Waste Management Inc. (WM) provides integrated waste management services in North America. The company is engaged in collection, transfer, recycling, disposal, and waste-to-energy services. WM is neither a dividend aristocrat nor a dividend achiever. In fact, WM has started showing some dividend growth trends in last five years. While I am presenting and showing data from last 10 years, I am only using last five years of dividend data. My objective here is to understand if WM has any potential to be a dividend achiever.

Trend Analysis
Since WM has recently started growing dividends, I am looking at trends for past 5 years of corporation’s revenue and profitability. The parameters should show consistently growth trends. The trend charts is shown in image below and for background reference I have plotted data for past 10 years.

• Revenue: Overall stable and consistent revenue in last 5 years. The average revenue growth for last 5 years is 3.2% (with 3.1% std. dev). While it shows stability, it shows company facing growth challenges.
• Cash Flows: Relatively increasing trend for operating cash flow. The corporation has a consistently higher operating cash flow, two times the net income or free cash flow.
• EPS from continuing operation: In general, the EPS also has an increasing tread since year 2003 with average growth rate as 9.8% (17.5% std dev). Most of that growth is coming in 2004 and 2005. After that is more or less constant. With relatively flat revenues, the EPS growth is most likely coming from operational efficiencies and share buybacks.
• Dividend per share: Dividends per share are consistently growing for the last 6 years, including the most recent 2009 dividend increase.

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. The factors that are making it medium risk-to-dividends are increasing payout factor and high variability in EPS.

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 (9.6%) is very much similar to average EPS (9.8%) growth rate. However, the EPS has a very high variability (sometimes negative growth).
• Duration of dividend growth: Dividends have continuously grown for the last 5 years. Before 1998 in its pervious incarnation, before WM, the corporation has consistency paid dividends for more than 25 years. However, not a consistently growing dividends.
• 4 year rolling dividend growth rate for past ten years: No
• Payout factor: In the recent past 5 years, it has been consistently less than 50%. This provides little flexibility and room to grow dividends.
• 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 3.8%; and (b) MMA yield is 2.4%. Considering the average dividend growth rate of 9.6%, the stocks dividend cash flow at the end of 10 years is 2.9 times MMA income. If we assume my average expected growth rate of 3.2%, then the dividend cash flow is only 1.70 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 15 year DCF: $15.35
• Average high yield price calculated based on past 10 years: $39.8
• Pricing based on past 10 year relative price-to-earnings ratio. $44.0
• Pricing based on price-to-earnings ratio of 12: $26.1
• Graham number: $9.9

The range of fair value is calculated as $19.1 to $26.7.

Qualitative Analysis
The strength of WM business is its well established distribution network and existing market share of approximately 30%. The closest competitor has half of that market share. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

• This quantitative analysis shows that, in last 5 years WM has been able to bring in some level of stability in revenues, profitability, and operating margin. While the corporation is able to maintain consistent operating cash flow, it facing challenges in growing that cash flow. The EPS also has high volatility. Due to its low payout factor, corporation has been able to grow dividends for last 6 years.
• Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its 5 year average.
• The company expects to continue to maintain its cash flow.
• The company plans to use its free cash flow for debt reduction, dividends, and share buyback.

Conclusion
WM raised its annual dividend for 2009 from $1.08 to $1.16 per share. This increase shows corporation’s confidence in its free cash flow. For 2009, I believe this increase is ably supported by its cash flow. The stocks risk-to-dividend number is 2.00 (medium risk category). The current pricing of $30 is very close to my fair value range. I would be open to adding WM in my portfolio as long as my asset allocation allows. I expect WM to provide long term value and sustainable current dividends (and slow dividend growth).

Full Disclosure: No position at the time of this writing.

I am very sure that every dividend investors would have received this question. While dividend investors can ignore responding to folks with trading philosophy, sometimes it does become difficult to argue with value investors. Value investors who in general are looking to invest below book value sometime have an argument that focusing on dividend is not that critical. Business should be applauded for reinvesting profits back into business to grow. In essence, either create additional value or continuously increase value for their shareholder. That is a good argument. However, the key here is “creating value for the shareholders”.

Each individual will look at this differently. For me, “creating value for shareholder” is how much I am getting back in return. In simplistic terms, what is in there for me? From purely business standpoint, typically, value creation means increasing value of its business (and hence increasing stock value). Managements use combination of funding sources (debt, equity, leverage, etc.) to continuously increase the value of its business.

Let us consider that an individual is interested in harvesting profits based on buying undervalued stocks and cashing out after it is has reached its value. In this context, focusing solely on capital appreciation makes sense. Dividends can be considered as misnomer. Here the investor wants to focus on value itself, and given an opportunity, he/she will cash out that value. The objective is not to stick with the business or company. In this case, the buy-and-hold is based on certain criteria (i.e. value).

In my investment approach of buy-and-hold, I am also looking for management to continuously increase the value of its business (and hence my stocks value). I do not plan to cash out my profits (if any). In that context, I only have paper value creation. Unless I cash out, that increased value has no meaning for me. Who knows some nutjob manager will screw things and value is vanished. While I am waiting and continue to trust management, I need management to share some profits with me. That’s rational argument and prudent money management which shows to me company cares for its shareholders. I don’t want 100% profits. I want management to give back 25%-30% of profits as dividends.

