By Serkan Unal
With a total return of 15.3% in 2012, the S&P 500 Dividend Aristocrats, a group of stocks that have increased dividends for at least 25 consecutive years, beat the 14.3% total return of the S&P 500 Index. Despite the robust performance of the S&P 500 Dividend Aristocrats on average, many members of this reputed group of dividend growers posted a below-average performance. Some of the notable underperformers were giants Coca-Cola Company (NYSE:KO), PepsiCo Inc. (NYSE:PEP), Procter & Gamble (NYSE:PG), and Exxon Mobil Corporation (NYSE:XOM). These and several other stocks represent the 54% of the S&P 500 Dividends Aristocrats that had below-average total returns in 2012. Among the underperformers, four suffered losses. Here is a list of last year's five worst performing S&P 500 Dividend Aristocrats with dividend yields exceeding 2%.
Pitney Bowes Inc. (NYSE:PBI) was the worst performing Dividend Aristocrat last year, with a total return of negative 37%. This postage meter company has raised dividends for the past 30 consecutive years. Currently, the stock is yielding 14.5% on a payout ratio of 51%. The company's dividend growth averaged 2.6% over the past half decade. Many investors challenge the sustainability of the company's current business model in the age of digitalization and online services for banking, utility payments, etc. The company has been experiencing several years of declining revenues and, in response, has been trying to capture more enterprise-based revenues, which, nevertheless, are lower-margin revenues. However, the strategy has not paid out yet. The company's exceptionally high yield thus reflects the high risk associated with owning this stock. Analysts expect a negative EPS CAGR of close to 2% for the next five years. The stock is trading at only 5.6x its forward earnings. Despite the noted concerns, fund managers Philippe Laffont (Coatue Management) and Cliff Asness hold positions in this stock.
McDonald's Corporation (NYSE:MCD) was the second worst performer among Dividend Aristocrats in 2012, with a total return of negative 7.9%. The world's largest chain of fast food restaurants, McDonald's raised dividends for the past 36 consecutive years. Over the past decade, it was one of the best dividend growers, boosting its payout by 27.4% per year. The latest annual increase was less than half of this average. MCD's current dividend is yielding 3.5% on a payout ratio of 58%. The company has experienced some competitive pressures and lower same-store sales around the world, adversely affected by weak employment globally and the European recession. A stronger dollar also reduced MCD's profitability last year. Despite all this, the company's long-term outlook remains optimistic based on product and service innovations as well as the expansion in emerging markets. Analysts forecast MCD's five-year EPS CAGR at 9.0%. The stock is attractively priced, with a forward P/E of 15.6x versus 18.8x for its industry. Value investor Ken Fisher is bullish about MCD.
Consolidated Edison (NYSE:ED) was the third worst performing Dividend Aristocrat in 2012, with a total return of negative 4.6%. Raising dividends for 38 consecutive years, this electric utility is currently yielding 4.4% on a payout ratio of 64%. On average, the company grew its dividends by less than 1.0% annually over the past five years. ConEd's stock is a defensive income play, with a beta of only 0.11 and high, stable yield. Hurricane Sandy inflicted large damage on the utility's infrastructure, which will require major investments that will be paid for through rate increases. Some analysts have raised concerns about the company's accounting practices that inflated earnings in 2011 and the utility's large unfunded pensions. In general, equity analysts see the stock's long-term EPS CAGR at a meager 3.1% annually. A lower electricity demand and earnings dilutive stock issuances have weighted on valuation. The stock is trading at 14.5x forward earnings, slightly below its industry. The stock is popular with RenTech's Jim Simons.
Archer-Daniels-Midland Company (NYSE:ADM) was the fourth worst performing Dividend Aristocrat in 2012, with a negative 2.8% total return. This agricultural commodities company and ethanol producer has raised its dividend for 37 years in a row. Its current dividend is yielding 2.6% on a payout ratio of 49%. ADM's dividend growth averaged 8.8% per year over the past half decade. The company has seen rising input costs due to severe and chronic droughts in the United States. The rising cost of corn has also hurt its ethanol business, which has seen margins squeezed substantially. ADM is looking to expand internationally through acquisitions, including the offer to buy Australia's GrainCorp for $3 billion, which was turned down by GrainCorp late last year. The company's five-year EPS CAGR is still robust at 10% annually. ADM is trading at below-industry price-to-book and price-to-sales ratios. With a forward P/E of 11.9x, the stock is undervalued relative to its industry and its own historical multiples. Billionaire Cliff Asness is bullish about this stock.
Air Products & Chemicals Inc. (NYSE:APD) was the fifth worst performing Dividend Aristocrat in 2012, with a total return of only 0.3%. This atmospheric gases company has increased its dividends for 30 consecutive years. Its current dividend is yielding 3.1% on a payout ratio of 47%. The company's dividend growth averaged 11.0% annually over the past five years. The company's shares performed poorly in an environment of sluggish economic growth. Rising input costs, especially for helium, have pressed its earnings. Despite some revenue growth, earnings have been adversely impacted by restructuring costs at its photovoltaic business. The company does enjoy stable long-term contracts and has some pricing power, which was demonstrated by the latest hike in helium prices. Counting on the economic rebound starting this year, APD is expected to see a relatively robust five-year EPS CAGR at 9.5% annually. With a forward P/E of 14.8x, the stock is trading at a lower multiple than its historical average. Fund manager Edgar Wachenheim (Greenhaven Associates) holds more than $300 million in this stock.