21

My Own Advisor’s Three Picks for the Dividend Growth Index

This article covers my three selections for the Dividend Growth Index. The Dividend Growth Index is a fun project created by Mike over at The Dividend Guy, comprised of eight dividend growth bloggers, selecting three stocks each, for a total of 24 dividend paying companies.  I think this is a great initiative and one that will be very interesting to follow.   You can check out the results and performance of the index thus far, here.

My three selections are Abbott (ABT:US),  Bank of Nova Scotia (BNS) and CML Healthcare (CLC).

Before I go any further, I must say these selections are not recommendations for purchase.  This project is for fun, although I must disclose I own all three companies.  While I don’t expect these companies to clobber the market I think these companies will perform well over the next few years.   I’ve selected each company for a variety of reasons, you’ll read about that soon, but I also like this grouping of companies for the following reasons:

  • I think this collection of companies balances risk and reward well.
  • All these companies have a good, and in some cases, a very long history of paying dividends.
  • I obtain a moderate average dividend yield by owning these companies (in the Index).

The downside of this small portfolio:

  • I have two large, blue-chip companies and one, smaller company.
  • I have two companies that operate in healthcare, which is not very diversified across market sectors.
  • I don’t have lots of geographic diversification, 2 Canadian companies and 1 U.S. company.

For each company below, I’ll provide an overview of the company and some key metrics for them.  I’ll also try to address some risks that come with buying-and-holding each company.  I can say this about each company because well, I do own them ;)

1.      Abbott Laboratories (ABT:US)

Now trading close to $50 per share, Abbott is trading between its 52-week high and low.

The company has a tidy yield of 3.8%, with a substantial market cap upwards of $80 billion. In the healthcare sector, Abbott is a heavy weight; it is one of the biggest companies in the world, engaged in the discovery, development, manufacture, and sale of a diversified line of health care products.  I work in the healthcare industry, these guys are everywhere.   For the calendar year ending in 2010, Abbott’s operational cash flow was over $8 billion and net income from operations was extremely healthy, well over $4 billion.  Abbott has increased dividends for the past 38 consecutive years.  It currently pays a quarterly dividend of $0.48 USD.   In fact, in June 2011, they declared their 350th consecutive dividend payment to shareholders.  I’m rather bullish on Abbott because healthcare needs are not going to dissipate anytime soon.  The demand for Abbott products and diagnostics is only going to increase as demographics around the world enter a new age, literally.  Overall, I believe Abbott is a conservative investment as far as stocks go.  This company, like any healthcare organization, faces patent risks.  Over time, Abbott must continue to develop new products, grow through acquisitions and continue to develop synergies with other healthcare providers.

Here’s what analysts have recently said about this company:

G. Reid – “Have grown earnings every single year since 1991. Only 10 or 11x earnings. Likes them in the health care space because they are diversified. Market is worried about their largest drug, whose patent expires in a few years. He doesn’t see it as a problem.”

C. Poole – “Diversified healthcare company. Branded drug division has Marot for arthritis etc., medical devices including stents and nutritional. Have also been making acquisitions in the branded generic space. Good diversity. About 20% of revenues come from emerging markets.”

2.      Bank of Nova Scotia (BNS)

When shouldn’t you own a Canadian bank?   I figure if you can’t beat ‘em, join ‘em, but I own BNS for better reasons than that.  Now trading at about $51 per share, Bank of Nova Scotia is much closer to its 52-week low than high, and for me, that’s good - time to buy.  In fact, I am, adding more to my portfolio every month via a DRIP.  By the end of 2012, I hope to have enough BNS shares to run a synthetic DRIP in my brokerage account.

The company has a tidy yield around 4%, with a substantial market cap in the Canadian banking space of about $55 billion.   Scotiabank is one of North America’s premier financial institutions, and arguably Canada’s most international bank. International banking and commercial banking operations are in more than 45 countries outside Canada; more than 48,000 employees, including those working in our subsidiaries and affiliates execute operations around the world; serving over 11 million customers.  Bank of Nova Scotia has thousands of branches and ABMs in the Caribbean and Central America, Mexico, Latin America and Asia.  Like Abbott, BNS net income from operations was extremely healthy last year, reporting well over $4 billion.  Bank of Nova Scotia has paid dividend, since, get this, 1832.  Strong growth, diversification internationally and an excellent brand here in Canada has allowed BNS to raise their dividend in 37 of the last 40 years. Earlier this year, they increased their dividend from $0.49 to $0.52 CDN.  Risks?   Yes, Canadian banks like BNS are well-captialized but they are not immune to credit woes – it is a bank afterall.  With increased diversification also comes increased risk, and we know how risk and reward are related.

