During the week I participated in blog carnivals and continue to read articles from fellow bloggers. I am listing some of the articles that I enjoyed reading.

Economy, Finance, Investing.…..

• Impact of dividend policy of shareholder’s wealth
  
• Four stocks with higher dividends
• Don’t be fooled by high PE values
• Dividend aristocrat performance update
  
• Warren Buffett’s BNI intrinsic value calculation
• Main disadvantage of dividend investing
• Infosys -a dividend technocrat
• Dividend policy and share value
  

These are some diverse set of articles from fellow bloggers and business magazines. I hope you enjoy reading all or some of these interesting posts.

Waste Management Inc. (WM) provides integrated waste management services in North America. The company is engaged in collection, transfer, recycling, disposal, and waste-to-energy services. WM is neither a dividend aristocrat nor a dividend achiever. In fact, WM has started showing some dividend growth trends in last five years. While I am presenting and showing data from last 10 years, I am only using last five years of dividend data. My objective here is to understand if WM has any potential to be a dividend achiever.

Trend Analysis
Since WM has recently started growing dividends, I am looking at trends for past 5 years of corporation’s revenue and profitability. The parameters should show consistently growth trends. The trend charts is shown in image below and for background reference I have plotted data for past 10 years.

• Revenue: Overall stable and consistent revenue in last 5 years. The average revenue growth for last 5 years is 3.2% (with 3.1% std. dev). While it shows stability, it shows company facing growth challenges.
• Cash Flows: Relatively increasing trend for operating cash flow. The corporation has a consistently higher operating cash flow, two times the net income or free cash flow.
• EPS from continuing operation: In general, the EPS also has an increasing tread since year 2003 with average growth rate as 9.8% (17.5% std dev). Most of that growth is coming in 2004 and 2005. After that is more or less constant. With relatively flat revenues, the EPS growth is most likely coming from operational efficiencies and share buybacks.
• Dividend per share: Dividends per share are consistently growing for the last 6 years, including the most recent 2009 dividend increase.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 2.00. This is a medium risk category as per my 3-point risk scale. The factors that are making it medium risk-to-dividends are increasing payout factor and high variability in EPS.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past ten years.

• Dividend growth rate: The average dividend growth (9.6%) is very much similar to average EPS (9.8%) growth rate. However, the EPS has a very high variability (sometimes negative growth).
• Duration of dividend growth: Dividends have continuously grown for the last 5 years. Before 1998 in its pervious incarnation, before WM, the corporation has consistency paid dividends for more than 25 years. However, not a consistently growing dividends.
• 4 year rolling dividend growth rate for past ten years: No
• Payout factor: In the recent past 5 years, it has been consistently less than 50%. This provides little flexibility and room to grow dividends.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.8%; and (b) MMA yield is 2.4%. Considering the average dividend growth rate of 9.6%, the stocks dividend cash flow at the end of 10 years is 2.9 times MMA income. If we assume my average expected growth rate of 3.2%, then the dividend cash flow is only 1.70 times MMA income.

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $15.35
• Average high yield price calculated based on past 10 years: $39.8
• Pricing based on past 10 year relative price-to-earnings ratio. $44.0
• Pricing based on price-to-earnings ratio of 12: $26.1
• Graham number: $9.9

The range of fair value is calculated as $19.1 to $26.7.

Qualitative Analysis
The strength of WM business is its well established distribution network and existing market share of approximately 30%. The closest competitor has half of that market share. Putting this in context of economic environment, it has opportunity to grow due to its pricing ability and leveraging existing distribution network.

• This quantitative analysis shows that, in last 5 years WM has been able to bring in some level of stability in revenues, profitability, and operating margin. While the corporation is able to maintain consistent operating cash flow, it facing challenges in growing that cash flow. The EPS also has high volatility. Due to its low payout factor, corporation has been able to grow dividends for last 6 years.
• Assuming that the corporation’s existing trends in profitability and growth continue ‘as is’, I expect dividend growth to slow down relative to its 5 year average.
• The company expects to continue to maintain its cash flow.
• The company plans to use its free cash flow for debt reduction, dividends, and share buyback.

