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Are These Dividend Hikes Enough?

Sunday - 6/16/2013, 1:45pm  ET

Apparently, we are seeing several companies try to instil confidence with massive dividend hikes – but should we really be confident? In the case of some, I say “yes,” thus let’s take a look to determine which of these dividend hikes are presenting an investment opportunity.

Company

Ticker

Quarterly Dividend Hike

5-Year Hike

Forward Yield

Target Corporation

19%

170%

2.47%

Caterpillar

15%

43%

2.88%

Allied World Assurance

33%

178%

2.19%

Helmerich & Payne

233%

1,000%

3.15%

Large Retailer Makes Statement

Target is the largest competitor to Wal-Mart . The two companies have similar growth, are secular in nature, and pretty much offer the same products.

Target trades at 12.34 times next year’s earnings with a price/sales of 0.61. Wal-Mart trades at 12.86 times next year’s earnings with a price/sales of 0.52. Therefore, the two are similarly valued, including both companies having a near identical forward yield.

With Target and Wal-Mart operating the same business strategy and being valued identical, an investment decision between the two is based on personal preference. In my opinion, there is nothing wrong with an investment in Target, but nothing glamorous either. If you are looking for safe exposure in the retail space, then Target makes sense.

Large-Cap Industrial Stock With Heavy Exposure

Caterpillar couldn’t be further from being a secular stock, but is rather a company that needs a strong global economy in order to perform well. Since January 2012, the stock has lost about 10% of its value, and after struggles in mining and a slowdown across all of its segments, it appears as though the company is trying to instill confidence with its recent dividend boost.

Caterpillar trades at just 11.3 times earnings and 0.90 times sales, about 50% of the S&P 500, but I see significant reasons for its valuation. The company has already said that it expects traditional mining machines to be down about 50% compared to 2012, and its all-important China and Brazil markets are also seeing substantial slowdowns. Thus, in the case of Caterpillar, a 15% dividend hike does not look to be enough to overshadow these fundamental problems.

A Specialty Insurance Play

Much like Target, there isn’t too much exciting about Allied World Assurance. The company has very little analyst coverage and is not a company that you consider as a top investment. However, this is a company that has delivered five consecutive quarterly beats, and by large margins.

The stock has increased 111% over the last five years, making its large dividend hikes, icing on the cake. Overall, this is a balanced company that has performed well regardless of the market, trading just 42% as volatile as the S&P 500, making it an intriguing buy to me.

Drilling Up Profits And Giving Back To Investors

Although I can’t be certain, I don’t believe there is any other company in the market that has increased its dividend yield by 1,000% over the last five years, except for Helmerich & Payne. In my opinion, Helmerich & Payne is the quintessential dividend play in the energy space.

Helmerich & Payne has a massive fleet of rigs – most of which are U.S. based – and the company charges a hefty premium for its high-performance rigs. Over the last few years, the U.S. has placed an emphasis on domestic oil production, and is expected to increase oil production even more in upcoming years. Therefore, it is encouraging that Helmerich & Payne owns 330 land rigs with 296 being in the U.S. Thus, with demand increasing, and Helmerich & Payne having great supply and pricing power, I think it is a great investment moving forward.

Final Thoughts

Just because a company boosts its dividend doesn’t mean that it’s a good investment. An increased dividend should be viewed as a bonus on top of fundamental performance. While Target appears to be a safe and reliable company, it presents nowhere near the value as in shares of Helmerich & Payne or Allied World Assurance. In my opinion, Caterpillar presents too many risks to be a substantial dividend play, thus I’d go with the two noted stocks above. 

This article was originally published as Are These Dividend Hikes Enough?on Fool.com

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