This is part eight 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, ; Part Two, ; Part Three, ; Part Four, ; Part Five, ; Part Six, ; and Part Seven, .
I have been analyzing dividend companies for close to a year. I am now three-quarters of the way 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, although it is not a Master Limited Partnership (like Enterprise Products Partners L.P. (NYSE:EPD) and Sunoco Logistics Partners). Williams Companies, Inc. (NYSE:WMB) received 18 points on my rating scale.
Williams Companies is an energy infrastructure company, one of the biggest names in the natural gas business, with more than 15,000 miles of gas pipeline and 1,000 miles of NGL pipelines. All in all, Williams moves more than 10% of the entire country’s natural gas capacity, including record levels of natural gas to the Northeast during late January.
In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Williams’s yield is 3.3%, and it has a 10-year history of consistently paying and raising dividends. The company announced an increase in its first quarter 2013 dividend, payable March 25, an increase of 4% over the previous quarter’s distribution. The company actually raised its dividend four times in 2012, for a total 2012 payout of 54% over the 2011 payout.
The company’s 5-year DGR is an extremely impressive 27.4%. The dividend payout ratio is 105%, which is typical for a pipeline operator.
Future Earnings Metrics
In terms of future earnings growth, the 5-year earnings growth rate (EGR) as estimated by the 14 analysts who cover the company is much higher than its competitors, at 13.6%, as compared to the growth rate for the industry of 7.9% and for the sector of 8.7%. (The S&P 500 5-year EGR is currently 8.6%).
The company has a TTM PE of 32.1, based on today’s price of approximately $36. The average PE in the Basic Materials sector is 18.3, and in the Oil and Gas Pipelines industry the average PE is 14.9.
Williams is currently trading at about 5% less than its 52-week high of $37.56 and is up 23% from a year ago. Its twelve month total return is 28.3%.
The Motley Fool community rates WMB a four-star CAPS pick, with 523 Bulls and 21 Bears (96% positive sentiment). The 14 professional analysts who cover the company rank it a 1.9 (1.0 = Strong Buy, 5.0 = Sell) with three Strong Buys, nine Buys, and two Holds. They have assigned a one-year average target price of $38.75, which is a potential gain of 8%.
In January, TheStreet.com reiterated its Buy recommendation for Williams, citing improved return on equity over the previous year, strong gross margin performance, and excellent stock price performance over the past twelve months.
I looked at one of the most popular companies in the Oil and Gas Pipeline industry, Kinder Morgan Energy Partners LP(NYSE:KMP). Naturally, I have examined this one several times in my current quest for the perfect dividend companies, and I have rejected it every time. KMP is currently trading at $88 per share and yields 5.7%. The company has been paying and raising dividends for 16 years, the 5-year DGR is 7.5%, the EGR is 11.8%, and the PE is 38.
The total return over the past twelve months is 8.4%, which is primarily from dividends, as the share price has gained only 3%. Kinder Morgan Partners scores a 15 on my dividend ratings scale.
I also re-examined Enterprise Products Partners L.P. (NYSE:EPD), another pipeline MLP that I added to my Dividend Portfolio in December. It is currently trading at $56 per share (up from $50.05, where I bought) and yields 4.8%. The company has been paying and raising dividends for 15 years, the 5-year DGR is 7.8%, the EGR is 7.2%, the PE is 19.2 and the payout ratio is 84%. EPD’s total return over the last twelve months is 17%. Based on my original analysis, I am still happy with EPD in my portfolio; it scores an 18 on my ranking system.
Williams Companies has many strengths, including excellent historical dividend growth, an attractive yield, strong analyst support, and terrific growth over the past twelve months. I am less thrilled about its high PE, but I would rather buy into the stock now than wait for a pullback that may not materialize.
It is now the eighth stock in my new dividend portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
The article Building My Dividend Portfolio – Williams Companies originally appeared on Fool.com and is written by Karin Hernandez.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.