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Two of the best predictors of sustainable investing success are dividend growth and company buyback of its stock. Dividend growth is widely appreciated by Seeking Alpha readers. Buybacks are at least as good, and arguably a better, indicator of future performance. There are several ETFs that focus on dividends. At least one, Powershares Buyback Achievers Portfolio (PKW), invests in companies with recent records of stock buybacks. PWK has consistently outperformed the market since its inception. So, how might an investor combine these two?

In this review I look at one measure of where these two intersect. David Fish's CCC list is the premiere resource for dividend growth investors and well known and appreciated here at SA. The S&P 500 Buyback Index, which began publishing last fall, measures the performance of the 100 stocks with the highest buyback ratios in the S&P 500. Ploutos has an ongoing series of articles looking at the companies current in this index. Let's call the portfolio comprising the intersection of these two lists the DGBI Portfolio for Dividend Growth-Buyback Intersection. (click to enlarge)

Here's the list: Ameriprise Financial Inc. (AMP), AmerisourceBergen Corp. (ABC), Assurant, Inc. (AIZ), AT&T Inc. (T), Becton Dickinson & Co. (BDX), C.R. Bard Inc. (BCR), Cintas Corp. (CTAS), Coca-Cola Enterprises Inc. (CCE), CVS Caremark (CVS), Dover Corp. (DOV), Gap Inc. (GPS), Illinois Tool Works (ITW), Johnson & Johnson (JNJ), Kroger Company (KR), L-3 Communications Holdings Inc. (LLL), Lowe's Companies (LOW), McKesson Corp. (MCK), Northrop Grumman (NOC), ONEOK Inc. (OKE), Pentair Ltd. (PNR), Safeway Inc. (SWY), Travelers Companies (TRV), Unum Group (UNM)

SYMBOL

MARKET CAP

SECTOR

AMP

$13B

Financial

ABC

$4.16B

Services

AIZ

$18B

Financial

T

$9B

Technology

BDX

$19B

Healthcare

BCR

$10B

Healthcare

CTAS

$6.02B

Services

CCE

$73B

Consumer Goods

CVS

$15B

Services

DOV

$21B

Industrial Goods

GPS

$33B

Services

ITW

$256B

Industrial Goods

JNJ

$20B

Healthcare

KR

$8.31B

Services

LLL

$49B

Industrial Goods

LOW

$28B

Services

MCK

$22B

Healthcare

NOC

$11B

Industrial Goods

OKE

$3B

Utilities

PNR

$6.20B

Industrial Goods

SWY

$184B

Services

TRV

$31B

Financial

UNM

$7.82B

Industrial Goods

The portfolio comprises 23 large cap companies spread among 7 sectors: 7 in Services, 6 Industrial Goods, 4 Healthcare, 3 Financial, and 1 each from Consumer Goods, Technology and Utilities.

Performance

Price performance for the past 52 weeks for these 23 stocks has been outstanding with an average increase of 38.2%, a very impressive 86.4% increase over the 20.5% gain for the S&P500 (SPY). All but one were winners over the past year, with all but four (ABC, BCR, OKE, T) topping the index. Average beta for the group: 1.00.

(click to enlarge)

Of course, it's not clear when these four were added (or, to be more accurate, when they would have been eligible to be added to, as the index itself isn't 52 weeks old) to the S&P Buyback Index. So the 52 week performance may not be a valid comparison. The index is recalculated quarterly, so how have these stocks have performed recently, say the last four weeks? Here, too, the numbers look quite good: There's an average gain of 1.61% for the group vs. +1.01% for SPY.

Dividends and Dividend Growth

These 23 companies have solid, but not spectacular, dividend yields. Dividend growth rates are, on the other hand, generally quite impressive. There are average dividend growth rates here of 17, 15 and 14% for 1, 3, and 5 years, respectively. The values are summarized in the following table. Note that there is some modest disagreement among sources on these figures, especially dividend growth rates. I've chosen to use Dave Fish's numbers mainly because (to be honest) they're in an easier-to-transfer format. You may well find somewhat different results for any individual stock, but nothing I've found is wildly off from what I'm showing here.

