The only way for a stock to increase its dividend for 25 or more consecutive years is for it to have a strong and durable competitive advantage. With that in mind, it’s no surprise that The Dividend Aristocrats Index has outperformed the S&P 500 over the last decade – with lower volatility.
While not all Dividend Aristocrats are buys today, some are poised to generate solid total returns ahead. Below, we analyze the Top 10 Dividend Aristocrats today based on our expectations of future total returns.
#10: People’s United Financial
People’s United Financial is a regional bank with over 400 branches in the Northeastern United States. The company has $48 billion in total assets and a $6.6 billion market cap, making it one of the smaller Dividend Aristocrats.
The company has more than doubled its assets over the last 10 years. This growth has come from geographic expansion, normal organic growth, and several acquisitions. And, rising interest rates are a growth catalyst going forward. We expect annualized growth of around 5% over the next several years from People’s United.
Dividend cuts in the banking industry during the Great Recession were widespread. But People’s United Financial increased its dividend each year through this difficult time. The company has increased its dividend for 26 consecutive years.
And the company’s dividend yield is substantial at 4.0%. People’s United appears poised to continue raising its dividend going forward based on both its growth prospects and its reasonable payout ratio. The company is expected to have a payout ratio of under 50% in fiscal 2019.
People’s United offers investors expected total returns of 9.0% a year (5.0% from growth, 4.0% from its dividend yield) before factoring in valuation. People’s United is trading at just 12.1 times expected fiscal 2019 earnings-per-share of $1.45. We believe the company is somewhat undervalued at current prices, making it a reasonable choice for conservative investors looking for an above-average yield in the banking sector.
PPG Industries is one of the largest paint and coatings company in the world. The company was founded in 1883 and has grown to have a $26 billion market cap today and operations in more than 70 countries.
PPG Industries has a long history of growth. Remarkably, the company has paid a quarterly dividend every quarter since 1899. And it has increased its dividend payments for 46 consecutive years.
The company’s stock currently offers investors a dividend yield of 1.7%, which is a bit below the S&P 500’s yield of 1.9%. The company’s dividend is very secure. Its payout ratio in fiscal 2018 was 32%. We expect a similar payout ratio of around 30% in fiscal 2019.
PPG Industries has compounded its earnings-per-share at 7.3% annually over the last 5 years. A full 3.3 percentage points of this growth has come from a declining share count. PPG Industries’ low payout ratio allows the company to spend meaningfully on share repurchases. We expect the next 5 years to result in a similar growth rate – around 7.0% annually – as the last 5 for PPG Industries.
The company’s stock is currently trading at 17.4 times expected fiscal 2019 earnings-per-share of $6.42. The stock’s average price-to-earnings ratio over the last decade is around 19. We see shares of PPG Industries as a bit undervalued.
Chevron is the second largest oil corporation in the United States, behind only fellow Dividend Aristocrat Exxon Mobil. Interestingly, these two oil supermajors are also the only energy sector stocks that are Dividend Aristocrats.
The energy sector is notoriously volatile. Rapid fluctuations in oil prices create “feast or famine” situations for many oil companies. That makes Chevron’s streak of 32 years of consecutive increases even more remarkable.
With that said, Chevron’s earnings are far from steady. The company actually posted a net loss in 2016 amid plummeting oil prices. The company’s management chose to keep its dividend streak alive despite a difficult operating environment; a testament to how important the company’s dividend streak is to management.
Chevron’s dividend yield of 4.0% is more than twice the S&P 500 average. And Chevron is not done growing. We expect growth of around 5.5% annually over the next several years, assuming oil prices do not plummet.
Chevron generated earnings-per-share of $7.74 in fiscal 2018. We expect earnings-per-share of $8.17 in fiscal 2019. Chevron is trading for 14.7 times expected fiscal 2019 earnings. We believe Chevron is trading around fair value at current prices. With a 4.0% dividend yield and expected growth in the 5.0% to 6.0% range, investors in Chevron should expect total returns of 9.0% to 10.0% moving forward.
Target’s $38 billion market cap makes it the fourth largest discount retailer in the United States, behind only
Amazon AMZN -1.64%,
Wal-Mart and
Costco. What stands out about Target is its incredible 51-year streak of consecutive dividend increases. This is the longest active streak among retailers.
