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What are we looking for?

Sustainable dividends from sound companies under pressure from activist investors.

The screen

Activist investors are once again in the spotlight, with U.S. investment firm Elliott Investment Management targeting U.S. airline Southwest Airlines Co.

This week, Elliott said it plans to call for a special meeting of the carrier’s shareholders. The activist blames chief executive officer Bob Jordan and other top executives for Southwest’s underperformance and wants to replace them. Elliott also wants the airline to change how it conducts its business and replace two-thirds of its 15-member board of directors with a slate of its own candidates.

Activists typically take a significant shareholding in what they see as underachieving companies and then push for change. Their demands are often for seats on the board of directors or a call for the target company to jettison subsidiaries to increase shareholder dividends or share buyback programs.

Whatever the outcome, activist pressure draws stock market attention to a company’s underlying value. It just as often increases dividend sustainability by pushing measures to boost profits and cash flow.

Our search started with a list of companies that are now the target of investor activism, but which already have strong prospects. We then applied our TSI Dividend Sustainability Rating System to a short list of income payers. It 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 to cover dividends;
  • One point if the company is 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

Reliable dividend payers activist investors are targetting

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. ($ Bil.)1Y Ttl. Rtn. (%) Recent Price ($)
1Texas Instruments Inc.TXN-QAbove Average82.7186.627.5205.06
2Starbucks Corp.SBUX-QAbove Average82.4107.03.195.62
3Nike Inc.NKE-NAbove Average81.7132.0-2.988.00
4Johnson Controls International PLCJCI-NAbove Average72.050.937.775.83
5Bath & Body Works Inc.BBWI-NAverage62.66.7-7.730.53

Source: Dividend Advisor. 

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements.

Our TSI Dividend Sustainability Rating System generated five stocks. Seattle-based Starbucks Corp. SBUX-Q is a leading seller and roaster of specialty coffee. The company recently responded to pressure by activists Elliott Investment Management and Starboard Value by appointing a new CEO. The new leader, Brian Niccol, will have a strong mandate to make further positive changes. Texas Instruments Inc. TXN-Q, headquartered in Dallas, makes analog chips, which convert touch, sound and pressure into electronic signals. The company is already responding to the demands of activist Elliott by cutting its capital spending plans as it builds a new facility in Sherman, Tex. That site will house as many as four new chip-making plants. Johnson Controls International PLC JCI-N, based in Ireland, makes commercial and residential HVAC equipment, industrial refrigeration systems, controls, security systems, fire-detection systems and fire-suppression solutions. Elliott has bought shares of Johnson, and while it has not yet made any demands, it likely supports Johnson’s plan to sell some of its less-important businesses. Activist investor Bill Ackman’s Pershing Square Capital Management LP now holds a stake in Beaverton, Ore.-headquartered Nike Inc. NKE-N. That company is one of the world’s largest athletic footwear and apparel manufacturers. Mr. Ackman will likely push to boost the company’s slowing sales. Bath & Body Works Inc. BBWI-N, based in Columbus, Ohio, sells personal care and beauty products. Activist investor Dan Loeb, who owns a stake in the company, continues to pressure it to cut costs. That should ultimately benefit all shareholders.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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