This week we kick off with our comments on the powerful growth affect of adding dividend growers to your portfolio, in our Your Stock Our Take Segment we review a viewer question on the restaurant group Imvescor Restaurant Group Inc. (IRG:TSX) and in our Stars and Dogs of the week we review Brookfield Infrastructure Partners L.P. (BIP.UN:TSX) and retail chain Sears Holdings Corporation (SHLD:NASDAQ).
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Nuvo appears attractive trading at a 4.3 times multiple of EBITDA (2017e) vs. specialty pharma peers at 7.9 times. The company’s PE based on our 2016 expected earnings power of $0.73 per share is in the range of 10. We place a near-term fair value on Nuvo’s shares in the range of $9.00 or 21% higher than the current share price. The stock has upside on this if the company is able to continue to grow 2% in the U.S. at 10-15%+ annually and out-licensing progresses to sales in Europe, Canada, Russia, and Australia by 2018. In the near term, the company faces its seasonally weaker Q3. As such, we are initiating coverage on the stock with the recommendation of buying half of a full position (BUY HALF) at current prices with the intention to fill the other half position at an opportune time over the next 3-12 months. The company is relatively thinly traded and we recommend placing limit orders in the $7.00-$7.75 range.
Now, let’s dig into the show.
I would like to welcome again, my co-host, KeyStone’s Senior Equity analyst, father of 1, and a man who has just been picked to replace Ryan Lochte as the top spokesperson for Speedo, Mr. Aaron Dunn,
Dividend Growers – I saw an article this week about some of the staggering long-term returns that have been produced by dividend growers…or those stocks that increase their dividends long term.
There’s no question that dividends can be a powerful part of any long-term investor’s portfolio. There are very few things that are guaranteed in the investing world, but the best dividend stocks always come through for shareholder’s quarter after quarter.
Dividend Growers – some of the best long-term performers – companies that started small and have grown into household names today continue to grow there dividends over time – not just pay them every year but increase them every year…powerful affect on your returns.
Each of these companies have made it through the Vietnam War, stagflation, two oil booms and busts, the Dot Com Bubble and the worst financial crisis since the Great Depression have come and gone, and these five dividend stocks have upped their payouts in each of the last 50 years.
Great examples – Johnson & Johnson (JNJ) – one of the biggest names in healthcare today…has increased its dividend for 54 consecutive years. 0Ver that time its share price has increased 4,800%.
Coca-Cola Co. (KO) stock has its own streak of 54 years of consecutive dividend hikes.
Lowe’s Companies – your classic big box home improvement chain – 53 consecutive year of higher dividends.
Procter & Gamble Co.
Procter & Gamble Co. (PG) is the only stock among the group that currently has a streak of 60 consecutive years of dividend hikes.
To be perfectly honest, these stocks are very difficult to come by, but you only need a couple of them in your life time to make a massive impact on your portfolio –
I actually got a call last week from a long-term client that had purchased Boyd (BYD.UN:TSX) following our recommendation in 2009 at $3.00. She said the stock has paid here well over $3.00 in dividends since then (she is still holding it) and now trades at $85. She bought 3,000 shares at $3.00 for a total of $9,000 and has been paid over $10,000 in dividends and her shares are now worth $255,000.
This is why we spend our days searching for the next one! We think we have uncovered a few with our strict criteria and we will talk about at least one today!
In true dividend growth stocks we look for;
1) Strong cash flow generation
2) Relatively low payout ratios – 25-55% of cash flow for example they still have a great deal of cash flow to grow – the most important reason that a company can grow its dividend long-term is long-term business growth.
3) This is the 3rd item we look for – is a business with above average growth prospects – organic or through consolidation.
4) Manageable debt – TOO MUCH debt can siphon away cash – often our top dividend growth stock have a stockpile of cash which helps them attack growth opportunities.
5) Management with share ownership – the more shares the key management own, the more likely they are to favor raising the dividend – they essentially get a raise every time they do so – and who doesn’t like a raise!
With this criterion in mind – We look to find the next J&J, or Coke, or Lowe’s…
Now a track record of consistently increasing dividends is not the sole criteria you should rely on when looking for a stock, but it can be a powerful indication of the company’s long-term prospects and the returns you may generate on your initial purchase – again over the long-term.