With such a long dividend streak, it’s no surprise that Target remains profitable during recessions. Earnings-per-share fell from $3.33. in 2007 to $2.86 in 2008 before hitting a new high (at the time) of $3.88 in 2010.
While Target remains profitable during recessions, it grows during prosperous times. We expect earnings-per-share growth from target of around 6% annually moving forward. Share repurchases will be a big part of growth moving forward. Target has reduced its share count by an average of 3.6% annually over the last decade. Sales growth from both physical and online channels make up the remainder of our growth estimate for Target.
Target stock currently has a dividend yield of 3.5% and a price-to-earnings ratio of just 13.9. Like the other stocks analyzed in this report so far, we view Target as modestly undervalued and offering investors total returns of between 9% and 10% annually before valuation multiple gains.
#6: T. Rowe Price Group
- Rowe Price Group is an asset manager with a $23 billion market cap and assets under management of nearly $1 trillion. The company was founded in 1937 and has increased its dividend for 32 consecutive years.
The asset management business is notoriously fickle. When the stock market is rising, asset managers benefit from both rising asset prices and rising funds as investors pile into the market. The opposite tends to happen during market declines.
The fact that T. Rowe Price Group has increased its dividend steadily for 32 years shows that it is able to thrive in spite of this cyclicality. More than 80% of T. Rowe’s funds have outperformed their Lipper category averages in the last 3, 5, and 10 years, which helps the company retain customers.
Amazingly, T. Rowe remained profitable during The Great Recession. Earnings-per-share fell from $2.40 in 2007 to a temporary low of $1.65 in 2009 before recovering to a new high (at the time) of $2.53 in 2010.
- Rowe stock currently trades for a dividend yield of 3.1%. We expect earnings-per-share growth of around 6% annually in the absence of a recession, from a mix of asset growth and share repurchases. This gives T. Rowe expected total returns of around 9% annually. And, the stock is trading for only 14.1 times expected fiscal 2019 earnings-per-share of $6.95.
Cardinal Health is one of the “big 3” pharmaceutical distributors in the United States.
Mckesson and
AmerisourceBergen ABC +0.28% are the other two. Together they control more than 90% of the industry.
Cardinal Health has increased its dividend payments for 33 consecutive years, and has been in business since 1971. The company’s long dividend streak can be attributed to its efficiency. The largest pharmaceutical distributors benefit from having a larger network and economies of scale, which makes them more efficient. This allows Cardinal health to succeed in an industry with razor thin profit margins that are often less than 1%.
Cardinal Health has struggled over the past few years. Earnings-per-share have declined from $5.40 in fiscal 2017 to $5.00 in fiscal 2018. And we expect another year of weak results in fiscal 2019, with expected earnings-per-share of $5.07 this year.
Pressure to lower pharmaceutical prices and the resulting margin erosion and intense competition are largely to blame for Cardinal’s tepid performance.But the company’s long-term future remains bright.
Cardinal Health provides an essential service in an industry that is likely to grow over time. We expect the company to compound its earnings-per-share at around 5.0% annually after 2019. This growth combined with Cardinal Health’s 3.6% dividend yield gives investors 8.6% expected total returns.
On top of that, Cardinal Health is trading for just 10.5 times expected 2019 earnings-per-share. We believe the security to be meaningfully undervalued at current prices.
Caterpillar is one of the leading manufacturers and sellers of natural resource and infrastructure equipment. Caterpillar has a ~$80 billion market cap and was founded in 1925. The company is one of the newest Dividend Aristocrats, having increased its dividend for 25 consecutive years.
The company has managed to consistently grow its dividend in a cyclical industry. The company is far from recession resistant, but has managed to remain profitable (and pay rising dividends) even in the worst of economic times. The company raised its dividend each year through the Great Recession as an example.
Caterpillar stock currently yields 2.5%. The company has compounded its dividend at 7.7% annually over the last decade. We believe 6.0% annualized growth moving forward is a reasonable – if not conservative – estimate. Together, growth and dividends give the stock an 8.6% expected total returns.
And, Caterpillar appears undervalued at current prices. The company is trading for 11.3 times expected 2019 earnings-per-share of $12.25. For comparison, the company’s average price-to-earnings ratio since 2010 is around 15.
