Thursday, April 7, 2016

Forecasting Dividend Growth


The start of the year is typically a great time for dividend growth investors with many companies getting off to a fresh start with higher payouts.  The first quarter of the year was no exception with 13 of my holdings giving out 14 raises.  In total my forward dividends have increased by $67.69 through dividend increases alone.

April looks to be an especially fruitful month with 7 companies slated to announce raises based on the timing of their previous raises and maybe an 8th could join the party.  Even better is that some of the financials that I own, Wells Fargo, Bank of America and J.P. Morgan might announce increases as well depending on when their capital allocation plans are approved by the Fed.  That's a minimum of 7 and potentially 11 raises that I could get in April alone.

As a dividend growth investor that gets me excited.  There's not much that's better in the world of investing than hearing that a company you own wants to give you more money because you own some shares.

Even better is the diversity among these companies.  There's 2 consumer good giants, a consumer/health care company, health care real estate company, a technology firm, industrials company and an an oil giant.  There's also 1 Dividend Challenger, 3 Dividend Contenders and 3 Dividend Champions.
Since I fully expect dividend increases from 7 companies this month I wanted to take a guess at what the raise will look like.  While I don't expect to be 100% right every single forecast it's a fun game to play while I wait for the details.

So who are the raisers to be? (in order of expected increase date)
*All dividend, earnings per share and free cash flow per share values sourced from Morningstar

Unilever (UL) - 8 Year Dividend Growth History
Date of last increase: 4/8/2015 but management has already announced the date of the next dividend announcement as 4/14/16

Unilever operates globally in the consumer goods space and is divided into 4 operating units: Personal Care; Foods; Refreshment; Home Care.



Analysts are expecting 7.1% annual growth in earnings over the next 5 years which should give way to solid dividend growth.  However, the payout ratio is creeping up there and it looks like management wants to target a 60% payout ratio.  Earnings for 2016, in euros, are forecast to be 1.91 and a 60% payout ratio would correspond to a 1.14 euro dividend which would be less than 2015's payout.

Current Dividend - 0.302 euro quarterly
Low Forecast - 0.312 euro quarterly / 5% growth
High Forecast - 0.320 euro quarterly / 6% growth

Omega Healthcare Investors (OHI) - 14 Year Dividend Growth History
Date of last increase: 1/14/16, corresponding dividend announcement from 2015 is 4/15/15

Omega Healthcare Investors is a real estate investment trust specializing in healthcare facilities, primarily skilled nursing/long term care facilities.


This is the easiest one of the bunch and I fully expect Omega Healthcare Investors to stick with the trend of $0.01 increases each quarter.

Current Dividend - $0.57 quarterly
Forecast - $0.58 quarterly / 1.8% growth from previous quarter (7.4% growth from April 2015 payout

Procter & Gamble Company (PG) - 60 Year Dividend Growth History
Date of last increase: 4/17/15

Procter & Gamble is a giant in the consumer staples that operates in five segments: Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care.  They have a number of widely known brands consumers use on a daily basis such as Head & Shoulders, Olay, Gillette, Crest, Tide, Dawn, Febreze, Bounty, Charmin, Pampers and many more.



Analysts are predicting 6% annualized earnings growth over the next 5 years; however the company is going through lots of changes currently selling off several brands to other companies in hopes of refocusing around a core.  With the big changes for the company and already high payout ratio I expect Procter & Gamble to keep their streak alive, but with a fairly meager increase this year.

Current Dividend - $0.6629 quarterly
Low Forecast - $0.683 quarterly / 3.0% growth
High Forecast - $0.695 quarterly / 4.8% growth

Johnson & Johnson (JNJ) - 53 Year Dividend Growth History
Date of last increase: 4/23/15
Recent Analysis Here

Johnson & Johnson makes a variety of products in the health care space and operates in 3 segments: Consumer; Pharmaceutical; and Medical Devices.  Consumer brands consist of Listerine, Lubriderm, Band-Aid, Neosporin, Tylenol, Benadryl, Sudafed and many more.  Johnson & Johnson is one of the three remaining companies with a "AAA" credit rating.



