7 New DRIPs to Consider
10/23/2012 11:00 am EST
Any long-term investor knows that direct stock purchase plans are one of the best ways to buy into good companies and let the magic of compounding help grow wealth. Now there are more companies joining the elite group, writes Vita Nelson of Investing Daily.
Over the past couple of years, a number of companies have introduced new Direct Purchase Plans (DRIPs), often in conjunction with the initiation of their first dividends.
Companies that offer DRIPs make it possible to buy shares without first opening an account with a broker. Generally, these are large-cap companies whose products and services are used and appreciated around the world. The best of these companies tend to raise their dividends regularly, and are relatively stable during times of market volatility.
What’s more, since you can increase your holdings by making small dollar amount investments over time, DRIP investors have a measure of protection against reacting emotionally to the whims of the marketplace.
For this DRIP portfolio, we’ve chosen a widely diverse group of what we feel are the best of the “new” DRIPs. Some come from small companies that are not followed by analysts, while others come from multibillion-dollar companies that have matured to the point that they feel comfortable distributing a portion of their earnings to shareholders.
One example is Buckle (BKE), a financially strong retailer with no debt, no preferred stock, and no pension obligations. This mid-cap began paying dividends in 2003, at 9 cents per share, a payout that has grown to 80 cents this year.
It also has a pleasant habit of paying a special annual dividend. In 2008, it paid an additional $2 per share; in 2009, it paid an extra $1.80; in 2010, it distributed an additional $2.50; and last year, the extra dividend was $2.25 per share.
Although yet to be announced, it will likely pay another special dividend this year, in addition to its 20-cent quarterly payout. And for the fiscal year ending next January, it should reach a milestone of $1 billion in annual sales, while earning about $3.35 per share, up from $3.20 in fiscal 2011. It is expected to net about $3.52 per share in 2013.
When some companies grow too large to manage efficiently, they execute spin-offs. If the “parent” company has a DRIP, the new spin-off often initiates a similar plan. Such was the case with Marathon Petroleum (MPC), spun-off by Marathon Oil (MRO) in July 2011.
Marathon Petroleum consists of the refining, marketing, and transportation businesses, while Marathon Oil retained the drilling operations. Petroleum’s management has now taken preliminary steps to spin off its crude oil and pipeline businesses. That unit could operate on its own and generate between $150 and $200 million in annual profits.
Meanwhile, Marathon Petroleum logged profits of $2.39 billion in 2011, up from $623 million in 2010. The company is expected to earn about $7.43 per share this year, compared with $6.72 in 2011.
Before I settle on companies to include in these portfolios, I run the choices past Moneypaper editors Pat Racaniello, Dave Fish, and Mike Burke. Companies that make it into the portfolio are those that they agree are worthy of long-term accumulation. However, many of these new companies charge fees for investing (but not necessarily for dividend reinvesting).
For companies with fees, make larger investments less frequently so that fees represent no more than 1% of the invested amount. If your investing budget is limited, you might invest quarterly instead of monthly to bring your investment to at least $500 for companies that charge a $5 investing fee.
Agilent Technologies (A)
This company operates three divisions: Electronic Measurement Devices (50% of 2011 revenues), Chemical Analytics (23%), and Life Sciences (27%). With the exception of 2009, earnings have increased annually since 2004.
The initial quarterly dividend (10 cents per share) was paid in June. It has $3.9 billion in cash, compared with only $2.18 billion in debt. Earnings in fiscal 2010 (ends in October) were $1.77 per share, followed by $2.65 last year, should total about $3.25 this year, and hit $3.72 in fiscal 2013.|pagebreak|
American Water Works (AWK)
Headquartered in New Jersey and founded in 1886, this is the largest publicly traded water company in the US, providing 15 million people with drinking water, wastewater treatment, and other services in 30 states and two Canadian provinces.
The annual dividend of $1 per share is up from 80 cents in 2008. Estimates call for about $2.02 per share this year and $2.13 in 2013, compared with $1.66 in 2011.
This is the world's largest biotech company. It discovers, develops, manufactures, and markets human therapeutics in the US, Europe, and Canada.
Quarterly dividends were initiated last September at 28 cents per share, and were raised to 36 cents in March. This year, revenues should top $16 billion for the first time, while earnings should total about $6.33 per share (and $6.90 is projected for 2013), compared with $5.33 in 2011.
This is a financially strong retailer of higher-priced clothing for people between ages 15 and 30. Its stores are primarily in regional shopping malls. As of May, the company operated 433 stores in 43 states.
Quarterly dividends have risen from 9 cents per share in 2003 to 80 cents now. Since 2008, it has paid special annual dividends of over $2 per share. BKE is sitting on $220 million in cash, has no debt, no pension liability, and no preferred stock. It has fewer than 48 million common shares outstanding.
Dollar General (DG)
This is a retailer with about 10,000 stores located in both rural and urban areas across 39 states, mostly east of the Mississippi. It offers consumables, home products, and apparel at discounts.
This year, it is expanding into California, with 50 additional locations. During fiscal year 2011 (ended February 2012), it opened 625 stores, remodeled or relocated 575, and closed 60.
Earnings have grown from 34 cents per share in 2008 to $2.37 in 2011, and $2.81 is expected this year, followed by $3.31 in 2013.
This company was spun off last October by ITT. It operates four divisions: Electronic Systems, Geospatial Systems, Information Systems, and Mission Systems.
Management expects to earn $1.80 to $1.86 per share this year on revenues of about $5.5 billion. In 2011, earnings were $1.99 on revenues of $5.8 billion. About 70% of revenue is from the Pentagon, which is cutting back spending. The company is seeking business from its nonmilitary customers.
Freeport McMoRan Copper & Gold (FCX)
This is a cyclical company that mines copper and gold. It's the world’s largest low-cost producer of molybdenum (producing about 20 million pounds in 2013, with plans to increase to 30 million in the future).
Management stated that the company will spend $275 million on exploration in 2012, up from $221 million last year, and expects copper production to increase by about 25% over the next three years, to 225 million pounds.
Earnings were $2.93 in 2009, $4.57 in 2010, and $4.78 in 2011. Dividends are now set at $1.25 per share, up from the $1 in 2011 and the 91 cents paid in 2010.