Johnson & Johnson (JNJ) dividend analysis

From above analysis,

1) Solid financial health.  JNJ is a solid company and most of us should be concur on this point.

2) Market price valuation is at $63.16.

3) Payout ratio is very high, at 63%, which is out of my criteria range of less than 50%.

4) Yield is high, at 3.6%.

5) Dividend growth is optimal.  5-year dividend growth at 9.11%, 10-year dividend growth at 12.39%.

In the past 32 years , JNJ maintained a good history record of increasing dividend every year versus previous year.

With 10-years annual dividend growth rate at 12.39%, we can achieve 9.95% yield on cost even without considering dividend reinvestment.  If we wait till the market price pulls back a little to $63, we can achieve 10.59% within 10 years.  If considering dividend re-investment, the percentage will be much higher.

Disclosure: Long JNJ.

3M Co (MMM) dividend analysis

From the above analysis,
1) MMM financial performance is very healthy.
2) Current market price is slightly higher.  I would say $85~$86 is a reasonable entry price.
3) Payout ratio is nicely positioned at less than 40% of earnings and FCF.
4) Yield rate is 2.70%, lower than my criterion at 3%.
5) 5-year dividend growth is 4.6%; 10-year dividend growth is 5.99%.  So the dividend growth trend is slower in recent years. I would say 5.5% dividend growth is more reasonable to expect in the coming years.

From above two charts, without considering dividend reinvestment, in 10-year's time frame, yield on cost will be 3.83% based on dividend growth rate 5.99%.  While the 10-year yield on cost will be 3.35% based on dividend growth rate 4.6%.

With this stock, I can't achieve my goal of 10% yield on cost within 10 years time frame. However, if the price is cooled down, I may purchase some shares to diversify my portfolio. My entry point will be in the range of $81-$85.  At purchasing price at $81, the dividend payment could be doubled in 10 years.

Disclosure: None.  Will purchase some qty at the price range of $81-$85.

Colgate-Palmolive Company (CL) dividend analysis

From above analysis, CL price is currently overvalued, the reasonable entry price is around $91.

Current yield is 2.40%, which is lower than my criterion at 3%, which can be improved by waiting for a better entry price.

Annual dividend growth is acceptable at >12% for both 5-year dividend growth and 10-year dividend growth.

Also, CL is a highly leveraged company with Debt/Equity >2.

Disclosure: None. Plan to wait patiently for a reasonable entry price.

My check list for dividend growth stocks

First of all, I'll only focus on S&P 500 Dividend Aristocrats and S&P High Yield Dividend Aristocrats.


For each stock, here is how I'll do the analysis.


Company financial analysis:-

1) ROE (Return on Equity) >15%.
2) Debt / Equity <50%.
3) FROIC (Free Cash Flow / Total capitalization) >15%.
4) Cap Flow (capital expenditure / operating cash flow) <50%.
5) T. Rowe Price Ratio (Return on Equity / (1-payout ratio)) >15%.
Source: here.

Stock price valuation:-

1) Price to owners earnings (=price / (FCF/outstanding shares))  <15.
2) Current P/E ratio should be less than 5-year average P/E ratio.
3) Current market price should be less than DCF valuation.
4) Current market price should be less than Graham valuation.

Dividend analysis:-

1) Payout ratio <50%.
2) Dividend / FCF <50%.
3) Yield >3%.
4) 5-year dividend growth rate & 10 year dividend growth rate should both be > 8%.

Online Broker Review 2012

Company Analysis -- Procter & Gamble update

In Feb, I wrote this article for Proctor & Gamble.  I mentioned that When the next quarter result comes out, the market might be leak out a chance for patient buyers to go in. I still think $63 or lower is a good entry point.  Currently, the market price is lower than $63, which render a very good opportunity for long term investors.  


The reason for current price drop is mainly as following:-


"Wednesday, June 20, 5:21 AM P&G cuts FQ4 guidance, citing slower-than-expected growth in developed markets and forex fluctuations. P&G forecasts adjusted EPS of $0.75-$0.79, vs. prior guidance of $0.79-$0.85 and consensus of $0.82. Net sales to fall 1%-2% vs. +1%-2% prior. For FY 2013, P&G predicts a percentage increase in profits of flat to mid-single-digits. (PR)" 


This article provided very good analysis for PG.


