Here's to Dividends
There's nothing like cold, hard cash to ease investing anxiety. And what could be better than companies that consistently raise dividends? We found six that meet all our criteria.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, March 2005
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A Clear Title
Title insurance may not always be a bargain for consumers, but it's a super business. "We love it," says Ron Muhlenkamp, manager of Muhlenkamp fund, which has owned shares of Fidelity National Financial (FNF), the nation's largest and most profitable title-insurance company, since 1991. "It's the only insurance business I know of in which you're insuring against things that aren't going to happen. The title is either good or it's not." In fact, Fidelity pays out little in claims.
With the refinancing boom over, earnings are plunging. Fidelity made $5.63 per share in 2003, an estimated $4.18 in 2004 and should earn just $3.71 this year. "But that's already reflected in the stock price," says analyst Geoffrey Dunn, of Keefe, Bruyette & Woods. The stock has a P/E of 12, and analysts expect earnings to rise 12% annually after this year.
Fidelity sells more than just title insurance. Its Fidelity National Information Services division operates the computer systems that process nearly 50% of all U.S. mortgages. As in its title business, the information-services unit enjoys economies of scale that make life difficult for competitors. Many mortgage-bank clients have signed long-term contracts with Fidelity. When those contracts come up for renewal, the costs of switching to another vendor are often prohibitive. The value of the information-systems business hasn't gone unnoticed. Two savvy private investors, Texas Pacific Group and Thomas H. Lee Partners, have agreed to buy a 25% stake in it. Fidelity subsequently announced that it plans to sell off part of the unit to the public within the next two years. In addition, Fidelity will pay shareowners a special $10 dividend sometime in the first quarter of this year. That's on top of the regular annual dividend of $1.
At Your Service
ServiceMaster (SVM) provides outsourcing for homeowners. The company's subsidiaries will take care of your lawn (TruGreen ChemLawn), kill your bugs (Terminix), clean your house (Merry Maids) and sell you a home warranty (American Home Shield). ServiceMaster even provides handyman services. The company has 10.5 million customers, 24,000 employees and another 70,000 people who work for its franchises. In virtually all of its businesses, it's the dominant company. Two-thirds of revenues come from individuals; the rest come from businesses and other organizations.
The company's future profits depend on an aging population and increasingly overworked homeowners. "Many of the services we provide are things that people can do for themselves," says Ernie Mrozek, the firm's president. "But people are working longer hours and have less leisure time." To fuel growth, the company hopes to sell multiple services to more families.
ServiceMaster is on its way to realizing its potential, says Simon Wong, an analyst with Olstein Financial Alert fund. The company was expected to have earned 59 cents a share last year, and Wong expects it to make 65 cents a share in 2005. Accounting rules require the company to amortize goodwill, which cuts earnings by 20 cents a share, he says. Excluding the goodwill, ServiceMaster will earn 85 cents this year. Brokerage analysts predict that earnings will grow about 10% annually. The improvements are being led by chief executive officer Jonathan Ward, who was hired in 2001 from RR Donnelley. "Ward is selling less profitable businesses," Wong says, "and using the proceeds to buy back stock, pay down debt and improve the profitable businesses." And to pay a dividend that results in a generous 3.4% yield.