We just added another at the start of this year and the stock is up 45% already this year and once again raised its dividend.
Johnson & Johnson
Johnson & Johnson (JNJ) owns popular brands like Motrin, Tylenol, Benadryl, Band-Aid and Listerine. The dividend stock currently yields 2.6% after an incredible 54 consecutive years of dividend hikes.
JNJ stock issued its most recent dividend hike in May, when its quarterly payment climbed from $0.75 to $0.80. In the last 50 years, the S&P 500 has produced a total return of 1,880%. In that same time, JNJ’s total return is a staggering 4,800%.
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In recent years, the dividend stock has shown no signs of slowing down. JNJ’s total return in the last decade is 94%, significantly greater than the S&P 500’s returns of 70%.
The Coca-Cola Co.
Not to be outdone, The Coca-Cola Co. (KO) stock has its own streak of 54 years of consecutive dividend hikes. In addition to Coca-Cola Classic, KO owns 19 other billion-dollar drink brands, including Dasani, Sprite, PowerAde and Minute Maid.
KO’s current yield is 3.2%, including its most recent quarterly dividend hike from $0.33 to $0.35 in March. KO stock has returned 3,050% in the past 50 years and 99% in the last 10 years. The company’s remarkable consistency has even caught the eye of Warren Buffett, one of the dividend stock’s largest investors.
Lowe’s Companies, Inc.
When Lowe’s Companies, Inc. (LOW) stock upped its quarterly dividend from $0.28 to $0.35 in July, it marked the company’s 53rd consecutive year of higher dividends. Today, LOW yields 1.7%.
In the past 50 years, LOW stock has been one of the top performers in the market, producing a total return of 15,980%. Over the last decade, the dividend stock has returned 195%.
Remarkably, LOW’s net income is down 18% in the last decade, but the company has reduced its share count via buyouts by about 5% per year in that time.
3M Co. (MMM) was founded 114 years ago, and it has upped its dividend payment for each of the last 58 years: MMM recently upped its dividend from $1.025 to $1.11 in February. The stock currently yields 2.5%.
In the past 50 years, MMM stock has produced a total return of 1,760%. Even after that impressive run, MMM is one of the top dividend stocks in the market in 2016, up 18% year-to-date.
Procter & Gamble Co.
All of the stocks mentioned above have impressive histories of dividend hikes. However, Procter & Gamble Co. (PG) is the only stock among the group that currently has a streak of 60 consecutive years of dividend hikes.
PG is the owner of household brands like Crest, Tide, Pampers, Head & Shoulders and Gillette.
The stock’s most recent dividend hike came in April when it upped its quarterly payment from $0.6629 to $0.6695.
PG has been one of the superstar dividend stocks of the last 50 years and has produced a total return of 2,710% in that time.
Boyd – a small cap dividend star has increased 3,600% over the past 8-years – getting in early is key…but the stock is also up 40% this year alone.
Now a track record of consistently increasing dividends is not the sole criteria you should rely on when looking for a stock, but it can be a powerful indication of the company’s long-term prospects and the returns you may generate on your initial purchase – again over the long-term.
One thing I am consistently looking for when we recommend small cap growth stocks is the next Proctor and Gamble or the next Coca-Cola – essentially a company that is small and growing cash flow at a high rate which is allowing it to pay higher and higher dividends each year and still grow its business. We look for a 2-5 year track record of increasing dividends and the potential for the stock to keep raising its dividends for 5-10 years or longer – great examples from our research over the past decade of unknown stocks that have done just that are Last week’s star – Boyd group and Enghouse (ESL:TSX).
We just added another at the start of this year and the stock is up 45% already this year and once again raised its dividend…become a client to discover this potential long-term dividend grower that we updated this past week at a long-term buy in our Focus BUY portfolio.
Dog – Sears Holdings (NASDAQ:SHLD)
The venerable long standing department store is bleeding cash and on the verge of running low on cash.
The department store is accepting $300 million in financing from CEO Edward Lampert’s hedge fund following another quarter of declining sales. Excluding items, Sears reported a net loss of $2.03 a share. Same-store sales dropped 5.2%.