Disclosure: I am long PG.

My goal in the dividend growth account

Basically, my goal is to achieve yield on cost 10% in 10 years.

At the first glance, this goal seems very ambitious.  However, when looking into it a little deeper, I should say that this is a very reasonable and achievable goal.

Firstly, the 10% return is based on cost, the purchase price, not on market price.  If I invest in stocks with solid fundamental financials, I will be very confident to predict an uprising stock market price trend in the long run, reflecting the companies' ongoing growth.  Of course, there are ups and downs in the process, the long-term trend should be upwards.  In the meanwhile, the purchase price is very important.  I should be very patient to wait for a good reasonable entry point, because the purchase price will largely affect my initial yield rate.

Secondly, I only look at those companies that have a consistent dividend growth history in the past 10 years.  With such good record on hand, I believe they will tend to put stakeholders' benefit in a higher priority.  In the future, they will continue to endeavor to increase annual dividend.

Thirdly, here is the guideline to achieve 10% return in 10 years.

In order to achieve this goal, I only look at the gray area, which means the initial yield should be higher than 3%, and the annual dividend growth rate should be 13% or higher.  In this chart, we haven't considered dividend re-investment.  If dividend re-investment is considered, the goal will be achieved faster because of the compounding effect.  Of course, since I plan to put in additional money from my paycheck each month, I'll expect the average yield to cost will be lower than 10% in 10 years.  However, when considering each individual investment, the 10% in 10 years should be guaranteed.

Let's take Walgreen as an example in order to strengthen my analysis:-

Why do I choose to be a dividend growth investor

I used to be a self-claimed value investor.  I input a lot of time and effort to do stock analysis.  I did achieve some good return.  However, I found that I don't always have adequate time to do all those analysis.  I was quite active in year 2009.  However, due to some personal issues, I didn't participate in stock market at all in year 2010 the whole year and the first half of 2011.  When I did have time to take a look at my portfolio, I ran some performance benchmarking my portfolio versus SPY in the same period.  I was disappointed with the result.  Although there were several outstanding stocks I own with very satisfactory performance, 80% of my portfolio had performance worse than the no-brainer SPY.

I learned several lessons from this experience: 1. to be a sensible long-term investor is much better than to be a short-term impulsive one.  2. having a long-term investment strategy to follow is very essential.  3. for a person like me, to purchase a stock with solid fundamental financials and then to "forget" all it after purchase is much suitable for my character.  Capital gain is one of my goals, and long run dividend yield to cost return is much more attractive.  4. I always want to invest in real estate market which I believe can provide me more stable and more potential returns.  However, currently I don't have enough money to invest in housing market, so I decided to set up two pillars for my retirement income account: dividend growth account to begin with, and real estate investment account later when enough money is accumulated.

My goal in dividend growth is to achieve 10% yield to cost in 10 years.  This goal makes sense after analyzing several stocks initial yield and annual dividend growth rate.

WAG dividend analysis

Annual dividends and growth data

How to find proxy statement in SEC files

On this EDGAR page, input company name and form type DEF 14A in the search area.

You will get below result:-

The speech marks ” ” is used just in case the company name has a space in it and the asterisk * is used to display any filing beginning with 10-Q.  By using the asterisk you can search for amended filings that have the code 10-Q/A. If you just did FORM-TYPE=(10-Q OR 10-K), you wouldn’t see any of the amended filings.

For a list of all the other forms, this is the pdf you want.

Here is an excellent article for more detailed info about the SEC search.

When you check a company's inventory...

• You'll have to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

 1) A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

2) On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

•  Compare inventory turnover days among the competitors.

• Compare the company's inventory growth to sales revenue growth.

Good articles about SEC filings

What to look for in the SEC filings

How to read SEC form 4

Inside trading and how to read SEC forms 3,4,5

Auto track inside transactions

How to find special situation stocks

Quickly detect changes in footnotes

Goodwill and other intangible assets

This is extracted from PEP's 10-Q report, and I think this part is very helpful for me to understand goodwill and other intangible assets.

We sell products under a number of brand names, many of which were developed by us. The brand development costs are expensed as incurred. We also purchase brands in acquisitions. In a business combination, the consideration is first assigned to identifiable assets and liabilities, including brands, based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, product life cycles, market share, consumer awareness, brand history and future expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash flows.

