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Letting Dividends Do Their Work

Dividend investing is a means of building wealth over a long period of time with reduced risk. Many brokers offer fee-free purchases and reinvestments and the ability to reinvest fractional shares. Dividend investing is for the long term buy-and-hold type investor who wants to sleep at night while their investments steadily build.

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Articles from The Prudent Investor

What Is A Dividend Champion?

by George L Smyth

Oddly enough, the simple definition of a Dividend Champion being a company that has increased their annual dividend each of the past 25 years can be interpreted numerous ways. Should we care?

     

Introduction

I met Dave Fish on The Motley Fool message boards in the mid-1990s.  At that time, The Fool had a live portfolio centered on dividend stocks, which made more sense to me than some of their other ideas.  Many of their portfolios assumed that one could invest thousands of dollars at once - back then, I was fortunate to just cover my expenses - so I found having a strategy that allowed me to invest as little as $25 a month to be appealing.

When The Fool decided, during the Internet implosion, to restrict the message boards to paid visitors, I made the counter-decision to create a website where investors could discuss dividend companies and strategies.  In February 2002, DRiPInvesting.org went live.  Dave (aka dfish) was a prolific poster, offering thousands of posts helping others (out of curiosity, I counted over 5,000).

On Christmas 2007, Dave sent me a spreadsheet that contained the first listing of Dividend Champions and suggested that I place it on the Tools page of the website.  Thus began the monthly posting of the spreadsheet that still exists today.

Sadly, Dave Fish passed in 2018.  Updating the listing was picked up by Justin Law, a contributor to the SeekingAlpha website.

What is a Dividend Champion?

As a photographer who works extensively with the Bromoil photographic process, I regularly get asked what exactly it is, and I have both a short and long answer to the question.  It is the same with Dividend Champions.  The short answer is that a Dividend Champion is a company that has increased its annual dividend for the past 25 years.

That is a straightforward answer, and similar to my explanation of Bromoil (Bromoil is a photographic process where one creates a print on traditional photographic paper, removes the silver, and replaces it with lithographic ink by striking it repeatedly with a stiff, ink-charged brush), satisfies the questioner the majority of the time.

Both, however, require additional explanation once one begins to think about the answer.  It is why there are, at times, differing opinions as to whether or not a company should belong to this select group.  Below are some examples.

Complications

In mid-2020, the Fed decided to place a cap on dividends of large banks during the third quarter of the year, pending the results of stress tests.  It put some dividend payouts at risk, jeopardizing the status of some Dividend Champions.  A company may wish to continue increasing its dividend yet not be allowed to do so.  In this situation, do we give a pass to companies caught in this situation?

A more common situation has to do with the case where one company splits from another.  Take the example of AbbVie (a company I happen to own).  In 2011 Abbott Laboratories spun off its pharmaceutical division to specialize in diversified products, like medical devices, diagnostic equipment, and nutrition products.  As a result, Abbott dropped their dividend and AbbVie started theirs.

If one combines the dividends of Abbott and AbbVie, then that could be considered to represent 47 years of consecutive dividend growth.  However, the strict numbers individually place each company with less than ten years of consecutive dividend growth.  Should either or both companies be considered Dividend Champions?

A third situation involves companies like Calvin B. Taylor Bankshares.  It is a small company that found itself prone to manipulation.  They offered an excellent dividend but paid only once a year.  This resulted in investors buying just before the ex-div date, then selling after the dividend distribution.  The result was a stock more volatile than the company wished, so they decided to move to quarterly payments.

The 2018 dividend came to $0.99 per share.  In 2019 the company offered three $0.25 distributions and one $0.31 distribution.  In 2020, following a $0.31 payment, they reduced the next two to $0.26.  It certainly sounded like a dividend cut to me, but in speaking with Dean Lewis, Chief Financial Officer, the plan was to offer a third payout of $0.26, then increase the final payout of the year to the point where the total for 2020 would be greater than 2019.  The company was initially dropped from the Dividend Champions, but should this have been the case?  (They were later added back.)

