A “Chocolate Rain” of Dividends

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

One of the fun things about being on Twitter (I’m @stocksnboxing) is when you get a follower you’re especially excited about.

My inner 14-year-old lost his mind when Lydia Cornell, the gorgeous blonde from the TV show Too Close for Comfort, followed me. Nothing like having your adolescent crush follow you on social media to scramble your brains for a day.

My street cred soared at home when Keith Powell, the actor who played Toofer on my kids’ favorite show, 30 Rock, followed me.

And last week, my colleagues and I were thrilled when we discovered that Tay Zonday is now following our Wealthy Retirement Twitter account.

If you’re not familiar with Zonday, he had one of the first viral videos. The YouTube video of his song “Chocolate Rain” has been viewed more than 113 million times.

As a result, Zonday has appeared on Jimmy Kimmel Live!, Good Morning America and a Super Bowl commercial. He was even featured on the front page of the Los Angeles Times.

This year marks the 10-year anniversary of the song. So as an homage to “Chocolate Rain” and to Zonday for following us, we decided to make this week’s Safety Net a special “Chocolate Rain” edition.

Let’s take a look at the dividend safety of three chocolate makers and see if their dividends will continue to rain upon investors.


The Hershey Company

I’m not a huge fan of Hershey’s bars or marshmallows. But put them together on a graham cracker (melt the marshmallow first), and it is nothing short of perfection.

Unfortunately for dividend investors, The Hershey Company’s (NYSE: HSY) dividend falls far short of being perfect.

SafetyNet Pro, my proprietary dividend safety rating system, recently downgraded Hershey because cash flow in 2016 fell precipitously from the previous year. It is expected to rebound in 2017, but not back to 2015 levels.

Cash flow growth is an important metric in SafetyNet Pro.

What Is SafetyNet Pro?

SafetyNet Pro is a groundbreaking tool that predicts dividend cuts and raises with stunning accuracy. With it, you can determine the dividend safety rating of nearly 1,000 stocks. Access to SafetyNet Pro is reserved exclusively for subscribers of Marc’s newsletter, The Oxford Income Letter. To learn more about SafetyNet Pro and The Oxford Income Letter, click here now.

In 2015, the company generated $885 million in free cash flow. But that slid to $714 million last year and is expected to rise to $756 million this year.

If 2017’s estimates are accurate, Hershey will pay out 76% of its cash flow in the form of dividends. That’s just a hair above my 75% threshold. If the company’s cash flow comes in even slightly higher than expected, pushing the payout ratio below 75%, Hershey should get an upgrade.

For now, Hershey’s dividend safety rating is only semisweet.

Dividend Safety Rating: C

 

Nestlé

If I’m stranded on a desert island and can pick only one food, it’s going to be chocolate chip cookies. And is there anything better than Nestlé’s (OTC: NSRGY) Toll House cookies?

Nestlé has a problem similar to that of Hershey in that cash flow is expected to slip this year, though by a smaller amount percentage-wise.

The Swiss chocolate maker’s free cash flow is forecast to drop to $10.6 billion from $11.8 billion.

However, the company is expected to pay out $7.5 billion in dividends, staying below my 75% threshold.

The reason I want to see a company pay out 75% or less of its free cash flow in dividends is that in case of a down year, the company isn’t in jeopardy of cutting the dividend. It gives it more of a buffer and buys time to get cash flow moving in the right direction.

Nestlé has an excellent track record for paying dividends. The company has never had a cut since it began paying one in 1959. It has raised the dividend every year for 21 years.

Nestlé’s brands include Kit Kat, Butterfinger and Wonka. When it comes to dividend safety, shareholders have found the golden ticket.

Dividend Safety Rating: A

 

Rocky Mountain Chocolate Factory

Rocky Mountain Chocolate Factory (Nasdaq: RMCF) has a tiny $69 million market cap and sports a 4% yield.

The company from Durango, Colorado, franchises its chocolate shops, which offer delicious treats that can also be purchased online.

Like the larger chocolatiers, Rocky Mountain’s 2017 free cash flow is lower. The company’s fiscal year ended in February.

In fiscal 2017, Rocky Mountain Chocolate Factory’s free cash flow was $4.1 million, compared to $6 million in fiscal 2016.

The company pays out only $2.8 million in dividends, so it is below my 75% threshold.

If fiscal 2018 shows a further decline in free cash flow, the dividend safety rating will likely be downgraded.

But for the immediate future, the dividend appears to be fairly safe.

Dividend Safety Rating: B

Next week, we’ll go back to analyzing the stocks that you ask me to look at. So if you have a stock whose dividend safety rating you want to see appear in this column, leave the ticker symbol in the comments section.

Don’t forget to follow me on Twitter @stocksnboxing. I tweet throughout the day about stocks and what’s going on in the market.

And if you can’t get the song “Chocolate Rain” out of your head – you’re welcome.

Good investing,

Marc