In addition to an incoming Presidential administration, a slower-than-anticipated pace of COVID-19 vaccinations and the emergence of a new coronavirus strain might engender continued stock market uncertainty in the coming months. In fact, many analysts expect the market to witness another correction in the near term. On the other hand, an expected economic recovery resulting from the very same mass coronavirus vaccination program makes a favorable case for growth stocks. Hence, we think it could be wise at this juncture for investors to focus on both growth and a steady income stream.
When investing in a stock for a steady stream of income, it is important to ensure the sustainability of its dividend payments. A company’ growth features indicate the strength of its business and, thus, its ability to continue rewarding shareholders.
Texas Instruments Incorporated (TXN), Cintas Corporation (CTAS), and Innovative Industrial Properties, Inc. (IIPR) pay steady dividends and hold immense price appreciation potential based on growth in their revenues and earnings.
Texas Instruments Incorporated (TXN)
TXN is a global semiconductor company that designs, manufactures, tests, and sells analog and embedded processing chips for markets such as industrial, automotive, personal electronics, communications equipment, and enterprise systems. The company also provides DLP products, primarily for use in projectors to create high-definition images, calculators, and application-specific integrated circuits. It operates in two segments – Analog and Embedded Processing.
In terms of forward P/E, TXN is currently trading at 31.29x, 5.5% higher than the industry average of 29.67x. TXN has been uniformly paying dividend every quarter since 1972 and has raised its payout in each of the last 17 years. Its dividend has grown at a CAGR of 20.6% over the last three years. The most recent dividend declared by TXN was $1.02 in October, raising its payout 13%. TXN’s annual dividend aggregates to $4.08, which yields 2.38%.
Over the past three years, TXN’s EPS and free cash flow have grown at a CAGR of 7.3% and 2.7%, respectively. In its last reported quarter, TXN recorded a top line of $3.82 billion, increasing 18% sequentially, with notable strength in the rebound of automotive demand and growing demand from personal electronics. The company generated $1.30 billion in free cash flow and returned $825 million to its shareholders in the form of dividends. EPS came in at $1.45, compared with $1.48 for the previous quarter.
TXN will host a conference call on January 26 to discuss financial results for the fourth quarter and full year 2020 ended December 31, 2020. As a participant in the building-block side of technology, TXN stands to benefit from the proliferation of the Internet and growing digitization, with customers in a wide array of industries, including electric cars, automated factories, and 5G base stations. Driven by its diversified product portfolio and focus on growth, analysts expect TXN’s EPS to grow 8.4% this year.
How does TXN stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Industry Rank
A for Overall POWR Rating.
You cannot ask for better. It is ranked #5 of 99 stocks in the Semiconductor & Wireless Chip industry.
Cintas Corporation (CTAS)
CTAS designs, manufactures, and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, first aid, safety and fire protection products and services in North America, Latin America, Europe, and Asia. It operates primarily through two segments – Uniform Rental and Facility Services, and First Aid and Safety Services.
CTAS currently commands a forward P/E ratio of 33.99x, which is 17.7% higher than the industry average of 28.88x. Over the past three years, CTAS’ dividend has grown at a CAGR of 20.2%. In October, the company approved a change in its dividend policy from an annual dividend to quarterly dividends. CTAS paid an annual dividend of $2.81 per share, an increase of 10.2% over last year’s annual dividend. The current dividend yields 0.86%. This marked the 37th consecutive increase in the company’s annual dividend. In addition, CTAS paid a quarterly dividend of $0.70 per share.
Over the past three years, CTAS’ EPS and free cash flow have grown at a CAGR of 25.5% and 30.5%, respectively. In its fiscal second quarter ended November 30, 2020, CTAS reported total revenue of $19.3 billion, which remained relatively stable sequentially on the back of organic revenue from the First Aid and Safety Services operating segment. The company reported free cash flow of $234 million. EPS for the quarter came in at $2.62, growing 15.4% year-over-year.
CTAS strength across the healthcare and hygiene end markets has driven solid demand for its personal protective equipment (PPE) amid the coronavirus pandemic. The company is currently focusing on enhancing its product portfolio, strong supply chain and distribution network, along with expanding its market share and customer base through acquisitions. In line with the progress, analysts expect the company’s EPS to grow 19.2% this year.
Under our POWR Ratings, CTAS has a “Buy” rating. It has been accorded a “B” for Trade Grade and Buy & Hold Grade. Among the 55 stocks in the Outsourcing – Business Services industry, it is ranked #22.
Innovative Industrial Properties, Inc. (IIPR)
IIPR operates as a real estate investment trust (REIT) that targets medical-use cannabis facilities for acquisition, ownership, and management, including sale-leaseback transactions of specialized industrial properties leased to experienced, state-licensed operators for medical-use cannabis facilities.
In terms of forward P/E, IIPR is currently trading at 54.69x, which is 29% more expensive than the industry average of 42.36x. IIPR has grown its dividend at an average rate of 58% over the trailing12 months. While the company’s four-year average yield is 2.16%, its annual dividend of $4.96 translates to a yield of 2.62%. IIPR paid a quarterly dividend of $1.17 per share on October 15, 2020, representing a 10% increase sequentially and a 50% dividend increase over the comparable quarter last year.
IIPR’s revenue has grown at a CAGR of 176.8% over the past three years. The company delivered strong third-quarter results, generating total revenues of $34.3 million, representing a 197% year-over-year increase. IIPR paid $19.8 million in dividends. Adjusted funds from operations (AFFO) came in at $1.28, surging 192% compared to the year-ago value.
IIPR is on an expansion drive. It has signed long-term leases with major property dealers across the country. Moreover, the Biden administration, with its accommodating outlook regarding the legalization of cannabis for recreational use, has rekindled hope among investors that the cannabis industry is set to rebound on demand from medical and recreational marijuana markets. Wall Street analysts expect its revenue and AFFO to rise 72.2% and 69.7%, respectively, this year.
It is no surprise that IIPR is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade. Among the 22 stocks in the REITs – Industrial industry, it is ranked #4.
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TXN shares were trading at $174.01 per share on Tuesday morning, up $4.82 (+2.85%). Year-to-date, TXN has gained 6.02%, versus a 1.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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