Investors have already gotten a big wake up call in September: Central banks are willing to dump money into the system, even if it comes at the expense of returns for income-focused investors. If you’re an income investor, I hope you’re taking note.
We’re already in a toxic environment for income investors. When inflation is higher than low-risk bond investments, there’s no other word to describe what’s going on. And the money-printing being teased out by the Fed and the ECB only looks to jack that spread between inflation and interest rates even higher.
But stocks are a different story right now.
At the same time that super low-risk investments are getting bid down to near-zero yields, dividend stocks are paying out record cash to investors. And that cash isn’t coming from nowhere; firms in the S&P 500 currently have bigger profits and bigger bank account balances than they’ve ever had before. More important, they’re currently dishing out a higher yield than they have any time in the last two decades.
That’s why we’re scouring the stock market for a new group of big-name stocks that look ready to hike their dividend payouts in the coming quarter. In other words, these five firms are getting ready to boost dividends; they just don’t know it yet.
In the past few months we’ve had some stellar success in finding future dividend hikes just by zeroing in on a few key factors. Now we’ll look at our crystal ball and try to do it again.
For our purposes, that “crystal ball” is composed of a few factors: namely a solid balance sheet, a low payout ratio, and a history of dividend hikes. While those items don’t guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about this mid-2012 rally.
Without further ado, here’s a look at five stocks that could be about to increase their dividend payments in the next quarter.
Agricultural and construction equipment maker Deere is the biggest name on our list. The $30-billion firm has been battling headwinds since the “Great Recession” reared its ugly head and pulled the rug out from under the construction side of Deere’s business.
But the pain inflicted wasn’t as bad as many investors initially thought – and rising commodity prices have helped the firm roll plenty of its signature green-and-yellow tractors off of its factory lines. The firm’s post-recession bounce sets the stage for a bigger dividend payout in the next quarter.
Worldwide, Deere is probably the most recognizable name in agricultural equipment. The firm’s heavy machinery is used the world around, a factor that’s been helping Deere’s sales as emerging markets look for ways to modernize and increase production for farms. The firm already owns half of the U.S. ag market, positioning that ensures continued spending in a mature market as machinery ages and demand for parts and replacement equipment perks up.
Deere has never been the price leader. Instead, it’s focused on harnessing a quality reputation and the latest technology to sell tractors and combines. The strategy has worked well for DE, and maintaining that valuable brand gives it an edge that rivals don’t have. Deere’s captive finance arm is another major ace in its pocket. In this environment, the firm has access to exceedingly cheap capital, and it should be able to stoke the growth fires as a result.
With a payout that currently comes in at 46 cents a quarter, Deere has room to move its 2.39 per cent yield higher next quarter.
Even if you don’t realize it, you probably eat a lot of food from Sysco. The firm is the standard bearer in the food service distribution business, providing everything from ingredients to par-cooked entrees to services such as menu analysis to 400,000 restaurants, hotels and institutional dining facilities. Being the biggest foodservice distributor in North America comes with some distinct advantages for Sysco.
For starters, big scale means that the firm can boast a more svelte supply chain than its smaller peers. In an environment where rising input costs are every food firm’s biggest concern (and one of the tailwinds helping Deere’s sales), that increased efficiency helps SYY churn out respectable margins. From a food service standpoint, it makes sense to turn to a supplier like Sysco; after all, the firm can take many of the costs and food safety concerns off of a restaurateur’s plate, helping profitability down the line as well.
Historically, Sysco’s growth has come through acquisitions, an approach that’s worked well, but ramped up the amount of leverage on the firm’s balance sheet. That said, debt obligations aren’t out of whack by any stretch, and Sysco has plenty of wherewithal left over to increase its already sizable dividend payout.
Right now, SYY pays out a quarterly 27-cent payout, for a 3.5 per cent yield. I’d expect to see that number increase in the next quarter.
We’re double-dipping a bit with Republic Services – I covered this stock in early July as a name that looked ready to increase its dividend, and sure enough it did, increasing its payout to 23.5 cents per quarter, a 3.35 per cent yield.
But I think that Republic played it a little too conservative with their latest dividend increase, and the firm looks likely to give investors another raise in 2012.
Republic Services is a garbage stock – and by that, I mean that it’s in the waste management business. The company is the No. 2 trash collection company in the country, with 343 individual subsidiaries, close to 200 active landfills and a trash-to-energy business. Republic has considerable scale, and it’s managed to turn that scale into consistent financial performance. Net margins have historically come in just shy of double-digits, meaning that the firm turns a very large chunk of its trash into cash.
Like Sysco, Republic Services’ growth has come from mergers and acquisitions. Most notable was the Allied Waste merger in 2008 that ballooned the firm’s size. Adding pricey purchases to an already capital-intense business means that the firm carries a lot of balance sheet leverage, and we’ll want to see RSG pay down some of that debt with the profits that the firm doesn’t pay out as dividends.
2012 has provided a challenging environment for Milwaukee-based heavy mining equipment maker Joy Global. The firm has gotten knocked around by headwinds in the mining industry, as the price of many hard commodities contracted after what’s been a pretty prodigious multi-year rally. But while investors continue to get anxious over macro factors, Joy’s still making money – lots of it.
Joy Global makes equipment like electric shovels and excavators used in surface and underground mines. That niche has proven successful for Joy in the past few years, with shares more than doubling as hard commodities pushed through to higher and higher levels. As miners, Joy’s customers, saw their profits and scale expand, their need for new machinery dumped cash right into Joy’s coffers.
Emerging markets still hold a lot of hope for Joy Global in the next few years, as new mining projects go online in places like China and India. At the same time, the very same wave of central bank easing that’s spurring us to take a look at dividend payers stands to give the commodity rally a second wind. With a big backlog and ample balance sheet liquidity, Joy Global looks solid shape to hike its dividend, regardless of what the detractors might say.
Currently, the firm’s payout weighs in at a quarterly 17.5 cents per share.
Snap-On is having a stellar year in 2012. Since the first trading day of January, the $4.2-billion tool maker has rallied more than 44 per cent. Snap-On isn’t your typical tool company. The firm sells its tools and diagnostic equipment primarily to professionals who work on cars, trucks, planes, or other machines.
Independent car techs are the biggest buyer of Snap-On products, served by a fleet of 3,200 vans that sell and deliver tools directly to potential client shops. That control of the product from manufacture to delivery gives SNA precision control over its costs that outsourcing rivals don’t have. By focusing on its professional lines, SNA has built an enviable brand that trickles down to consumers. DIY customers want to use the same tools that the pros use, and effective marketing (like sponsoring a NASCAR team) has helped the firm keep its brand attractive and its pricing power intact.
Snap-On currently pays out a 34-cent quarterly dividend, which gives investors a 1.9 per cent yield. Financially, I think SNA looks likely to boost its payouts in 2012.
|JOY-N Joy Global||53.60||
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|SNA-N Snap-On Tools||103.25||
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|RSG-N Republic Services||33.74||
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|DE-N Deere & Co.||86.901||
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|SYY-N Sysco Corp.||36.01||
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