When it comes to dividend investing, it usually pays to keep things simple.
As this column has noted, chasing high yields' to the exclusion of everything else' can be risky.
Using data from FactSet and Bloomberg, our first step was to find stocks with yields of at least 2.5%. The index's yield is a shade below 2%, and we wanted stocks with meaningful income, especially as rates have begun to move up. The 10-year U.S. Treasury's yield was at 2.96% on Thursday.
In addition to attractive yields, we searched for companies whose cash flows are expected to grow in 2019 over this year's level. Cash flows, after all, fund dividends, and investors want to make sure the money is going to be there. All 12 of these companies meet that requirement.
We also hunted for companies with reasonable dividend pay-out ratios, preferably below 75%. The ratio measures the percentage of a firm's earnings that get paid out as dividends. Many of the ones listed here are under 50%, allowing for plenty of room for additional dividend hikes down the road.
Our screening criteria additionally focused on balance sheets' the stronger, the better. We looked for companies whose long-term debt-to-capital ratios were below 75%. A company's capital consists of debt and equity, and too much debt can weigh down a capital structure and impede dividend growth.
Kraft Heinz (ticker: KHC), for example, paid a dividend of $2.45 a share last year against profits of $3.55 for a payout ratio of 69%, one of the highest on the list. But its balance sheet looks healthy, with a long-term debt-to-capital ratio of below 30%. It's expected to throw off $4.73 a share of cash flow next year, up from $4.17 this year, according to Bloomberg. It defines cash flow per share as after-tax earnings plus depreciation. Kraft Heinz yields 4.4%, tops on our list.
Of course, high yields often come at a price, in this case a battered share price. Along with many other consumer-staples companies, Kraft Heinz has faced sluggish growth as consumer habits change and more competitors emerge, including those online.
Even with dividends, Kraft's stock has posted a one-year loss of 36%. But the dividend looks safe, helped by solid free cash flow. The company is expected to earn $3.78 a share this year, up 6.5% from $3.55 in 2017.
Many of the other stocks on our list have fared much better, including the retailing giant Target (TGT), whose one-year total return heading into Wednesday was more than 40%. But it was down more than 4% on Wednesday following the release of the company's most recent quarterly earnings.
Target earned $1.32 a share, below the consensus forecast of $1.39, disappointing investors. Bad weather was cited as a factor on its quarterly conference call.
Still, for the full fiscal year, which ends in January, Target expects to earn $5.15 to $5.45 a share. The midpoint of that range, $5.30, would be a 13% increase over the previous year?s profits of $4.71 a share. That, along with cash flow growth, should help the dividend expand as well.
One of the most reliable dividend payers on our list is Johnson & Johnson (JNJ), the health-care conglomerate that has hiked its payout every year for 55 straight years, according to S&P Dow Jones Indices.
Its recent yield was 2.9%. The company just raised its quarterly dividend by 7% to 90 cents a share from 84 cents. Its dividend-payout ratio is below 50%, its balance sheet is solid, and it generates plenty of cash. Cash flow per share is expected to hit $9.46 a share next year, up from $8.71 in 2018.
Walgreens Boots Alliance (WBA) has regularly raised its quarterly dividend, most recently last summer to 40 cents a share, up from 37.5 cents, for a 6.6% hike. Analysts expect the company to boost the dividend again this year, to 43 cents.
The stock yields 2.5%.
Higher disbursements should be supported by the company?s earnings and cash-flow growth. Walgreens is expected to earn $5.93 a share in its current fiscal year, which ends in August, up 16% from $5.10 a year earlier.
Two other large health-care companies? Eli Lilly (LLY) and Merck (MRK)?also made the grade. Lilly yields 2.7%. It?s expected to grow earnings this year to $5.14 a share, up from $4.28 in 2017.
Besides paying a reliable dividend, Lilly has been investing heavily in drug development. It tends to spend more than 20% of its annual sales on that, above the industry average in the midteens, according to Damien Conover, a Morningstar analyst.
?We believe recently approved diabetes drugs Trulicity, Tradjenta, and Jardiance, and immunology drugs Taltz and Olumiant hold the highest sales potential of Lilly?s new drugs,? he says.
Merck sports a higher yield of 3.3%, a reflection of how its stock has struggled relative to Lilly?s. Merck has fallen 6.5% in the last year, versus an 8.3% gain for Lilly.
Still, the company is generating plenty of cash flow to fund its dividend and grow it. Merck is expected to throw off $4.71 a share of cash flow in 2019, up from $3.70 this year.
Conover notes that's Merck is through the worst of its patent cliff, which should remove the heightened generic competition the company has experienced over the past five years.?
Keytruda, used to treat various forms of cancer, is an important ?blockbuster with multibillion-dollar potential,? Conover says. The drug?s sales totalled $3.8 billion last year, and are expected to exceed $6 billion this year, according to FactSet.
Both Merck and Lilly boast debt-to-capital ratios below 50%, along with reasonable pay-out ratios. They seem like good bets.
Fierce rally in shares of oil refiners appears to be 'in only the second or third inning,' according to Evercore ISI analyst Doug Terreson.
Terreson has been tracking every refinery construction project on earth for decades to get a read on coming supply of fuels, petrochemicals, and other finished products. Back in 2003, when he was at Morgan Stanley, he declared a golden age for the group had arrived'and shares went on to rise 1,100% by 2006. In December, Terreson, now at Evercore, turned bullish again.
Referring to the call in a March story highlighting four refiner stocks ('Oil Refiners Are Primed for Profits,'March 30), with an emphasis on the appeal of Andeavor (ANDV), which has since agreed to a takeover by Marathon Petroleum (MP). Andeavor is up 43% since our story, and Marathon, 7%. The other two stocks mentioned, Valero Energy (VLO) and Phillips 66 (PSX), are up 31% and 26%, respectively. By comparison, the Standard & Poor's 500 is up 3% over that stretch.
What has changed since Terreson's December call, and since our story, are the signs that refiners are headed for plump profits. 'Back then, there was no evidence in the forward curve, and now the evidence has strengthened considerably,' says Terreson. That evidence comes in the form of futures contracts predicting the crack spread, or the profit margin that comes from buying crude oil and selling refined products.
Since the end of March, the price of Brent oil has shot more than $9 higher to $78 and change, while West Texas intermediate crude has risen more slowly, by just over $6, to $71. Rising oil prices are attributable to strong demand, OPEC-led restrictions on supply, and geopolitical unrest. The widening spread between Brent and WTI oil is owed to a transport bottleneck; pipeline companies are struggling to keep up with new production. When U.S. oil is relatively cheap and refined products like gasoline grow pricier, U.S. refiners prosper.
On May 16, Morgan Stanley issued a sweeping bullish call on refiners that used some familiar language in the headline: 'In Transition to a Golden Age.' Three years of good margins for the group has failed to attract major investment in new infrastructure, because of concerns over competition from alternative fuels, the report argues. As a result, capacity will be constrained through 2020, margins will swell, and refiner stocks should shine.
Morgan Stanley has price targets of $100 for Marathon, implying a 27% upside at recent levels; $135 for Phillips, for an 11% upside; and $140 for Valero, for a 15% upside. The firm calls Marathon and Valero top picks, along with overseas players S-Oil (010950.Korea), Thai Oil (TOP.Thailand), Bharat Petroleum (500547.India), Repsol(REP.Spain), and Tupras Turkiye Petrol Rafinerileri (TUPRS.Turkey).
'The more, the merrier,' says Terreson of his former firm's bullish take. 'A lot of sell-side analysts are going to come to the same conclusion.'