The company has a strong track record of operational performance. It boasts the highest pro-forma returns on invested capital in its industry, best profitability per barrel of crude capacity, and shareholder-oriented capital deployment through strong regular and special dividends as well as share repurchases. Its competitive advantage is the favorable location of its refineries near lower-cost shale oil plays in the United States and Canada.
This has been a positive factor in the company’s profitability, as crack spreads, reflecting inland to coastal crude oil differentials, have been exceptionally wide. In fact, the surge in refining margins in the first quarter pushed HollyFrontier Corp (NYSE:HFC)’s net income attributable to stockholders by 38% from the year earlier. Crack spreads have eased so far in the second quarter, which means near-term refiners’ profits will likely suffer on the year-over-year comparison. However, the ample supply of low cost crude oil will help support HollyFrontier Corp (NYSE:HFC)’s margins in at least the medium term. Risks to its operational performance include unplanned maintenance, refinery outages, excess inventories and declining gasoline consumption.
Cisco
Cisco Systems, Inc. (NASDAQ:CSCO), the networking giant, boasts a rock-solid balance sheet with a relatively low debt burden and nearly half of its total assets in cash and short-term investments. The company has embarked on robust dividend growth, hiking its payout by a cumulative 112.5% over the past twelve months. Its current yield is 2.8% on a still-low payout ratio of 34% of the current-year EPS estimate.
A positive contributor to dividend boosts in the future could be the company’s long-term EPS CAGR, forecasted at 8.3% for the next five years. The company generates large operating cash flows, which can support higher dividends. For the reference, in the previous quarter, the company generated as much as $3.1 billion in operating cash flow and paid out almost $1.8 billion in share buybacks and dividends.
Despite the weak macroeconomic environment, Cisco Systems, Inc. (NASDAQ:CSCO) has now reported record revenues for nine consecutive quarters. Its non-GAAP diluted EPS was up 6% from the prior-year quarter, with nearly flat product margins and slightly lower service margins. The company is poised to grow in the future amidst a U.S. enterprise sector growth, with long-term demand coming from data center and cloud computing, wireless/mobile, and service provider video. To capitalize on growth in these sectors, Cisco is actively pursuing acquisitions. For example, recently, in the mobile sector, the company acquired Ubiquisys, a leader in intelligent 3G and LTE small-cell technologies, and Intucell, Ltd., a provider of self-optimizing network software solutions for mobile carriers.
Potash Corp. of Saskatchewan
Potash Corp./Saskatchewan (USA) (NYSE:POT), a Canadian producer of fertilizer potash and industrial feed products, is a strong candidate to double down on its dividend payout within three years. The company’s long-term debt-to-equity is about 34%. The company does not maintain a large cash sum on its balance sheet, but it generates significant operating cash flow. Potash’s dividend growth has been exceptional. Since January 2011, the company has increased its regular quarterly dividend five times, with a cumulative increase of more than 950%.
Within the past 12 months, the company hiked its dividend three times, with a cumulative increase of 150%. Currently, Potash is yielding 3.4% on a payout ratio of 48% of its current-year EPS estimate. As the company moves from investing in growth to bolstering shareholder value, its capex will more than halve within three years while free cash flow will move to converge with EPS. This will create opportunities for a sizable boost to dividends.
