Dividend Growth Investing is usually a relatively laid-back strategy that focuses on income rather than the ups and downs of stock prices.
Nevertheless, even some DGI proponents might be sweating a little now that the COVID-19 pandemic has slammed the brakes on economies in America and around the world.
As a result, many publicly traded companies have resorted to reducing or eliminating their dividends so they can meet financial obligations.
For example, venerable European oil company Royal Dutch Shell (RDS.A) slashed its dividend 66% — its first cut since World War II.
Boeing (BA), the troubled aerospace giant, suspended its dividend “until further notice.”
In putting together DTA’s Income Builder Portfolio, I have tried to select high-quality companies that are very likely to keep raising dividends through thick and thicker.
Of the 12 IBP holdings that have made dividend announcements so far this year, 11 have declared raises. The 12th, TJX Companies (TJX), said on March 19 that it was “evaluating its dividend program,” and I decided to sell it a few days later; most market-watchers believe a suspension is imminent.
According to CNBC, more than 200 companies have reduced or suspended their dividends, including 44 S&P 500 firms.
So it was comforting to hear the CEO of a major international corporation say this during a recent earnings presentation:
The world has clearly now changed, with considerable uncertainty as to the development and duration of the pandemic and its economic and social consequences, including those which impact our operating environment and our consumers.
Our business has historically proven remarkably resilient, and we believe we can deliver a solid performance under the current challenging circumstances. …
Crucially, our organization, liquidity and balance sheet are strong. We will continue to protect and support our employees, serve our consumers and reward our shareholders, which clearly includes our strong commitment to our dividend.
The person who said that on April 21 was Andre Calantzopoulos, CEO of tobacco behemoth Philip Morris International (PM).
That commitment to the dividend was a big factor in my selection of PM for the Income Builder Portfolio.
On Tuesday, May 5, I executed a purchase order on Daily Trade Alert’s behalf for 13 shares of Philip Morris at $73 apiece.
That price was just a little less than the $73.73 we paid when we initiated a position in PM on Sept. 10, and the IBP now owns 26.5817 shares of the company.
PMI = Producing Major Income
Philip Morris yields 6.5% and has raised its dividend annually since being spun off from Altria (MO) in 2008.
SimplySafeDividends.com
Altria (another of the 33 stocks in the IBP) has been increasing its payout for half a century, so one could say that dividend growth is part of the corporate DNA.
With this purchase, Philip Morris has leapfrogged Altria to be our portfolio’s No. 3 income producer. PM is one of five companies projected to deliver more than $100 in income to the IBP over the next year.
Come mid-July, Philip Morris is expected to pay a dividend of $31.10, which will be reinvested right back into the stock (as per the IBP Business Plan).
I don’t want to assume a raise for PMI’s mid-October payout — although that has been the norm for years, and the company certainly sounds ready to keep it going.
Oh, and here’s a cool note: The Income Builder Portfolio now is projected to produce more than $2,000 in annual income.
I’m a big believer in celebrating milestones, especially when they are reached well ahead of the predicted pace.
Analyze This!
Despite the pandemic, analysts generally are bullish on PM’s prospects, as the following graphic from Thomson Reuters indicates.
CFRA rates Philip Morris a 5-star Strong Buy, and has set a target price roughly 23% higher than what we paid for our latest stake in the company.
Another analytical firm, Argus, has established a similar target price for PMI.
Looking 3-5 years out, Value Line envisions price appreciation of as much as 80% (blue circle below) while forecasting little movement in the nearer future (yellow highlight).
The sub-1.0 “Relative P/E” (red circle above) suggests undervaluation, as it means PM’s price/earnings ratio is lower than the average of the 1,700 stocks Value Line analyzes.
Valuation Station
Morningstar Investment Research Center agrees with Value Line that Philip Morris is available at an attractive price — well below the $102 fair value Morningstar has assigned.
The blue and red circles below indicate that PM is respected as a high-quality business.
The following FAST Graphs illustration shows PMI being undervalued, as the company’s “blended P/E ratio” of 14.3 is about 13% lower than its 16.4 norm.
Wrapping Things Up
These can be unnerving times for stock owners, even for relatively chill folks like DGI practitioners.
Nothing is guaranteed, even from long-time dividend growers, so all we can do is assess probabilities and invest accordingly.
In the case of Philip Morris International, its CEO couldn’t have been more blunt about his company’s commitment to its dividend, and I’m happy we have doubled-down on PM for the Income Builder Portfolio.
— Mike Nadel
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