Dividend Hike: The In Thing - Analyst Blog

By Zacks Equity Research,

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Increasing dividends is becoming a common trend these days, mostly followed by companies that boast a stable cash position and healthy cash flows. These strategies not only enhance shareholders' return but also raise the market value of the stock. The companies through this strategy bolsters investors' confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them.

Recently, Limited Brands Inc. ( LTD ), a specialty retailer of women's intimate and other apparel, beauty and personal care products, raised its annual dividend by 25% to $1.00 from 80 cents a share. The company announced that the dividend will be paid on March 9, 2012, to stockholders of record as of February 24, 2012. The dividend yield based on the new payout and the last closing market price is 2.4%.

Last December, Limited Brands, an S&P 500 company, declared a special dividend of $2 per share. In January 2011, the company had last hiked its dividend to 80 cents from 60 cents, reflecting an increase of 33%. 

Limited Brands' commitment towards increasing shareholders' return reflects the company's free cash flow generating capability and sound liquidity position. The company expects to have a free cash flow of about $700 million and a cash balance of approximately $800 million at the end of fiscal 2011.

Currently, we have a long-term Neutral recommendation on the stock. However, Limited Brands holds a Zacks #2 Rank that translates into a short-term Buy rating.

Following the Foot Steps

Limited Brands is not the only one to be focusing on paying higher dividends, other bellwethers too have already added their names in list of dividend hikes. The owner of Victoria's Secret Direct and La Senza chains also followed the foot steps of other S&P 500 companies, who increased their dividend payouts to boost investors' return.

The McGraw-Hill Companies Inc. ( MHP ), a publisher and provider of financial information and media services, stated a hike in its quarterly dividend by 2% to 25.5 cents a share. Since 1974, the company has boosted its dividend at a compound annual dividend growth rate of around 9.6%.

The increased dividend will be paid on March 12, 2012, to stockholders of record as of February 27, 2012. The dividend yield based on the new payout is 2.2%. The company holds Zacks #2 Rank that translates into a short-term Buy rating.

Macy's Inc. ( M ), one of the leading department store retailers in the U.S., announced a two-fold increase in its quarterly dividend of 10 cents to 20 cents a share. The increased dividend will be paid on April 2, 2012, to stockholders of record as on March 15, 2012.

The last quarterly dividend hike was from 5 cents to 10 cents, which was paid in July 2011. The dividend yield based on the new payout is 2.4%. The company holds Zacks #2 Rank, which translates into a short-term Buy rating.

Family Dollar Stores Inc. ( FDO ), the operator of self-service retail discount store chains, raised the quarterly dividend by 16.7% to 21 cents a share. Since the inception of dividend program in 1976, the company has raised its dividend every year at a compounded average growth rate of about 16%. The new dividend will be paid on April 13, 2012, to shareholders of record as on March 15, 2012. The dividend yield based on the new payout is 1.5%.

The company holds Zacks #3 Rank that translates into a short-term Hold rating.

The Washington Post Company ( WPO ), a diversified education and media company, announced 4.3% jump in quarterly dividend to $2.45 per share. The increased dividend is payable on February 10, 2012, to stockholders of record as on January 30, 2012. The dividend yield based on the new payout is 2.6%.

The company holds Zacks #3 Rank that translates into a short-term Hold rating.

Our Take on Role of Dividend

Perhaps, increasing dividend appears to be one of the best tools to win back the confidence of the investors, who now prefer to move to the safe heaven, in an economy that is fraught with risks. Investors, in order to shield themselves from the upheavals that the financial world is susceptible to, are now diligently choosing their portfolio of stocks that can give them the best returns. On that note, while building the portfolio, underlining dividend growth potentiality plays a vital role.

Investors do prefer an income generating stock, and a dividend paying stock is always a preferable option. Meanwhile, keeping the hard cash in the bank's locker is a much safer alternative than investing in stocks, so offering higher return on stocks becomes obvious to compensate the risk undertaken. Higher dividend growth companies have a better chance to attract investors that in turn provides an impetus to the share price.

A consistent dividend payment and increasing the same at regular intervals primarily reflect the company's sound financial position, defined future prospects and intention to enhance shareholders' value. But what might hurt shareholders' sentiment is a dividend hike in one year, followed by a cut in the next year.

However, not all companies pay dividend regularly, and even some companies don't declare dividend. Nonetheless, that never suggests that the stock is devoid of growth propositions, unless the underlying fundamentals indicate so. It might be that they want to preserve the earnings for future expansions rather than to payout in the form of dividend. So, do consider all the factors while picking the stocks.

Every stock has its own strengths and weaknesses that need to be evaluated. Dividend increase remains one of the criterions to be considered before taking any investment decision, but apart from that an investor must take into account the top and bottom lines' growth potential, free cash flow generation capability, cash flow per share, return on capital and debt-to-total capital ratio to name a few. A diligent use of these tools will help in assessing and scrutinizing equity investments.

FAMILY DOLLAR ( FDO ): Free Stock Analysis Report
LIMITED BRANDS ( LTD ): Free Stock Analysis Report
MACYS INC ( M ): Free Stock Analysis Report
MCGRAW-HILL COS ( MHP ): Free Stock Analysis Report
WASHINGTON POST ( WPO ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: FDO , LTD , M , MHP , WPO

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