Rising profitability and swelling cash flows have enabled an increasing number of companies to boost their dividends substantially. In an environment characterized by low yields and reduced opportunities for business growth, some companies have pursued shareholder value-boosting capital deployment policies, channeling more funds into dividends and share buybacks. Among companies with strong operational performance, there are some that could continue to boost dividends at above-average rates.
A select few
A small group of companies has a potential to double dividends within a relatively short time, including a few that have the preconditions to double them in three years. Below is a closer look at four dividend-paying companies with yields exceeding 2% that have basic preconditions to double dividend payouts within three years; investors searching for a repeatable, market-beating strategy can continue reading here.
Qualcomm
QUALCOMM, Inc. (NASDAQ:QCOM), the world’s third largest chipmaker, is one of the companies that could deliver double its current level of payouts within three years. The company’s balance sheet is characterized by absence of long-term debt and cash and short-term investments constituting some 28% of the company’s total assets. (Cash and marketable securities are 64% of total assets.) QUALCOMM, Inc. (NASDAQ:QCOM) boosted its dividend by 40% in March 2013, and cumulatively by 84% since May 2010. Despite such a high recent increase in QUALCOMM, Inc. (NASDAQ:QCOM)’s dividend, the stock is yielding only 2.2%. The company’s payout ratio is low at 31% of the current-year EPS estimate. The chipmaker’s long-term EPS CAGR, at 18.0% for the next five years, could support dividend growth that would double the payout within three years.
QUALCOMM, Inc. (NASDAQ:QCOM) is the major beneficiary of the smartphone and mobile computing revolution, as it has a leading position in application processors with integrated basebands for smartphones. The company’s revenue from mobile chipsets has risen so fast over the past two years that Qualcomm has ascended from the world’s ninth to third largest chipmaker by revenues. This marked the fastest rise in the top ranks of any chipmaker in recent history. In the first quarter, the company’s delivered a 24% increase in revenues, 16% growth in non-GAAP EPS, and 14% increase in MSM shipments.
The growth streak is expected to continue, with double-digit revenue and EPS CAGR targets for the next five years, as smartphone penetration increases and 3G expansion continues in emerging markets. In fact, Gartner forecasts that smartphone unit shipments will grow at a CAGR of 24% between 2011 and 2016, while tablets will see a 41% CAGR over the same period. Wireless Intelligence expects 3G/4G connections growth in emerging markets of a cumulative 255% between 2011 and 2016. This growth will drive a robust demand for QUALCOMM, Inc. (NASDAQ:QCOM)’s chipsets across the three dominant smartphone operating systems. Still, risks of a slowdown exist, especially if emerging market growth in 3G/4G falters and competition gains market share.
HollyFrontier
HollyFrontier Corp (NYSE:HFC), an independent petroleum refiner, has a strong balance sheet with long-term debt-to-equity of 20% and nearly 24% of total assets in cash and short-term investments. The company has been paying both regular quarterly and special dividends since mid 2011. Since announcing the merger in 2011, the company has increased its regular quarterly dividend by 300%. It supplements the regular quarterly payouts with 50-cent special dividends, which the company paid five times in 2012. Its current yield on the regular dividend is 2.4% and its payout ratio is only 19%. While analysts forecast a modest 3.4% EPS CAGR for the next five years, the company is well positioned to continue growing its regular dividend, with a possibility of doubling it within three years.
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.
The company posted a 12.5% increase in EPS in the previous quarter, driven by a 78% gain in Potash Corp./Saskatchewan (USA) (NYSE:POT) sales compared to the same quarter a year earlier. Aside from improved global potash demand in North America, China, and Brazil, the company also reported robust nitrogen sales. The strong nitrogen demand has faced supply challenges in key producing regions and is supported by higher ammonia prices. Fertilizer applications should be strong amid supportive crop economics; in China, higher cost imports will push for domestic crop productivity enhancements.
Thus, the outlook for Potash is optimistic, as potash consumption is expected to increase by almost 12% this year. In the period between 2012 and 2016, global potash consumption will grow at a rate of 3.5% per year, nitrogen consumption will expand at a rate of 1.3% annually, and phosphate demand will increase by 2.7% per annum. As Potash is in the process of expanding ammonia and urea capacity by 2015, margin potential in this segment will develop.
Final thoughts
There are plenty of dividend-paying companies out there that offer investors solid yield, but this group shrink significantly when we factor in their ability to hypothetically double their payout. Qualcomm and Cisco’s tech prowess, in addition to HollyFrontier Corp (NYSE:HFC)’s strength in the domestic oil marketplace and Potash Corp.’s ability to benefit from an ongoing potash boom make this “fab four” worth watching. As mentioned above, to learn more about what makes Insider Monkey so unique, check this out.
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