Johnson & Johnson doesn't need much of an introduction and I imagine just about every dividend growth investor owns some shares of this wonderful company.  Analysts expect Johnson & Johnson to grow earnings 5.3% per year over the next five years.  Management will likely stick with a raise between 6-7%.

Current Dividend - $0.75 quarterly
Low Forecast - $0.795 quarterly / 6.0% growth
High Forecast - $0.80 quarterly / 6.7% growth

United Technologies (UTX) - 22 Year Dividend Growth History
Date of last increase: 2/2/15 although management has typically increased dividends every 5th quarter corresponding dividend announcement from 2015 is 4/27/15

United Technologies operates in the industrial goods/services and defense sector dealing with elevators, escalators, climate control, fire safety products and various aerospace defense support products.



Analysts expect United Technologies to grow earnings by 8.99% per year over the next five years.  The payout ratio based off earnings looks solid around 30%; however, the free cash flow payout ratio is quite a bit higher at 54% for 2015.

Current Dividend - $0.64 quarterly
Low Forecast - $0.68 quarterly / 6.3% growth
High Forecast - $0.70 quarterly / 9.4% growth

International Business Machines (IBM) - 20 Year Dividend Growth History
Date of last increase: 4/28/15

IBM provides information technology products and services worldwide including cloud support, hardware, software and the most intriguing, to me at least, "rational software" or Watson.




IBM's struggles are well known with revenue struggling to move higher over the last decade.  Much of this is due to IBM's slow move out of their hardware/IT infrastructure services and into faster growing cloud/artificial intelligence services.  Analysts expect IBM to grow earnings at 7.25% per year over the next five years.  Even with revenue growth stalling and a hefty dividend growth rate the payout ratio is still very manageable in the mid 30% range based off earnings and free cash flow.

IBM's dividend growth is a bit tricky to forecast and I could easily see anywhere from a 7% increase up to a 12% raise.

Current Dividend - $1.30 quarterly
Low Forecast - $1.40 quarterly / 7.7% growth
High Forecast - $1.45 quarterly / 11.5% growth

Exxon Mobil (XOM) - 33 Year Dividend Growth History
Date of last increase: 4/29/15
Recent Analysis Here

Exxon Mobil is a "super major" in the oil field operating in upstream (exploration and production), midstream (pipelines) and downstream (refining and marketing).  Exxon Mobil is one of the last three companies with a "AAA" credit rating.



Exxon Mobil is built to prosper during the inevitable downturns that the oil field experiences due to their size and conservative capital allocation plan.  The ongoing rout in the price of oil continues to be a drag on companies with large exposure to the upstream side of operations which makes up the bulk of Exxon's earnings.  Historically, management has refrained from overly generous dividend growth in the good times in order to continue with dividend growth during the bad times.  Analysts expect Exxon Mobil to grow earnings by 13.2% per year over the next 5 years.

Current Dividend - $0.73 quarterly
Low Forecast - $0.76 quarterly / 4.1% growth
High Forecast - $0.78 quarterly / 6.9% growth

The Wildcard

Chevron (CVX) - 28 Year Dividend Growth History
Date of last increase: 4/30/14

Chevron is another "super major" in the oil space.



Chevron was likely a bit too generous with dividend growth in the past, although I'm not really complaining too much.  I really have no idea if Chevron will return to dividend growth after placing things on hold last year.  Luckily their dividend growth streak is still in tact and they actually have until December 2016 payment, late October announcement based on past declarations, to raise the dividend and keep the streak going another year.  Analysts expect Chevron to grow earnings by 39.2% per year over the next 5 years.

Given the on going low oil environment I think a $0.01 raise is the best case scenario for Chevron although I expect no raise to be announced this month.

Current Dividend - $1.07 quarterly
Low Forecast - $1.07 quarterly / 0.0% growth
High Forecast - $1.08 quarterly / 0.9% growth

Conclusion

My forecasts are likely to be wrong with some raises coming in lower and others coming in higher, but they represent reasonable guesses as to what April has in store.  Whether the actually announcements fall within my ranges or not doesn't matter as long as they do get announced.

