This is part seven of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One here, Abbott Laboratories; Part Two, PartnerRe Limited; Part Three, Enterprise Products Partners; Part Four, Cracker Barrel Old Country Store; Part Five, Meredith Corp; and Part Six, Lockheed Martin.
I have been analyzing dividend companies for over six months. I am now more than halfway through constructing a model portfolio of my own that I am presenting to the Motley Fool community, one company at a time. Each week, I am digging deeper into individual companies that are at the top of my consideration list.
I review the companies on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.
I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.
The next company in my portfolio comes from the oil and gas industry, and is another master limited partnership (the first was Enterprise Products Partners L.P. (NYSE:EPD), although one of the lesser-known organizations. Sunoco Logistics Partners L.P. (NYSE:SXL) received 18 points on my rating scale.
Sunoco is involved in the transport and storage of crude and refined oil products in the United States. The company owns and operates approximately 2,500 miles of pipeline that transport refined products such as gasoline, heating oil, diesel, jet fuel and LPG. Approximately 5,000 miles of pipelines transport crude oil to refineries in Oklahoma and Texas. The company also owns and operates significant terminal and storage families as well.
In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Sunoco’s yield is 3.7% and it has a 10-year history of consistently paying and raising dividends. The last raise in its dividend was November 14, 2012, for an increase of 10% over the previous quarter’s distribution. The company’s 5-year dividend growth rate (DGR) is 10.6%. The dividend payout ratio is 49%, which is very reasonable and allows for a bit of wiggle room if earnings disappoint.
Future Earnings Metrics
In terms of future earnings growth, the 5-year earnings growth rate (EGR) as estimated by the 12 analysts who cover the company is lower than its competitors, at 8.7%, as compared to the growth rate for the industry of 14.1% and for the sector of 13.5% (The S&P 500 5-year EGR is currently 9.0%). SXL’s FY 2012 estimate for earnings, which are expected to be announced on January 22, is $3.82, compared to last year’s actual $2.54, an increase of 50%. The estimate for 1Q 2013 is 15% higher than 1Q 2012.