by Richard Moroney, editor Upside Stocks
Rather than chasing stocks with the highest yields, income-minded
investors are likely to do better focusing on companies positioned to
extend a record of strong dividend growth.
One useful tool for
finding likely dividend growers is our Big, Safe Dividends (BSD) rating
system. The BSD system uses 10 factors to rank stocks from 0 to 100,
with 100 the highest.
BSD considers such dividend-specific metrics as payout ratio, yield, and
three-year growth rate. It also considers a company's operating growth
and outlook, while applying quality checks for the balance sheet and
earnings.
Below, we review three picks that seem capable of both outperforming the market and continuing to grow their dividend.
By
delivering annualized growth of 17% for sales, 25% for net income, and
48% for cash provided by operations in the past three years,
Ensign (
ENSG) has been able to expand its quarterly dividend at an annualized rate of 11%.
Ensign
supports its operating momentum with a steady diet of acquisitions,
often of underperforming health-care facilities. Among U.S. public
companies, Ensign ranked ninth last year for the most deals completed,
according to Dealogic.
Although Ensign has no formal dividend policy, the payout has equaled 5%
to 15% of annual net income every year since its initiation in 2002.
Through
nine months of 2011, dividend distributions represented 9% of net
income. In November, Ensign assured investors that its newly established
share-repurchase program will not replace nor reduce the
dividend.Ensign, yielding 0.9%, is a Best Buy.
MTS Systems (
MTSC)
has paid a quarterly dividend without interruption for the last 30
years. In the past decade, the dividend has advanced at an annualized
rate of 14% and earnings per share 16%, consistent with management's
strategy of pacing the dividend with profit growth.
Dividend
growth has accelerated in the past couple years, with a 25% hike
announced in August on top of a 33% increase in November 2010.
Management
tries to keep its long-term payout ratio at roughly 40% of net earnings
per share. The current payout ratio is 30%, leaving room for a generous
hike in the year ahead.
A leading supplier of test systems, MTS
holds a 20% share of the test market, valued at roughly $2 billion. At
less than 14 times trailing earnings, the stock trades at a discount to
its five- and 10-year average P/E ratios near 18. MTS, yielding 2.2%, is
a Best Buy.
RPC (
RES)
ranks in the top 10% of our research universe for both five-year
dividend growth and current yield relative to the three-year median
yield. It also scores a 99 in the Big, Safe Dividends (BSD) rating
system.
It is one of few midsized companies in the oil and gas
equipment and services industry that pays a dividend. And the cyclical
natural of its industry can occasionally hinder RPC's quarterly
distribution.
RPC slashed its dividend 43% in September 2009.
But the company has aggressively rebuilt its dividend since then. In
January, RPC boosted its dividend 20% for the March quarter, on top of
hikes of 25% and 14% in the prior two quarters.
Recent dividend growth signals RPC's robust balance sheet and management's confidence in long-term performance.
While
profit margins seem likely to be under pressure in the near term, the
stock seems unduly cheap at eight times the lowest 2012 estimate of
$1.90. Also, the new quarterly dividend of $0.12 per pre-split share
equates to a yield of 3.1%. RPC is a Best Buy.