Here’s what analysts have recently said about this company:

A. Nasr – “He is underweight financials. Good results from BMO this morning. Canadian banks in general had a pretty big tailwind lending to Canadians. And will now be a headwind with debt levels being so high now. Definitely a good place for a long term outlook.”

M. Sprung – “Likes the international flavor. Canada’s most internationally diversified bank. Best for credit discipline. Fewer surprises in terms of loan losses. Sells for a premium but worth it because of stability it supplies to a portfolio.”

3.      CML HealthCare (CLC)

This company may be unfamiliar to some but it’s a player in North American healthcare space.   CML HealthCare is big at home, in Ontario.

Trading at just over $9, CML HealthCare is much closer to its 52-week low than high, and for me, that’s good even though the metrics are a bit intimidating.  This one is risky.  This company has a phenomenal yield close to 8%, a little too high for my liking and what I’d normally invest in.   This is because the their dividend payout ratio is rather high.

Using dividends paid / adjusted funds from operations (cash flow less capital expenditures), for Q2 2011 CLC payout ratio was 80.9%.

They are a small company, certainly dwarfed in comparison by my other two selections, with a market cap below $1 billion.   Effective January 1, 2011, the company converted from an income trust to a dividend-paying corporation, and this year has been a year of an adjustment; the annual distribution was cut by about 29%, from the annual distribution of $1.07 per unit.  Also effective at the start of this year, CML HealthCare began trading on the Toronto Stock Exchange under the ticker symbol CLC.  CML Healthcare Income Fund, through its subsidiary, CML HealthCare, Inc. (CML), provides healthcare diagnostic services. The company provides laboratory testing services and medical imaging services Canada and the United States.  Their subsidiaries in the United States, American Radiology Services (ARS), operates 17 centres in Maryland and one in Delaware and The Imaging Institute operates five centres in Rhode Island. Together they offer a comprehensive range of radiology services using the latest technology to provide patients and referring physicians with superior diagnostic imaging.  That said, the move into the U.S. has not gone to CML HealthCare’s plans.  They’ve lost tons of money on this venture, mainly because of Medicare funding or lack thereof.  Their U.S. operations have suffered considerable losses.   Because of this mess, back in May 2011 the company parted ways with their President and Chief Executive Officer and Chief Operating Officer.  I read those individuals “left to pursue other interests” but that was likely putting it nicely.

On a happier note, during the past quarter negotiations began between the Ontario Association of Medical Laboratories, of which CLC is a member, and the Ontario Ministry of Health and Long Term Care on the new funding agreement for capped laboratory services, which make up approximately 55% of Canadian revenues. A new agreement is expected to be in place and announced soon.  In the interim, the Company continues to be reimbursed based on terms of the existing agreement.

“Revenues from Canadian operations increased 2.5%, demonstrating continued stability and growth in our core business,” noted Tom Weber, Executive Vice President and Chief Financial Officer. “During the (last) quarter, we advanced our investments in technology in the Canadian laboratory and imaging operations which accelerates efficiencies and improved quality. The automation of the chemistry platforms at our central laboratory, completed early in the third quarter, will further heighten the lab’s productivity.”

This is good news since net income from operations has been declining rather sharply since 2008.  Net income from operations for the 2010 calendar year was $31 million, down from $55 and $101 million in previous years.  This is obviously not a good sign, but I expect a recovery.  Why?  CML HealthCare operates in a critical space in our modern healthcare industry and consequently offers vital services to patients abroad.  While its debt load is rather high and certainly not for all conservative investors, it does offer a tremendous return in terms of yield and should deliver long-term returns for many years to come.  Will CLC hold its dividend?  That is a wild-card.  Yield is rather high, and some rumours speak of a dividend cut in the next 12 months.  Even if they cut their dividend by 20% months from now, the company will still yield close to 6%.   I can handle that.

Here’s what analysts have recently said about this company:

M. Sprung – “Doesn’t think the problems in the US are entirely fixed, but are stabilized to a great extent. 2nd quarter showed Canadian results. Chart reflects the change from high payout trust to low payout corp. There are some problems in US operations. There have been management changes and so some uncertainty for some period of time. They are on a better tact right now. Will re-negotiate lab contracts in Ontario. 9% yield. Even if it came off a little, which it could because of their earnings power it is still attractive.”

