Two weeks ago I published my predictions for the 11 dividend increase announcements there were expected in my portfolio during the first quarter. Shortly thereafter, Polaris Industries Inc. $PII announced a 5.45% boost to its dividend, which was a pleasant surprise to the upside compared to my prediction.
On February 7th, two more companies, Gilead Sciences $GILD and Church & Dwight Co., Inc. $CHD, announced their new rates. Before we discuss the increases, let’s take a look at my original prediction.
The first declaration came from Church & Dwight, which announced its new dividend along with earnings before the opening bell.
Here is management’s commentary on the dividend from the release:
The Company’s Board of Directors today declared a 7% increase in the regular quarterly dividend from $0.1775 to $0.19 per share, equivalent to an annual dividend of $0.76 per share. This raises the dividend payout from $183 million to approximately $195 million to maintain a 40% targeted payout ratio. The quarterly dividend will be payable March 1, 2017 to stockholders of record at the close of business on February 21, 2017. This is the 21st consecutive year in which the Company has increased the dividend. The Company has paid a regular consecutive quarterly dividend for 116 years.
Mr. Farrell commented, “This action reflects the Company’s desire for stockholders to benefit from our continued strong growth and is an indication of our confidence in the Company’s performance. The Company expects to generate over $1.8 billion in free cash flow over the next three years. Our robust cash flow enables us to deliver higher value directly to our stockholders while maintaining significant financial flexibility.”
This 7% increase was in line with my expectations, and Mr. Farrell’s comments echo my own when I made the prediction. Companies like Church & Dwight are great to have in a dividend growth portfolio because they are straightforward in their guidance, and they have the long track record of backing that guidance up.
When a company says it will raise the dividend along with earnings, and provides a solid target for the payout ratio, it becomes fairly easy to predict what the increases will be on a year to year basis. Couple that with a steady grower like Church & Dwight, which hasn’t had a year of EPS growth under 7% in the last 15 years, and you have the formula for an excellent long-term hold for your portfolio.
I will point out that Church & Dwight is expensive on a historical basis, so despite its performance it isn’t something I would buy more of at current prices. Nonetheless, I sleep quite well with it in my portfolio, and enjoy watching its steady climb higher.
My thinking is the company will at a minimum produce 10% growth to $0.52 per share, but I’m optimistic that we will see at least $0.55, which would be a 17% increase. Even at that rate, the payout ratio is just 20%, well below its peers. If management really wanted to make a splash it could do something like a 40% boost to $0.66, which would be a 24.6% payout ratio and would provide an attractive 3.6% yield on forward basis. Decreasing sales and questions about growth has caused share prices to stagnate, maybe a move like that would be something the market would notice and bring new buyers to the table.
Taking into account the company’s weak guidance for earnings and revenues in 2017, the smaller increase isn’t much of a surprise. Gilead has a growth problem right now, and management stated in its Q4 216 Conference Call that it plans to scale back repurchases and direct its efforts on an acquisition to boost its pipeline.
In 2017, leveraging our capital to pursue external opportunities to expand our R&D pipeline is our primary focus. As a result, we will reduce the level of capital dedicated to share repurchases this year and focus a greater percentage of our shareholder return on our dividend. We currently have $9 billion remaining under our 2016 share repurchase authorization, and we’ll utilize it over time to maintain our current share count. Over the longer term, we may be opportunistic with additional share repurchases.
So, while I am happy that Gilead is rewarding shareholders with a 10% dividend increase, there are certainly some questions going forward with the company. Compare that with Church & Dwight, which continues to pump out 8-10% earnings growth like clockwork, and its easy to see why my comfort level with Gilead is at a different place.
That said, I do still plan to continue holding my Gilead shares, and will continue reinvesting dividends into more shares as they come in. The company still has impressive cash flows despite the current question marks about growth, and in the long run should be able to convert that cash flow into opportunities that will benefit shareholders.
My predictions for these two companies were pretty much spot on with what was announced. Church & Dwight announced a 7% increase, in-line with its targeted payout ratio of 40% of earnings, while Gilead announced a 10.6% increase. Looking ahead, I think 8-10% dividend growth is possible for both companies, but I am much more certain on that happening for CHD than I am for GILD.
Next up on the docket are Dr Pepper Snapple Group Inc. $DPS and Coca-Cola $KO, which should announce within the next week. Looking forward to some more increases to my dividend income!