If Caterpillar’s price-to-earnings ratio increases to its historical average, shareholders will see their total returns increase considerably. In the meantime, Caterpillar’s rising dividends allow investors to get ‘paid to wait’ for valuation multiple mean reversion.
AT&T has managed to increase its dividend payments for 35 consecutive years. The company is one of the 2 large telecommunications companies in the United States based on in its $228 billion market cap. Verizon is the other, with a $234 billion market cap.
AT&T stock has a 6.5% dividend yield, making it the highest yielding Dividend Aristocrat. And, the dividend is well covered by earnings. AT&T expects to pay out less than 60% of its fiscal 2019 profits as dividends.
Moreover, AT&T appears significantly undervalued now. The stock is trading for just 8.7 times its expected 2019 earnings-per-share of $3.60. For comparison, the company has traded with an average price-to-earnings ratio of 12.7 over the last decade.
AT&T stock is cheap due to its higher debt load after acquiring DirecTV and Time Warner. But the company’s management has a workable plan in place to reduce leverage. The company expects to have a reasonable debt-to-EBITDA ratio of 2.5 by the end of fiscal 2019.
And the aforementioned acquisitions have increased the company’s growth potential. With a yield north of 6%, even growth at or just above inflation would give investors solid expected total returns. The combination of a reasonable payout ratio, undervalued stock, long dividend history, and high yield make AT&T a compelling choice for income investors.
Walgreens Boots Alliance (hereafter Walgreens) was founded in 1901 and has increased its dividend for 43 consecutive years. Walgreens is a ‘corner store’ retailer and pharmacy that has grown to reach a market cap of $67 billion.
The management team is headed by Italian billionaire
Stefano Pessina; he has grown Walgreens adjusted earnings-per-share from $3.88 in 2015 to $6.02 in 2018 for a compound annual growth rate of 15.8%. Pessina has been an avid share repurchaser, reducing Walgreens share count by 4.4% annually since 2015.
Walgreens has allocated capital intelligently by buying up
Rite AidRAD +1.17% stores at a reasonable price, repurchasing shares, and testing out ideas through partnerships instead of costly acquisitions. We expect the company to compound its earnings-per-share at 8.0% annually over the next 5 years, though growth could prove to be overly conservative.
Despite impressive performance since Pessina too over, Walgreens stock is trading for a price-to-earnings ratio of just 10.9 times expected 2019 earnings-per-share of $6.50. For comparison, the company’s 10 year historical average price-to-earnings ratio is 16.2.
Walgreens stock offers investors expected total returns of 10.5% annually based on 8.0% expected growth and its 2.5% dividend yield. Additionally, this high quality dividend growth stock appears deeply undervalued and unappreciated.
AbbVie is a large pharmaceutical company with a $122 billion market cap. AbbVie became a publicly traded company when it was spun-off from fellow Dividend Aristocrat
Abbott Laboratories ABT -0.99% in 2013. AbbVie has increased its dividend each year since the spin-off.
AbbVie’s story so far has been about Humira, which is the highest grossing pharmaceutical in the world. Unfortunately for AbbVie, Humira is slowly losing its patent protection. Humira sales have begun to decline in Europe after losing patent protection.
But the company still has surprisingly good growth prospects ahead thanks to investing heavily in its next generation of pharmaceuticals through both research and development spending and acquisitions.
AbbVie isn’t going to keep compounding its earnings-per-share at 20.3% annually like it has been able to do from 2013 through 2018, but we expect strong earnings-per-share growth of 9.5% annually over the next several years.
In addition to its growth prospects, AbbVie offers investors a 5.3% dividend yield. And the dividend will only be around 50% of AbbVie’s expected 2019 earnings-per-share, making it safe and well covered.
AbbVie shares are trading for only 9.1 times expected fiscal 2019 earnings. This is an exceptionally low price to pay for a company with the strong growth history of AbbVie. Investors get ‘paid to wait’ 5.3% annually for the valuation multiple to expand thanks to AbbVie’s dividend. (Disclosure: Ben Reynolds is long shares of AbbVie, Walgreens, AT&T, Exxon Mobil and Cardinal Health.)
(Source : https://www.forbes.com/sites/moneyshow/2019/03/06/the-top-10-dividend-aristocrats-stocks-to-buy-for-2019/#4d307e55b044 )
