Dividend Payers with Earnings Momentum

In the study of physics, momentum is the product of the mass and velocity of an object.

That’s not a bad way to define the term when descrialink_72192ng a company’s earnings, either.

When a company’s per-share earnings grow, it means revenue is growing or margins are expanding because of increased sales, cost improvements, market expansion or some combination of the three.

Earnings growth also means a company has more cash to pay its shareholders.

To search for potential investments, I began by excluding companies with market caps below $500 million. I then removed companies whose 2009 earnings estimates have been downgraded in the past six months. Finally, I sought companies that have grown earnings for the past four quarters as well as year-over-year.

Four companies fit the bill.

Two are financial stocks; two are master limited partnerships. The two financial stocks, however, are paying more in dividends than they’re earning. The master limited partnerships look much better.

Company (Ticker) Yield EPS DPS P/E
Plains All-American Pipeline LP
7.7% $4.21 $3.68 11.42
Sunoco Logistics Partners LP
7.3% $6.27 $4.26 9.25

Master limited partnerships — commonly referred by income investors as estate. Their corporate structure allows them to pass their earnings to their shareholders tax-free. (Note: These distributions are taxed as regular income instead of the lower dividend rate.)

Plains All American Pipeline L.P. (NYSE: PAA)

This MLP has increased its distribution every year since 2000, when the quarterly distribution began at $0.45. The most recent distribution, in October, was $0.92. Compounded annually, this equates to a growth rate of +7.6%.

Earnings have also grown. From 2003 to 2008, EPS grew from $1.01 to $2.70, or +21.7% compounded annually. For the first two quarters of this year, Plains All American has already earned $2.21 per share.

The $4.2 billion company transports, stores and markets crude oil, natural gas and related products. On average, Plains All American handles more than three million barrels a day through its 17,000 miles of pipelines.

Sunoco Logistics Partners L.P. (NYSE: SXL)

Sunoco Logistics’ distribution has been on a tear. Since its first dividend in May 2002, the company has increased its payout every quarter except two, when it remained unchanged. This translates into a return of +21.1% compounded annually.

From 2003 to 2005, the company’s earnings jumped +96.5% to $5.01, or +14.5% compounded annually. In the first three quarters of 2009, earnings have already surpassed the 2008 figure.

Sunoco is a $1.8 billion MLP that transports and refines crude oil. The company operates about 2,200 miles of pipelines for refined products, 3,800 miles for crude oil, and has a total storage capacity of 21.2 million barrels.

Stocks with Earnings Momentum and Big Dividends

These two companies are the cream of the MLP crop. While their structure allows them to maximize their distributions, other master limited partnerships don’t quite stack up. These two have been boosting earnings and distributions for years, and right now, earnings momentum is in their favor. With yields around 8% and cheap valuations, it doesn’t get much better than this.