We believe that a brand has an indefinite life if it has a history of strong revenue and cash flow performance, and we have the intent and ability to support the brand with marketplace spending for the foreseeable future. If these perpetual brand criteria are not met, brands are amortized over their expected useful lives, which generally range from five to 40 years. Determining the expected life of a brand requires management judgment and is based on an evaluation of a number of factors, including market share, consumer awareness, brand history and future expansion expectations, as well as the macroeconomic environment of the countries in which the brand is sold.

Perpetual brands and goodwill are not amortized and are assessed for impairment at least annually. If the carrying amount of a perpetual brand exceeds its fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. Goodwill is evaluated using a two-step impairment test at the reporting unit level. A reporting unit can be a division or business within a division. The first step compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, we complete the second step to determine the amount of goodwill impairment loss that we should record, if any. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.

Amortizable brands are only evaluated for impairment upon a significant change in the operating or macroeconomic environment. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on its discounted future cash flows.

In connection with our acquisitions of PBG and PAS, we reacquired certain franchise rights which provided PBG and PAS with the exclusive and perpetual rights to manufacture and/or distribute beverages for sale in specified territories. In determining the useful life of these reacquired franchise rights, we considered many factors, including the pre-existing perpetual bottling arrangements, the indefinite period expected for the reacquired rights to contribute to our future cash flows, as well as the lack of any factors that would limit the useful life of the reacquired rights to us, including legal, regulatory, contractual, competitive, economic or other factors. Therefore, certain reacquired franchise rights, as well as perpetual brands and goodwill, are not amortized, but instead are tested for impairment at least annually. Certain reacquired and acquired franchise rights are amortized over the remaining contractual period of the contract in which the right was granted.

On December 7, 2009, we reached an agreement with DPSG to manufacture and distribute Dr Pepper and certain other DPSG products in the territories where they were previously sold by PBG and PAS. Under the terms of the agreement, we made an upfront payment of $900 million to DPSG on February 26, 2010. Based upon the terms of the agreement with DPSG, the amount of the upfront payment was capitalized and is not amortized, but instead is tested for impairment at least annually.

Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain of the risks discussed in “Risk Factors” in Item 1A. and “Our Business Risks.”

We did not recognize any impairment charges for goodwill in the years presented. In addition, as of December 31, 2011, we did not have any reporting units that were at risk of failing the first step of the goodwill impairment test. In connection with the merger and integration of WBD in 2011, we recorded a $14 million impairment charge for discontinued brands. We did not recognize any impairment charges for other nonamortizable intangible assets in 2010 and 2009. As of December 31, 2011, we had $31.4 billion of goodwill and other nonamortizable intangible assets, of which approximately 70% related to the acquisitions of PBG, PAS and WBD.

Company Analysis -- Procter & Gamble

P&G’s performance is mediocre in recent years; part of the reasons is because the acquired Gillette business in year 2005 has been a drag on P&G’s top line, not a boost.  ROE dropped from 40% before the acquisition to around 19% after 2005 till now. 

I studied the most recent 10-Q report, and there is literally nothing to be excited about. The stock’s price hovered at $63 range for quite some time.

However, on 02/23, Procter & Gamble Co announced that it plans to cut a total of 5,700 nonmanufacturing jobs as part of a new plan to reduce costs by $10 billion by the end of fiscal 2016.  P&G had already said it would cut 1,600 positions in the current fiscal year. On Thursday, it said it would cut another 4,100 jobs during fiscal 2013, which begins in July.  This news brought excitement to the market, since people believe this plan will help P&G make another leap forward.  The stock has been upgraded twice, and the current market price is $67.

I strongly believe that this stock is a solid one that worth being held forever (both for capital growth and for dividend earnings).  However, at current market surge, I tend to believe that the price is too high for me to go in.  I’d rather wait till it cools down a little bit.  I believe P&G’s performance in this fiscal year won’t be very good.  When the next quarter result comes out, the market might be leak out a chance for patient buyers to go in. I still think $63 or lower is a good entry point.

Disclosure: None.

