The wheat is getting separated from the chaff. While big names were cutting dividends to manage their debt, there are slew of mid to small cap companies that are continuing to show resilience, and  continuing to show how to manage sustainable and profitable business even in recession. Many companies are continuing to make sure shareholders have a stake in the business by increasing dividends. Among these dividend growers, following are three companies that have received by attention for the dividend increase.

Lincoln Electric Holdings Inc. (LECO): LECO manufactures and sells welding and cutting products worldwide. The products are mostly sold to industrial customers in general metal fabrication, power generation and process industry, structural steel construction, heavy equipment fabrication, shipbuilding, automotive, pipe mills and pipelines, and offshore oil and gas exploration and extraction markets. The company was founded in 1895 and has headquarters in Cleveland, Ohio. It is part of S&P 400 MidCap index.

• It is a dividend achiever has paid growing dividends for last 15 years. Most recent dividend increase of 3.7% was in December 2009. The quarterly dividend is $0.28 per share
• The 3Q09 earning per share was $0.30 including impact of acquisition.
• The key highlight was improving operating profits and net earnings because of controlling cost and cost savings initiatives.
• The cash flow improved to $231 million for first nine months.
• Annual dividend of $1.09 per share appears to be barely covered by the earnings. The cash flow and reserves provide some room for flexibility.
• This payout ratio is more than 80% and current dividend yield is 2.00%.

McCormick & Company Inc. (MKC): MKC is a specialty food company, engages in the manufacture, marketing, and distribution of flavor products and other specialty food products to the food industry worldwide. Its products include spices, herbs, extracts, seasoning blends, sauces, marinades, and specialty foods. Their customers are direct retail consumer and industrial business houses. The company was founded in 1889 and has headquarters in Sparks, Maryland.

• It is a dividend achiever and has been increasing dividends for more 24 years. The most recent dividend increase of 8.3% was in November 2009. The quarterly dividend is $0.26 per share.
• It has paid dividends since 1925, and dividends have tripled in last 10 years.
• The 3Q09 earning per share was $0.57 (vs. $0.52 in 3Q08).
• The key highlight was increased earnings due to combination of acquisition, tad higher sales, and cost reduction initiatives.
• The year 2009 earnings per share is estimated to be $2.26 to $2.28
• The yearly dividend of $1.04 per share appears to be well covered with expected earnings for year 2010.
• The payout ratio is approximatley 46% and current dividend yield is 2.6%.

Graco Inc. (GGG): It is provider of fluid handling systems and components and its products are used to move, measure, control, dispense, and spray a wide range of fluids in Industrial, Contractor and Lubrication applications. The company was founded in 1926 and has headquarters in Minneapolis, Minnesota.

• This company has been increasing dividends for last 10 years. It will most likely be added to Dividend Achievers list in 2010. The most recent dividend increase of 5.0% was in December 2009. The quarterly dividend is $0.20 per share.
• In last 10 years, the annual dividends have increased from $0.13 per share to $0.80 per share.
• The 3Q09 earning per share was $0.29 (vs. $0.54 in 3Q08).
• While the operating cash flow (for y-o-y) is steady at approximately $110 million, the key lowlight is the significant reduction in earnings in year 2009.
• The yearly 2009 earnings is expected to significantly less than year 2008.
• It is likely that the yearly dividend of $1.00 per share would not be covered by the earnings. However, cash flow and reserves provide some flexibility.
• This year’s payout ratio would be more than 75% while the current dividend yield is 2.6%.

These three companies are from two different markets viz., food industry and industrial, which show businesses focusing on core competency have resilience to wither recession and US companies are being run profitability.

(Photo Credit)

Sysco Corporation (SYS), through its subsidiaries, markets and distributes a range of food and related products primarily for food service industry. It distributes frozen foods, non-food items, restaurant equipment and cleaning supplies. It serves restaurants, hospitals and nursing homes, schools and colleges, and hotels and motels.

SYS is a member of Broad Dividend Achievers and has been raising dividends for last 38 years. The most recent dividend increase was in December 2008. It remains to be seen if it will increase dividends later this year. I had reviewed this stock in February 2008 which at that time was a medium risk to dividend. My objective here is to analyze if SYY still continues to be a good dividend growth stock.

Trend Analysis
This section measures the trends for past 10 years of corporation’s revenue and profitability. The parameters should show consistent growth trends. The image below shows the trend chart.

• Revenue: Increasing trend in revenue with average growth of 9.4% (3.4% standard deviation). Immediate past five years show reducing trend of growth rates from low teens to high single digits. This is sign of slow down in growth rates.
• Cash Flow: The cash flow is remaining flat in 2008 to 2009 with minor reduction. Free cash flow is almost equal to net income. The good aspect is that it continues to generate operating cash flow.
• EPS from continuing operation: In general, the EPS also has an increasing tread (with a blip in 2006 and 2009) with average growth rate as 13.2% (11.1%).
• Dividend per share: Dividends per share are consistently growing for the last 10 years.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. An increasing payout factor, historically high yield, negative EPS growth makes SYY dividend as a medium risk.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

• Dividend growth rate: The average dividend growth (17.9%) is higher than average EPS (13.2%) growth rate. The flexibility in payout factor and share buybacks allowed this difference. However, on a longer term basis this is not sustainable.
• Duration of dividend growth: Dividends have continuously grown for the last 37 years.
• 4 year rolling dividend growth rate for past ten years: Close to 10% on 4 year rolling basis.
• Payout factor: Historically, it has been less than 50%. However, the trend is showing that payout factor has been increasing from low 30% to now more than 50%.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.9%; and (b) MMA yield is 3.4%. Considering historical average growth rate of 18.9%, the stocks dividend cash flow at the end of 10 years is 4.0 times MMA income. If we assume my average expected growth rate of 6.4%, then the dividend cash flow is 1.5 times MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 20 year DCF: $18.21
• Average high yield price calculated based on past 10 years: $40.1
• Pricing based on past 10 year relative price-to-earnings ratio. $41.5
• Pricing based on price-to-earnings ratio of 12: $19.0
• Graham number: $15.10

The range of fair value is calculated as $20.3 to $26.8.

