Are These 5 Dividend Boosters a Buy?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When a company raises its dividend, it is a sign of confidence.

However, is this sign of confidence misleading, or are these companies really presenting a good opportunity?

Company

Ticker

Dividend Raise

Dividend Yield

5 Year Div. Raise

5 Year Stock Performance

J.M. Smucker

(NYSE: SJM)

11.5%

2.18%

81%

145%

Unum Group

(NYSE: UNM)

11.5%

1.85%

80%

52%

Ryder

(NYSE: R)

9.67%

2.24%

48%

(6.75%)

Fastenal

(NASDAQ: FAST)

25%

2.12%

80%

114%

KLA-Tencor

(NASDAQ: KLAC)

12.5%

3.2%

200%

57%

The Investment Sweet Tooth

For a secular company, J.M. Smucker has been on a tear, and has done so by producing strong top-line growth over the last five years. During this period, J.M. has become a very shareholder friendly company, returning more than 40% of its earnings in dividends alone.

Moreover, the company has reaped the benefits from multi-year lows in costs. However, commodities such as coffee are expected to rise, which would negatively affect the company’s bottom line. As a result, I do have concerns about the company sustaining a 40% payout of its net income. If costs rise, then it becomes harder to pay the high dividends, meaning the company's payout could be reaching a max. Therefore, with growth now significantly slowing, and its stock fully inflated, I would think about taking profits.

A Solid Insurer

Unum has been a strong performer in this post-recession financial era, and has done so with a strong financial position – debt is only 50% of equity – and high satisfaction rates among claimants.

Over the last couple years, the company has been able to raise prices without losing customers, but many believe that they have reached a point of stability now. This is a company that trades about even to its book value per share, at just 10 times earnings. Moreover, their payout ratio is only 15%, meaning the company should be able to maintain its dividend regardless of any unexpected operational issues. Thus, I believe it is a good, and solid company.

Natural Gas Transition Lowers Costs

Ryder is a ground freight company that has not been a favorite on Wall Street. The company has boosted its dividend over the last five years, but has been preoccupied with the expansion of its natural gas powered fleet.

The company has had to make large investments to undergo this transition, but most believe that it will drastically cut costs long-term. Last quarter we saw earnings grow 16% while revenue grew 1.7%. I expect this trend to continue, which should bode well for a stock trading at just 0.5 times sales. However, with Ryder paying out 29% of its earnings in dividends, I would monitor its expansion closely, as dividends could become more difficult if earnings decline.

Does Growth Validate Valuation?

The industrial and construction supply company Fastenal has produced great returns following several years of impressive fundamental growth. Although, during its last quarter, sales grew just 5% while earnings grew 7.7%.

Overall, this is still growth, and shows continued improvements in margins. However, at 32 times earnings, and a price/sales of 4.3, this growth does not validate its valuation. In addition, the company is paying out 81% of its net earnings in dividends. Hence, buying growth could become rather difficult. Therefore, I’d take profits off the table.

A Semiconductor Leader Gives Back

KLA is a large chip maker, and is currently trading at multi-year highs after data suggests strong performance for chip stocks. In recent months, momentum in chip sales have risen globally, and with KLA being a large supplier, many believe that it will fundamentally benefit.

In terms of valuation, it trades at 15.5 times earnings, which is consistent with the rest of the space. However, my concern is its 40% payout ratio, which means the company returns 40% of its earnings in dividends.

 In my opinion, this leaves fewer opportunities to invest in growth, as the company remains focused on giving back to shareholders. Therefore, I wouldn’t consider KLA a value stock, but because of it being shareholder friendly, it could be a good long-term investment.

Final Thoughts

As I’ve shown with these five dividend boosters, giving back does not always equal a good investment. Sometimes, a boosted dividend can take a stock higher by itself. However, in the case of Fastenal, which is expensive, and J.M. Smucker, which faces macro challenges, the dividend can be misleading.

In my opinion, Unum remains a strong and stable insurance company, and Ryder is an oversold stock, who has made investments for its future. Therefore, I consider these two stocks the leaders of this list, and would explore both as an investment. 


Brian Nichols has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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