Follow the Blue Chip Dividend Hikes

02/06/2012 8:15 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

A number of premier companies in various industries have announced dividend increases recently, which is a good indicator for lesser dividend payers, writes Jim Trippon of Dividend Genius.

Dividend increases continue. There were a batch of recent increases, led by some well known companies such as Time Warner Cable (TWC) and Schlumberger (SLB), with a host of other companies joining in.

The dividend increases which have been coming in recent months may seem rather ordinary to many investors, but dividend investors know differently. The proliferation of increases is a sign of good things, not just for income and yield investors. Non-dividend investors should take note, too.

Why? Simply because companies are much more prone to increase their dividends when their business is going well, when the economy is doing well, and are much more reluctant to do so when things aren’t going so well. While this is one of those investment themes that seems so incredibly obvious as to be banal, you’d be surprised how many investors miss it.

Schlumberger, one of the major oil companies, increased its annual dividend payout from $1 per share to $1.10, a 10% hike that takes the yield to roughly 1.47% at the stock’s current price. Schlumberger’s yield is less than some of the other major oils—such as Exxon Mobil (XOM), which currently yields about 2.2%, or Chevron (CVX), which yields 3%—but neither of those companies increased their recent dividend.

With healthy revenues of $37 billion and net income of $4.8 billion, Schlumberger trades at a P/E of 21. Not a high yielder, consider the dividend is a bonus paid to wait as the stock appreciates.

Diversified utility Dominion Resources (D) pays a current yield of 4.11%, and raised its dividend by just over 7%. Dominion sells at a P/E of roughly 19 and at price-to-book of 2.45.

Many utilities have enjoyed a nice run up in their stock prices this year, and Dominion has been a part of that, trading in the upper range of its share price. Dominion offers stability and a nice payout that’s edging up.

Somewhat of a surprise in a challenging industry, Time Warner Cable (TWC) managed a neat double play by delivering both a strong earnings report and a hefty dividend increase.

The cable company reported fourth-quarter earnings which rose 40%, to $1.39 a share, on a 4% revenue increase. A solid performance in broadband sales and its business segment propelled the quarter. It also announced a quarterly dividend hike to 56 cents a share from the previous 48 cents. This boosts the yield to 3%.

Liquor company Beam (BEAM), which is the alcoholic spirits segment split off from what used to be Fortune Brands, delivered an 8% dividend increase. The previous annual rate of 76 cents was raised to an 82-cent payout, which gives the stock a current yield of 1.6%.

Beam trades at a P/E of 9 with a trailing 12-month EPS of $5.79, and has grown earnings in recent years despite essentially flat revenue. Recently it purchased Cooley Distillery, an Irish whiskey company, which will help it grow revenues, and Beam expects the acquisition to be accretive to earnings in the near term.

One of the most interesting dividend increases was by Eaton Corp. (ETN), a diversified industrial company. Despite an earnings miss due to slightly slower sales than expected, the company announced a quarterly dividend increase from 34 cents to 38 cents. At a recent closing share price of $49.57, this brings Eaton’s annual dividend yield up over the 3% mark.

With its reported $1.08 EPS, 3 cents under the estimates, along with a GAAP number that it failed to beat, investors were disappointed. The EPS, however, was a marked increase from the same quarter last year’s 82 cents, on revenue that rose by 10%. Although the power and aerospace manufacturer saw some softness in its business, there are already signs that demand will strengthen later this year.

These companies, though they are not high-yield plays, provide clues to the overall direction of dividend-paying companies and can be indicators of trends. The dividend increases averaged around 10%, and ranged across all kinds of industries and sectors.

Even if these companies aren’t ones you invest in, they point to an improving economy, which can mean more income for dividend investors as business picks up for more dividend-paying stocks.

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