Dividend Dynamo International Flavors & Fragrances Is Sweet for Income Investors

 | Apr 14, 2018 | 2:00 PM EDT
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First-quarter earnings season began this week, with some companies likely to announce plans to use increment cash from President Trump's tax reform to boost dividends. But one key question that income investors should ask is: "How sustainable will these dividend increases be?"

I say this because when companies cut their dividends, it's usually not pretty for a stock's price.

Consider the case of General Electric (GE) , which disclosed plans in November to slash its dividend 50% to $0.12 per share. That announcement helped spark a 7% pullback in GE's share price the day the news broke. And all in all, the stock has lost some 35% since the dividend cut, falling from $20.18 the day before the announcement to around $13 today.

The lesson here is that investors want dividend streams that are ongoing, so companies should think heavily about sustainability before upsizing their quarterly payouts. As I've previously noted, I refer to companies that consistently raise (and cover) their dividends as "dividend aristocrats" or "dividend dynamos."

One of the newer dividend dynamos out there is International Flavors & Fragrances (IFF) , which I call "newer" because it's only raised its dividend for the past several years rather than the past several decades.

As its name suggests, IFF deals in the flavors and fragrances that go into a variety of products, from perfume to snacks. I like the stock because it fits in with a "Buy the Bullets, Not the Gun" strategy of investing in supply chains.

IFF also serves end markets that are both rather diversified and benefit from the rising middle class across the globe. Additionally, the company is well-positioned to take advantage of a shift in more-developed markets toward healthier foods. For example, core customer PepsiCo (PEP) has recently entered the market for flavored sparkling waters that boast no calories, sweeteners or artificial flavors.

International Flavors & Fragrances has been growing its dividend on an annual basis since 2011, paying a 69-cent-per-share quarterly dividend these days vs. just $0.31 seven years ago. Still, IFF's so-called "dividend payout ratio" is just below 44% -- a healthy level.

Analysts calculate a stock's dividend payout ratio by dividing its trailing dividend by the company's earnings per share. This can help determine whether earnings can actually support paying the promised dividend.

When we see a dividend payout ratio that's in nosebleed territory, the odds are either we're not likely to see that company hike the dividend or the existing payment is unsustainable. For example, World Wrestling Entertainment WWE saw its dividend payout ratio top 100% for several quarters in 2011 before the company slashed its dividend to 12 cents per share from a previous $0.36.

By contrast, International Flavors & Fragrances' dividend payout ratio of about 44% tells us that the company has ample revenues to cover its current payout -- and room to grow it even further in the future. And the stock has fallen some 9.5% year to date to close Thursday at $137.34, making its current dividend yield a rather enticing 2% or so.

Current consensus price targets also call for IFF to reach $150, offering about 11% upside from current levels before we even factor in dividends. Any dividend increases from here would only sweeten the pot, as these tend to have a step-up effect on the stock's price.

This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this from Chris Versace, Robert Powell, Peter Tchir and others.

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