Last week, I’ve introduced you to the 4% rule for retirees. The whole idea to work with this simple rule is to build a portfolio generating over 4% in yield with a dividend growth perspective to beat inflation (about 2%). On July 31st (Today!)DSR will launch 2 retirement portfolios (one 100% Canadian and another 100% US). You can learn more about them here. Each portfolios will include 20 robust and high yielding stocks. Today, I’m offering 4 of our picks (2 US and 2 Canadian). I obviously don’t discuss my favorite picks or highest yielding stocks, those are reserved for our members!
HELMERICH & PAYNE (HP)
Business Model
Helmerich & Payne is engaged in contract drilling of oil & gas wells for businesses in the ownership, development and operation of commercial real estate. HP divides its business into three segments: U.S. Land, Offshore and International Land. The U.S. land drilling division is the most important with over 85% of its revenues. This is also the segment where HP shows a strong leadership position.
Investment Thesis
If you read our investment thesis after looking at the DDM calculation, you will not understand why we sound bullish about HP. Please note that we have used a 12% discount rate for the valuation. This explains why the stock seems overvalued. If the per barrel crude oil price remains over $60 in 2018, HP’s share price could easily reach $80. Don’t forget that HP is currently grabbing market share year after year as smaller drillers die on the side of the road.
VALUATION
| Intrinsic Value | Discount Rate (Horizontal) | ||
| Margin of Safety | 11.00% | 12.00% | 13.00% |
| 20% Premium | $88.20 | $67.04 | $54.31 |
| 10% Premium | $80.85 | $61.46 | $49.78 |
| Intrinsic Value | $73.50 | $55.87 | $45.26 |
| 10% Discount | $66.15 | $50.28 | $40.73 |
| 20% Discount | $58.80 | $44.70 | $36.21 |
TYPE OF HOLDING: GROWTH
5 YEAR REVENUE GROWTH: -10.60%
SECTOR: ENERGY
5 YEAR EPS GROWTH: 8.92%
CURRENT DIVIDEND YIELD: 4.27%
5 YEAR DIVIDEND GROWTH: 58.49%
PE RATIO: 16.32
PAYOUT RATIO: 69.01%
Potential Risks
While HP represents a nice buying opportunity today, it remains highly risky. If the oil price remains stable, HP won’t be able to sustain its dividend growth rate. It can afford to wait before pushing the panic button, but it’s not impossible it happens in a year from now. In 2017, some analysts raised concerns about the dividend payment. If there is a dividend cut, HP’s stock share price will dropped again. There should be any concerns in 2018 in regard to the dividend.
Dividend Growth Perspective
Management didn’t increase its payout in 2017 or in 2018 (as of mid year). I’m confident a dividend increase will happen later in 2018 as the oil price is on an uptrend and management has seen stronger activity of late. If their rigs start drilling instead of gathering rust, HP will be able to keep its aristocrat status. In our DDM calculations, we used a dividend growth rate of 4% for the upcoming 10 years. We do not expect a strong dividend increase in 2018, but the company should not lose its aristocrat status.
CUMMINS (CMI)
Business Model
Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. The company is divided into 4 business segments: Engine (35%), Distribution (27%), Components (22%), Power Generation (16%). The Cummins’ business model is closely related to the transportation, mining and infrastructure industries, as 35% of its sales come from its engine division.
Investment Thesis
Cummins took over 100 years to build its solid reputation in the engine manufacturing industry. Today, CMI’s brand is known for its reliability and longevity. The company offers advanced engines and continues to invest in R&D to improve fuel efficiency. CMI is well positioned to benefit from the transition from classic engines to cleaner technologies such as hybrid motors. The company has successfully increased its dividend each year since 2010.
VALUATION
| Intrinsic Value | Discount Rate (Horizontal) | ||
| Margin of Safety | 8.00% | 9.00% | 10.00% |
| 20% Premium | $290.02 | $193.34 | $145.01 |
| 10% Premium | $265.85 | $177.23 | $132.92 |
| Intrinsic Value | $241.68 | $161.12 | $120.84 |
| 10% Discount | $217.51 | $145.01 | $108.76 |
| 20% Discount | $193.34 | $128.90 | $96.67 |
TYPE OF STOCK: GROWTH
5 YEAR REVENUE GROWTH: 3.34%
SECTOR: INDUSTRIALS
5 YEAR EPS GROWTH: -7.22%
CURRENT DIVIDEND YIELD: 3.14%
5 YEAR DIVIDEND GROWTH: 18.52%
PE RATIO: 24.73
PAYOUT RATIO: 76.29%
Potential Risks
CMI is obviously riding the strong economic tailwind we have in the U.S. The demand remains strong as the transportation business continues to grow. However, this kind of situation quickly turns around. With 58% of its sales coming from Canada and the U.S., CMI’s future is closely linked to both countries’ economy. In the hope of getting better results, some of CMI’s clients started their own “in house” engine program. This could hurt Cummins’ growth potential.
