But chasing yield is only one way to take advantage of cheap dividends this fall. Stepping in front of dividend hikes is probably a better one.
That’s exactly 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.
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 late-2012 rally. And the number of dividend hikes we've already been able to predict with this same approach speaks volumes.
Without further ado, here’s a look at five stocks that could be about to increase their dividend payments in the next quarter.
Industrial behemoth General Electric is having a standout year in 2012. So far, shares of the firm have rallied more than 26 percent, besting the S&P’s already impressive returns by a wide margin this year.
GE’s hefty 3 percent dividend yield has added a material amount to the returns investors are getting on this conglomerate. Currently, that payout comes from a 17 cent per share dividend. I think that GE has room for growth in 2012.
GE is a manufacturer with its hands in a diverse group of businesses: The company builds everything from jet engines to medical devices to dishwashers. The common thread between all of those seemingly disparate units is that the products are capital-intense, so they do significantly better when money is cheap and readily available — just like now. GE is a case study for companies hoping to find cost savings between completely different units and boost the bottom line even when times are tough. That’s a big benefit in this economy.
But investors shouldn’t forget that one of GE’s biggest businesses is still lending. GE Capital nearly gutted the rest of the company when the credit crisis hit in 2008, requiring equity dilution to keep shares afloat. While the business has recovered immensely in the years since, it’s still probably too big a portion of GE’s total business today. That said, GE is generating some huge cash flows right now, more than enough to send some money back to shareholders in the form of a dividend hike.
The firm’s third-quarter earnings call could be just the time and place to give shareholders a raise.
(Disclosure: General Electric is the minority owner of NBC Universal, the parent company of CNBC and CNBC.com.)
One billion: That’s how many prescriptions pharmacy giant CVS Caremark fills each year. There’s safety in those numbers, at least for CVS shareholders. The firm has consistently outperformed its pure-play retail pharmacy peers, delivering enviable net profit margins and paying out a decent dividend throughout the financial roller coaster of 2007 and 2008. But CVS’ income statement has grown faster than its dividend payout has — and I think that the firm is ready to hike its 16.25 cent quarterly dividend.
While CVS is best known to consumers for some 7,000 namesake retail pharmacies, the other part of the company's name comes from the 2007 acquisition of Caremark, a pharmacy benefit manager. Buying Caremark was a big deal for CVS — it meant that the firm could suddenly avoid the somewhat adversarial relationship between PBMs and retail pharmacies. In essence, PBMs act as a middleman for pharmacies, stepping in between drugstores and drugmakers to source, package, and distribute pharmaceuticals in exchange for a markup along the way. Because CVS owns its own PBM, it doesn’t have to fight over the size of that markup.
The introduction of MinuteClinics to many of CVS’ store locations has provided another exciting growth avenue in the last few years, especially as consumers look for more cost-effective ways to get health treatments. Make no mistake: Right now, CVS’ cash flows readily support a bigger dividend payout for investors.
CVS is one of Warren Buffett's holdings as of the most recently reported period. (Read More: Berkshire Hathaway's 15 Biggest Stock Holdings.)
Paint, stain, and coatings firm Valspar isn’t much of a core income holding right now, but it was a much higher yielder not long ago. That’s because shares have nearly doubled over the course of the last 12 months, giving management a very difficult benchmark to keep up with when they announce quarterly payouts.
Valspar’s rally has been predicated on fundamental performance, though, so I think that a hike to the firm’s quarterly 20 cent dividend is likely in the near-term, especially given a track record of 34 straight annual dividend hikes.
Valspar’s products range from house paint sold to consumers to industrial coatings used to seal food packages. The firm’s paint is one of the larger consumer brands in the U.S., with distribution through Lowe’s. While the hefty customer concentration of Lowe’s does create some risks for Valspar, they’re more than offset by the increasing geographic footprint at zero risk that Lowe’s provides — it spares the firm from having to open its own retail stores, a capital-intense proposition. Overseas, Valspar has taken on a growth-by-acquisition approach that's recently included the purchase of China’s third-biggest paint brand.
Like the other names that made this list, Valspar’s cash flows more than cover its current dividends and its balance sheet obligations, leaving plenty of room for a bigger payout in the near-term.
The same can be said of filtration system maker Donaldson. Donaldson operates a fairly boring business, manufacturing filtration products that are used in truck engines, turbines, and even disk drives. But boring is good for income investors, and DCI’s revenue trajectory over the past few years has largely outperformed bigger names. That sets the stage for a bigger dividend payout in the next quarter.
With a yield that currently sits at just more than 1 percent, Donaldson clearly isn’t a high yield income name. That said, it’s still a niche industrial that’s could play a supporting role for investors who want industrial exposure over income generation. Donaldson has taken a cost-focused approach for the past several years, efforts that have produced steadily rising net profit margins every year since 2009.
That, coupled with a debt-neutral balance sheet make the firm’s payout look undersized right now — a hike to its 9-cent quarterly payout looks likely. The firm’s next earnings call in November looks like a plausible venue for a dividend increase.
Last up on the list is Eaton Vance, the Boston-based asset manager with more than $192 billion under management. Eaton is a leader in equity and fixed-income investments designed to minimize their clients’ tax burdens. Niches are tough to come by in the institutional investment business — typically size is one of the few advantages firms can claim — but Eaton’s focus gives it at least some semblance of a moat, even if it’s had to fight hard to hold onto assets in recent years.
A series of events could help spark upside in Eaton this year. With an election year shoving extra emphasis on climbing taxes on investment gains and an equity rally that’s continuing to find higher ground this fall, the onus is going to be on investors to find more tax-sensitive ways of managing their money. And because Eaton gets compensated based on the dollar value of the assets it manages, those factors could help to swell Eaton’s revenues in kind.
Already, Eaton Vance sports a reasonably strong balance sheet with a cash position of more than $633 million that plays a big role in offsetting its debt load. Margins have been steadily on the rise for the past few years, and while the firm’s dividend yield is already decent for a financial sector name at (2.6 percent), its income generations says there’s still room for improvement.
I’d expect to see a raise in the firm’s quarterly 19 cent payout in 2012.
—By TheStreet.com Contributor Jonas Elmerraji
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TheStreet’s editorial policy prohibits staff editors, reporters, and analysts from holding positions in any individual stocks. Disclosure information was unavailable for Jonas Elmerraji.