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.

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Brown & Brown, Inc. (BRO) and its subsidiaries, provides insurance and reinsurance products and services, as well as risk management, employee benefit administration and managed health care services. It is a diversified insurance agency and brokerage firm, markets and sells to its customer’s insurance products and services, primarily in the property and casualty area. BRO has operations in 219 locations and in 37 states.

BRO is member of Mergent’s Dividend Achiever Index and S&P Mid-Cap 400 Index. The most recent dividend increase was in October 2009.

Trend Analysis
Here I am looking at trends for past 9 years of company’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 9 years has been approximately 13.8%. Year 2009 revenues are expected to be flat.
• Cash Flows: Overall, until 2008, a growing trend of free cash flow and operating cash flow. FCF is consistently more than net income.
• EPS from continuing operation: In general, it had an increasing trend until 2007, drop in 2008, and expected to remain flat in 2009.
• Dividends per share: Very slow anemic albeit growing trend.

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 1.57. This is a low risk category as per my 3-point risk scale. Other than negative EPS growth in 2008, all other parameters are positive.

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 18.9% (stdev. 4.81%) is more than average EPS growth rate of 12.3% (stdev. 14.5%).
• Duration of dividend growth: 16 years of consecutive dividends growth.
• 4 year rolling dividend growth rate for past ten years: More than 10%.
• Payout factor: It has been less than 30% since 2001.
• 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 1.7%; and (b) MMA yield is 2.9%. With my projected dividend growth of 8.2%, the dividend cash flow is 1.41 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $14.1 (i.e. yield 2.2%)

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: $20.3
• Average high yield price calculated based on past 10 years: $24.8
• Pricing based on past 10 year relative price-to-earnings ratio. $29.5
• Pricing based on price-to-earnings ratio of 12: $15
• Graham number: $16.4

The range of fair value is calculated as $18.2 to $21.2.

Qualitative Analysis
BRO is a 70 year old company, and is in top 10 independent insurance intermediaries in US. Its growth model consists of growing market share by acquisition of insurance agencies.

• Its revenue is pretty much focused in US markets; with approx 70% of revenue is concentrated in 9 states.
• It continues to have very stable gross and operating margins. It continues to generate relatively stable free cash flows.
• Being in financial service and insurance industry, I am surprised it does not seem to be affect as other major companies. Perhaps demonstrates its resilience and/or quality of its management taking calculated risk.
• The risk factor is that other than acquisition mode of growth model, there is not other source of growth.

Conclusion
Brown and Brown Inc is stable and slow growth mid-cap company. It is expected to continue to have a sustainable cash flow over next few years. It is typical dividend growth company where dividends grow in excess of 10%. However, the dividends yields are less than 2%. The stock’s current risk-to-dividend rating is 1.57 (low risk). The current pricing of $18 is within my buy range. I would be open to initiating a position based my allocation levels.

Full Disclosure: No position at the time of this writing. I may buy in near future.