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3 Dividend Stocks That Don't Pay Out Nearly as Much as They Could

By Rich Duprey, Chuck Saletta, and Tyler Crowe – Jul 17, 2017 at 3:02PM

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Are these dividend stocks being thrifty or miserly with their shareholder payouts?

Dividend-paying stocks are what every income-loving investor seeks. But sometimes some companies can be downright miserly with their payouts, even though they could afford to do more.

We asked three Motley Fool investors to highlight a stock that does reward shareholders with a dividend payment, but isn't doing nearly as much as it could be while avoiding entry into risky territory. See why A.O. Smith (AOS 1.84%), Jones Lang LaSalle (JLL 3.02%), and Apple (AAPL 1.56%) are underpaying their shareholders.

HVAC system

Image source: Getty Images.

This company can raise its payout and pull its big growth lever at the same time

Tyler Crowe (A.O. Smith): Water heaters probably aren't the first thing that comes to mind when you think about incredible growth opportunities, but A.O. Smith is poised to take advantage of one of the greatest growth trends of the next several decades: People in China and India entering the middle class. A big component of the middle class in these countries is not just buying basic household products like hot water heaters, but also buying foreign brands that have a reputation for quality.

A.O. Smith has played its hand well here and now is the largest seller of water heaters in China, with burgeoning demand for its residential water and air purification systems. Sales for water heaters, water treatment systems, and air purification systems in China grew 20%, 50%, and 80% last quarter, respectively. While the company has yet to make similar headway in the Indian market, it is still in the early innings there. 

With growth opportunities like that, investors would be hard to blame the company for keeping its dividend payout modest. Its payout ratio for the trailing 12 months is 25.7%. That said, the company's North American sales are such an incredible cash cow that it easily generates enough cash to fund its overseas expansion and raise its payout. Contrary to the expectations of most investors, sales of heater heaters in North America are incredibly steady and don't follow the overall housing market that much. That's because more than 80% of water heater sales are replacements rather than for housing starts. 

With such a high level of recurring revenue from the replacement cycle, A.O. Smith generated enough cash from ops to cover all its capital expenditures for the year, make an acquisition, pay its dividends, buy back stock, and tuck another $100 million away in marketable securities. With results like that occurring more often than not, A.O. Smith is a company that could easily raise its payout significantly without putting too much strain on the business.

Property inspection

Image source: Jones Lang LaSalle.

A surprisingly small dividend for a real estate titan

Chuck Saletta (Jones Lang LaSalle): Property management titan Jones Lang LaSalle earns a pretty penny managing other companies' commercial real estate. Over the past four reported quarters, Jones Lang LaSalle has earned $303 million in profit, generating around $338 million in operating cash flow along the way. Yet despite that substantial cash flow, it pays out less than 10% of its earnings in the form of its dividend. It can easily afford to pay more.

Jones Lang LaSalle has a debt-to-equity ratio of around 0.6 and a current ratio above 1.2, indicating a strong balance sheet. While the company does make significant capital expenditures in its operations and spends a bit on mergers and acquisitions, its healthy balance sheet along with low interest rates gives it room to borrow to cover its expansion plans.

It's not as if Jones Lang LaSalle is a start-up that needs to retain every dime of its cash flow in order to cover its rapid expansion. The company traces its roots back to 1783 and has been handling property-related operations since at least the end of World War II. Nor is the company priced like a rapid grower -- its trailing price-to-earnings ratio below 19 is less than the S&P 500's, and the company's expected earnings growth rate around 10% annualized is respectable but isn't setting the world on fire.

Put it all together, and Jones Lang LaSalle is a solid company with strong earnings and cash flows, a decent balance sheet, and reasonable prospects for moderate growth. That combination points to the company having an excellent opportunity to pay out in dividends far more than the 10% of earnings it is currently.

Apple iPhones

Image source: Apple.

Its payout is huge, but it could be bigger still

Rich Duprey (Apple): When Apple hiked its dividend 10.5% back in May, the fifth time it's raised the payout since it first initiated it in 2012, it became the world's biggest dividend stock, surpassing the payout of previous top income stock General Motors. Apple is paying out $13.2 billion a year, whereas GM pays out $12.7 billion annually, and as remarkable as that is -- considering just five years ago the tech giant didn't even pay a dividend -- Apple could be paying investors so much more.

Since August 2012, it's bought back $151 billion of stock, a move that analysts say has expanded earnings per share by about 21%. And even with the latest dividend hike, Apple said it's increasing its share repurchase program by $35 billion and plans to spend a cumulative total of $300 billion buying back its stock by the end of March 2019.

Even though Apple's stock has pulled back a bit from its record highs, if the money spent on buying its stock been diverted toward dividend payments, investors could have had more tangible returns in their pocket.

Apple also has a huge cash hoard of some $257 billion, though most of it ($230 billion) is held overseas and would be prohibitively expensive to repatriate under current law. However, President Donald Trump has proposed a one-time "tax holiday" for American corporations like Apple that have trillions of dollars sitting in foreign bank accounts. Cisco has spoken of the possibility of increasing its dividend if it was able to repatriate the $60 billion in cash it holds overseas.

Having raised its quarterly dividend to $0.63 a share from $0.57, the dividend yields only 1.7% currently, and its payout ratio of 26.6% means there is a lot of room for it to grow the dividend.

No one is suggesting Apple should get careless and just dump all of its cash and profits into its dividend, and thus far the tech giant has proved it is increasingly willing to share its wealth with its investors. But as much as Apple pays out in dividends, it could actually afford to pay quite a bit more.

Chuck Saletta has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Tyler Crowe owns shares of A. O. Smith and Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Jones Lang LaSalle. The Motley Fool has a disclosure policy.

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