• Genuine Parts just released its third quarter results with record sales totaling $4.0 billion were up 8% compared to the third quarter of 2013. EPS were also up by 11% ($1.24 vs $1.12).

    We will go through the main highlights of their reports, but first, we will analyze what Genuine Parts has been doing over the past five years and determine whether or not it should be part of your dividend portfolio.

    GPC#1

    This dividend aristocrat has not only increased its dividend payment since 1957, it clearly shows growth on all fronts: revenues, earnings and dividend payments. GPC forecasts a revenue growth of 7-8% for this year.  Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Genuine Parts and share a full dividend analysis.

     

    Principle #1 High Dividend Yield Doesn’t Equal High Returns

    Did you know that the highest dividend yield stocks underperform more “reasonable” yielding stocks? The Hartford Mutual Funds company wrote:

    The study found that stocks offering the highest level of dividend payouts have not performed as well as those that pay high, but not the very highest, levels of dividends.”

    GPC#2

    Read more about this research here.

    As a dividend aristocrat, we can’t really expect GPC to pay a very high dividend yield. However, I was surprised to see that GPC paid more than a 4.50% yield not so long ago (in 2010).

    GPC#3

    GPC now shows a relatively high PE ratio at 20.17. It was trading at 14.45 back in 2010 when the yield was higher. Therefore, even if the dividend went from $1.65 in 2011 to $2.225 now, the price went up accordingly. However, the dividend growth of this stock is very interesting…

    Principle #2: If There is One Metric; It’s Called Dividend Growth

    If I had to go blindfolded to pick a stock and have only one metric to look at, I would pick dividend growth. This is the most important metric to me as it is a clear sign of the company’s financial health and its ability to pay me for years to come. Here’s an interesting quote from Saturna Capital:

    “Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”

    GPC#4

    You can get the full detail here.

    If you wonder about dividend growth for GPC, you can see what they are posting on their own website:

    GPC#6

    The dividend will probably double (or be very close) within 10 years, which makes an annualized dividend growth rate of ±7%. After 58 consecutive years with a dividend increase, it’s not a surprise that GPC shows almost twice the growth of the S&P 500  over the past 5 years (+131.19% vs +73.46%). Now, can GPC continue to please dividend investors in the upcoming years?

     

    Principle #3: A Dividend Payment Today is Good, A Dividend Guaranteed For the Next 10 Years is Better

    I think it’s very important to cross the payout ratio with the dividends paid over at least 5 years to see where the company is going with its dividend policy. When I did the exercise with GPC, I noticed that it was able to push its dividend on a steep uptrend while decreasing its payout ratio.

    GPC#7

    GPC could have paid even more to investors but management preferred to keep additional cash flow to ensure sustainable growth. This tells you a lot about how this company is managed. The additional cash is also use to ensure growth for the future.

     

    GPC not only shows good results but also grows by acquisition. In 2014, they bought Garland  C. Norris, EIS, Electro-Wire and Impact products. GPC continually looks for companies to buy  with revenues in the range of $25M to $125M. These bites are easy to chew on and don’t affect their balance sheet in a negative way. Their ability to integrate new companies reflects in their earnings which show a steep uptrend. GPC  will continue to be a leader in its industry and we won’t lack for car parts in the near future.

     

    Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model

    A company that doesn’t have a sound business model won’t be able to sustain consecutive dividend increases over the long haul. On the other hand, businesses which pay dividends and increase them will outperform other stocks:

    GPC#8

    Source: Edward D. JonesDividend Stocks Rock

    Now how can you find these marvels? This is why you need other financial metrics to identify companies that will be able to sustain and increase their dividend for the next 10 years. At DSR, we look at the 3 and 5 year metrics for Sales and Earnings per Share (EPS) growth. We only select companies showing positive growth over both the 3 and 5 year periods. Since an economic cycle lasts between 5 and 8 years, a strong company should be able to post increasing sales and earnings over these periods. I’m using both EPS and Revenue data from Ycharts:

    DSR STOCK METRICS

    3 year revenues = 7.90% Pass

    5 year revenues = 5.03% Pass

    3 year EPS growth = 13.60% Pass

    5 year EPS growth = 8.56% Pass

     

    Genuine Parts Company passed the four tests easily. The automobile parts industry is relatively stable and GPC benefits from its leadership position to generate consistent cash flow. It’s important distribution network combined with great locations and branding makes it a very strong company. In addition to this solid business model, GPC has the ability to generate more growth through acquisitions. This company is continuously buying smaller players and has become a pro at integrating acquisitions to create more synergy.

    A Look at the Most Recent Results

    For the first nine month of the year, sales are up 9% compared to the same period in 2013 and EPS are up by 2.92%. If we include an adjustment related to the acquisition of GPC Asia Pacific in 2013, the EPS would have been also up by 10% for the same period. This tells you GPC’s business model works well in a bullish environment. GPC doesn’t only grow by acquisition. When you look down on where the sales boost come from, you will find that 5.4% is coming from internal growth and 3.3% from acquisition. Genuine Parts is having a small bite of acquisition at a time and does a great job handling its own growth. Management keeps in mind its cash flow statement along with its strong balance sheet.

