By Serkan Unal
Dividend growth has been a key driver of total return in the long run, says asset manager BlackRock. The asset manager also asserts that dividend growth stocks as investment choices are most appropriate for the periods of low or no economic growth, given that dividend growth stocks tend to outperform most other asset classes during such times. The current macroeconomic environment is characterized by low yields and low economic growth that is caused by lackluster labor market conditions, weak private and business spending, and fiscal austerity that is stifling growth.
In the current environment, particularly desirable are dividend stocks that are boosting their payouts by high rates of growth. While there are many dividend growth stocks, only some have the capacity to hike their dividends by double-digit rates. We focus on six dividend growth stocks that recently have increased their quarterly payouts by between 12% and 25%, providing juicier yields for their investors in the range between 2.1% and 4.7%.
Neenah Paper, Inc. (NP) is a fine and technical paper products manufacturer. It pays a dividend yield of 2.1% on a payout ratio of 26%. Its competitor P.H. Glatfelter Company (GLT) yields 2.1%, while rival KapStone Paper and Packaging Corporation (KS) does not pay any regular dividends. Neenah Paper's dividend growth averaged 3.7% per year over the past five years, with hikes implemented mainly in 2011 and 2012. In November, the company boosted its quarterly dividend by 25%, from $0.12 per share to $0.15 per share. Over the past five years, the company's EPS grew at an average annual rate of nearly 7.0%. The EPS growth is expected to accelerate to 12.5% per year for the next five years. Neenah Paper, Inc. just posted financial performance that beat analyst expectations on both revenues and EPS, as the company focuses on high value performance-oriented products, sees higher sales and lower input costs, and achieves production cost efficiencies. The stock has a free cash flow yield of 2.7% and ROE of 19%. The stock's forward P/E of 10.2 compares to the industry average ratio of 11.8 and the stock's three-year average ratio of 12.0. AQR Capital Management's Cliff Asness holds a minor stake in the stock.
Orchids Paper Products Company (TIS) manufactures private label tissue products such as paper towels, bathroom tissue, and paper napkins. Its dividend yields 4.7% on a payout ratio of 80%. Its rival Cascades Inc. (CADNF.PK) pays a dividend yield of 3.9%, while Kleenex tissue maker Kimberly-Clark Corporation (KMB) pays a dividend yield of 3.5%. Orchids Paper Products Company boosted its dividends 2.5 times since initiating a dividend in the first quarter of 2011. Last year, the company doubled its quarterly dividend; this year in November, it boosted it by another 25%, from $0.20 per share to $0.25 per share. Over the past five years, the company's EPS expanded at an average annual rate of 48.4%. The company's EPS growth is expected to increase by 25% next year. Orchids Paper Products Company was recently named to the Forbes 2012 list of the "100 Best Small Companies in America," based on strong earnings growth, sales growth, and return on equity over the past twelve months and over five years, as well as stock performance versus each company's peer group. The stock boasts a ROE of 13%. Its total debt to equity ratio is low at 22%. The stock is attractively priced with a forward P/E of 13.2, compared to the industry average of 18.6 and the company's five-year average ratio of 16.6. RenTech's Jim Simons is the only reputable hedge fund manager reporting a stake in this stock.
BankUnited, Inc. (BKU) is a bank holding company operating an independent depository institution and an insurance agency selling wealth management and financial planning products and services. This $2-billion Florida-based financial services company pays a dividend yield of 3.6% on a payout ratio of 45%. Its peers Regions Financial Corp. (RF) and BB&T Corporation (BBT) pay dividends yielding 0.6% and 2.8%, respectively. The BankUnited's dividend, initiated in March 2011, has increased by 50% from $0.14 per share to $0.21 per share. Following a 21.4% dividend hike last year, the bank boosted its dividend by another 23.5% this November. The bank's EPS growth is expected to average about 6.0% annually for the next five years. With no long-term debt, this bank boasts a ROE of 10.8%. The bank's stock is priced on a forward P/E of 13.9, above the banking industry ratio of 10.6. The stock is also pricey based on a price-to-book ratio of 1.3, compared to 0.9 for its industry. Wilbur Ross of Invesco Private Capital (see its top picks) and Mark T. Gallogly (Centerbridge Partners) are both great fans of the stock.
Union Pacific Corporation (UNP) is a railroad transportation services company in North America. It pays a dividend yield of 2.2% on a low payout ratio of 34%. Its rivals Canadian National Railway Company (CNI) and CSX Corp. (CSX) pay dividend yields of 1.8% and 2.8%, respectively. Over the past five years, Union Pacific's dividends grew by 27.3% annually. Last month, the company boosted its dividend by 15%. Union Pacific's EPS expanded at a rate of 16.2% annually over the past five years. For the next five years, the company is forecast to grow its EPS at an average rate of nearly 14% per year. The company has benefited from a rebound in economic growth and fracking-driven shale natural gas and oil production boom. Higher oil prices increase the attractiveness of low-cost rail services, which is likely to be a positive factor in the company's future appeal and growth. Warren Buffett, whose Berkshire Hathaway owns Burlington Northern Santa Fe LLC, is very bullish about the railroad industry's prospects. Union Pacific has a ROE of 20.3%. With a forward P/E of 13.5, the stock is priced on par with the railroads industry. Billionaire D. E. Shaw owns nearly $262 million in this stock.
Hormel Foods Corp. (HRL) is a meat and food products manufacturer. This dividend aristocrat's yield is 2.2% and its payout ratio is 36%. Its competitors Hillshire Brands Company (HSH) and Tyson Foods (TSN) yield less at 1.8% and 1.0%, respectively. Over the past five years, Hormel Foods' EPS expanded at a rate of 11.4% per year, while its dividends grew by almost 15% annually. Last month, the company hiked its quarterly dividend by 13.3%, from $0.15 per share to $0.17 per share. The EPS growth is expected to average 10.0% per year for the next half decade. The company has just met its objective "Go for $2B by 2012" by achieving $2 billion in revenues from new products created since 2000 by the end of fiscal year 2012. Hormel Foods is cash rich and its long term debt is only 9% of equity. The stock has a free cash flow yield of 2.9% and ROE of 18.2%. With a forward P/E of 15.9, the stock is cheaper than Hillshire Brands Company, whose forward P/E is high at 19.1. Fund managers Chuck Royce (Royce & Associates) and Cliff Asness are buyers of this stock.
Waddell & Reed Financial Inc. (WDR) is an asset manager with a dividend yield of 3.5% on a payout ratio of 70%. Its peers Eaton Vance Corp. (EV) and AllianceBernstein (DPS) have dividend yields of 2.5% and 8.0%, respectively. The company's EPS increased at an average rate of nearly 30% per year over the past five years, while its dividends rose at a rate of nearly 25% per year over the same period. In November, the company boosted its regular dividend by 12%, from $0.25 per share to $0.28 per share. In addition, the company declared a special dividend of $1.00 per share payable on December 6 to shareholders of record as of November 26. The company's balance sheet remains solid and its cash flow strong. The company has indicated that "additional extraordinary distributions may occur in the future." Analysts expect that the company's EPS growth will average a somewhat lower 16% per year for the next five years. Waddell & Reed Financial Inc. has a free cash flow yield of 3.5% and ROE of 33%. With a forward P/E of 13.5, the stock is priced at a small discount to its asset management industry (with a forward P/E of 13.9) and its own five-year average ratio of 18.7. Value investors Ken Fisher and David Dreman are fans of this stock.