 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. UnitedHealth Group (UNH), AmerisourceBergen (ABC), and RPC Inc. (RES) 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.
UnitedHealth Group is a diversified health and well-being company. It offers products and services to more than 70 million individuals through two business segments: UnitedHealthcare (network-based healthcare benefits) and Optum (information and technology-based health services). The Medical Cost ratio (a comparison of healthcare costs to its premium revenues) was a solid 80.6% in 2010.
UnitedHealth Group has posted strong growth in recent times. In the June period, the company added more than 180,000 clients across its three units. This represents the sixth-consecutive period of expansion for the company. Indeed, it has augmented its customer base by over 2.2 million since the beginning of last year, which represents one of the healthiest growth periods in the company’s history. Much of this was supported by acquisition activity, which management recently said will continue in the coming quarters.
Meanwhile, medical expenses are garnering management’s attention. Although they moderated a bit during the first half of the year, increases in outlays per unit remain significant. With that in mind, the company is focusing its efforts on moving toward a pay-for-performance structure. Looking 3 to 5 years out, the forecast appears bright. The company should be able to sustain solid top- and bottom-line growth out to mid-decade, thanks in part to the likelihood of an improved job market by that time frame. This should allow the dividend payout to rise by approximately 28% annually.
AmerisourceBergen was created via the merger of AmeriSource Health and Bergen Brunswing. The company is a full-service wholesale distributor of pharmaceutical products and related healthcare services in the United States. It operates three segments: Drug Corporation, which distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment to healthcare providers; Specialty Group, provides pharmaceutical distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including dialysis clinics; Packaging Group, delivers unit dose, punch card, unit-of-use, and other packaging solutions to institutional and retail healthcare providers.
AmerisourceBergen posted solid June-quarter profits of $0.66 a share, a 15% increase, year over year, on a moderate top-line improvement. Revenue gains were driven by an uptick in AmerisourceBergen Drug Corporation sales, which was primarily the result of independent customer growth. Furthermore, margins continued to gain traction, owing to the combined effects of a larger-than-expected contribution from specialty generics, ongoing expense management, and a reduced share count.
Hence, we look for the next fiscal year (fiscal years end September 30th) to be another good one for the company. Amerisource appears to be putting excess capital to good use. In mid-August, the board of directors authorized a new $750 million share-buyback program, which comes on the heels of the recently exhausted $500 million plan that was enacted last September. We believe these repurchases will help support annual bottom-line growth in the years ahead. Furthermore, we look for solid annual dividend increases in the coming three to five years.
RPC Inc. provides services and equipment to the oil and gas exploration and production industry in the United States and international markets (including China and Eastern Europe). Technical Services include pressure pumping, snubbing, coiled tubing, downhole tools, and nitrogen services. It also provides support services including rental tools and well control.
RPC is on pace for a profitable 2011. The boom in onshore U.S. shale drilling has fueled the company’s healthy bottom-line recovery and its share price has followed suit. Consequently, RPC has bolstered capacity to meet the strong demand. With onshore rig counts up 21% from last year, and 7% sequentially, and the majority of that coming from the unconventional basins that the company serves, RPC boosted its 2011 capital budget to $400 million. It now intends to add 90,000 horsepower of pressure pumping capacity in the second half of 2011. Furthermore, it plans to add another 55,000 horsepower by early next year, bringing the total to 640,000.
The prospects for next year appear promising as well. Preliminary drilling budgets for onshore shale exploration companies suggest that there will be no material diminution of drilling activating in 2012. This ought to help keep the dividend growing by just shy of 20% annually in the coming three to five years. We do, however, believe that growing costs may crimp operating margins a bit over the near term.
At the time of this writing, the author did not have any positions in any of the companies mentioned.