4 Stocks Ready for Big Dividend Hikes in 2013
A firming economy can have a profound impact on a company's capital allocation strategies. If the economy can finally gain altitude, companies will be increasingly willing to part with all of the cash that has been piling up on balance sheets.
Some of that cash will be spent on share buybacks and acquisitions, but a big chunk of the money will be earmarked for major dividend hikes. And it's pretty easy to spot the companies that are best-positioned for dividend increases: the firms that still maintain very low payout ratios. Companies that pay out less than 20% of their income can still manage to double their dividends and maintain a payout ratio in the reasonable 35% to 40% range.
In the middle of the last decade, Ford Motor (F) paid out 40 cents a share in annual dividends. That dividend was eventually eliminated to conserve cash, but thanks to a recent doubling in the quarterly dividend to 10 cents a share, Ford is right back to that 40 cents a share annualized payout.
And this automaker is just getting started. Ford is now so much more profitable than before, and its cash-rich balance sheet is so much stronger, that the dividend might double again from here. A hike to an 80 cents a share annual payout would equate to a 6.1% dividend yield.
Considering that Ford is now quite profitable -- and poised to become even more profitable in coming years as the European and U.S. economies improve -- management will become less fixated on maintaining absurdly high levels of cash. The company had $23 billion in gross cash at the end of 2011 and $27 billion at the end of 2012, and it should have $35 billion in cash by the end of 2014, according to Merrill Lynch.
With such a comfortable cash balance, Ford could support a dividend of at least 80 cents a share, which would still leave the payout ratio below 50%.
Illinois Tool Works
Industrial conglomerate Illinois Tool Works (ITW) managed to hike its dividend at least 20% in 2006, 2007 and 2008, but in recent years has only boosted the payout at a single-digit clip. As cash flow has risen at a more robust pace, ITW's payout ratio has moved steadily lower. The current $1.52 annual dividend is less than 20% of the $8 a share in EBITDA the company generated in 2012.