Dividends have historically been an important component of total return for the broader market and 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 growing company with consistent cash-generation capabilities.
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 careful money management 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 for those in the 90th percentile and above in regard to estimated dividend growth rates over the next three to five years. Solera Holdings (SLH), Chicago Bridge and Iron (CBI), and Carnival Corp. (CCL) were highlighted and may appeal to certain investors. Subscribers can replicate and, perhaps more important, customize this screen using Value Line’s online stock screening tool.
Solera Holdings provides software and services to the automobile insurance claims processing industry. It helps customers drive productivity and return on investment by estimating the costs to repair damaged vehicles and determining pre-collision fair market values for cars where the repair costs exceed the vehicles’ value; automating and outsourcing steps of the claims process that insurance companies have historically performed internally; and improving their ability to monitor and manage their businesses through data reporting and analysis. Other products and services include used vehicle validation, fraud detection, disposition of salvage vehicles, and data and analytics used by insurers in the re-underwriting of their insured drivers. Solera's customers include more than 1,500 automobile insurance companies, 36,500 collision repair facilities, 7,000 independent assessors and 30,000 automotive recyclers, auto dealers and others. It derives revenues from many of the world’s largest automobile insurance companies, including the ten largest in Europe and nine of the ten largest in North America.
Solera has done well over the past few years, and is set to continue this steady upward trend in 2012. Not only are claims volumes rising because more people are on the roads in emerging markets, but insurers are investing in new technology to streamline their operations. Although the company recently announced the loss of a major customer, it also said that it's getting new business from German insurer Allianz that will more than offset the lost revenue. Recent weakness in the share price can be partly attributed to management’s expectations for currency translation headwinds. On the bright side, the operating margin is expected to expand 100 basis points this year.
Long-term plans include extensive geographic and product diversification. To this end, the company has expanded into France, Germany, Belgium, Poland, Russia, Brazil, Mexico, China, Italy, and Chile, with a particular emphasis on the latter three. Acquisitions, along with research and development are the backbone of its plan for product diversification. At present, the company remains focused on its most lucrative area: claims processing, which, despite global economic challenges, has remained quite profitable.
Solera declared a dividend payout in 2009, and subsequent payouts in 2010 and 2011 showed considerable increases. The company’s strong cash flow allows it to be generous to shareholders. In the second quarter, SLH returned over $50 million in capital to stockholders through dividends and share repurchases. Although the 1.0% yield is below average. it appears likely that SLH will continue to increase its dividend allocation, which should make this equity more appealing to income investors.
Chicago Bridge and Iron
Chicago Bridge and Iron is one of the world’s leading engineering, procurement, and construction businesses. It provides storage facilities to the petroleum, water, and nuclear industries via its Steel Plate unit. Projects include above ground storage tanks, elevated storage tanks, Liquefied Natural Gas (“LNG”) tanks, pressure vessels, and other specialty structures, such as nuclear containment vessels. The company also works with energy handling facilities, as well as proprietary hydrocarbon and petrochemical processing technologies through its Lummus division. Customers include international energy companies such as Chevron (CVX - Free Chevron Stock Report), ConocoPhillips (COP), ExxonMobil (XOM - Free Exxon Stock Report), and Royal Dutch Shell (RDS/A). Chicago Bridge & Iron Company was founded in 1889 and is currently headquartered in The Hague, Netherlands.
At present, the business is doing quite well, and is set to increase earnings by about 20% for both 2012 and 2013. Large tank projects in the Middle East and Australia, along with the construction of several gas processing and other facilities in Colombia, Papua New Guinea, and the United States are set to boost the top and bottom lines until mid-decade, at the least. The company also has a large backlog, valued at about $9.3 billion, consisting of several contracts for mechanical, electrical, and instrumentation work on the Gorgon gas project (located in Northwest Australia).
Over the long-term, Chicago Bridge and Iron should benefit from a growing global need for energy, particularly via its gas processing and storage segment. All these factors present a rosy view of the company’s prospects, and our dividend growth projection reflects this. The company reinstated its dividend payout in 2011 (it was suspended in the last quarter of 2008), and all indications point to rapid hikes in future payouts, which should interest our income-oriented investors.
Investors are likely to recognize the name of our last highlighted company, Carnival. Not only is it the world’s largest cruise line, but it’s also been plagued with a string of negative headlines recently (more below). Carnival has 11 brands under its umbrella: Carnival Cruise Lines, Princess Cruises, Holland America Line, Costa Cruises, P&O Cruises, Cunard Line, The Yachts of Seabourn, Ocean Village, AIDA, Ibero Cruises, and P&O Cruises Australia. As of January 23, 2012 it operated 60 cruise ships serving North American customers and 39 in the Europe, Australia, and Asian markets.
Chief among the recent onslaught of negative news stories is the grounding of the Costa Concordia cruise ship off the coast of Isola del Giglio, Italy. The vessel struck a giant rock and became submerged. Tragically, this resulted in several casualties. The ship remains in shallow water and the company is assessing whether the vessel can be salvaged. The recent catastrophe will probably have short-term repercussions for Carnival, the extent of which is difficult to ascertain. In its most recent 10-K, the company noted that booking volumes experienced a mid-teens decline following the disaster. The problem was compounded by poor timing, as it coincided with the beginning of the cruise industry’s peak booking season. Too, Carnival temporarily suspended its marketing activities. Still, management said volumes have stabilized and likely troughed this quarter.
The question now is how quickly will demand bounce back? The answer may be sooner rather than later, considering recent comments from CCL’s primary rival in the space, Royal Carribean Cruises (RCL). That outfit said disruption to the industry had eased over the past few weeks and prices have firmed up. We fully expect demand for cruise vacations to recover as more time passes and media coverage subsides. We note that there is significant risk this won’t materialize for several quarters yet. Although public opinion regarding the safety of cruise ships is relatively low at present, we note that, statistically, cruise ships are among the safest forms of transportation. Too, prior to the disaster the cruise industry was set to post solid gains in 2012, as more vacationers seek the relative value that cruises can provide via all-inclusive packages. Carnival is set to give an investor update in late March.
In addition to the demand repercussions, the company could see inflated legal fees from a class action law suit. Insurance costs and the loss of business from one less ship will likely lower earnings. And the potential for more safety regulations, like mandatory drills for passengers, may reduce demand. Separate from the disaster, Carnival’s Costa Allegra ship recently had a fire in its engine room, and 22 passengers in Mexico were robbed during an excursion. Clearly, the company is facing some very negative public relations headwinds. This, along with bunker fuel prices hovering near the five-year high, is contributing to CCL’s historically low valuation. Indeed, since the incident, Carnival stock has lost 11% of its market value compared to a 6% increase in the S&P 500 Index.
As mentioned earlier, we expect the industry to fully recover from recent setbacks. This should allow Carnival to grow its already respectable dividend payout (currently yielding 3.3%). Still, some investors may be repelled by the risk inherent in this stock driven by the recent bad press and the potential ramifications from the disaster. Indeed, less aggressive investors should probably wait on the sidelines for further support to the thesis that demand has bottomed. Those with an appetite for risk may view CCL’s historically low P/E as an opportunity to capitalize on a rebound. But we note visibility into when the shares will bottom is low.
At the time of this writing, the author did not have any positions in any of the companies mentioned.