By Serkan Unal
If stocks' excellence in boosting shareholder value is measured by consistency of dividend growth, then only a small group of stocks is privileged to carry the title of the best and safest among dividend growth stocks. These stocks characterize companies with strong market positions in their respective industries, consistent earnings power through all economic cycles, and strong cash flow generation that allows these companies to pay ever-increasing dividend payouts year after year. While these stocks may not be the ones with the highest yields or dividend growth, consistency of their dividend payments makes them natural picks for prudent income portfolios.
Among the stocks with the longest streaks of consecutive dividend growth, there are four companies that celebrate a semi centennial this fiscal year, or 50 years of consecutive annual dividend increases. Three of the four featured stocks are large-cap blue chip constituents of the S&P 500 index, while only one is a small-to-medium capitalization stock.
Colgate-Palmolive Co. (NYSE:CL) currently pays a dividend yield of 2.3% on a payout ratio of 48% of the current-year EPS estimate. Over the past five years, the company's dividend grew at an average CAGR of 12.3%, faster than its EPS CAGR, averaging 8.7% annually over the same period. The company recently raised its dividend by 10% and approved a 2-for-1 stock split, both effective in the second quarter. CL has a truly global reach, selling products in some 223 countries and territories. Its exposure to emerging market growth is significant, with some 52% of its revenues coming from those markets. The company registered organic sales growth of 6% last year, within the range of its target of 6%-7% growth annually. It is implementing restructuring to achieve cost savings and is optimizing its supply chains, which will help boost its margins by up to 70 basis points this year, from 58.3% in 2012. The company's EPS is expected to expand at a double-digit rate this year, and at a long-term CAGR of 9.7% for the next five years. This growth is driven by rapid expansion and innovation, spanning new markets, products, claims and packaging. In terms of valuation, CL is pricey, trading at 20.5x forward earnings, slightly above its respective industry. Last quarter, the stock was popular with hedge fund managers Paul Ruddock and Steve Heinz (Lansdowne Partners) as well as billionaire Jim Simons.
Johnson & Johnson (NYSE:JNJ) pays a dividend yield of 3.0% on a payout ratio of 45% of the current-year EPS estimate. Its dividend grew at an average CAGR of 8.1% over the past five years, faster than the company's EPS growth of 3.5% annually over the same period. J&J is a pharmaceutical giant with a diversified product mix, robust development pipeline, solid balance sheet, and rising exposure to emerging markets. The company derives some 90% of its earnings from prescription drugs and diagnostics. J&J is an appealing defensive play with exceptionally low volatility of returns, with declines in downturns usually lower than the overall market's. However, the recent run-up in prices has increased the stock's valuation, with JPMorgan analysts recently saying that the stock is currently trading at "an 8% premium to the value of its parts." With a forward P/E of 15.2x, JNJ is also overvalued relative to its peer group. Still, the company has achieved 29 years of consecutive increases in adjusted EPS, with another year of adjusted EPS growth likely to be added this year. However, JPMorgan analysts caution that the current FY2013 EPS guidance could be reduced due to unfavorable trends in foreign exchange rates. Despite the short-term headwinds, the company's long-term outlook remains positive, as the healthcare market is expected to expand by 73% through year 2022. The stock is a major position in portfolios of billionaires Ken Fisher and Donald Yacktman.
Lowe's Companies Inc. (NYSE:LOW) pays a dividend yield of 1.7% on a payout ratio of 31% of the current-year EPS estimate. Over the past five years, the company's dividend grew at an average CAGR of 16.2%, three times as fast as the company's annual EPS growth over the same period. LOW has been a testament to the resilience of the home improvement retailer model in the United States, withstanding various headwinds during the housing cycles over the past several decades. The stock's earnings power and capacity to raise dividends even during the challenging times make this stock one of the desirable dividend plays for the long term. However, the recent housing boom has sent the stock to record high levels in recent months, simultaneously boosting its valuation. Now, despite its expected robust performance in FY2013, in which sales are expected to rise 4% and EPS some 21% year-over-year, the stock is priced fairly at 18.5x, reflecting the upbeat expectations about the housing market's continued recovery. In the near term, however, those expectations can disappoint if housing shows any signs of leveling activity. If that happens, investors' could see better entry points for the stock. In terms of hedge fund interest last quarter, the stock was popular with Citadel's Ken Griffin.
Lancaster Colony Corporation (NASDAQ:LANC), the maker of specialty foods, glassware, and candles, pays a dividend yield of 2.0% on a payout ratio of 38% of the current-year EPS estimate. The company's dividend grew at an average CAGR of 18.8% over the past five years. This annualized rate of dividend growth was close to the company's rate of EPS growth, averaging 16.4%, over the past half-decade. The company has a strong portfolio of high-quality brands, which have driven a 13% CAGR in its specialty foods sales since 1971. Its glassware and candle segment has just turned a profit, which will support EPS expansion going forward. As regards its growth outlook, Lancaster Colony's long-term EPS CAGR is forecasted to 10.0%. LANC appears to be a safe bet due to a long record of sound operating and financial execution. Still, the run-up in LANC's stock price to an all-time high at the end of March has boosted its valuation. The stock is currently trading at 18.7x forward earnings, a small premium to a forward multiple of its respective industry. Despite high valuation, LANC still fares well with investors who are willing to pay higher prices for the company's sustainable and growing dividend, leading to multiple expansion. As regards hedge fund interest, small-cap value investor Chuck Royce reported owning some 1.2 million LANC shares last quarter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Dividendinvestr is a team of analysts. This article was written by Serkan Unal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.