By Serkan Unal
Mergent's "Dividend Achievers" index tracks companies that have raised dividends for at least ten consecutive years. The companies making up the index boast strong cash reserves, solid balance sheets, and a proven record of consistent earnings growth. All Dividend Achiever stocks have a two-month average daily trading volume in excess of $500,000. The broadest index, U.S. Broad Dividend Achievers Index, consists of some 199 dividend-paying stocks.
We focus on five consumer goods dividend achievers with strong earnings performance and the capacity to generate attractive income in the future. Consumer goods companies generally hold up well during recessions. The featured stocks are either growth plays, benefiting from the robust demand dynamics, the companies characterized by earnings and dividend stability, or firms with a strong capacity to maneuver any potential slowdowns with their strong pricing power and the ability to adapt to new situations.
The J. M. Smucker Company (SJM) is a manufacturer and marketer of branded consumer products, including, inter alia, coffee, jams, preserves, and jellies. Some of its popular brands include Folgers, Millstone, Pillsbury, Crisco, and Café Bustelo. The company has a dividend yield of 2.5% and a payout ratio of 49%. Its peers Nestle (OTCPK:NSRGY) and Unilever (UL) both pay dividend yields of 3.3%. Over the past five years, the company's EPS and dividends grew at average annual rates of 8.0% and 11.1%, respectively. EPS growth is expected to average around 8.5% annually for the next half decade. The stock's free cash flow is 6.1% of the company's market capitalization. Its ROE is at 9%. The J. M. Smucker Company reported EPS that beat analyst expectations for the previous quarter and upped its earnings guidance for fiscal 2013 from $5.00-$5.10 per share to $5.12-$5.22 per share. The growth is driven by the recently-acquired North American foods ervice coffee and hot beverage business from Sara Lee Corporation. The J. M. Smucker Company has a portfolio of strong brands, robust growth estimates, a competitive dividend yield, and attractive valuation. The stock is trading at a forward P/E of 15.6, which is a discount to the average ratio of 17 for its respective industry. Among fund managers, John W. Rogers (Ariel Investments-check out its top picks) and Jim Simons are bullish about the stock.
McCormick & Company (MKC) is the largest spice company in the world. It is a dividend aristocrat that pays a dividend yield of 1.9% on a payout ratio of 43%. Its main competitors are closely held companies. With its brands selling in 110 countries, the company is well positioned in the market given its large size, which means it has a strong pricing power and a wide moat, competing with reputable brand names against mainly unbranded competitors. Over the past five years, McCormick & Company's EPS and dividends grew at average rates of 13.2% and 9.2% per year, respectively. The EPS growth is expected to average about 8.5% per year for the next five years. The company has been growing organically and through acquisitions. The MKC stock boasts a free cash flow yield of 3.1% and ROE of 23%. The stock is trading at a P/E of 19.9, which compares to the food products industry ratio of 17. Ariel Investments and Cliff Asness' Aqr Capital Management (check out its top picks) hold small stakes in the stock.
Universal Corporation (UVV) is a leaf tobacco merchant and processor. Its dividend yields 4.4% on a payout ratio of 60%. Its peer British American Tobacco Plc (BTI) yields 2.6%, while rival Alliance One International (AOI) does not pay any dividends. Over the past five years, Universal Corporation saw its EPS and dividends grow at average annual rates of 5.2% and 2.2%, respectively. With the latest dividend hike of 2% implemented in November, Universal Corporation has increased dividends for 42 straight years. The company has seen a major jump in its free cash flow, which has now boosted its free cash flow yield to 14.3%. This consumer non-cyclical stock is favorably valued, with a forward P/E of only 6, compared to the company's own five-year average ratio of 11.1. Universal Corporation boasts a ROE of 14.4%. Its total debt to equity ratio is relatively low at 40% of equity. Billionaires Jim Simons and D. E. Shaw hold minor stakes in the company.
Walgreen Co. (WAG) is a drugstore retailer with a total market cap of $31 billion. It is paying a dividend yield of 3.3% on a low payout ratio of 46%. Its rivals CVS Caremark Corporation (CVS) pays a dividend yield of 1.4%, while rival Rite Aid Corporation (RAD) does not pay any dividends. Over the past five years, the company's EPS expanded at a rate of 3.6% per year, while its dividends grew at an average annual rate of nearly 24%. Following a plunge in sales earlier this year due to a conflict with Express Scripts (ESRX), which had caused a precipitous drop in its stock price, Walgreen has restored its partnership and is seeing better sales data. The outlook is bullish as the company is forecast to see EPS growth at a 5-year CAGR of about 13%. The stock is attractively valued, with a forward P/E of 9.7, trading at a major discount to its respective industry and main competitors. Hence, given its attractive yield and valuation, the stock is an appealing value play. It boasts a high free cash flow yield of 6.8%. Its ROE is 13%. Legendary investor George Soros initiated a new position in the stock in the previous quarter.
Sysco Corporation (SYY) is the largest U.S. food wholesaler and distributor for the food service or food-away-from-home industry. It pays a dividend yield of 3.6% on a payout ratio of 60%. Its peers United Natural Foods, Inc. (UNFI) does not pay any dividends, while Nash-Finch Company (NAFC) pays a dividend yield of 3.6%. Over the past five years, Sysco Corporation's EPS increased at an average rate of 3.6% per year, while its dividend rose at a rate of 7.3% annually. Analysts expect that the company's EPS growth will double to an average of 7% per year for the next five years. Although Sysco Corporation is benefiting from a higher restaurant demand, rising food prices-especially the drought-induced grains inflation-have squeezed Sysco's margins. Still, the company has been able to pass some higher prices to its customers. Lower fuel prices-namely oil prices-bode well for the company's top line. The stock has a marginal free cash flow yield and a ROE of 23%. The stock has a P/E of 15.4, compared to 18.8 for the industry on average. On a forward P/E basis, the stock is trading above its five-year average P/E. Value investor Jean-Marie Eveillard (First Eagle Investment Management-check out its top holdings) owns more than $745 million in the stock.