Furthermore, if management is confident and company pays increasing dividends, it will be because of increased earnings (and hence P/E ratio). Indirectly, my stocks price valuation will also increase.

Let us take an example:
I start a corner store. I am owner (or shareholder). I want to grow my business. I agree for first few years (say three years) I need to put every penny back into growth. But after three years, I still want to continuously grow it. And I also want to make a decent above average living. It cannot be a one way street forever. I would take some percentage (say 20-30% profits) and remaining plow back into business. That’s what I call prudent management. I am getting something back to wait and continue to do my business.

Other options could be I keep plowing back for few years, say 5 or 6 years, and then sell it completely at higher value. Here my focus would be solely to go after increased value and cash out. I am not worried about whether my business stays to goes.

To summarize…
There has to be balance based on individual’s buy and hold objectives.

• Going after buy and hold approach solely for capital appreciation is a high risk strategy, even when buying at deep value. My view is, until you exit, this value creation has no meaning. And hence, one needs dividends to keep the total returns increasing year after year.
• Individuals wanting to use value investing for capital appreciation alone should always have an exit strategy (it cannot be buy and hold on continued basis). This paper value can vanish at any point in time.

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.

This article was originally published on The DIV-Net, on May 28, 2009.

Becton, Dickinson and Company (BDK) is a medical technology company that serves healthcare institutions, life science researchers, clinical laboratories, industry and the general public. BD operates in three different market segments viz. medical supplies and devices, laboratory equipments, and diagnostic products. BD is headquartered in the United States and has offices in nearly 50 countries worldwide.

BDX is a dividend achiever and has been paying growing dividends for last 10 years. In one of my earlier post, I listed few companies that may have potential for dividend growth investments. I had shortlisted BDX for more analysis. Keeping with that, my objective here is to analyze if BDX is a good dividend growth stock and how it will rate on my scale of risk-to-dividends.

Trend Analysis

Here I am looking at trends for past 8 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: Consistently growing revenue. The average revenue growth for last 8 years is 8.6% (with 2.8% standard deviation).
• Cash Flows: In general, an increasing trend for operating cash flow (except a dip in year 2006). The free cash flow is generally close to net income.
• EPS from continuing operation: Consistently growing earnings.
• Dividends per share: Consistently growing dividends.

BDX: Trends Analysis

BDX: 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 1.14. This is a low risk category as per my 3-point risk scale.

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 16.0% (stdev. 15.7%) is less than average EPS growth rate of 18% (stdev. 12.3%). The dividends seem to be well covered and consistent with earnings growth.
• Duration of dividend growth: 10 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10% for past 8 years. More than 12% for last six years.
• Payout factor: In the past 8 years, it has been in the range of 20% to 30%. There is room for growth in payout factor.
• 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 2.0%; and (b) MMA yield is 3.4%. Considering the last 8 year average dividend growth rate of 16%, the stocks dividend cash flow at the end of 10 years is 1.65 times MMA income. However, with my projected dividend growth of 8.6%, the dividend cash flow is equal to 0.91 times MMA income. For MMA income to be equal to dividend cash flow, the yield has to be 2.4%, and price has to be at $56.00

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: $46.5
• Average high yield price calculated based on past 10 years: $67.5
• Pricing based on past 8 year relative price-to-earnings ratio. $74.7
• Pricing based on price-to-earnings ratio of 12: $50.7
• Graham number: $38.2

The range of fair value is calculated as $48.0 to $55.5. This is determined by taking average (for high value) of above five parameters and then subtracting it with half the standard deviation (for low value). This fair value is also very similar to the requirement for MMA income equal to dividend cash flow.

Qualitative Analysis

BDX’s history can be traced back to 1897. It has survived all the major ups and downs in the recent history of United States. This demonstrates that it keeps adapting to changes in the market place.

• Contrary to widespread belief, my viewpoint is it operates in an industry with high barriers to entry. The quality and reliability requirements for end products in this industry are among the stringent ones. BDX’s has consistently showing that it can meet those requirements in profitable way.
• Current financial turmoil does not seem to have had a game changing effect on its businesses. The company does not have excessively high debt levels. It does not depend upon the credit markets.
• BDX generated more than half of its sales from outside of US. This allows individuals investor like me to hedge against dollar decline and exposure to international markets.
• The area of concern for BDX is the regulatory driven constraints which may change the spending patterns of hospitals and clinics.
• Another area of concern is recession driven likely reduction in expenditure from community hospitals and other life science customers.
• Like any other company, I expect BDX to face short-to-intermediate term challenges due to recession driven slow down.

Conclusion

BDX is a dividend achiever and has been raising dividends for last 10 years. The stocks current risk-to-dividend rating is 1.14 (low risk). This is a low yield dividend stock with dividend cash flow being equal to MMA cash flow after 10 years (at price of $56). This analysis shows that BDX continues to be a good stock for potential dividend growth investment. I will be willing to open a long position when the stock prices falls within my fair value range.

Full Disclosure: No position at the time of writing. I may initiate a long position in near future.