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By Jeremy Glaser | 03-02-2011 05:43 PM

Peters: Many Dividend Increases Are 'Remedial Actions'

Despite some dividend newcomers' recent eye-popping dividend increases, investors should continue to focus on stocks with a consistent history of dividend hikes, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With earnings season wrapping up, I'm here with Josh Peters, he's editor of Morningstar DividendInvestor, to see what earnings brought for dividend investors and what increases we saw.

Josh, thanks for joining me today.

Josh Peters: Good to be here.

Glaser: So, Josh you manage two model portfolios for the DividendInvestor newsletter, and I saw that there were quite a few increases within those holdings. Let's talk about a few of them, the first being UPS. There has been lot of questions about how the logistics firms are going to handle the recovery. What did you see from UPS this quarter?

Peters: Well, we actually got a bigger dividend increase than I expected from UPS. I mean the company has done a pretty good job of raising its dividend over the years. As you might know, the company hasn't been public all that long for a company of its size. It only went public about 10 years ago, but actually it had paid dividends to its private shareholders for many years prior to that.

It has maintained a record of at least not cutting its dividend and raising its dividend in most years. In this case, we got an increase of 10.6% that will kick in here for this year. That's faster than dividend increase we had last year and the year before that, very tough circumstances all around. I was just glad, the company didn't cut its dividend and that they just held it flat.

So, as I see this starting to pick up, I'm actually feeling better and better about UPS' prospects going forward in part because they're now raising the dividend at a rate that I think is better reflective of how fast earnings are going to grow, even though they've just gotten back to that peak level in terms of earnings. Management's looking for a new record level in per share earnings this year, but not by a huge margin relative to where they were at in the last peak.

So, since the dividend is continuing to grow, I'm actually seeing that maybe they are even just a little bit more devoted to returning cash to shareholders through dividends this time around then they were at the last cycle, so, it's a very good sign.

Glaser: What about Genuine Parts?

Peters: Genuine Parts is one of my favorite all-time company's. I mean it is boring as the day is long. Their biggest business is distributing to the Napa chain of auto-parts stores, aftermarket auto-parts, repair auto-parts. They also distribute office supplies, electronic equipment, and factory maintenance parts. I mean these are just about some of the most humdrum businesses imaginable, but they grow a little bit over the course of the cycle. Management maintains a very good level of profitability. They throw off a huge amount of cash.

Even though they got hit much harder in the last recession than in prior recessions and saw earnings come down a little bit, they continue to raise their dividend. This year the dividend went up just under 10%. That was more than double the increases that we had in previous two years, in fact those increases were down in the 2.5% range. So, you got a thing that is capable I think of firing on all cylinders, good for an auto-parts related story. The firm now has 55 straight years of dividend increases.

When I see that kind of track record it tells me that the dividend isn't just an afterthought it is embedded in the way they are actually running the businesses. They know they need to pay and continue to raise the dividend to their shareholders over time. The stock's not especially cheap right now, I wouldn't be looking to buy it up here. But it's the kind of name that I think every dividend investor ought to have on their radar screen if there is a sell-off. If the stock traded down in the mid-$40s, and had a 4% current yield, then I would think that is pretty attractive.

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