    GPC finished its third quarter by increasing its FY2014 earnings guidance to $4.56-4.60 and sales of $15.2 billion. GPC is definitely a good addition to a dividend portfolio!

    Disclaimer: I do not hold personally GPC shares at the moment of writing this article. However, GPC is held in some Dividend Stocks Rock Portfolios.

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  •  

     

    Apple just released its fourth quarter with stronger results than expected:

    • $42.1 billion in revenue vs $37.5 in Q4 2013

    • $1.42 Earnings per share vs $1.18 in Q4 2013

    • 16% sales jump for iPhones

    • 20% EPS growth in 2014

    • $13.3 billion in cash flow

    • Declared dividend of $0.47/share

    We will go through the main highlights of their reports, but first, we will analyze what Apple has been doing with its cash over the past few years. If you look at the following graph, you will notice how fast its growth was in 2011 but how revenues are now slowing and 2013’s earnings were less than those of 2012.

    apple#1

    At the beginning of 2013, the stock started to disappoint the market as many investors were worried about how Apple would deliver its next big thing and the fact that competitors like Samsung were grabbing market share on Apple’s most profitable segment; the mobile industry.

    But the company bounced back since the beginning of 2014 with surprising growth in terms of sales and earnings. It recently announced the new iPhone 6 and Apple Watch to be launched in early 2015. The stock has been trading around $97-$100 for a while – is Apple set to boom again? Following the first 4 Dividend Stocks Rock Investing Principles, I’ll take a look at Apple and present a full dividend analysis.

     

    Principle #1 High Dividend Yield Doesn’t Equal High Returns

    Did you know that the highest dividend yielding stocks underperform more “reasonable” yielding stocks? The Hartford Mutual Funds company wrote:

    The study found that stocks offering the highest level of dividend payouts have not performed as well as those that pay high, but not the very highest, levels of dividends.”

    apple#2

    Read more about this research here.

    Apple’s dividend history is still in its infancy since management started this strategy to seduce investors in 2012. Was this related to the fact that 2013 produced slower growth and management wanted to keep more people on board? Or was pressure from activist shareholders like Icahn enough to convince Apple to distribute a few pennies from its treasure chest?

    apple#3

    Apple’s dividend yield hasnnever been higher than 2.63% (and this was for a very short period). The yield is most likely to hover around 2% and this is why this stock will fly under the radar of many dividend investors. Keep reading and you will see why AAPL should be part of all dividend portfolios.

     

    Principle #2: If There is One Metric; It’s Called Dividend Growth

    If I had to go blindfolded to pick a stock and have only one metric to look at, I would pick dividend growth. This is the most important metric to me as it is a clear sign of the company’s financial health and ability to pay me for years to come. Here’s an interesting quote from Saturna Capital:

    “Indeed, dividend growth has been a much larger determinant of equity returns in this new era of low benchmark rates and higher levels of uncertainty.”

    apple14

    You can get the full detail here.

    Did you know that Apple used to pay a dividend back in the 80s? in fact, from 1987 to 1995, Apple paid a quarterly dividend that went from $0.06/share to $0.12/share. The dividend recently came back from the dead in 2012 starting at $2.65/share and has risen to $3.05 in 2013 and $3.29 in 2014 (now $0.47/share after the 7-for-1 stock split).  Considering the immense amount of liquidity this company has (XXXX in cash for its latest quarter), we can see this stock increasing its payout over the upcoming years.

     

    Principle #3: A Dividend Payment Today is Good, A Dividend Guaranteed For the Next 10 Years is Better

    What really makes me enthusiastic as a dividend investor is Apple’s ability not to simply maintain its dividend but to increase it systematically. You can easily analyse a company’s ability to sustain a dividend growth policy by looking at its dividend payout ratio combined with their dividends paid.

    apple#5

    This means the company has adopted a sustainable model for raising its dividend and won’t jeopardize the company’s future since there is more than enough money to pay investors. Apple has tons of cash and a very low payout ratio. This looks good for the future.

