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Stock Screen: Companies with Significant Estimated Dividend Growth - April 27, 2012
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 purchasing power. 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. Gardner Denver (GDI), Triumph Group Inc. (TGI), and Brunswick Corp. (BC) 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.
Gardner Denver designs, manufactures, and markets engineered industrial machinery and related parts primarily in North America, Europe, Asia, South America, Africa, and Australia. Its products include compressors, liquid ring pumps, and blowers for various industrial, medical, environmental, transportation and process applications, as well as pumps used in the petroleum and industrial market segments and other fluid transfer equipment, such as loading arms and dry break couplers, serving the chemical, petroleum and food industries. The business has two segments- the Industrial Products Group, and the Engineered Products Group. Gardner sells its products via independent distributors and sales representatives. It also offers its services directly to OEMs, engineering firms, packagers, and end users. The company was founded in 1859, and is currently based in Wayne, Pennsylvania.
GDI recently reported record first-quarter sales. The March adjusted share net number was $1.40, up 22% over last year and at the high end of its guidance. Revenues advanced 14% and a record was established for orders. The top-line gain was mostly fueled by organic growth (along with a recent acquisition of Robushi S.p.A, an Italian company). Exposure to oil & gas and infrastructure end markets proved particularly beneficial.
Stable worldwide industrial trends and the healthy order backlog provide good visibility. We think earnings will grow at a moderate pace for the remainder of 2012. Still, GDI’s pressure pump business (13% of revenue) is facing a challenging demand environment due to reduced natural gas capacity expectations, owing to recent low prices for that commodity. We expect the business to be a mild drag on earnings for the next two quarters, but probably not as severe as the currently depressed stock price would suggest.
Given the company’s strong market position and strengthening brand value, it should remain on top of the pile. The balance sheet is expected to remain healthy, with dividends continuing to grow. As a result, most investors, particularly those that are income-oriented, should find this stock of interest. Long-term investors should also take a look at this equity. Specifically, due to the recent price fall, it now has above-average appreciation potential over the next 3 to 5 years.
Triumph Group Inc.
Triumph Group, Inc, via its subsidiaries, designs, engineers, manufactures, repairs, and distributes aero structures, aircraft components, accessories, subassemblies, and systems. The business operates in three segments: Aero structures, Aerospace Systems, and Aftermarket Services.
The company had a bright end to calendar 2011, with a 108% year-to-year jump in the top line. In total, sales are expected to increase of about 8% in fiscal 2012 (Triumph ends its fiscal year in March). Much of the revenue increase looks to be coming from a slated ramp-up of deliveries to Boeing (BA – Free Boeing Stock Report) and Airbus, for both companies’ new fuel-efficient commercial aircraft. The bottom line is also likely to rise, due to a combination of higher revenue, as well as savings from consolidated synergies related to the June 2010 acquisition of Vought (current costs savings are at $24 million, and the number is likely to rise up as the year goes on).
For income investors, this stock might be of some interest. Global passenger air travel has shown signs of bouncing back from its 2009 low, and the company has started to provide various high-end components from several commercial jets being manufactured by Boeing and Airbus. As a result, it is quite likely that the dividend will grow steadily.
Brunswick Corporation designs, manufactures, and markets recreational products around the world. The business has four main segments: Marine Engine, Boat, Fitness, and Bowling & Billiards. Lines include Brunswick bowling centers, equipment, billiards; Life Fitness and Hammer Strength exercise equipment; Sea Ray, Bayliner, Boston Whaler boats; Mercury, Mariner, MerCruiser engines and many more. Brunswick was founded in 1845, and is currently located in Lake Forest, Illinois.
As the economy continues to recover, it is quite likely that consumer demand for Brunswick’s wares will steadily rise. This is particularly true for fitness equipment (which has been the most robust out of all the segments, showing double-digit revenue gains in 2011). Recent impressive results from rival fitness equipment maker Nautilus (NLS) and America’s largest boat retailer, MarineMax (HZO) suggest demand for more discretionary recreational goods may have turned the corner.
The company has also started to restructure its operations to streamline costs and boost the bottom line. Management stated its intent to spend more on research and development, along with capital spending in order to enhance its long-term prospects, which should interest patient investors.
In fact, those with a momentum or income-oriented focus should take a look at this equity. Brunswick shares are ranked to outperform the broader market in the year ahead, and with a strong cash flow position, dividend hikes seem a highly probable.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.