When reviewing the companies that increased dividends in December 2013, a few caught my interest. I decided that I would be interested in looking further into these companies to determine if I would like to include them on my watch list for possible future investment.
Therefore, today I thought I would demonstrate exactly how I quickly review a company to determine if I might want to buy them for investment purposes.
Usually, how my process works, is that I hear about a possible dividend growth company that I haven’t looked into previously. So my next step is to do a quick review of some key metrics and characteristics. Upon this quick review, I will either place this company in the “not for me” pile or in the “further review” pile. If the company gets placed in the “further review” pile then eventually I will get around to doing a much more detailed analysis before actually investing in the company.
So today, I will demonstrate my initial review process. I will be looking over 4 companies (3M Company, Archer Daniels Midland, Rent-A-Center, Pfizer) and deciding if they are either “not for me” or if they need “further review.” Let’s get started!
Archer Daniels Midland (ADM)
Archer Daniels Midland is involved in procuring, transporting, storing, processing and merchandising agricultural commodities and products. They also process some commodities into consumer food products, animal feed, chemical and energy uses.
ADM operates in the Agriculture Products industry. Currently I don’t have any agriculture products companies in my portfolio or watch list so certainly ADM would be good for diversification purposes. But most important is the businesses operating performance which I will review shortly.
When quickly reviewing a company, the main things I look at are earnings per share (EPS) and Dividends over the past decade. For me, those two metrics give me an idea of whether I want to look further into the company with a more detailed analysis at a later date. EPS must be trending higher over the past decade with very few down years. Dividends must be growing.
Let’s take a look at ADM’s EPS trend and dividend trend the past 10 years.
I’ve charted the EPS and dividend payment of the last 10 years (2013 is an estimate due to 4th quarter results not yet announced).
As you can see, EPS has had a nice uptrend over the past decade. However, the past couple years we have seen a decline in EPS. Looking at this chart though, I see 8 good years of consistent EPS growth followed by 2 down years. I also understand that ADM has a 39 year history of annually increasing dividend payments to shareholders.
This history compels me to want to look more into this company. I would put ADM on my “further review” pile to dig into deeper. After a quick review, I like ADM for a few different reasons.
- They operate in an industry which my portfolio currently has no exposure in.
- They have a mostly uptrend in EPS over the past decade. I would definitely need to figure out what happened over the past couple years and determine if this is a short term headwind that will be reversed or are there long term problems.
- They have a very long streak of dividend growth.
ADM goes on my “further review” pile. This does not mean I would buy ADM currently. I need to research with a deeper analysis.
Rent-A-Center is a rent to own retailer of consumer electronics, appliances, computers, furniture and accessories. Customers make payments on merchandise over a fixed term at the end of which they become the owners. At any time the customer can cancel an agreement by returning the merchandise. Rent-A-Center has about 3,000 stores and 225 franchised locations.
Let’s review RCII’s earnings per share and dividend trend over the past decade:
As you can see, RCII has had a much rockier road over the past decade. Earnings per share were dropping from 2004 to 2009 before finally starting to climb higher. We then have another decrease in 2013 compared to 2012.
RCII began paying a dividend in 2009 and has increased it each year since. This could be the beginning of a long dividend growth streak. However, we don’t have much history to base this idea off of yet.
With just a quick glance, I would put Rent-A-Center in my “not for me” pile. After a quick review, I’m not interested in RCII for the following reasons:
- RCII does not have an uptrend in EPS over the past decade. The company struggled when the economy struggled and I can guarantee that the economy will struggle again sometime in the future. I don’t want to own companies that have huge troubles in a down economy.
- I don’t understand RCII’s business concept. Sure I understand what they do and how they make money. Personally, I’m just surprised there is a market for this type of business. When I want something for the house, I go buy it. I’m not a rent to own type of person. I’m not interested in owning a rent to own type of business.
I’m not saying RCII may not be a great investment. It’s just not for me and I will pass. I won’t bother wasting my time digging in deeper to this company when there are plenty of other companies that I am more interested in.
Pfizer is a global biopharmaceutical company. They work on the discovery, development, manufacture and sale of medicines for people and animals.