Interpretations

In researching Cardinal Health, I noticed that there were varying opinions on their actual dividend growth streak.  These were not just random people in comments sections of articles offering their school of thought - these were knowledgeable authors.

For instance, Cory Cook, a SeekingAlpha author, wrote, "The real number is 15 years of raises due to the dividend payouts between 2001 and 2005. June 2001 through March 2003 (8 quarters) dividend stayed at $0.018 per quarter. Again, in June 2003 through March 2005 (8 quarters), the dividend stayed at $0.022 per quarter."

Perhaps this will be the subject of a future article, but the bottom line is that there are numerous definitions of what "X years of dividend increases" actually means.  It is reasonable for an individual to look through a company's past dividends and question if it supports that individual's definition.

Justin Law maintains a spreadsheet of Dividend Champions, and his notes state, “The initial goal was to identify companies that had increased their dividend in at least 25 consecutive years. But that definition was broadened to include additional companies that had paid higher dividends (without necessarily having increased the quarterly rate in every calendar year."

This was unclear to me, so I asked him what "without necessarily having increased the quarterly rate in every calendar year" meant. Wouldn't each company have increased the quarterly rate in every calendar year?

His response was, "This just means the list has some leniency for companies that might not increase their dividend every year. For example, if company XYZ increased its dividend in July 2019, but didn't announce any increases in 2020, it would still pay out greater dividends in 2020 than 2019 due to the first two quarters being higher than the previous year. So the company would stay on the list through 2021, but if it kept the same dividend rate, it would then be removed for freezing its dividend."

Possibly the best idea is to simply go with a mechanized approach, which is the case with the CCC spreadsheet, provided by Dividend Radar.  The list is broker-grade and sourced from S&P Global, and uses an automated, rules-based approach, which greatly reduces errors and inaccuracies that result from manually curated lists.  Their methodology is clearly defined, so there are no judgment calls to be made.

Finishing Up

So when one gets down to the nuts and bolts of things, defining a Dividend Champion is not as straightforward as one might think.  Different people can have different reasonable opinions on this issue, so I have decided to go with the spreadsheet in the Tools section of the website.  However, the bottom line is to find great companies with a long history of dividend increases, so almost any definition that is understood and followed should point you in the right direction.

 

Other Articles of Interest

Dividend Champions

Dividend Champions, Achievers, Kings and Aristocrats – A Comparison against the Indexes

Safety and the Dividend Champions – Part 1

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Future Dividend Champions - Cardinal Health

by George L Smyth

Cardinal Health is about to announce its dividend offering, which should make for 25 years of consecutive dividend growth. This soon-to-be Dividend Champion has many pluses and minuses as far as adding it to your portfolio is concerned.

Cardinal Health, Inc. is an integrated healthcare service and products company based in Dublin, Ohio. They specialize in the distribution of pharmaceuticals and medical products and manufacture surgical products and fluid management products.  Being around for over 100 years and with 50,000 employees in 46 countries, they are currently #16 in the Fortune 500.

The company is split into two components – Medical and Pharmaceutical.  The Medical segment includes medical gloves, feeding tubes, skin and wound management, surgical products, and numerous other categories.  The Pharmaceutical segment provides one out of every six pharmaceutical products in the United States. 

Performance

10 year chart
Chart via Stock Rover

Over the past 10 years, the company's performance was impressive in the initial five years and disappointing the most recent five years.  This decline is the result of the market moving toward low-margin generics.  One may decide that the company is unworthy of consideration, or, its P/E being about half that of the S&P 500, makes for an interesting opportunity.  A glance at the company's quantitative scores in Stock Rover’s Research Report indicates that the balance might be tipped toward the latter.

quantitative scores
Stock Rover Research Report

An examination of numerous analyst's reports indicates that they appear to be fairly evenly divided between Hold and Strong Buy.  While I do not base my decisions on such reports, it is interesting to see that there are two distinct camps of thought on this company.