Conclusion
WM raised its annual dividend for 2009 from $1.08 to $1.16 per share. This increase shows corporation’s confidence in its free cash flow. For 2009, I believe this increase is ably supported by its cash flow. The stocks risk-to-dividend number is 2.00 (medium risk category). The current pricing of $30 is very close to my fair value range. I would be open to adding WM in my portfolio as long as my asset allocation allows. I expect WM to provide long term value and sustainable current dividends (and slow dividend growth).

Full Disclosure: No position at the time of this writing.

Summary for October 2009 is that I did buy two stocks to increase my annualized dividends. In addition, I also continued to add to my existing positions because I have automatic dividend re-investments for almost all of the stocks. Attached below is the summary table to reflect the status as of October 31, 2009.

Progress Update October 2009

Portfolio Status Update

• The total annualized portfolio dividend cash flow was $1912 (up from $1786 in September 2009). This change was due to new purchases.
  
• The portfolio’s total yield on cost went up to 4.31% (down from 4.82% in September 2009). As a note, this YOC does not take into account additional shares or dividends added up due to reinvested dividends. I plan own adding those up at by end of the year.

New Purchases

• Purchased ABT with annualized dividends of $64.00. The purchase yield was 3.27%.
• Purchased AFL with annualized dividends of $62.00. The purchase yield was 2.77%.

Additions to Existing Positions – None.

Selling – None.

General Comments

• My over exposure to AOD for total portfolio dividends is automatically getting reduced since I am not adding to my existing position. My exposure has reduced to 13.3% of total dividend income (from more than 20% in January 2009) and 3.5% of total portfolio value.
  
• I expect one or two more purchases before the end of this year. Hence, I am going to miss my year goal of reaching $3000 cash flow from dividends.
  

Until next month, happy investing.

Kellogg’s Company (K) is a leading producer of ready-to-eat cereal, and also sells convenience foods such as cookies, crackers, cereal bars, fruit snacks, and frozen waffles.

For starter, K is neither a Dividend Aristocrat nor member of Broad Dividend Achiever. This is primarily because it had flat dividends between 2001 and 2004. However, it has paid consistent and stable dividends (without cutting) since 1985. The most recent dividend increase was in August 2009. My objective here is to analyze if how it rates on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 9 years of company’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

• Revenue: In general, a growing trend since 2002. The average revenue growth for last 9 years has been approximately 7.3%. The company raised the year 2009 revenue estimate.
• Cash Flows: Overall, a very slow and anemic increasing trend of free cash flow and operating cash flow. FCF is more or less similar to net income, but 2008 FCF was 80% of net income.
• EPS from continuing operation: In general, it had an increasing trend from 2001 onwards. It has raised its EPS estimate for full year 2009.
• Dividends per share: On ten year basis an anemic dividend growth. It remained constant between 2001 and 1004.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.86. This is a medium risk category as per my 3-point risk scale. The slow EPS growth rate and relatively reduced gross margins is making this as medium risk to dividends.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 4.1% (stdev. 3.1%) is less than average EPS growth rate of 11.9% (stdev. 15%).
• Duration of dividend growth: Dividends have never been cut since 1985. However, they have remained constant between 2001 and 2004.
• 4 year rolling dividend growth rate for past ten years: Less than 10%.
• Payout factor: It has been less than 50% since 2004.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.04%; and (b) MMA yield is 2.9%. With my projected dividend growth of 4.1%, the dividend cash flow is 1.16 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $29.77 (i.e. yield 4.8%).

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $35.1
• Average high yield price calculated based on past 10 years: $43.2
• Pricing based on past 10 year relative price-to-earnings ratio. $37.6
• Pricing based on price-to-earnings ratio of 12: $33.0
• Graham number: $24.5

The range of fair value is calculated as $30.3 to $37.2.