The Illinois-based company has grappled with challenges at Sears and Kmart (which it owns), two chains that struggling to turn things around in a tough environment for retailers. Target (NYSE:TGT), Kohl’s (NYSE:KSS) and others have recently reported weaker sales as shoppers spend more online. Sears is facing some broader issues. The company has posted red ink for the last six fiscal years, and 78 additional Sears and Kmart stores will be closed by the end of the summer.
In May, Sears announced plans to seek out buyers or partners for its Kenmore, Craftsman and DieHard brands, hoping to unlock the value of three brands that are well-known in their respective categories.
For those who grew up in the 80s and 90s – Kmart is having a blue light sale – unfortunately the sale is for the shares in its parent, Sears – We say, stay away from this former retail giant!
Star – Brookfield Infrastructure Partners LP (BIP.UN: TSX)
Since we are on the topic dividend growth stock we thought there would be no better example than Brookfield Infrastructure Partners for this week’s star. Brookfield Infrastructure was recommended in our Income Stock Research in March of 2011 at a price of $21.62 and trades today at just over $63. The company is a global infrastructure stock which means that is owns critical pieces of infrastructure including shipping ports, toll roads, electrical transmission lines and other types of assets in the utilities, transport, energy and communications in North and South America, Australia, and Europe. These are long life assets with 90% of revenue based on long-term contracts.
What we liked about this company back in 2011 is that it produced stable, visible cash flows and paid a generous and growing income distribution based on those cash flows. They invest capital back into their existing asset base and are also very active acquirers of new assets when the opportunities present themselves.
The company just put out Q2 results this August which were a continuation of the strong financial performance we have seen over the past 5 years. 7 distributions since our recommendation 5 ½ years ago and this distribution growth has been driven by rising cash flow. The outlook going forward continues to look promising and we have just recently updated the stock in the Income Stock Report to our clients.
Your Stock Our Take –
Imvescor Restaurant Group Inc. (“IRG” or the “Company”) (TSX: IRG), a leading franchisor of restaurants operating 226 locations in Eastern Canada,
Imvescor Restaurant Group owns franchised and corporate stores throughout Canada, under four brands: Pizza Delight operates primarily in Atlantic Canada, where it dominates the family/mid-scale segment. Mikes and Scores restaurants operate primarily in Quebec in the family and casual dining segments and the take-out and delivery segments. Bâton Rouge operates in the Province of Quebec, Ontario and Nova Scotia in the casual dining segment.
When we look at a company like this we are looking for same-store sales – meaning year over year are sales from each location individually growing – this is organic growth excluding growth by the addition of new restaurants. In the company’s last quarter the company posted 1.2% growth – a significant improvement and a positive but not massive growth…overall it is a plus.
Is the company growing EBITDA, cash flow and earnings? – we have check marks here, although the growth is only between 5-12% respectively.
We think management has done a solid job turning around this business…the valuations based on cash flow – it trades at 16-18 times cash flow…which is not cheap, but likely relatively fair value for the business the way it is structure now.
Interestingly, two major shareholder groups this week are pressing for the sale of the company.]
ADW Capital Partners, L.P. (“ADW Capital”) and Eric Shahinian of Camac Partners, LLC (“Camac”), New York City based investment firms, transmitted today a letter to the board of directors and management of Imvescor Restaurant Group Inc. (the “Company” or “Imvescor”) (TSX: IRG) seeking a strategic sale of the Company. ADW Capital and Camac along with their affiliates (which collectively hold approximately 16.4% of the Company’s shares and warrants) believe that in seeking a strategic/financial partner it will ensure that the Company can best continue on its growth plan while maximizing shareholder value.
The two investment firms expect the company to earn on a standalone basis roughly CAD $21 – 22 MM of EBITDA in Fiscal 2017, with minimal maintenance capital expenditures. In the hands of the right strategic buyer, we could expect Imvescor’s contribution to approximate CAD $31 — 32 MM of EBITDA. At a multiple of 8.0x to 10x this would amount to exit values of CAD $4.10 – 5.30 per share.
If these numbers are achieved, the stock offers decent value here.
