The focus on total return tends to vary with equity-market performance. In strong markets, stock price increases outpace dividend yields, so dividends receive less attention. But in weaker markets, like the 2000–2010 period, dividend yields become more important. If you focus on the long term — the past 80 years, for example — dividends have comprised about 44 percent of the S&P 500’s total return.
From an investor’s perspective, total-return investing offers several benefits. Dividends — and dividend reinvestment plans — provide compounding benefits. They also offer income-seeking investors competitive yields that can keep pace with inflation over time.
Dividends represent more than just a return of corporate profits. They also demonstrate the company’s financial acumen and how management views the company’s outlook. Dividend payments and increases require board approval, and a board won’t pay or increase a dividend unless it is confident the payment or increase is sustainable. In some instances, however, deciding to temporarily suspend a dividend is a fiscally prudent action that can increase benefits to shareholders over time.
Producing outstanding returns consistently is no easy feat, particularly in light of the recent global economic downturn. Research recently spoke with executives at three companies known for their strong and consistent ability to produce total returns.
Alliance Resource Partners, L.P. (ARLP), which is organized as a master limited partnership (MLP), is the fifth-largest eastern U.S. coal producer. The company began mining operations in 1971 and sold 25 million tons of coal in 2009. ARLP produces and markets a diverse range of steam coals, primarily to major U.S. utilities and industrial users, satisfying a broad range of customer specifications.
The company operates nine mining complexes in five states: Illinois, Indiana, Kentucky, Maryland and West Virginia. In addition, ARLP is constructing an additional complex in West Virginia and operates a coal-loading terminal on the Ohio River at Mt. Vernon, Ind. Its mining operations are near major utility generating plants, and its distributions have more than doubled over the past five years.
Fortunately for Alliance, the outlook for coal demand remains positive. The U.S. Energy Information Administration (EIA) forecasts that U.S. coal consumption in the electric power sector will grow by 6 percent in 2010, primarily the result of higher electricity consumption. The agency also notes that strong global demand for coal, particularly metallurgical coal used to produce steel, has resulted in sharp increases in U.S. coal exports in 2010. Metallurgical coal exports have nearly doubled in the first half of 2010 compared with the first half of 2009, and metallurgical coal’s share of total coal exports has grown from 52 percent in 2008 to a projected 73 percent in 2010.
According to Brian Cantrell, senior vice president and chief financial officer of ARLP, the company increased its distributions by 48.2 percent from September 2007 to September 2010. On a compounded annual-growth basis, ARLP’s distributions grew by 18 percent over that same period.
Total return for the five years ended September 30, 2010 was 56.9 percent; distributions paid during this period accounted for 52.0 percent of the total return with unit price increases accounting for 48.0 percent.
The company considers its distributions on a very long-term basis, Cantrell points out. While some MLPs tend to guide toward a certain percentage increase in distributions every year or plan to increase distributions regularly by fixed amount, ARLP focuses on providing its unitholders with long-term distribution growth at the upper end of the MLP space.
“Our primary business objective is to generate consistent capital efficient growth in cash flows, which in turn will allow us to increase distributions to unitholders over the long term,” he says. “Each quarter we stress test our plans and forecasts to assess whether a distribution increase is supportable and sustainable over the long term. In addition, we believe our investors value the potential for increasing distributions over the long haul and consideration of quarterly distribution levels is made with a view toward opportunities for future distribution increases as we execute on our business plans.”
The Volvo Group (VOLVY) is a leading supplier of commercial transport solutions, providing products such as trucks, buses, construction equipment, drive systems for marine and industrial applications, as well as aircraft engine components. The company also offers its customers financial services.
Volvo Group has customers in more than 180 countries worldwide, including Europe, Asia and the Americas; in the past nine months about 50 percent of net sales were from customers outside of Western Europe and North America. Group sales of products and services are conducted through both wholly owned and independent dealers, and the global service network handles customer demand for spare parts and other services. Volvo Group has more than 90,000 employees, production facilities in 19 countries, and sales activities in some 180 countries.
In the first nine months of 2010, Volvo Group’s sales increased to 191.4 billion Swedish Kroner (SEK) — about $28.2 billion — from 158.6 billion SEK, or $23.4 billion, in the first nine months of 2009. Operating income was 12.5 billion SEK ($1.84 billion) vs. a loss of 14.7 billion SEK (-$2.16 billion) in the year-ago period. Diluted earnings per share in the first three quarters of this year improved to 3.76 SEK ($0.55) vs. negative 6.27 SEK (-$0.92) last year.
According to John Hartwell, vice-president of Investor Relations for Volvo Group, North America, the company historically has paid an annual dividend and occasional extraordinary dividend. That changed in early 2010, however, when the company’s board decided against paying a dividend. “This is the first year in a long time that we did not propose a dividend,” says Hartwell. “Based on the economic conditions and 2009’s performance, the board felt that it did not make economic sense to return cash to our shareholders.”
Despite eliminating the dividend until conditions improve, the Capital IQ statistics show that Volvo maintains its high rank in terms of total return to shareholders. Hartwell believes the dividend-suspension decision reflects well on the company. “It shows that we are taking our fiscal responsibility and our return to our shareholders very seriously,” explains Hartwell. “While everyone likes the return with the dividend, to put ourselves in further debt did not make economic sense, so I think that says quite a bit about our management.”
Solid Retail Presence
With over 1,000 properties in 43 states, National Retail Properties (NNN) is focused on owning single-tenant, long term net-leased retail properties. These properties are leased to more than 200 tenants in 34 industry classifications. A net lease generally places substantial financial and operating responsibilities of property ownership, maintenance and use on the tenant rather than the landlord.
That means NNN’s leases typically provide for attractive initial yields and potential growth in cash flow through a combination of base rents, periodic increases in these base rents and percentage rents based upon tenant sales.
Maintaining high occupancy (over 96 percent) and a strong balance sheet for many years has allowed the company to not only weather difficult economic conditions, but support its ability to grow dividends annually for 21 consecutive years — something very few companies have been able to do. NNN plans to perpetuate that track record, according to Kevin Habitch, NNN’s chief financial officer.
This dividend track record has been an important component in achieving average annual total shareholder returns of 13.0 percent over the past 15 years, of which approximately 60 percent of that total return came in the form of quarterly cash dividends. Habitch believes that strong, consistent dividend yields frequently go hand in hand with strong, consistent total return performance.
He notes that NNN has produced positive total returns for the past one-, three-, five-, 10- and 15-year periods that have significantly outperformed general equity averages like the S&P 500 Index. These long-term results are not driven by a handful of exceptional years but by many consistent years with dividend income leading the way.
Dividend income is a very important component to consistent and strong total-returns, Habitch notes. For the past two or three decades, dividend yield was largely overlooked, despite being a primary source of total shareholder returns for many decades prior to the 1980s. The CFO thinks it is regaining some of its past importance, however, as more investors at or near retirement age seek consistent income producing investments and especially if the United States experiences less than stellar economic growth for some period of time.
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