Sunday, November 11, 2012

The Best DRIP in America Now Yields 8.6%

Nearly 1,000 U.S.-listed companies offer Dividend Reinvestment Plans or "DRIPs" as a way for shareholders to accumulate shares without using a broker. These plans allow investors to automatically use their dividends to buy more shares of the company's stock. The price may be at a discount to the market price, and most DRIPs charge no transaction fees, which makes the plans one of the least expensive ways to invest.

About half the companies that offer DRIPs yield above 6%. Far fewer, however, can boast of strong dividend coverage. (Dividends that can be paid from current earnings are said to be "covered.")


Only 70 companies have robust enough earnings to support their current distributions.

The last element in evaluating potential DRIP investments is dividend growth. Ideally, prudent income investors should seek not only a dependable distribution but also one that grows at a brisk pace, outpacing inflation at the very least.

Inflation has been nonexistent during the recession, but prices rose +3.0% a year in the period from 1998 to 2008. That rate of growth adds up to +15.9% price growth after five years. To mitigate this, all an income investor needs is a company that has increased its dividend by more than that during the past five years.

Only one company has accomplished that.

CenturyTel (NYSE: CTL)
CenturyTel has increased its dividend by more than +1,000% during the past five years. In June 2008, the company announced plans to increase its annual dividend from $0.27 to $2.80. Even before this large and unusual hike, the company's dividend growth was strong. It grew +23.6% from 2003 to 2008. The company yields 8.6% at its current price.

Based in Monroe, Louisiana, CenturyTel is a communications company that provides voice, broadband and video services in 33 states. In an all stock deal it merged with Embarq last year. The combined company now provides about eight million access lines and has more than two million broadband customers.

The company's payout ratio has risen higher during the recession and now stands at 87% of net earnings. The company's EPS has given up some ground to $3.22 a share during the past 12 months, down from $3.56 in 2008.

CenturyTel is fairly valued. It has a price-to-book ratio of 1.04. AT&T's (NYSE: T) is 1.51 and Verizon's (NYSE: VZ) is 1.94. CTL is also cheaper on a price to earnings basis. At 9.78 times earnings, it's a full point below AT&T and two points below Verizon.

The company has a modestly larger debt load because of the Embarq merger. Still, its debt-to-equity ratio is still reasonable at 91%. AT&T's, for comparison, is 72%, and Verizon's debt-to-equity ratio is 74%.

The company has been repurchasing its shares for the past several years. Since 2004, CenturyTel has spent more than $2 billion to buy back its shares, which increases its return.

CenturyTel's DRIP is completely without fees, and the price investors pay is the average of the high and low price of common stock on the cash dividend payment date.

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