By Eli Inkrot
The economy has made its way from “firmer ground” to “moderate growth”. Companies are looking to pay out some of their recently built up cash hoards and investors are happy to take it in. Here are 6 companies that have the ability to become second quarter dividend kings.
Pfizer (PFE) is still enjoying New York tax breaks, and now fancies itself a biopharmaceutical company. The giant produces useful, well-known products such as Lipitor, Celebrex and Viagra. PFE is also established in the vaccine niche which can provide a healthy, almost “set it and forget it” cash flow. On the dividend front PFE has an above average current yield of 3.9%, which is in line with other pharmaceutical companies. At first glance the consistent dividend growth appears to be lacking as Pfizer has only increased payouts for the last 2 years. But a closer look will show that PFE had increased payouts from 1982 until February of 2009, a recessionary cut. With a Price to Earnings ratio around 20, PFE is not as cheap as it could be since it recently hit a 52-week high. Further, the 71% payout ratio is approaching a worrisome level; that payout ratio has been much lower in the past years. Still, having increased dividends by about 11% last December, Pfizer is showing signs of getting back to its old self again.
Home Depot (HD) comes in with a current yield of 2.7%. This home improvement giant has already doubled in price since its 2009 low and is the go-to play for those who are optimistic about the future of real estate. HD held a stagnant dividend from 2006 to 2009, but has since increased its payouts twice. For the last 5 quarters profits have seen double digit growth rates, and that’s with a depressed housing market. This Atlanta-based DIY Company has a P/E ratio around 18 and an average analyst 1-year target upside of about 10%. Considering the opportunity for a housing comeback not just in the next year, but in the coming decade, HD could be a long-term buy. Currently paying out under half of it profits, HD's 47% payout ratio looks sustainable. Expect another $.25 payout announcement later this month. CEO Francis Blake gets high marks from us. HD remains a better real-estate construction pure-play relative to Lowe's (LOW).
Kid favorite Disney (DIS) isn’t just G movies and theme parks; it also sports the ABC and ESPN networks, magazines and cruise ships. But this California dreamboat leaves something to be desired with its 1% current yield. Further, dividends are divvied out just once a year in December; closer to a Christmas bonus than an income stream. Having hit its 52-week high in March, the P/E ratio around 18 doesn’t scream bargain and the recent earnings miss is troubling. However, if you add in that DIS holdings are in demand with children and sports fans, two of the most inelastic markets, you will discover its pricing power. Additionally the 18% payout ratio suggests future growth is possible. Factor in that analysts collectively expected a 1-year upside of 16% and DIS starts to look more appealing.
It should be no surprise that Wells Fargo (WFC) made this list. As one of many financials negatively affected by recent economic events, this San Francisco-based bank took a hefty beating in the dividend department. To be fair, it took a beating everywhere. But it appears that banks are back and the economy is on steadier ground. After a mandatory $.05 payout for the last 8 quarters, WFC immediately took advantage of the opportunity to raise dividends by issuing a $.07 special dividend in March. The company's latest, April 20th announcement upheld this level with a $.12 quarterly issue due to be payable on June 1st. That’s still a far cry from the pre-recession $.34 a quarter, but with the payout ratio near 10% there’s plenty of room for cautious growth. The P/E ratio around 13 is much cheaper than a couple of years ago, but is in line with historic levels. 26 brokers come in with a 1-year median target of about 30% higher than the current price and none of them expect WFC to be lower than where it is today.
If WFC was no surprise, U.S. Bancorp (USB) shouldn’t turn too many heads either. This Minneapolis-based bank announced a 150% increase in its dividend payouts about a month ago. Still, if you start with an artificially low $.05 a quarter, bumping it up 2 and a half times to $.125 isn’t as impressive as it sounds; but then it again it does best WFC’s payout by half a penny. USB has a current yield of 2% and with its payout ratio around 15% there’s plenty of room for future increases. USB’s quarterly dividend mark was at $.425 before the recession. If USB can approach that in the near term, it could be a huge boost to an investor's yield on cost. The P/E ratio around 13 appears to be in line and 25 brokers expect a 1-year upside of about 19%, although some hold targets below today’s price.
Oracle (ORCL) sits at the bottom of this list with a current yield of 0.7%. I can see it already; you’re saying “How can I possibly make money with a yield this low?” Oracle owner Larry Ellison doesn’t quite have that concern with his 1.1 Billion (yes Billion) shares nabbing him about $500 a minute. However, this technology giant’s low yield leaves the average investor wanting. But ORCL just started making payments in April of 2009 and the payouts appear to be up and coming. For 8 quarters it was held its payout at $.05 a share, until earlier this year when it was bumped up a penny. Not quite there yet, but a 20% dividend increase is rarely a bad sign. Add in the 13% payout ratio and ORCL is a definite candidate for future growth. The P/E ratio of around 23 looks high but is slightly below what it was 5 years ago. 37 brokers are looking for a targeted 1-year upside of about 6%, which is consistent with our trading projections.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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