    Principle #4: The Foundation of Dividend Growth Stocks Lies in its Business Model

    A company that doesn’t have a sound business model won’t be able to sustain consecutive dividend increases over the long haul. On the other hand, businesses which pay dividends and increase them will outperform other stocks:

    apple#6

    Source: Edward D. JonesDividend Stocks Rock

    Now how can you find these marvels? This is why you need other financial metrics to identify companies that will be able to sustain and increase their dividends for the next 10 years. At DSR, we look at the 3 and 5 year metrics for Sales and Earnings per Share (EPS) growth. We only select companies with positive growth over both the 3 and 5 year periods. Since an economic cycle lasts between 5 and 8 years, a strong company should be able to post increasing sales and earnings over these time frames. I’m using both EPS and Revenue TTM (total return, not annualized) from Ycharts:

    DSR STOCK METRICS

    3 year revenues = 39.35% Pass

    5 year revenues = 281.4% Pass

    3 year EPS growth = 23.45% Pass

    5 year EPS growth = 323.30% Pass

    apple#7

    Apple passes the four tests easily. The beauty of Apple’s business model is its ecosystem. They don’t launch products just for the sake of it. They study and research long enough to launch an innovation that is backed with a solid plan and a perfect fit with the current product ecosystem. This is how the Mac, the iPhone, iPod and iPad and soon the Apple Watch can “talk” together.

     

    A Look at the Most Recent Results

    Apple’s last quarter is not only very strong but leads to an optimistic forecast for the Holiday season and the rest of 2015. The company projected stronger than expected revenue of $63.5 – $66.5 billion for the next quarter. Tim Cook had great reasons to smile:

    “Our fiscal 2014 was one for the record books, including the biggest iPhone launch ever with iPhone 6 and iPhone 6 Plus,” said Tim Cook, Apple’s CEO. “With amazing innovations in our new iPhones, iPads and Macs, as well as iOS 8 and OS X Yosemite, we are heading into the holidays with Apple’s strongest product lineup ever. We are also incredibly excited about Apple Watch and other great products and services in the pipeline for 2015.”

    Source: Apple

     

    Digging down the financials, we notice iPhone sales are strong (with iPhone 6 being the biggest launch ever in the iPhone series) but iPad sales struggles down by 13%. This is about the only bad news for this result as even the Mac has well performed with sales up by 21%. We compare Samsung a lot with Apple since both companies drive most of their revenues from smartphones. While Apple keeps piling cash, Samsung expects its benefits to drop by 60% du to high margin pressure on its smartphones.

    Considering Apple Pay and Apple Watch as new innovation to have an impact on 2015 results, Apple is in the right direction to go through a strong 2015.

    Disclaimer: I hold APPL shares at the moment of writing this article and it is part of our Dividend Stock Rocks Portfolios.

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  •  

     

    I’ve heard an interesting theory several times of late. This investing theory explains how the next market crash will happen. This is a bubble that went on for years and nobody suspected it. Have you ever heard how the baby boomers will withdraw so much money from the market to finance their retirement that will generate a massive bear market?

     

    The Theory about the Next Market Crash

    Here’s a little bit of rationale behind this theory: The baby boomers are the group of people that were born between 1946 and 1964. It was the most massive wave of newborns since the Great Depression:

    boomers

    These newborns also became the most powerful workforce of the past century. They have built, grown and prospered for many years. The Boomers created a real boom of wealth in the economy. They also put lots of money aside in their pension plans and retirement funds.

    But all good things come to end and soon these boomers will retire (some of them already have). Boomers are also known for their good lifestyle and once they retire, they will want to maintain it at a high level. This is why they will withdraw massive amounts from their nest egg to finance their retirement and high cost of living. Combine this situation with the current demography showing a lot less newborns each year. This means that for every boomer retiring, we have about 1/3 of a worker entering the workforce. This also means that for every boomer withdrawing funds, we have 1/3 of a worker contributing to a retirement fund (e.g. investing money). Considering the fact that most young people are more worried about buying an iPhone 6 than contributing to their retirement fund, we may even push the math to 1/4 or 1/5 of a worker investing for every boomer retiring!

    What happen when investors start to withdraw funds massively from the market? It becomes a sellers’ market or a bear market if you prefer. Companies may continue to bring in the numbers and grow their profits, if there are more people to sell their stocks than to buy them, the stock will drop accordingly.

     

    Is This The End of Our Bull Market?

     

    When I first heard of this theory, I was a bit skeptical. I mean; it all makes sense but any simplistic theory about something bad that’s going to happen is always hiding part of the truth. This is why I dug further to find out if we are really going to see more sellers than buyers in the future? Will the pension funds be forced to sell too many stocks and push the market down?

     

    The short answer is no; there will not be a bear market because of the boomers. The situation is not that bad for one reason; the huge stack of money they are sitting on in their pension plan is generating yield. This investment return will be almost enough to cover for the big wave of withdrawals:

     

     net withdrawals

    This graph is coming from Stats Can (Canadian data) but it shows how the ratio net cash flow on assets will drop slightly but not enough to create a commotion in the markets. In addition to this graph, I would also add that boomers better be careful with their withdrawal rates as they are retiring early (in their 60’s) and will possibly live for a good 20-25 years. Therefore, if they start selling too much right away, they won’t have enough money saved aside and will out live their savings…

     

    Then again, just another simplistic theory down the drain because of some gurus trying to scare you. You can keep investing, boomers won’t bust our markets!

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