A Top Investor's Idea of a Dividend Fund - Really??
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
OK, I love dividend stocks, and I’ve spent the last six months exploring all kinds of them, from all different angles.
I’m building my own dividend portfolio, one company at a time, and introducing them to The Motley Fool community. You can see what I had to say about my first two picks, Abbott Labs and PartnerRe Limited. I will also be introducing another company this week.
I’ve been taking a look at what the so-called professional investors are buying in terms of dividend companies, and what they are offering to the general public in terms of performance. And frankly, most of the time I am shocked and disappointed by what they are considering to be “the best.”
Take, for example, the Royce Dividend Value Fund (RYDVX). This is a 5-star rated fund, according to Morningstar, categorized as investing in Small Blend companies, and the fund has $382 million in assets. The Royce fund’s stated goal is to invest in dividend-paying companies with market caps up to $5 billion. The manager (Chuck Royce, lead manager since inception) looks for companies that he feels are trading at less than their current worth, based on valuation models of balance sheet quality and cash flow levels.
The fund was started in May 2004, so it has 8 solid years of experience, and yet its numbers are abysmal. The fund has a 5-year average return of 5.69%, a one-year return of 13.7%, and currently yields 0.7%.
You could do better investing in an ETF of the S&P 500, which is currently yielding 2.0% and has returned 15% over the past 12 months. The ETF will also cost you a lot less in management fees than the Royce Fund, which has an expense ratio of 1.46%.
So just what companies does Chuck Royce hold in this paragon of dividend investing? I’m going to take a look at his top 3 holdings.
The top holding is Kennametal Inc. (NYSE: KMT), a manufacturer of metal machining tools and accessories. The company has been in business since 1938 and employs over 12,000 people. Its market cap is $3.1 billion.
The stock is currently trading at about $39 per share, has a PE of 11.4 and yields 1.6%. It is trading at 18% less than its 52-week high, which was reached back in March.
Fifteen analysts cover the stock, with an overall rating of 2.1 (1.0 = Strong Buy, 5.0 = Sell). There are 3 Strong Buys, 3 Buys, and 9 Holds. The analyst one-year target price is $41.46, a 5% potential gain. Based on analyst estimates of FY 2013 (which ends in June) earnings and its current PE, I give it a target price of $37. The analyst average 5-year earnings growth estimate is 9.7%, which is barely above the S&P 500’s average of 9.1%.
In terms of its value as a dividend-trading stock, which is where my interest lies, I would say that it barely registers. A yield of 1.6% is only half of what I am looking for. The company has only been raising dividends for 2 years – before that it held its dividend frozen for 3 years.
Those two figures alone stop me in my analysis. I don’t see the company as a good growth prospect, and I don’t see it as a dividend opportunity.
Next on the Royce list is SEI Investments (NASDAQ: SEIC), an investment management firm, founded in 1968 and based in Pennsylvania. The company employs 2,300 people and has a market cap of $3.9 billion.
The stock is trading at $22 per share, has a PE of 20.5 and yields 1.4%. It is trading at its 52-week high.
Seven analysts cover the stock, with an overall rating of 1.8. There are 2 Strong Buys, 3 Buys, and 2 Holds. The analyst one-year target price is $25.25, a 12% potential gain. Based on analyst estimates of FY 2013 (which ends in December) earnings and its current PE, I give it a target price of $29. The analyst average 5-year earnings growth estimate is 12%, which is less than the industry average of 16.0% and the sector average of 17.7%.
In terms of its value as a dividend-trading stock, I would say that it barely registers. A yield of 1.4% is less than half of what I am looking for. The company has been paying dividends for many years, but it has been inconsistent. It generally pays semi-annually instead of quarterly, and has only raised dividends consistently for the past two years.
I would not consider SEI Investments as part of my dividend paying portfolio, based on these metrics. As a growth prospect, it has a bit more attraction, but I am looking specifically for dividend-growth companies, and I believe there are a lot of companies out there that are better than SEI.
The third company in the Dividend Value portfolio is Helmerich & Payne (NYSE: HP), not to be confused with Hewlett-Packard. Helmerich & Payne is in the business of drilling oil and gas wells, and provides equipment, rigging and personnel on a contract basis. It was founded in 1920, employs 9,400 people, and is based in Oklahoma, with a market cap of $5.7 billion.
The stock is trading at $54 per share, has a PE of 10.1 and yields 1.1%. It is trading at 21% less than its 52-week high of $68, reached in January.
Twenty-six analysts cover the stock, with an overall rating of 2.2. There are 6 Strong Buys, 9 Buys, 10 Holds, and 1 Underperform. The analyst one-year target price is $58, a 7% potential gain. Based on analyst estimates of FY 2013 (which ends in September) earnings and its current PE, I give it a target price of $49. The analyst average 5-year earnings growth estimate is 6.6%, which is less than the industry average of 13.7%, the sector average of 12.7%, and the S&P average of 9.1%.
In terms of its value as a dividend-trading stock, I would say that it barely registers. A yield of 1.2% is less than half of what I am looking for, and it would not be considered further under my criteria.
However, for the sake of this article I will take my analysis further. The company has been paying and raising dividends for 35 years, which is a fantastic history, and its 5-year Dividend Growth Rate (DGR) is 9.3%, which is also a great metric. Its payout ratio is a mere 5%, which makes its dividend completely sustainable. Its 12-month total return, however, is -2.5%. Overall, it would score 14 points using my Dividend Portfolio rating system, but it would not come anywhere near making it into my portfolio.
In conclusion, I just want to say that I can barely believe that this fund calls itself a dividend fund. If you are actually looking for a Small Blend (Growth and Value) fund, then this may be a good choice, as it currently ranks in the top 10% for the category for the 5-year period (top 30% for one-year period).
But as for a dividend fund, this is definitely not a fund for me.
khern0203 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kennametal. 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!