“Have not bought it because of other opportunities. Tremendous lab business in Canada that provides good, solid cash flow. More than more of the lab work will be outsourced to companies like this.”

J. O’Connell – “Medical diagnostic labs. About 8% yield and feels this is secure for the time being. Risks would include government intervention. With the aging population, they will have more and more tests.”

All bloggers involved in the Dividend Growth Index:

The Dividend Guy
Dividend Mantra
My Own Advisor
The Passive Income Earner
Dividend Ninja
The Wealthy Canadian
Dividend Growth Investor
Dividend Monk

I look forward to sharing the performance of my selections with you, including how these picks contribute to the Dividend Growth Index.  Stay tuned friends!

As always, your comments are welcome and appreciated.

Filed in: Dividend Growth Index

21 Responses to "My Own Advisor’s Three Picks for the Dividend Growth Index"

  1. A very nice breakdown of your 3 selections.

    I have positions in both BNS-T and CLC-T and am comfortable in owning both for the long-haul.

    I wasn’t overly familiar with Abbott until you brought it to my attention. I like the fact that the company has a market capitalization of $80 billion, has increased dividends for the past 38 consecutive years, and offers the investor an interesting sector to have exposure in. All in all, it looks like a good company to park some hard earned dollars. Good stuff!

    Thanks for the mention; it’s going to be a fun project. :)

    • @TWC,

      Well thanks! I’m looking forward to your post as well. ABT is great, a company I think you’d love to own based on its history and its future. I’ll be following your blog to see if you make a plunge into it :)

  2. Great article MOA!

    I can really see the reasoning behind your picks. I’m long ABT, and it’s currently one of my larger positions. I think it’s a great buy, and has been a great buy for a long time now. Excellent yield, great growth and doesn’t face the patent cliff a lot of other pharma plays face. Humira is a winner.

    Best of luck with your picks!

    • Thanks Mantra. I’m a little worried about CLC, a friend of mine Think Dividends says I should be, a bit anyhow. We’ll see!?

      ABT is an excellent company.

      Best wishes with your picks as well!

  3. falling knife says:

    Switch your choice. pick enbridge.

    • @Falling knife,

      Thanks for the recommendation! Great pick, Enbridge. I do own it, I just didn’t contribute Enbridge to the Dividend Growth Index. You think I should have added that one? Any other stocks that are your favourites?

  4. 101 Centavos says:

    Good selections, MOA. I need a little diversification away from oil and gas and REITs.

  5. Interesting that you picked 66% of your dividend portfolio in the health care industry! BNS sounds like a solid pick, banks will always be there :)

    • Yeah, true enough Y&T. I could have picked other companies, but I am quite bullish on healthcare companies in general. Aging demographics are just the tip of the iceburg for that.

      Thanks for checking in!

  6. I’m pretty bullish on health care as well. 6 of my 17 individual dividend stock holdings are related to health care. In terms of value, it’s not quite that focused on health care (some of my energy holdings are very large compared to those health care holdings), but health care is still one of my largest portfolio areas.

    I like the ABT and BNS picks. Not sure about CLC; haven’t looked into it closely enough. Good luck with the selection, and it may turn out to be a contrarian value pick.

    • @Matt, Dividend Monk,

      Yeah, health care needs aren’t going anywhere, in the U.S. or in Canada. I think things are going to get very interesting over the next 20 years. Thanks for your support on the ABT and BNS picks. I think both are great companies, not only for the index but for my own portfolio :)

      As for CLC, that’s a risky one I know. We’ll see how things go. I owe former blogger and financial expert Think Dividends a beer if/when CLC cuts their dividend in the next 6 months. I hope it doesn’t happen, but earnings haven’t been that strong and their entry in the U.S. diagnostic space hasn’t been good. Medicare cuts have really hurt them. I’m certain CLC management didn’t see that coming, and the reason why the CEO and other senior manager were booted.

  7. Think Dividends says:

    CML announced the sale of its U.S. operations for $51.5 million… Only thing left is a new CEO…

Top of Page

Copyright © 2009 to 3588 by My Own Advisor. All Rights Reserved. Admin
Powered by Theme Junkie  •  Designed by Dividend Ninja