By Serkan Unal
In 2012, the S&P 500 Dividend Aristocrats, a group of stocks that have raised dividends for at least 25 consecutive years, outperformed the overall S&P 500 Index by a whole percentage point. Consisting of 51 companies, the S&P 500 Dividend Aristocrats had an average total return of 15.3% for the year as a whole, versus 14.3% for the blue-chip benchmark, the S&P 500. While the S&P 500 Dividends Aristocrats as a group realized a remarkable average total return over the past year, some members fared better than others. In fact, more than 40% of the S&P 500 Dividends Aristocrats had above-average total returns in 2012. Here is a list of last year's five best performing S&P 500 Dividend Aristocrats with dividend yields above 2%.
Cincinnati Financial Corp. (CINF) was the fourth best performing Dividend Aristocrat in 2012, with a total return of almost 34%. Raising dividends for 51 consecutive years, the company is currently yielding 4.2% on a payout ratio of 73%. On average, this property and casualty insurance provider increased dividends by 2.7% annually over the past five years. With the company's long-term EPS growth projected at a modest 5.0% per year and an elevated payout ratio, dividend hikes in low single digits are expected in the future. In a year of remarkable performance for insurance stocks, Cincinnati Financial has rallied substantially despite its heavy exposures to catastrophe-prone Midwest and Southeast. The company has a number of strengths including adequate risk-adjusted capitalization, strong balance sheet with substantial free cash flow and low leverage, strong operational performance, and a solid business model. The stock is not cheap by any means, as it trades above industry with 18.2x trailing and 22.5x forward earnings. The stock is popular with Jean-Marie Eveillard's First Eagle Investment Management.
Illinois Tool Works (ITW) was the fifth best performing Dividend Aristocrat last year, with a total return of 30%. This industrial products and equipment manufacturer has raised dividends for the past 49 consecutive years. Currently, the stock is yielding 2.5% on a payout ratio of 31%. Its dividend growth averaged 8.6% over the past five years. The company has performed well in line with the expectations of a rebound in industrial production. It raised its guidance for the fourth quarter and the full year 2012. ITW expects revenue growth between 1% and 3% in 2013 and forecasts growth rates some 200 basis points above the rate of growth in industrial production by 2017. Moreover, the company sees 100% free cash flow conversion. Its five-year EPS CAGR is forecasted at 10.6% annually, while the company sees an accelerated EPS CAGR of 12.3% per year beyond 2017. The stock is attractive based on valuation. Its forward P/E of 14.4x is below industry's 27.7x. The company has a PEG of 1.5. ITW is popular with fund manager Ralph Whitworth (Relational Investors).
McCormick & Co. (MKC) was the sixth best performing Dividend Aristocrat in 2012, with a total return of 29%. This spice and seasonings maker has boosted dividends for 26 consecutive years. Its current dividend is yielding 2.2% on a payout ratio of 47%. The company's dividend growth averaged 9.1% annually over the past half decade. MKC has been growing through accretive overseas acquisitions. The company is planning additional acquisitions in fast-growing China. While it delivered weak revenue and above consensus EPS in the previous quarter, MKC is expected to see its five-year EPS CAGR at 8.5% annually. The company has strong brand recognition and has recession-resilient earnings, as evidenced by its earnings expansion during the last recession. Its beta is only 0.45. In terms of valuation, the stock is pricey with a forward P/E of 19.2x versus its industry's 16.2x. Insiders have also been accumulating this stock. Fund managers John W. Rogers (Ariel Investments) and Cliff Asness are buyers of MKC.
Leggett & Platt (LEG) was last year's ninth best performer among Dividend Aristocrats, with a total return of nearly 24%. The maker of components for residential furniture and automobile seats, Leggett & Platt has raised dividends for the past 41 consecutive years. Its dividend is yielding 4.4% on a payout ratio of 93% of trailing earnings and 57% of trailing free cash flow. The company has seen a rebound due to recoveries in the housing market and the auto industry. LEG's 5-year EPS CAGR is forecasted at 15%, which should bode well for the stock's continued appreciation and dividend growth. The company accelerated the payment of its dividend from January 2013 to December 2012 so as to assure its shareholders benefit from a lower dividend tax rate. Based on its forward multiple of 17.3x, LEG is trading on par with the furnishings industry and below its own five-year valuation average. Fund manager Michael Lowenstein (Kensico Capital) holds a stake in the company.
Aflac Inc. (AFL) was the 11th best performing Dividend Aristocrat in 2012, with a nearly 22% total return. This life and supplemental insurance provider has raised its dividend for 30 years in a row. Its current dividend is yielding 2.7% on a payout ratio of only 23%. The insurance provider's dividend growth averaged 10.9% per year over the past half decade. The company has a rock-solid balance sheet with low leverage. It has benefited from a robust demand for insurance products in Japan, its core market. AFL has also seen stronger stock performance following the easing of concerns about the company's possible exposure to bad European financial sector debt. While it remains highly exposed to Japanese government bonds, AFL is diversifying by increasing its exposure to U.S. government debt. Analysts see AFL's EPS expanding at a robust long-term CAGR of 10.2%. Despite the recent run-up in prices, with a forward P/E of 7.8x, the stock is still undervalued relative to its historical multiples. Citadel Investment's Ken Griffin is particularly bullish about this stock.