Qualitative Analysis
The strength of SYY is its well established distribution network and existing leadership position. In context of ongoing economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

• This quantitative analysis shows that, so far, SYS has been able to maintain its historically consistent profitability. It appears that in last few years, the dividend growth is coming from the combination of payout factor and growth in EPS.
• The flexibility in payout factor, stable profitability, and slow EPS growth provides room for maintaining the consistency is dividend.
• The revenues are likely to be under pressure. It’s largest customer base is restaurant industry which is expected to have a slow down.
• Meanwhile, SYS continues to adapt with new initiatives around its core competency.

Conclusion
SYS is an enviable position with largest market share in its market segment. A hallmark of a good company like SYS is that it is always evolving to remain competitive. With negative growth in 2009, it remains to be seen whether management will raise its dividends. The flexibility in payout factor should allow the increase in dividends. The stocks risk-to-dividend number is 2.00 (medium risk category). The stock’s price is within my buy range. I would continue to hold on to my existing position, and wait for dividend increase decision.

Full Disclosure: Long on SYS

This article was originally published on The DIV-Net on September 24, 2009.

John Wiley & Sons, Inc. publishes print and electronic products that provide content and digital solutions. It operates in three segments, viz., (1) Scientific, Technical, Medical, and Scholarly; (2) Professional/Trade; and (3) Higher Education. Segment 1 products include journals, encyclopedias, books, databases, and laboratory manuals in various publishing areas. Segment 2 products includes books, subscription content, and information services in subject such as business, technology, architecture, professional culinary, psychology, education, travel, health, religion, consumer reference, pets, and general interest. Segment 3 products focus on courses in business and accounting, sciences, engineering, computer science, math, social sciences, and other academic course material. John Wiley & Sons, Inc. was founded in 1807 and is based in Hoboken, New Jersey.

JW.A is a dividend achiever and has been raising dividends for last 16 years. The most recent dividend increase was in July 2009. My objective here is to analyze if JW.A still continues to be a good dividend growth stock and how does it rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

• Revenue: In general, a growing trend since 2000. The average revenue growth for last 10 years has been approximately 12%. Year 2009 shows the short dip which could be attributed to recessionary economy.
• Cash Flows: Overall, an increasing trend of free cash flow and operating cash flow. It is good indicator that FCF is always greater than income.
• EPS from continuing operation: In general, it has an increasing trend.
• Dividends per share: Very slow but increasing trend.

JW.A - Trend Chart

JW.A - Data Summary

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.86. This is a medium risk category as per my 3-point risk scale. The increased financial leverage and reduction in EPS (relative to its historical average) makes it a medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 15.3% (stdev. 6%) is similar to average EPS growth rate of 15.8% (stdev. 23%). Dividends are growing with the growth in earnings per share.
• Duration of dividend growth: 16 years.
• 4 year rolling dividend growth rate for past ten years:  10% or more
• Payout factor: In the past 10 years, it has been range bound from 18% to 20%. It has sufficient room to grow.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 1.8%; and (b) MMA yield is 3.4%. Last 10 years average dividend growth rate has been 15%, however, my projected dividend growth rate is 9%. With my projected dividend growth of 9%, the dividend cash flow is 1.4 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $13.10 (i.e. yield 4.27%)

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $20.1
• Average high yield price calculated based on past 10 years: $44.2
• Pricing based on past 10 year relative price-to-earnings ratio: $43.7
• Pricing based on price-to-earnings ratio of 12: $25.4
• Graham number: $20.5

The range of fair value is calculated as $24.7 to $30.8. I determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value).

Qualitative Analysis
John Wiley & Sons, Inc. was founded in 1807 and is based in New Jersey. That is more than 100 year old corporation. It has survived all the significant ups and downs of modern global economics. This demonstrates that it keeps adapting to changes in the market place.

• JW.A revenue is pretty diversified in product sectors and geographical region.   45% of its revenue comes from outside of North America. It’s three product lines have share of 58%, 28%, and 14% respectively.
• It continues to have stable gross and operating margins, generating operating cash flow and free cash flows. Being in publishing industry that is good sign.
• One significant concern that I have is; the general trend of continued decrease in profitability of published industry. That is something that it is exposed to and I believe to be a qualitative risk for this company.
• I difference that JW.A is pure play publisher (unlike MHP which includes security ratings and index business). It remains focused on its core competency of publishing business.

Conclusion
I like JW.A diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It has been raising dividends for last 16 years. The stock’s current risk-to-dividend rating is 1.86 (medium risk). The current pricing of $31 and change is very close to my buy range. I would be open to initiating or adding to my position as per my allocation levels.

Full Disclosure: No position at the time of writing.

This article originally appeared on The DIV-Net on August 6, 2009.