Dividend Farming Scorecards: Comparing MSFT, GD, and SO

During the first couple weeks of the new year I’ve had the chance to look at three possible adds to the Dividend Farm: Microsoft (MSFT), General Dynamics (GD), and The Southern Company (SO).  The firms represent technology, aerospace manufacturing, and utilities.  I chose to look at MSFT and GD because they represent segments currently under weight in my portfolio while SO is a company I’ve had my eye on for years.

It’s not uncommon to review multiple possibilities within a short span of time.  Doing so offers me the chance to see how alternatives compare to one another in light of my preferred selection criteria.

Analyzing Alternatives Side-by-Side

The following table summarizes my findings for the companies in question.  In keeping with simplified DIY dividend investing, I draw my financial data from Yahoo.Finance.com.  The dividend history and CCC classification is courtesy of DRiPInvesting.org.  Characteristics falling below my targeted selection metrics have been highlighted in yellow for ease of visibility.

FACTOR	TARGET METRICS	MSFT	GD	SO
CCC List	Champion	Contender	Champion	Contender
Current Yield	4.0%	1.7%	2.4%	5.7%
Company Profile	Red Flags	Software, Services, Cloud	Aerospace and Defense	Telco Svcs?
Industry Leadership	Top 10	#1	#4	#9
Market Cap	$10 B+	$789 B+	$42.7 B	$45 B
P/E	< 20	42.3	15.4	18.3
P/B	< 2	9.2	3.6	1.8
Debt / Equity	< 1	2	2.1	6
Dividend History	25 Years	17	27	18
12 Month Price Range	Lower Half	Upper Half	Bottom Quartile	Lower Half
Dividend Payout Ratio	< 75%	69	35.30%	98.3
Portfolio Weight	Slightly Over	Under	Under	Slightly Over
Date		1.11.19	1.6.19	1.2.19

The first two columns include factors I review and their desired target benchmarks.  The following columns include the relevant metrics of the firms in question.

CCC List: All three firms are on the CCC lists from DRIPinvesting.org, which is good, but only GD is considered a champion so it’s off to an early lead.

Current Yield:  Two of three firms offer current yields below my target.  SO is 42% above target so it gained ground on GD and then some!

Company Profile:  From a profile standpoint, none of the companies present anything overly distressing.  However, as noted earlier I find it curious that SO also participates in the telecom segment.

Industry Leadership:  All three firms are among the ten largest in their sector with MSFT standing head and shoulders above the rest.  As a result, the options are evenly stacked at this point.

Market Capitalization:  MSFT’s market cap dwarfs the other two combined by nearly 2 to 1. If that were the only consideration, there would be no question about which to add.

Price to Earnings:  Whatever separation there may have been in terms of size, that separation completely evaporated with P/E.  While GD and SO are comfortably within range, MSFT is well out of bounds.

Price to Book:  P/B is another area in which MSFT falls behind its rivals.  However, GD also finds itself well above target.

Debt to Equity:  D/E is above my target across the board and far afield in terms of SO.  GD is also over by nearly 2:1.  Despite lacking the infrastructure requirements inherent with SO, for instance, MSFT is still fond of more debt than I’d like to see.

    

Dividend History:  The record of consecutive payments for the alternatives is solid.  However, only GD has amassed more than 25 straight years of dividends.  It’s not to say the others won’t eventually, but today there’s only 1 having done so.

Price Range:  GD and SO’s prices are in the bottom half of their TTM range while MSFT is well into the high end.  I suspect this disparity may have as much to do with the segment tag “technology” that MSFT carries, but it’s still a factor in favor of GD and SO.

Payout Ratio:  SO’s payout ratio leaves practically no room for growth while MSFT has some.  GD, however, has ample room to grow its dividend assuming it decides to.  That potential is nice, but potential and actual are related the same way profit and cash are – one’s theory and the other fact.  How badly do I want to buy theory?

Portfolio Distribution:  MSFT might be a nice way to open a technology position if its metrics weren’t so far off the ranch vis my targets.  SO expands my third largest segment a bit and could be a decent add.  GD would do the most to bolster the light end of my portfolio.  The price in the $150 - $160 range coupled with P/E and P/B outside my comfort zone make it tough to punch the buy button now.  If price, P/E, or P/B improve in the short run, GD may suddenly become compelling.  

Analysis:

If you told me today I had to purchase one of the three firms above, I’d likely do so in favor of SO.  Both GD and SO are outside my target metrics in 3 areas while MSFT is off target in 6 of 10.  GD is misses the market for both P/E and debt to equity while SO is outside the boundary only for D/E.  Also, SO’s yield is considerably higher than GD’s.  Although GD has room for growth, it will take a long time for GD’s yield to equal that of SO even with aggressive annual dividend increases.

Fortunately, I don’t have to make the buy decision today.  My research and investigation will continue to see if an alternative better than SO exists.  I suspect it does.  Finding those gems is one of the fun, rewarding aspects of being a Dividend Farmer.  In the meantime, I’ll also keep an eye on GD.  Who knows, it may yet become one of the dividend crops on the farm!

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.