PEG Ratio

The calculation

Price/Earnings to Growth ratio (PEG ratio) = (Price/earnings ratio) / Annual EPS growth

PEG ratio is widely used as an indicator of a stock's potential value.  It is favored by many over the PE ratio because it also accounts for growth.  Similar to the P/E ratio, a lower PEG means that the stock is more undervalued. Most will use 12-month trailing earnings for the bottom part of this formula.

What PEG ratio tells us

PEG ratio results greater than 1 suggest one of the following:-

• Market expectation of growth is higher than consensus estimates.
•  Stock is currently overvalued due to heightened demand for shares.

PEG ratio results lower than 1 suggest one of the following:-

• Market expectation of growth is lower than consensus estimates.
•  Stock is currently undervalued due to markets underestimating growth.

Best use for PEG


The PEG ratio is best suited to stocks with little or no dividend yield.  Because the PEG ratio doesn't incorporate income received y the investor in its presentation of valuation, the metric may give unfairly inaccurate results for a stock that pays a high dividend.  For companies paying out dividend, the PEG ratio calculation should be revised as following:-

PEG = (P/E) / (Growth estimate + dividend yield)

Formulas and calculations for Balance Sheet

• Tests of a Company's Financial Strength and Liquidity:

 Working Capital: Current Assets - Current Liabilities 

Working capital per share = working capital / total shares outstanding

If you could buy a stock at working capital per share, you would be getting all of the company's fixed assets (real estate, computers, long term investments, etc.) plus its earnings / profit each year from now until eternity for free! The company will probably never trade that low; but you should always keep this in mind when analyzing a business. Sometimes, especially during serious economic downturns, you will find companies selling close to working capital.

Working Capital per Dollar of Sales: Working Capital ÷ Total Sales

Manufacturers of heavy machinery require the most working capital and range from 20-25%.

Current Ratio: Current Assets ÷ Current Liabilities 

The current ratio should be at least 1.5 but probably not over 3 or 4.

Too low current ratio means the company may have difficulty to pay off its current debts.  Too high current ratio means the management isn’t utilizing the money efficiently.

Quick / Acid Test / Current Ratio: Current Assets minus inventory (called "Quick Assets) ÷ Current Liabilities 

 Inventory is what causes the biggest difference between the current and quick ratio. The quick ratio was designed to measure the immediate resources of a company against its current liabilities.

Debt to Equity Ratio: Total Liabilities ÷ Shareholders' Equity

Generally, any company that has a debt to equity ratio of over 40% to 50% should be looked at more carefully to make sure there are no liquidity problems.

• Tests of a Company's Efficiency:

Receivable Turnover: Net Credit Sales ÷ Average Net Receivables for the Period 

Average Age of Receivables: Numbers of days in period ÷ Receivable Turnover 

Inventory Turnover: Cost of Goods Sold ÷ Average Inventory for the Period 

Number of Days for Inventory to Turn: Number of days in Period ÷ Inventory Turnover

Inventory turns and working capital

When analyzing the balance sheet, you want to look at the percentage of current assets inventory represents.  If 70% of a company's current assets are tied up in inventory and the business does not have a relatively low turn rate (less than 30 days), it may be a signal that something is seriously wrong and an inventory write-down is unavoidable.

Inventory turnover = cost of goods sold / average inventory for the period.

Working capital is to calculate the difference between current assets and current liabilities.

Working capital = current assets - current liabilities

Usually speaking, working capital should be positive, and the higher, the better.  However, there is an exception: negative working capital can be a good thing for high turn businesses thanks to the effect of leverage.

Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stockpile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available. 

Account receivable turns

Receivable turns calculation:

Account receivable turns = credit sales (or total sales shown in income statement) / average account receivables

An example of account receivable:-

H.F. Beverages Financial Statement Excerpt
	2009	2008
Accounts Receivable	$1,183,363	$1,178,423
Credit Sales	$15,608,300

average account receivable = (1,183,363+1,178,423)/2 = 1,180,893

account receivable turns = 15,608,300 / 1,180,893 = 13.217

The average number of days that customers pay = 365 / 13.217 = 27.62.

If the collection deadline policy is 30 days term, then the company is doing good because customers pay within 30 days.  Had the answer been greater than 30, you would have been wise to try to find out why there were so many late payments, which could be a sign of trouble. (Keep in mind you will need to read through the company's reports to find out what its collection deadline is.  Not all companies require their customers to pay within 30 days).