Dividend

 

The current dividend yield is an appealing 3.4%, which compares favorably against their peers.  Critically, their Free Cash Flow Dividend Coverage Ratio is, and consistently has been, well below 50%, so there is the confidence that the dividend will remain intact for years to come.

payout ratio
Chart via FinanceCharts.com

An Aside

In researching Cardinal Health I noticed that there were varying opinions on their actual dividend growth streak.  These were not just random people in comments sections of articles offering their school of thought - these were knowledgeable authors.

For instance, Cory Cook, a SeekingAlpha author, wrote “The real number is 15 years of raises due to the dividend payouts between 2001 and 2005. June 2001 through March 2003 (8 quarters) dividend stayed at $0.018 per quarter. Again, in June 2003 through March 2005 (8 quarters), the dividend stayed at $0.022 per quarter.”

Perhaps this will be the subject of a future article, but the bottom line is that there are numerous definitions of what "X years of dividend increases" actually means.  It is reasonable for an individual to look through a company's past dividends and question if it supports that individual's definition.

I will not get into the discussion at this point, but as an example of the interpretation, the Notes section of the spreadsheet states, "The initial goal was to identify companies that had increased their dividend in at least 25 consecutive years. But that definition was broadened to include additional companies that had paid higher dividends (without necessarily having increased the quarterly rate in every calendar year."

A question I posed to Justin Law, maintainer of the CCC spreadsheet, concerned what "without necessarily having increased the quarterly rate in every calendar year" meant.  Wouldn't each company have increased the quarterly rate in every calendar year?

His response was, "This just means the list has some leniency for companies that might not increase their dividend every year. For example, if company XYZ increased its dividend in July 2019, but didn't announce any increases in 2020, it would still pay out greater dividends in 2020 than 2019 due to the first two quarters being higher than the previous year. So the company would stay on the list through 2021, but if it kept the same dividend rate, it would then be removed for freezing its dividend."

I acknowledge that different people can have different mindsets on this issue, have decided to save time and effort by simply following Justin’s research.  For me, the crux of the matter is to find great companies with a long history of dividend increases, and almost any definition of that will point me in the right direction.

The Future

One item of concern consists of the company's exposure to opioid litigation.  While they have already agreed to a settlement to the tune of $5.6 billion, additional litigation could come their way.

debt

Stock Rover Research Report

Another point of concern is the company’s debt situation.  A Debt/Equity Ratio of 3.4 is something that can hold a company back.  They paid down $1.4 billion of long-term debt in 2020, so the direction is positive, but it is something to monitor.

In March, Cardinal Health signed an agreement to sell its Cordis business in the first half of next year.  While it is said to be doing this “to focus on its medical distribution and global medical products businesses,” it must be understood that they acquired Cordis in 2015 and are selling for a little more than half of the purchase price.  Overpaying and failing to integrate are not signs of success.

Finishing Up

There appear to be many reasons for not adding Cardinal Health to one’s portfolio.  That does not mean that there is not a case to be made in its favor.  Each year, since 2014, the company has been able to increase its revenue.  This is projected to continue for the next few years, and continued payback of their debt would be a big step in the right direction.

As the company is not currently valued as highly as its peers, and its P/E is nearly at a five-year low, this could be an opportunity to select an unloved company.  At least, in the short term, the increased need for gloves, gowns, and masks should result in a reliable cash stream.

Finally, with an attractive dividend yield that appears to be safe, this could be a company that properly fits into one’s portfolio.  It is a matter of balancing the pluses and negatives that leads to a proper decision.

 

Other Articles of Interest

Dividend Investing Strategies – High Dividend Stocks

Understanding the Dividend

Future Dividend Champions - Church and Dwight

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This website is maintained by George L Smyth