What are we looking for?
Sustainable dividends from sound companies under pressure to get even better.
The screen
Activist investors are once again in the spotlight, with U.S. player Starboard Value targeting online travel site Tripadvisor Inc TRIP-Q.
Earlier this month, Tripadvisor’s shares jumped when Starboard revealed its significant stake in the travel-industry aggregator. Like most activist investors, Starboard often pushes its targets to hire new management or make cost cuts in order to achieve strategic goals. For Tripadvisor, its struggle remains how to fully monetize the hundreds of millions of visitors attracted to its websites each year to book flights, accommodations and, increasingly, excursions.
Whatever the outcome of Starboard’s involvement here, an activist’s very presence tends to highlight the target company’s underlying value.
Our search started with a list of dividend-paying corporations with strong prospects and now in the crosshairs of an activist investor. We then applied our TSI Dividend Sustainability Rating System, which awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five
- Two points if it has raised the payment in the past five years
- One point for management’s commitment to dividends
- One point for operating in non-cyclical industries
- One point for limited exposure to foreign currency rates and freedom from political interference
- Two points for a strong balance sheet, including manageable debt and adequate cash
- Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments
- One point for an industry leader
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks. Headquartered in Idaho, Lamb Weston Holdings Inc. LW-N is a leading producer of frozen french fries, potatoes and other packaged vegetables. Under a new deal with activist investment firm Jana Partners, which owns about 7 per cent of Lamb Weston, the company will add four of Jana’s representatives to its board of directors.
Hewlett Packard Enterprise Co. HPE-N, based in Houston, sells computing services and products such as servers and analytics software, mainly to large companies and governments. Just this week, Hewlett agreed to co-operate with activist Elliott Investment Management by adding a veteran tech executive to its board of directors.
Also headquartered in Houston, Phillips 66 PSX-N is a downstream energy firm with businesses including refining and midstream operations. Elliott Investment Management has bought more shares of Phillips 66 and would like to see the company sell or spin off its midstream pipeline business.
Corteva Inc. CTVA-N, based in Indianapolis, is a leading developer of new seeds and crop chemicals, including herbicides and insecticides, for the agriculture industry. The company has already responded to the demands of activist Starboard Value by adding Starboard appointees to its board of directors.
Finally, Seattle-based Starbucks Corp. SBUX-Q is a leading seller and roaster of specialty coffee. The company responded to pressure by activists Elliott Investment Management and Starboard Value late last year and appointed a new chief executive officer. That new leader, Brian Niccol, has a strong mandate to adjust the company’s retail formula.
We advise investors to do additional research on investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
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