Qualitative Analysis
Kellogg’s Company was incorporated in 1922. It paid consistently growing dividends from 1985 to 2001. The acquisition of Keebler Foods Co halted this growth and dividends remained flat until 2001. The dividends have started growing back again since 2005 onwards.

• Its revenue is pretty much focuses in North America which contributes 66% of the revenue. Europe has 20%, Latin America 8%, and Asia Pacific as 6%.
• It continues to have stable gross and operating margins. It generates relatively stable (albeit not growing) operating and free cash flows.
• As with any branded consumer staples, Kellogg faces risk from private label products.
• Kellogg expects to continue increase EPS by the combination of operating cost discipline, share buy backs, and moderate sales based growth.

Conclusion
Kellogg’s is stable and slow growth company. It is expected to continue to have a good cash flow over next few years. It is not typical dividend growth company where dividends grow in excess of 10%. However, one can expect K to provide stability of dividends in the portfolio. On relative basis to its peers, it is a conservative company with controlled balance sheet which provides room for growth through acquisitions and/or growth of its various brands. The stock’s current risk-to-dividend rating is 1.86 (medium risk). The current pricing of $50.17 is above my buy range. However, I would be open to adding to my existing position when it is near to my buy range and my allocation allows the additions.

Full Disclosure: Long on K.

This article originally appeared on The DIV-Net on October 22, 2009

Few weeks ago, I posted an article earlier which discussed why emerging markets (e.g. BRIC) cannot be clubbed together. There are so many significant differences that it makes sense to look at it individually. Most likely it will also provide maximum possible return for our invested dollars. While China continues to receive most attention in the press, I believe its India that provides a much better option for small individual investors. Following are three reasons I believe India has relatively more fundamental strength than other countries.

• Inward Consumption Based Growth: India’s economy is consumption oriented when compared to other emerging markets. India’s export contributes less than 15% to its $1.2T GDP. The IT outsourcing services and back office has garnered most of the business media coverage; however, these industries have less than 8% contribution to the GDP and employ less than 5 million people. This is an indicator of growth by internal production and consumption. It is less reliant on exports. Quite contrarily, these technology services perform better in recession, because it is all about optimizing operational cost. In addition, its reserve bank (a.ka. central bank) has very conservative monetary policy, which is why we did not see failure of the banks (or banking system) during the current financial melt down. There were no widespread bank bailouts.

• Transparency: It has democratic governance which on many occasions slows down the decision making progress, but provides better transparency (relative to Russia and China). As of today, its currency is freely convertible for trading goods and services, but there are certain restrictions for international asset acquisition. However, it has a pragmatic roadmap to allow its currency to fully float with market dynamics. It has demonstrated international policy of non-confrontation which, to certain extent, immunes its economy from international squabbles.

• Government Stimulus Driven Growth is Less: The Indian market has rebounded in line with other emerging markets like China or Brazil. While it remains to be seen whether it can be sustained, the indicators suggests it may not hit similar level of bottoms again. A recent article showed rebound of earnings for companies in its SENSEX index. The key in this rebound is; not much is being supported by government driven expenditure or public infrastructure projects. In fact, it continues to stumble on its infrastructure.

Finally, India can boast that its government is run by a bunch of prominent economists (with political and public support). The architect of Indian economic reforms, who laid down the path for reforms 18 years ago, is now at its helm as a prime minister. It is always good to have a non-political leader who is not only an economist, but someone who knows how to execute it in the complex state like India. Therefore, I continue to believe that on long 10+ year time horizons my dollars are “relatively” safer in India markets than any other emerging markets. I do not expect to be a smooth ride. There will be time period when markets will crash, but it will eventually come out stronger.

Having said that, I believe, individual investors should use ETF based investment vehicles for India (or any other emerging markets) which invest in array of companies and have less fees and commissions. Keeping with this thought process, I use Wisdom Tree India based ETF, EPI. You may read more about my reasons for selecting EPI for this objective.