Published Mon, 29 July 2013 10:30 CET by DividendYields.orgMost investors are familiar with traditional value-growth and capitalization-based investment styles. However, there is another investing style that allows investors to capitalize on the persistence in relative performance of investment assets, and that style is momentum. Momentum is a disciplined and systematic investment style that serves as a tool for building portfolio efficiency and diversification. It can complement value-based investment strategies and substitute growth-allocations in investors’ portfolios. In fact, momentum strategies work best in combination with value strategies, given their negative correlations that lower risk and improve efficiency. However, even though momentum investing assumes that aggressive trends in total returns will likely persist over either short-term or long-term periods, momentum investing is not a mere trend-following. It focuses on identification of stocks with good relative performance in all markets.
Based on historical evidence, high momentum has produced outstanding returns over time (see the chart below). Dividend-oriented investors can attempt to combine their investment strategy with a momentum investing style to achieve a higher efficiency within their portfolios. Using the methodology developed by ACQ Capital Management that focuses on total returns (including reinvested dividends) over the past 12 months (excluding the last month), below is an illustrative look at four dividend stocks with high momentum trending.
The table below features four dividend stocks with a high momentum over the past 12 months. Inter Parfums (Nasdaq: IPAR) has seen the highest total return over the past year, realizing a total gain of nearly 112%. It also reported a significant increase in its dividend payout last year. Similarly, Rock-Tenn (NYSE: RKT) and SLM Corporation (NYSE: SLM) also boosted their dividends significantly in the previous year. Aetna (NYSE: AET), a diversified healthcare benefit plans company, had the lowest dividend growth among the four featured companies; however, it also boasts the lowest payout ratio. The exceptionally low payout ratios of the first three stocks suggest these dividend payers have plenty of room to continue increasing their dividends at robust rates in the future.
SLM Corporation, better known as Sallie Mae, is the largest U.S. non-government student lender. The company is undergoing transformation following the legislation that suspended subsidies to private lenders. As a result, SLM will split its business into two separate publically-traded companies. One will be focused on education loan management and the other will be engaged in consumer lending. The education loan management arm will consist of “$118.1 billion in debt under the government’s Federal Family Education Loan Program, $31.6 billion in private education loans and $7.9 billion of other holdings”, according to Bloomberg. The consumer lending arm, Sallie Mae Bank, will have $9.9 billion in total assets. The split will be completed within a year. Following concerns about a potential bubble in education loans –amidst reports of a swelling rate of student borrowers in repayment with loan delinquencies above 90 days– the company reported estimates-beating second-quarter earnings on a 15% year-over-year jump in private education loans and lower charge-offs and loan delinquencies. Still, analysts forecast a 10.3% drop in EPS next year, while the EPS CAGR for the next five years is a still-positive 8.4%. The stock is priced attractively.
Rock-Tenn is a manufacturer and seller of corrugated and consumer packaging products. The company has traditionally boasted a rich free cash flow position, with a particularly attractive free cash flow yield. Its free cash flow in the second quarter of fiscal 2013 was nearly 26% higher than in the year earlier. That has enabled the company to bolster its dividend payout significantly. The trend is expected to continue in the near future, as the company forecasts an increase in free cash flow per share from $10.00-$10.50 in fiscal 2013 to $14.25-$15.00 in fiscal 2014. This solid financial performance is a result of strong operating performance, including higher shipments, and higher containerboard and corrugated box prices. In the second quarter, the company’s adjusted EPS shot up 127% from the year earlier, with particularly robust net sales of corrugated packaging. The stock has nearly doubled over the past 12 months. Still, analysts expect a 35.4% jump in EPS next year, with a five-year EPS CAGR at a robust 18.6%. The stock is attractively priced based on its forward valuation.
Aetna has reported strong financial performance in the past few quarters amidst lower medical cost trends and robust operating performance. That company could get a boost from growth in Medicaid and Medicare, bolstered by the Affordable Care Act (ACA). According to Centers for Medicare and Medicaid Services, U.S. health spending in 2014 will rise 7.4%, “some 2.1 percentage points faster than in the absence of (ACA) reform”. The rate will moderate to a still-robust 6.2% per year in the period between 2015 and 2021. In addition, the company’s expanding health services segment is supporting its strong operational performance. Aetna is also well positioned for growth in international markets, most notably in Indiaand China. In this light, the company recently announced a partnership with Swiss Life Holding AG that will enable Aetna to offer its healthcare benefits through an international network of some 60 insurers operating in 70 countries. The stock also appears to be a good value.
Inter Parfums’ stock has been a star performer over the past 12 months. This company is a global marketer of prestige perfumes and beauty products. Some of its best-performing brands include Boucheron, Montblanc, and Jimmy Choo. One of its large customers, Burberry, exercised option to buy out its license last year for $239 million. Thus, excluding Burberry, the company will have realized a 22.7% sales CAGR between 2009 and 2013. This year alone, its net sales are expected to increase close to 16%. Last year’s sales at Inter Parfums were the company’s highest on record. (However, including Burberry, the company’s net sales in 2013 will be down 22%.) The company has a high gross margin of 63% and an EBIDTA margin of 33%. Relevantly, it does not owe any long-term debt. The company’s operational performance in the long-run is driven by a 10+% internal annual revenue growth target and an EPS growth target of 12%-to-15% per year. The company also looks to grow through acquisitions. As regards its dividend, while IPAR’s dividend payout ratio is the highest among the stocks mentioned here, it still leaves room for dividend growth in the future.
In summary, a momentum investing strategy can complement dividend investing strategies. However, any stock selection requires extensive due diligence that looks beyond momentum alone. As discussed above, some stocks with currently high momentum may also be attractive based on potential dividend growth in the future.