This is a guest contribution published on November 19th, 2016 by Small Cap Power.
Dividends are sought after for many who invest in the stock market. They are normally a sign from a company of strong and consistent revenue streams and profits further down the road.
Even if a company enters a downturn in its business cycle, management will do whatever they can to maintain the dividend payout to preserve the value of the company, and only raise them when the level of certainty surrounding any growth in earnings can be considered recurring.
If a company is increasing its dividend it is a strong sign to the market from management that it believes the growth in earnings that it has experienced will be sustained into the future.
The companies we’ll be taking a brief look at today have increased their dividends over the past four fiscal periods between 13% and 40% year over year, resulting in a rise in total dividend payouts of between 88% and 140% over that same time period.
Although some companies have paid dividends longer much longer (like the Dividend Aristocrats), we only went back a couple of years to ensure we are comparing the companies evenly.
Coresite Realty Corporation (COR)
- Dividend per Share- (FY-3): USD$0.81
- 3 Year Dividend Growth: 121%
- Dividend per share (FY0): USD$1.79
CoreSite Realty Corp (“CoreSite”) is engaged in providing secure, reliable, high-performance data centers and interconnection solutions in eight key North American markets. Having grown its dividend since 2010, CoreSite does not appear to be slowing down and should continue to increase it as the years pass.
CoreSite has seen steady year-over-year revenue growth for the past decade, and has only seen a drop in quarter over quarter once between 2010 and 2015, back in Q4 of 2012 to Q1 of 2013.
Although CoreSite started issuing dividends in 2010, its net income didn’t turn positive until 2012, but has grown by 594% up to fiscal 2015. This has also translated into significant dividend growth over that time period. With continued growth, increasing revenue and net income by 17% and 60%, respectively, for Q3 2016 over the same period last year, CoreSite may be in for another dividend boost in Q4 of 2016 or Q1 of 2017, as this has been when CoreSite changed its dividend payout in the past (Figure 1 Below).
Although fiscal 2016 hasn’t finished, CoreSite is on its way to having an annualized dividend of $2.12 as it increased its quarterly dividend from $0.42/ share to $0.53/share in Q4 of 2015, which represents an increase of 161% from its annual dividend of $0.81 in 2012. Watch for early December this year when CoreSite should announce the payment of its fourth-quarter dividend, as under current conditions there is a strong chance of an increase.
Figure 1: CoreSite’s Quarterly Dividend Payments for the past 6 Fiscals
Targa Resources Corp (TRGP)
- Dividend per Share- (FY-3): USD$1.64
- 3 Year Dividend Growth: 115%
- Dividend per share (FY0): USD$3.53
Targa Resources Corporation (“Targa”) is a provider of midstream natural gas and liquid natural gas (LNG) services in the U.S. Although Targa has seen the decrease in its stock value of more than 50% since its peak in the middle of 2014, it has maintained positive free cash flow over the past seven quarters.
Although Q3 of 2016 signifies the first time that Targa has gone more than a year without raising its dividend since Q1 of 2011, it should be able to maintain its current dividend into 2017 but could face difficulties ahead.
After a very mild winter last year, if it becomes as cold as is predicted, Targa should see a jump in natural gas demand pushing its price up and providing a much needed boost to revenue, which will hopefully translate into positive bottom-line growth. This will need to happen if Targa wants to maintain or raise its dividend responsibly later on in 2017.
As Targa currently has over 180mm shares outstanding and is paying a cash dividend of $0.91, and only increased cash flow by $900,000 for the quarter (Figure 2) ending September 2016, there isn’t much room for Targa to maintain its current dividend. Targa will need to increase cash flows by either collecting on its receivables or generating more sales to maintain its current dividend yield of 7%.
Figure 2: Excerpt from Targa SEC Filing
RLJ Lodging Trust (RLJ)
- Dividend per Share- (FY-3): USD$0.70
- 3 Year Dividend Growth: 86%
- Dividend per share (FY0): USD$1.32
RLJ Lodging Trust (“RLJ”) is a real estate investment trust that acquires focused-service and compact full-service hotels, with approximately 130 hotels and over 20,900 rooms. With a current dividend yield of 6%, and a payout ratio of approximately 50% of total year-end operating cash flow, RLJ has what appears to be a sustainable dividend policy.
Although it may not seem like RLJ will be raising its dividend anytime soon due to the annual cyclicality of cash flows as Q1 of each year seems to always be $100mm less than the following quarter, shareholders may get a boost because of the share buyback program that management is pursuing. As of September 30, 2016, RLJ had already repurchased 600,000 shares, for $13.3mm, but still has a remaining capacity of $161.5mm for the program.
If the company were to exercise the entire program amount at its current price of $22.62/ share, it could retire over 7.1mm shares, which under the current payout policy and amount of approximately $44.1mm raise its dividend from $0.33 per quarter to $0.38 or $1.51 annualized, effectively increasing its yield by 1%. As the Company has dropped its total outlook for 2016, RLJ will most likely not be raising its dividend any other way (Figure 3).
Figure 3: Excerpt RLJ 2016 Q3 Earnings Call Release