*UL dividend converted to USD at current exchange rate of 1.13 euros = $1

Any of my holdings by themselves won't move the needle that much in terms of boosting my income, but the key to the dividend growth investing strategy is the cumulative effect that each company has.  So far this year organic dividend growth has grown my forward dividends by $67.69 and the expected raises from April alone could potentially double that!

With 7 companies and potentially more set to boost up my income I can't wait to see how the month plays out.  The dividend raises are largely back-loaded so it'll be a busy second half, but that's the kind of busy I like.

Do you own any of these companies?  Do you ever forecast expected dividend increases or do you prefer to go the surprise me route?  What other companies are you expecting to bump up your pay in April?

Image provided by adamr via FreeDigitalPhotos

14 comments:

  1. I think you're right on the money with your forecasts for JNJ and OHI. As an impartial observer, I'm very curious what XOM and CVX do with their dividends this month. In particular, for Chevron, I think a penny might be optimistic. Guess we'll have to wait and see :)

    Fun read!

    ReplyDelete
    Replies
    1. DiH,

      Yeah those two were are much easier to predict compared to some of the others. XOM is going to bump theirs up. I could see it being a bit underwhelming but they will increase it. CVX on the other hand is likely not going to increase their dividend this quarter especially after the Gorgon LNG plant having to be shut down just weeks after opening. Sheesh! I think they'll give it a boost though with maybe 3Q payment but likely they'll wait until 4Q.

      Thanks for stopping by!

      Delete
  2. Gutsy post, JC! I'm looking forward to seeing how good your forecasts are :-)

    I own all of the stocks listed except UL and UTX. I'm hoping for at least a 1¢ increase by CVX as well, but that seems like a long shot in the current market conditions.

    Take care!
    FerdiS, DivGro

    ReplyDelete
    Replies
    1. Ferdi,

      Well I'm reading Superforecasting right now and based on the premise of the book these forecasts are worth what you're paying for them. ;) Time will tell but the increases seem reasonable, in my opinion. Realistically I don't expect a raise from CVX this quarter especially with the issues now with the Gorgon LNG plant.

      Thanks for stopping by!

      Delete
  3. JC,

    I hope your are right, on the high end. If the average is in the 1-3% range I am pretty happy, 4-7% range definitely happy, and 8+% range very happy. Its great to have your $ working for you.

    - Gremlin

    ReplyDelete
    Replies
    1. Gremlin,

      I think a was a bit conservative with some of the projections but I'd much rather be surprised to the upside. There's a lot going on right now both company specific and on a more macro scale that could keep dividend growth kind of muted for this year.

      That really is the greatest thing about this. Even if the dividend growth comes in on the lower side of my forecasts those are still increases to my income the required no additional work from me that is beating inflation.

      Thanks for stopping by!

      Delete
  4. Great post. Last month you were at 100% dividend increases on your holdings. April does look good and I own a handful of these stocks too :-)

    ReplyDelete
    Replies
    1. IH,

      Glad to be a fellow shareholder. I hadn't noticed just how busy the first four months of the year were for dividend increases but man it's awesome and encouraging to see them coming in.

      Thanks for stopping by!

      Delete
  5. Enjoyed this post. Makes me want to explore JNJ for sure.

    ReplyDelete
    Replies
    1. FV,

      JNJ is definitely one of my favorite holdings from a company perspective but I think the shares are expensive right now. Not ridiculously so but too expensive for me to want to make a significant new capital purchase.

      Thanks for stopping by!

      Delete
    2. I agree with you here. I considered buying some JNJ last year around August and September. Now I wish that I would have went ahead and pulled the trigger!

      I own several companies that you mentioned and I am looking forward to seeing if your forcast are correct.

      -More Dividends

      Delete
  6. Interesting article, you have come up with very realistic predictions on these using historical data.

    ReplyDelete
    Replies
    1. Ben,

      Glad you enjoyed it. Time will tell and based on the past it looks like the last week of April is going to be extremely busy with increase announcements. Hopefully they come in higher my forecast!

      Thanks for stopping by!

      Delete
  7. Dividend increases are great! Free extra money for no extra investment or effort, great. But all the increasing payout ratios to make this happen are a little concerning; that can't happen forever without causing damage to the balance sheet.

    Tristan

    ReplyDelete