Dividend Growth Perspective
CMI is on a positive streak since 2010. We expect CMI to become a dividend achiever in 2020. While management has been more than generous with its payout raise in the past, the last 2 increases were in the mid single-digit range. Since payouts are under control, investors can expect similar hikes in the upcoming years.
CT REAL ESTATE INVESTMENT (CRT.UN.TO)
Business Model
CT Real Estate Investment Trust is an unincorporated, closed-end real estate investment trust formed to own income producing commercial properties primarily located in Canada. Its portfolio is comprised of over 325 properties totaling approximately 26 million square feet of GLA (mostly retail properties across Canada). CT REIT creates long-term value for Unitholders by growing its portfolio of income-producing properties and development projects, benefiting from its relationship with Canadian Tire Corporation, its most significant tenant and controlling Unitholder.
Investment Thesis
An investment in CT REIT is primarily an investment in the Real Estate business of Canadian Tires. If you think this Canadian retail giant will do well in the future, but you are more interested in dividend than pure growth, CT REIT is the answer. The fact that CRT is paying a monthly dividend with a yield over 5% is highly attractive for income seeking investors.
VALUATION
| Intrinsic Value | Discount Rate (Horizontal) | ||
| Margin of Safety | 8.00% | 9.00% | 10.00% |
| 20% Premium | $18.10 | $15.08 | $12.93 |
| 10% Premium | $16.59 | $13.82 | $11.85 |
| Intrinsic Value | $15.08 | $12.57 | $10.77 |
| 10% Discount | $13.57 | $11.31 | $9.69 |
| 20% Discount | $12.06 | $10.05 | $8.62 |
TYPE OF HOLDING: CORE
3 YEAR REVENUE GROWTH: 8.74%
SECTOR: REAL ESTATE
3 YEAR EPS GROWTH: 8.05%
CURRENT DIVIDEND YIELD: 5.71%
3 YEAR DIVIDEND GROWTH: 2.56%
PE RATIO: 10.25
PAYOUT RATIO: 19.57%
Potential Risks
We often like diversified businesses when we want to add a company to our portfolio. This is not the case with CT REIT. It is mostly leasing all its properties to Canadian Tires. Therefore, if Canadian Tires can’t keep up its growth (we all know how the retail business is hard these days), CT REIT will not have many options to compensate.
Dividend Growth Perspective
This REIT continues to grow and show a low AFFO payout ratio. This means your paycheck will continue to rise faster than the inflation going forward. Shareholders can expect to cash a solid 5%+ yield with a 2-3% growth rate going forward.
ENBRIDGE (ENB.TO)
Business Model
Enbridge owns and operate an impressive network of liquid (OIL) and natural gas pipelines. Enbridge operates the longest pipeline in North America. The company recently merged with Spectra to create an energy infrastructure company. About 2/3 of ENB earnings is generated through oil sand (liquid pipelines) distribution while the other 1/3 is coming from natural gas transmission. ENB is able to transport energy from coast to coast, from north to south.
Investment Thesis
Enbridge clients enter into 20-25-year transportation contracts. The company is already well position to benefit from the Canadian oil sands (as its Mainline covers 70% of Canada’s pipeline network). Now that is has merged with Spectra, about a third of its business model will come from natural gas transportation. The company has a handful of projects on the table or in development. Among those projects, is the Line 3 replacement. The company expects the completion of this project in mid-2019.
VALUATION
| Intrinsic Value | Discount Rate (Horizontal) | ||
| Margin of Safety | 9.00% | 10.00% | 11.00% |
| 20% Premium | $107.93 | $85.45 | $70.64 |
| 10% Premium | $98.75 | $78.33 | $64.76 |
| Intrinsic Value | $89.77 | $71.21 | $58.87 |
| 10% Discount | $80.80 | $64.09 | $52.98 |
| 20% Discount | $71.82 | $56.97 | $47.10 |
TYPE OF HOLDING: CONSERVATIVE
5 YEAR REVENUE GROWTH: 12.47%
SECTOR: ENERGY
5 YEAR EPS GROWTH: 37.99%
CURRENT DIVIDEND YIELD: 5.56%
5 YEAR DIVIDEND GROWTH: 16.38%
PE RATIO: 33.41
PAYOUT RATIO: 115.3%
Potential Risks
Companies do not pay a high yield for nothing. ENB raised its debts and number of shares with the merger of Spectra. As pipelines require lots of capital to build and maintain, Enbridge may find itself in a position where cash is missing. After all, management has plenty of projects to fund, a doubled-digit dividend growth promise to keep and larger debts to repay. There is always a possibility where this scenario turns bad.
Dividend Growth Perspective
I guess the beauty of ENB resides in its dividend policy. The company has been paying dividends for the past 65 years and has had 23 consecutive years with an increase. ENB expects to increase its payouts by 10-12% for the next 7 years. Since the pipeline business model is built around long-term contract and predictable cash flow, I have no doubt this will happen.
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