Dividend investing is difficult. It is simple to go to the market and pick the stocks with the highest yield, but this strategy is fraught with danger, as those high yield figures could indicate the market’s lack of faith in the company to maintain its payout.
So in this four part series I am going to pitch several stocks that meet the criteria for several different styles of dividend investing. My focus will first be on the conservative dividend investor, who is looking for safety and stability from a buy-and-hold dividend stock that offers a payout above the market average and inflation.
I believe the two best contenders for the conservative dividend investor’s portfolio are Urstadt Biddle Properties Inc (NYSE:UBA), currently offering a 4.5% yield, and AT&T Inc. (NYSE:T), currently offering a 4.9% yield.
Dividend History
One of the best places to start dividend company analysis is the company’s dividend history. Companies that have paid and raised dividend payouts consistently for extended periods of time are less likely to cut or stop their payout.
| Company | Dividend Payment and Growth |
|---|---|
| Urstadt Biddle Properties | 17 years |
| AT&T | 28 years |
AT&T Inc. (NYSE:T) has been consistently paying out and raising its dividend every year for the past 28. Meanwhile, Urstadt Biddle Properties Inc (NYSE:UBA) has also been consistently raising its dividend for nearly two decades. With such strong dividend histories from both companies I have plenty of confidence in their ability to make future payments.
Balance Sheet Strength
Strong balance sheets are key in establishing the strength of dividend-paying companies. As I have recently highlighted in this article, companies that have weak balance sheets and especially high levels of debt and high debt interest costs can be seriously limited in their ability to grow and return cash to shareholders.
| Urstadt | AT&T | |
|---|---|---|
| Total Assets | $724 | $272,315 |
| Total Liabilities | $239 | $179,953 |
| Shareholder Equity | $484 | $92,362 |
| Debt to Equity | 0.44 | 0.74 |
| Debt to EBIT | 5.6x | 5x |
| Current Ratio | 0.71 |
$US Millions
REITs are usually associated with high levels of debt as they borrow to finance their purchases of property. However, Urstadt Biddle Properties Inc (NYSE:UBA) has kept its debt relatively low according to last year’s figures. Urstadt Biddle Properties Inc (NYSE:UBA)’s debt only amounted to 0.44% of shareholder equity, and the company had a debt to EBIT level of just over five-and-a-half times.
AT&T Inc. (NYSE:T), on the other hand, has a relatively high level of debt. That said, AT&T’s debt is about in-line with that of its peers in the rest of the telecoms sector, in particular Verizon Communications Inc. (NYSE:VZ), which has a net debt to equity level that is roughly the same. AT&T’s current ratio is worrying however, as it appears that the company cannot cover all of its liabilities falling due within twelve months with current assets, although once again the company’s closest peer Verizon Communications Inc. (NYSE:VZ) is in the same position.
AT&T Inc. (NYSE:T)’s debt only amounts to five times earnings before interest and tax, less than Urstadt Biddle Properties Inc (NYSE:UBA)’s.
Debt remains under control and at suitable levels at both AT&T Inc. (NYSE:T) and Urstadt Biddle Properties Inc (NYSE:UBA), which gives me further confidence in these two companies’ abilities to maintain their payouts to investors.
Cash Flows
At first glance it would appear that AT&T Inc. (NYSE:T)’s dividend is not covered by earnings. During 2012, the company earned $1.28 per share but paid $1.80 per share in dividends to shareholders. Although it appears that AT&T is issuing more cash to shareholders than it can afford, the company’s cash flows shows that the payout is well covered.
| Urstadt | AT&T | |
|---|---|---|
| Operating Cash Flow | $52.9 | $38,910 |
| Investing Cash Flow | $11.2 | $19,420 |
| Dividends Paid | $42.6 | $10,240 |
| Stock Repurchase (Issuance) | ($91.7) | $12,300 |
| Issuance/(Reduction) of Debt | ($17.3) | $4,750 |
| Free Cash Flow | $3.8 | $9,210 |
| Dividend Cover by Operating Cash Flow After the Deduction of Investing Activities | 0.98x | 1.9x |
$US Millions
AT&T had an operating cash flow of $38.9 billion during 2012, the company spent $19.4 billion on CAPEX and other investing activities, which left $19 billion for the dividend that only cost the company $10 billion, leaving the company with extra cash to buy back stock. AT&T did have to borrow slightly to afford the whole buyback, but at current low rates this could be beneficial for the company.
As a REIT, Urstadt has to pay out the majority of its income to shareholders in order to keep its preferential tax treatment, so the dividend is only just covered by available cash flow. It appears that the Urstadt does not have much room for further payout growth, but as a REIT the company’s income will rise with inflation as it raises rental rates, so I can assume the company’s cash flow will have room for further dividend growth next year.
Aren’t There Companies with a better history out there?
Both AT&T and Urstadt have decent dividend histories, solid balance sheets and payouts that are well covered by cash flows, but there are better companies out there with longer payout histories and stronger balance sheets– Exxon Mobil Corporation (NYSE:XOM) for example. The problem is that Exxon’s payout is so attractive, that investors have been drawn in depressing its yield to an almost unattractive level.
| Company | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|
| ExxonMobil | 2.3% | 2.5% | 2.2% | 2.3% |
| AT&T | 6.5% | 6.2% | 5.9% | 5% |
| Urstadt | 6.3% | 6% | 5.3% | 3.9% |
| Inflation Rate | 2.7% | 1.5% | 3% | 2% |
Exxon Mobil Corporation (NYSE:XOM) has a much longer payout history than AT&T and Urstadt, the company also has a strong balance sheet and is very unlikely to fail and stop the payout–but because of this, investors have been drawn to the company, depressing its payout to unattractive levels. Assuming dividend investors want to achieve the rate of inflation plus 1 or 2% extra income their investment, AT&T and Urstadt have provided the best options during the past four years. Exxon’s yield was less than the rate of inflation during 2009 and 2011 and was only marginally above the rate of inflation during 2012.
Conclusion
With long dividend histories, strong balance sheets and cash flows that easily cover their higher than average dividend yields Urstadt and AT&T look to be perfect picks for the conservative dividend investor.
The article Stocks for the Dividend Investor, Part 1; The Conservative Investor originally appeared on Fool.com is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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