By Serkan Unal
Consistent dividend growth provides inflation protection and allows for compounding that increases income streams from dividends. This is more favorable than earning fixed income streams from securities like bonds. In fact, dividend compounding, among other things, has such a powerful effect on total equity returns, that, according to Raymond James:
going back to 1960, 79.5% of the total return of the S&P 500 index can be attributed to reinvested dividends and the power of compounding.
While many stocks pay attractive yields and have good prospects for consistent dividend growth in the future, a select few can afford to double their dividend payouts in a short period of time. These stocks with yields of at least 3% have current dividend payouts below 40%, debt-to-equity below 50%, and positive long-term EPS growth. Below is a quick glance at five dividend payers with a potential to double down on their dividend payouts.
Ensco Ltd. (ESV), a supplier of offshore contract drilling services, pays a dividend yield of 3.6%. Its dividend payout ratio is only 30% of the current-year EPS estimate. The company's five-year dividend growth was 74.6%. Ensco also has a favorable ratio of long-term debt to equity, which is currently at 40%. The offshore contract driller recently boosted its dividend by 33%, on the back of an expected surge in future cash flows from a $12-billion revenue backlog and growth driven by new rigs put in operation through next year. Driven by high oil prices and record-high capital spending on oil and natural gas E&P that have invigorated the offshore drilling demand, Ensco's EPS is forecasted to grow at a near 30% CAGR for the next five years. If this forecast materializes, the company will be able to grow its dividend substantially without notably increasing its payout ratio. The stock is also inexpensive, trading at 8x forward earnings. OXY is popular with several hedge fund managers, including David Einhorn, Peter Rathjens (Arrowhead Capital) and Robert Pitts (Steadfast Capital).
Chevron Corporation (CVX), the energy behemoth, has a dividend yield of 3.3%, which was recently boosted by an 11.1% increase in the company's payout. Its payout ratio is 32% of the current-year EPS estimate. In addition to raising dividends, this S&P Dividend Aristocrat has been returning about $5 billion annually to shareholders through share buybacks. The company's operating cash flow last quarter was below levels in the previous quarters, due to high working capital requirements in the downstream operations. Because of high capex needs, its cash holdings fell by 17%. However, the company sees the impact reversing in the future quarters. Thus, with a total debt-to-equity of only 10% and a $17-billion cash cushion, Chevron has ample flexibility in capital spending and commodity price fluctuations. The company has solid balance sheet, excellent long-term volume and cash flow growth prospects, and the highest profitability per barrel in its industry. The stock is trading at 9.7x forward earnings (on par with its industry), with a long-term EPS CAGR of 1.6%. Based on the last-available fund holdings disclosures, CVX is popular with Ken Fisher and Phill Gross (Adage Capital).
Schweitzer-Mauduit International Inc. (SWM), the world's largest maker of cigarette paper, pays a dividend yield of 3.0% on a payout ratio of 31% of the current-year EPS estimate. Back in February, the company doubled its regular quarterly payout, which was the second such dividend boost in the past year. As a result, SWM's current dividend payout is 4 times greater than that one year ago. The company's long-term debt-to-equity is 30%. The company's leadership position, especially in premium brands and in China, bodes well for its growth prospects, as the market is shifting from West to East, with Asia accounting for 60% of the global cigarettes market. The Asian market is also the fastest growing, seeing cigarette consumption CAGR of between 2.5% to 3.0% annually, compared to the overall global consumption CAGR of about 0.5%. Projected to grow its EPS at a CAGR of 15% annually for the next five years, over the long term, SWM plans to return at least a third of its free cash flow to shareholders via balanced dividend and share repurchase programs. SWM is trading at an attractive 10.4x forward earnings and is a holding in small-cap value fund, Royce Special Equity Fund (check out the fund's positions here).
Validus Holdings, Ltd. (VR), a provider of reinsurance, insurance, and insurance-linked securities fund management services in the property, marine, and specialty lines, pays a dividend yield of 3.1% on a payout ratio of 24% of the current-year EPS estimate. Its long-term debt-to-equity is low at 10%. The reinsurer has been profitable in every year of operations since 2006, and recently reported record first-quarter earnings, driven by strong growth in both gross and net premiums written at Validus Re, mainly due to the agricultural reinsurance business and the Flagstone acquisition. In the first quarter, the company had annualized return on average equity [ROAE] of 22.5%. The reinsurer is committed to boosting shareholder value through dividends and share buybacks. In February, it paid a special dividend of $2.00 per share, raised its regular dividend by 20%, and increased the share repurchase authorization to $500 million. VR is trading at book value, slightly above its five-year historical average. Among fund managers, Ken Griffin, Phill Gross, and Leon Cooperman were fans of the stock in the December quarter.
Occidental Petroleum Corporation (OXY), one of the largest U.S. oil and gas companies, pays a dividend yield of 3.0% on a payout ratio of 36% of the current-year EPS estimate. Back in February, the company raised its dividend by 18.5%. Given its low payout ratio and forecasted long-term EPS CAGR of 6.0%, OXY is likely to continue boosting its dividend at high rates. Its low debt-to-equity of 19% will also allow for continued dividend growth. The company recently beat analyst estimates of both revenues and EPS, but these two indicators were below levels from the year earlier, despite record domestic daily oil and natural gas production and higher total daily production. The company targets oil and gas output growth of between 5% and 8% per year on average over the long term. It also expresses commitment to achieving "consistent dividend growth that is superior to that of (its) peers." As a testament to its commitment to dividend growth, with 11 consecutive annual increases, OXY is now a member of Nasdaq Dividend Achievers Index. OXY is trading at 11.9x forward earnings. In the fourth quarter, it was popular with billionaire D. E. Shaw.