Pfizer caught my initial interest because they have the start of a dividend growth streak (5 years) and I currently don’t have a pharmaceutical company in my portfolio or watch list. If Pfizer meets my requirements, they could offer some more diversification to my portfolio.
Let’s take a look at Pfizer’s past 10 years of EPS and dividend payments:
First off, looking at the EPS I am not that excited. Pfizer is a pharmaceutical company and sometimes earnings can be rocky. As you can see, they EPS tend to be pretty erratic for PFE over the past decade. This leaves me very unexcited.
Pfizer has started a 5 year dividend growth streak. However, we can see that in 2009 they were forced to cut their dividend rate. As a dividend growth investor this is a red flag for me. When the going gets tough the company was forced to cut their rate. I can guarantee the going will be tough again sometime in the future and I don’t want my companies being forced to cut their dividend rate.
I’ll put Pfizer in the “not for me” pile for a couple reasons:
- Erratic earnings. Pharmaceutical companies are dependent on the patents on their drugs. Pfizer has a few big name drug patents expiring over the next couple years which will most likely lead to more erratic EPS results.
- Recent dividend cut. Te dividend cut in 2009 is a warning flag for me to stay away.
Pfizer may be a great company and a great investment for others. Personally, I’m not interested and will move on to companies that get me more excited.
3M Company (MMM)
3M Company is a diversified manufacturer and technology company. They operate in over 65 countries. 3M operates in 6 different segments: Industrial and Transportation, Health Care, Consumer and Office, Safety Security & Protection, Display & Graphics, and Electro & Communications.
Just reading about 3M’s business gets me excited because there is lots of diversification within this one company. If any one segment shall face headwinds, there are 5 other different segments that hopefully can continue strong until trouble has passed.
Let’s take a quick look at 3M’s past 10 years of EPS and dividend payments:
Of all the charts, 3M’s is the most beautiful to me. You can see 3M’s EPS did decrease when the global economy was suffering in 2008 and 2009. Practically every company you would look at will have some decrease during these economic troubled years. However, since then 3M has bounced back nicely. Another thing I really like to see is that despite down years, 3M was able to maintain their dividend growth right through the great recession.
3M definately goes in my “further review” pile. I would like to dig deeper into 3M and hopefully add it to my watch list if I like what I see.
At a quick initial review I like what I see for these reasons:
- 3M is a global diversified company. They should be able to weather big economic storms.
- 3M has an upward trending EPS over the past 10 years. They had a couple years of struggle but have shown the ability to get back on track.
- 3M has a 56 year dividend growth streak. There are very few companies that have the outstanding operating performance to support a five decade long dividend streak. 3M is one of those companies.
I like 3M from this initial review. It gets me excited. I’m ready to jump in and do a more thorough analysis and hopefully will be adding 3M to my watch list soon.
Hopefully you can see how I can quickly look at a company and make a decision on whether I want to do further research or ignore the company. With this method I can look over hundreds of companies very quickly. This eliminates a great amount of time because I can easily put aside many companies that don’t meet my initial criteria.
From the above examples, I can easily put aside Rent-A-Center and Pfizer and probably never waste any more time looking at those companies. I will definitely be looking more into Archer Daniels Midland and 3M Company to determine if I want to add those companies to my watch list. From my initial review, 3M will probably make it on my watch list while I still have a couple questions about Archer Daniels that will need to be answered.
Once I do a more in depth review of 3M and Archer Daniels, they will either get added to my watch list or put aside in the “not for me” pile. If they get added to my watch list of 35 Top Dividend Growth Stocks (which just might soon become 36 or 37!), they will be considered for investment when I have capital available.
When I have capital ready for investment, I usually scan through my watch list to determine a few companies that I believe may offer decent value. Then I will look more into that smaller group of companies to decide what to buy at that given time.
- March 2014 (10)
- February 2014 (8)
- January 2014 (7)
- December 2013 (6)
- November 2013 (7)
- October 2013 (9)
- September 2013 (6)
- August 2013 (7)
- July 2013 (8)
- June 2013 (9)
- May 2013 (8)
- April 2013 (10)
- March 2013 (8)
- February 2013 (9)
- January 2013 (9)
- December 2012 (8)
- November 2012 (8)
- October 2012 (5)
- September 2012 (6)
- July 2012 (3)
- June 2012 (15)
- May 2012 (9)