Investing based on historical dividend increases can be misled, because of “catering.” Often companies increase dividends not because of a better financial condition, but rather due to catering to shareholders’ desires.
I witnessed this behavior early in my career as a CPA. The owners of a company I worked for were taking excessive capital draws. The company ended-up paying vendors late, which hurt the credit of the company, and they barely made payroll. Obviously, increasing capital distributions are not always beneficial to a company’s going-concern and certainly do not always suggest a better financial condition.
I think it is reckless to try to predict future dividend increases with historical dividend increases. In reality a solid environmental scan and thorough financial statement analysis are required to find the most lucrative dividend increasers.
I'd suggest that if a company has a long history (10 yrs or more) of increases, it's payout ratio and current yield remains fairly constant than yes. its quite likely that the company will increase its dividend in the future.
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I think historical record is much the same as a prospective employee's resume. It may not guarantee that they are a good worker, but it gives you a track record of what to expect.
Any time you see a company with a 10+ or 25+ year record of dividend increases, you know that dividends to shareholders is a top priority of management. You need to look at the whole picture of fundamentals to determine if this is likely to continue into the future, but first you need to identify those that have done it in the past.
Personally, I like to find companies that have a long track record of consistent earnings growth that have a sustainable model for continued growth in the future. Consumer staples, utilities, REITs, energy, telecommunications, industrials and to some extent technology and consumer discretionary generally have easy to understand businesses that you can reasonably expect growth from into the future.
All great points! I suppose there's two problems in dividend policy when it comes to dividend growth investors... 1) Company is increasing only due to catering, and 2) Company has the ability to increase, but is not increasing. The first problem would have to be solved with good due-diligence. The second problem could be solved by looking at historical increases.
I'm still holding on the position that magnitude of past increases isn't necessarily a good indicator of magnitude of future increases, (key word "magnitude"). A multi-decade history of increases is an indication there will be increases, but not the magnitude of the increase.
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(06-02-2015, 02:58 PM)800peace Wrote: All great points! I suppose there's two problems in dividend policy when it comes to dividend growth investors... 1) Company is increasing only due to catering, and 2) Company has the ability to increase, but is not increasing. The first problem would have to be solved with good due-diligence. The second problem could be solved by looking at historical increases.
I'm still holding on the position that magnitude of past increases isn't necessarily a good indicator of magnitude of future increases, (key word "magnitude"). A multi-decade history of increases is an indication there will be increases, but not the magnitude of the increase.
I agree completely. At some point you need earnings/cash flow growth or the payout ratio gets to unsustainable levels that leads to either a cut, freeze, or much lower growth rate going forward.
Historical cases in point: PBI, NUE, DRI, WM, LEG, MAT, TUP.
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And to point out the other direction: MMM's, PEP's & HP's outsized increases during the last few years when they seemed to have settled into mid-single digit increases at best.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
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(06-02-2015, 04:21 PM)Dividend Watcher Wrote: And to point out the other direction: MMM's, PEP's & HP's outsized increases during the last few years when they seemed to have settled into mid-single digit increases at best.
Yeah, I got a painful lesson of that with MMM. Sold a while back because of the declining DGR and high valuation, right before they announced the first of the last couple big increases.
Can't win them all I suppose.
Dividend growth history and payout ratio are normal numbers to check, but I also look at growth in sales, revenues, and earnings. I also want to know how the company plans on growing in the future; new products, new markets, ect. If the company isn't growing, it can not raise dividends forever.
(06-03-2015, 06:52 AM)benjamen Wrote: Dividend growth history and payout ratio are normal numbers to check, but I also look at growth in sales, revenues, and earnings. I also want to know how the company plans on growing in the future; new products, new markets, ect. If the company isn't growing, it can not raise dividends forever.
Are you relying on your gut feeling based on those factors, or do you have a quantitative approach to analyze those factors? If a gut feeling, how do you compare investment alternatives?
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Are you relying on your gut feeling based on those factors, or do you have a quantitative approach to analyze those factors? If a gut feeling, how do you compare investment alternatives?
[/quote]
Generally how I evaluate a company:
Dividend Yield?
P/E?
Forward P/E?
Debt? Debt to equity? Debt ratio? Times interest earned?
# Years increasing dividends
5 year dividend increase rate
Payout Ratio? Trend in payout ratio?
Looking at quarterly and annual reports: revenue trend? Earnings per share trend?
What is their moat?
How likely are people to still be buying their current products in 5, 10, 25 years?
Where are their expansion opportunities (products, geographies, ect)?
Can I buy at a cyclical or temporary low?
Are you relying on your gut feeling based on those factors, or do you have a quantitative approach to analyze those factors? If a gut feeling, how do you compare investment alternatives?
[/quote]
Generally how I evaluate a company:
Dividend Yield?
P/E?
Forward P/E?
Debt? Debt to equity? Debt ratio? Times interest earned?
# Years increasing dividends
5 year dividend increase rate
Payout Ratio? Trend in payout ratio?
Looking at quarterly and annual reports: revenue trend? Earnings per share trend?
What is their moat?
How likely are people to still be buying their current products in 5, 10, 25 years?
Where are their expansion opportunities (products, geographies, ect)?
Can I buy at a cyclical or temporary low?
[/quote]
I take the art & science approach too, although we'd probably arrive at different conclusions about investments, like Buffet and Munger.
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