|
 |
|
|
|||
|
|||
|
|
In the first half of the year, more companies boosted their dividend payments than in any six-month period since 1999, according to research firm Standard & Poor’s. So far this year close to 900 companies have increased their dividends, 14% more than a year ago and 20% more than two years ago. And while many companies are raising their dividends, others are initiating them. For example, Costco Wholesale (COST), QAD Inc. (QADI), Station Casinos (STN), Xilinx (XLNX) and Yum Brands (YUM) recently joined the ranks of this year’s first-time dividend payers. Fueled by strong corporate profits and reduced dividend taxes, the trend toward larger and larger dividend payouts is expected to continue. Current analyst forecasts call for companies in the S&P 500 Index to pay out roughly 15% more in cash this year than they did in 2003. Income investors have not only been reaping the rewards of these higher dividend payouts, but they've also been enjoying solid share price appreciation. For example, the 376 dividend-paying stocks in the S&P 500 have gained an average of +3.5% this calendar year compared to an average gain of just +0.5% for those that don’t pay dividends. Given the cloudy outlook for the overall market, investors have been taking a much more conservative stance toward their holdings. This has attracted investor interest in stable companies that can afford to pay healthy dividends. Thanks to the recent trend toward higher dividends, now is a great time to sniff out companies that not only offer solid dividend payments, but that could also deliver above-average growth. All four companies we feature below have delivered double-digit earnings growth over the past few years and are expected to boost their earnings an additional +15% or more in the coming year... EQUITABLE RESOURCES (EQT) -- A high-powered utility, Equitable supplies natural gas for electric power generation in the eastern U.S. As a government-regulated gas utility and pipeline operator, the company distributes gas to 275,000 retail customers in Pennsylvania, West Virginia and Kentucky. The firm's utility division also operates some 1,500 miles of gas pipelines interconnected with five major interstate pipelines and 15 gas storage units. Equitable's regulated utility business, which accounts for about one-third of company profits, provides a virtually guaranteed annual income stream. In addition to its regulated utility business, Equitable operates as a non-regulated natural gas producer. In stark contrast to its regulated business, the firm's non-regulated exploration and production arm does not provide predictable annual profits. On the plus side, however, this unit offers tremendous growth potential. The company’s production business owns and operates the largest gas reserves in the Appalachian area of the Southeastern U.S. This region is known for its long-lived reserves and low operating costs. Virtually all of the company’s drilling activity results in natural gas producing wells, giving the company a remarkable 100% drilling success rate. Exploration and production operations account for almost two-thirds of earnings, and this unit has been a prime beneficiary of rising natural gas prices in recent years. Finally, Equitable derives about 5% of operating income from its energy consulting business, NORESCO. This division provides energy efficient solutions mainly to government and commercial clients. The chart below compares the one-year performance of Equitable Resources (EQT) with the Utility Index (UTIL) and the S&P 500 (GSPC).
Dividend -- This 78-year old company has been boosting its annual dividend payout on a regular basis since 1950. The stock pays an above-average $1.52 dividend, up from 59 cents four short years ago. Since January 2003, the firm's quarterly dividend has climbed +124%. The stock yields about +3%, based on current prices. While this yield is slightly lower than the industry average, the firm’s five-year dividend growth rate of over +10% far surpasses the industry’s growth, which has been nearly flat. Given its below-average 40% payout ratio (defined as the percentage of earnings paid in cash to shareholders), Equitable's dividend has room for further growth. The company has said it plans to raise dividends in line with its projected earnings growth rate of about 10% a year for the foreseeable future. Equitable offers a Dividend Reinvestment Plan (DRIP) that allows shareholders to acquire additional shares without paying brokerage fees and service charges. Although at first glance Equitable might seem like a boring utility stock, with dividend reinvestment, a $10,000 investment in the shares five years ago would be worth about $30,500 today! Performance – Equitable's regulated and non-regulated businesses give it a nice balance of guaranteed income with strong growth potential. Company earnings have grown at a nearly +30% annual clip over the past five years. More recently, the firm has benefited from improved production efficiencies and higher gas prices, posting eight consecutive quarters of at least +7% growth.
Second-quarter earnings more than quadrupled to $2.06 a share from 50 cents a year ago. Results included a net benefit of $1.94 a share from a capital gain on its investment in Westport Resources, which was recently acquired by Kerr-McGee (KMG). Also included was a charge of 42 cents for costs related to discontinued international production operations. Excluding these one-time items, profits rose +8% to 54 cents a share. The company has a healthy balance sheet; with a debt-to-equity ratio of only 0.8, the firm's debt load is well below the industry average and on par with the overall market. Meanwhile, Equitable's interest coverage ratio of 7X is more than twice the industry norm, meaning the company should have no trouble paying its interest expenses in the future. Outlook -- Steady income from the utility business coupled with strong growth prospects for its production operation should keep Equitable's earnings growing at a rapid pace. Future growth is expected to come from continued production increases, improved gas-gathering rates and higher hedged gas prices. The company has hedged about 94% of this year’s expected gas production, 87% of 2005 production and 81% of 2006 production at current price levels. (Hedging involves selling forward production in the futures market to lock in a fixed price.) As well, the company is considering selling and hedging its remaining stake in Westport/Kerr-McGee. Management expects to deliver 2004 earnings of $3.10 to $3.15 a share, excluding one-time items such as the Westport/Kerr-McGee share sale. That represents a +13% to +15% gain over 2003 earnings. The company is also calling for 2005 earnings of $3.45 to $3.50 a share, even if gas prices stabilize. Valuation -- With an average price-to-earnings (P/E) multiple of about 17, the stock trades at a 15% premium to the average gas utility. However, Equitable's five-year projected growth rate is among the best in the industry, giving it a PEG ratio far lower than its peers. (You can calculate a firm's PEG ratio by taking its price-to-earnings multiple and dividing that figure by the company's projected five-year growth rate.) In addition to raising dividends in line with earnings growth, the company has said it plans to use the proceeds of any additional Westport/Kerr-McGee share sale to buy back shares. Given its strong growth prospects, we believe EQT is attractively priced at current levels. As such, it could make an excellent choice for income-oriented investors. Important Note: To view
the remainder of this article, which includes an analysis of three
additional income stocks that are poised to deliver impressive earnings
and dividend growth in the coming years, you'll need to read the August
issue of our premium High-Yield Investing newsletter. If you haven't
already signed up for this monthly newsletter, then please visit the
link below to subscribe. After doing so, you'll gain immediate access to
the remainder of the article above, as well as four in-depth research
reports and a host of additional members-only High-Yield Investing
content:
|
|
||||||||||||||||||||||||||
|
||||
