Saturday, February 15, 2020

My first 2020 Dividend Machine

  • Finding a Dividend Machine was difficult in 2019 due to high price valuations
  • Prudential provides income investors with a good yield and regular dividend increases at a low valuation
  • Revenue growth suggests dividend increases will continue
  • Prudential has very little debt
  • Covered call options add to the desirability of adding this stock
  • A growth catalyst would be increasing interest rates but in an environment of low interest rates, stocks with good yield and dividend growth are valuable.

While I constantly troll my excel screens for income opportunities, the stock profiled today is my first Dividend Machine of 2020.  You can look at previous Dividend Machine stocks by clicking on the individual portfolios created between 2011 and 2018.

Lately, I have concentrated on creating income with covered call options on mostly dividend stocks but also on a few growth stocks.   In 2019 I tended to add to positions with good dividends, good dividend increases, and good balance sheets and then sell calls on those new shares to boost income.

My theory is that if I am called away and lose the upside opportunity on the new shares, I will still have the original shares, most of which are at a lower cost basis.   On the other hand, if the shares are not called away, I add to my Dividend producing portfolio and wait for the next opportunity to sell calls.

During 2019, desirable stocks seemed expensive.  P/E's (price earnings ratios) where very high.  Deeply discounted stocks with low P/E's were not interesting as they didn't carry as solid a balance sheet as I would like or were in industries with poor forecasts.

Yet I have found a stock that I am adding.  This stock meets all the criteria I like in a stock I call a Dividend Machine.  Let's look closer:

PRU Earnings Dividend
 Earnings > Dividend $10.27 $4.00
 Debt to Equity 0.33
 Dividend Yield 4.17%
 3 Yr. Rev. Growth 2.36%

  • Earnings per share greater than Dividend payout
  • Dividend yield over 4% and dividend increases that beat current inflation: most recent dividend increase was from $1.00 to $1.10 effective 2/14
  • Solid balance sheet as measured by D/E ratio (debt to equity ratio)
  • Revenue growth
It's important to note that PRU's P/E/ ratio (price to earnings ratio) is under 15.  PRU's most recent 11 quarters are presented below.  The table presented below looks at revenues, earnings, and dividends.

Fiscal Quarter
(Fiscal Year) (Fiscal Year) (Fiscal Year)
   Revenue $15,091(m) $13,757(m) $13,670(m)
   EPS 2.22 (3/31/2019) 3.14 (3/31/2018) 3.09 (3/31/2017)
   Dividends 1 0.9 0.75
   Revenue $15,388(m) $14,655(m) $13,441(m)
   EPS 1.71 (6/30/2019) 0.48 (6/30/2018) 1.12 (6/30/2017)
   Dividends 1 0.9 0.75
   Revenue $15,105(m) $16,148(m) $16,313(m)
   EPS 3.42 (9/30/2019) 3.89 (9/30/2018) 5.08 (9/30/2017)
   Dividends 1 0.9 0.75
December  (FYE)
   Revenue $18,432(m) $16,265(m)
   EPS 1.99 (12/31/2018) 8.57 (12/31/2017)
   Dividends 0.9 0.75
   Revenue $45,584(m) $62,992(m) $59,689(m)
   EPS 7.35 9.5 17.86
   Dividends 3 3.6 3

You can easily see the revenue trend and the dividend trend.  It is important to note the earnings trend as well.   While earnings in 2017 were $17.86 per share they dipped to $9.50 per share in 2018.  In 2019, earnings are rebounding.

Many people use free cash flow instead of earnings per share to evaluate a stock.  I have no argument for using free cash flow.  Most of my readers don't get that into an income statement with earnings per share easier to find.

The dip in EPS is explained by Prudential as global pressure in an uncertain market.  They weathered that storm and you can watch a video of their report that was published 11 months ago by clicking here.  Prudential report on earnings

Selling calls on half my position is a way of boosting income. Here is the call I executed at the end of last week.

Stock Price on Open Call Expiration 
PRU $95.95 3/20/2020
Cost Basis:   2/12/2020 $95.89
Strike Price: $97.50
Call Premium:  $1.27
Dividend  2/14/2020 $1.100
Call Yield on Basis 1.32%
Call + Dividend Yield on Basis 2.47%
$ Gain if Assigned $3.98
Max Return  if Assigned 4.15%

I am a bit frightened of every market as I am a very conservative investor.  That feeling translates into my desire to invest in stocks that will continue to pay a dividend even if the market goes down, but also have enough positive sentiment that another investor is willing to buy a call from me.   My fear keeps my expirations short.  I give up some gain by picking a strike price close to but above my basis and a call premium that is equal to or greater than the quarterly dividend.   Thinking of it as getting 5 dividends in a year if you end up holding the stocks.  That is 25% additional income.

Prudential is really in the financial segment.  It will benefit if interest rates rise.  It can invest it's money for a higher return than the payout to its customers.   Who knows when interest rates will again go up.   Perhaps the interruption of supply chains will make the formula for inflation reappear.  Remember inflation occurs when there is too much money chasing too few goods.

For right now, I am very happy investing in a stock that pays me more than 4%, has the revenue growth to continue to increase the dividend, is reasonably priced with a solid balance sheet, and has enough upside sentiment to sell covered calls.

Happy Valentine's day and President's weekend.

M* MoneyMadam
Disclosure:  long PRU with calls

Call Calculator:   Call prices change all the time as does the price of a stock.   Use this interactive call calculator to measure how a call you are considering will provide income.

* If the calculator does not work with your browser, try this link.

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