SYMBOL

DIV YIELD

EPS PAYOUT

DGR-1yr

DGR-3yr

DGR-5yr

ABC

1.40%

33.20%

30.43%

35.72%

39.77%

AIZ

1.80%

20.04%

15.71%

11.14%

11.98%

AMP

2.30%

36.36%

64.37%

28.12%

20.62%

BCR

0.70%

40.00%

5.41%

4.68%

6.10%

BDX

2.00%

35.23%

12.50%

11.81%

13.49%

CCE

2.10%

38.10%

25.49%

28.73%

21.67%

CTAS

1.30%

25.30%

18.52%

10.84%

10.41%

CVS

1.50%

27.95%

30.00%

28.83%

23.20%

DOV

1.70%

26.32%

12.71%

9.25%

11.55%

GPS

1.30%

23.35%

11.43%

12.76%

8.78%

ITW

2.30%

28.90%

5.80%

5.60%

9.92%

JNJ

2.90%

58.67%

6.67%

7.54%

8.18%

KR

1.50%

20.62%

15.12%

10.69%

11.29%

LLL

2.40%

26.19%

13.41%

13.40%

15.34%

LOW

1.60%

41.38%

20.00%

19.68%

18.20%

MCK

0.80%

16.49%

2.56%

18.56%

27.23%

NOC

2.60%

30.31%

11.71%

12.08%

9.96%

OKE

2.90%

91.02%

17.59%

15.70%

12.65%

PNR

1.60%

N/A

10.00%

6.92%

7.96%

SWY

3.20%

41.24%

20.75%

20.59%

20.30%

T

5.20%

136.36%

2.33%

2.38%

4.39%

TRV

2.40%

25.84%

12.58%

13.32%

9.64%

UNM

2.00%

17.96%

18.99%

14.27%

9.39%

Average

2.07%

38.22%

16.70%

14.90%

14.44%

SPY

1.97%

Valuations

I hope that by now I've at least begun to persuade most dividend growth investors that the DGBI Portfolio shows some impressive performance credentials. How about valuations? Let's have a look:

SYMBOL

TOTAL EV

TRAIL P/E

FRWD P/E

P:SALES

P:BOOK

EV:EBITDA

EV:SALES

EV:FCF

ABC

13B

25.60

19.00

0.16

5.56

10.16

0.16

9.85

AIZ

5.8B

11.00

9.80

0.48

0.87

7.99

0.67

9.02

AMP

21B

15.70

13.20

1.67

2.13

11.62

1.94

-11.44

BCR

10B

56.40

19.60

3.06

5.85

10.97

3.27

27.65

BDX

21B

13.40

17.40

2.44

4.10

10.02

2.65

21.06

CCE

14B

18.10

15.40

1.29

4.92

11.77

1.71

43.04

CTAS

7.0B

19.50

18.10

1.40

2.73

9.24

1.62

33.73

CVS

82B

17.80

15.20

0.59

1.89

8.47

0.66

44.86

DOV

17B

16.60

16.70

1.85

3.03

9.97

2.04

751.39

GPS

20B

17.40

16.10

1.31

6.56

7.98

1.28

22.94

ITW

35B

14.60

17.50

1.94

3.21

10.74

2.09

13.71

JNJ

240B

20.40

16.80

3.66

3.67

10.96

3.43

13.31

KR

21B

13.40

13.90

0.21

4.39

4.63

0.21

34.38

LLL

12B

11.10

11.40

0.63

1.48

7.20

0.88

15.94

LOW

56B

26.20

22.00

0.96

3.66

10.86

1.12

37.30

MCK

30B

21.00

14.90

0.23

3.81

9.87

0.24

20.82

NOC

23B

11.80

12.20

0.87

2.28

6.31

0.91

17.22

OKE

17B

37.70

31.50

0.78

5.05

13.21

1.25

-10.28

PNR

15B

-

19.80

1.99

2.17

39.80

2.38

37.28

SWY

10B

11.50

22.70

0.15

1.95

4.92

0.24

12.33

T

255B

25.70

14.00

1.44

2.14

8.40

2.00

29.97

TRV

36B

10.60

10.20

1.18

1.23

8.59

1.40

14.59

UNM

11B

9.00

9.10

0.74

0.93

7.55

1.01

10.55

Average

19.30

16.37

1.26

3.20

10.49

1.44

52.14

Trailing P/E averages 19.3 (SPY=19.24) and forward P/E is a respectable 16.4. Price/Book is a bit high at 3.20, but not frighteningly so for a group showing impressive performance and a solid commitment by management to shareholder value.

Analyst Opinions

I've looked at the StarMine Equity Summary Score as a surrogate for analysts' opinions. It's far from a perfect metric, but it does provide a reasonable summary. The score is based on a minimum of four analysts (typically more than four for well covered stocks such as these) and is weighted to reflect each analyst's history based on such things as the kinds of recommendations the analyst tends to give and their track record in the sector and industry. It uses a ten point scale graded from very bearish (>1.0) to very bullish (>9.0). The average score for the DGBI portfolio is 7.53 (bullish). Nine (ABC, CVS, DOV, JNJ, KR, MCK, NOC, TRV, UNM) are in the very bullish range and 5 more (AIZ, AMP, CCE, GPS, LLL) in the bullish range. Two (OKE, PNR) drop into the bearish range. The rest are neutral.

(click to enlarge) Summary

Two well established criteria for shareholder value are dividends and buybacks. There is considerable evidence that each of these metrics can predict enhanced total return. By combining the two the investor has the opportunity to add value and return to his or her portfolio. What I've shown here is a method for screening both criteria and using them to create a portfolio of solid dividend paying companies with management clearly committed to enhancing shareholder value. While I certainly would not recommend all of these 23 stocks going forward, I do feel that there are several, or even many, real gems in the list.

I plan to follow this portfolio into the future. If readers find this approach interesting, I'll report back with quarterly updates on performance and rebalancing based on changes to the CCC list and the Buyback Index.

This is, of course, only a summary overview. Any investor should thoroughly research the appropriateness of any of these for their individual goals. I'd appreciate any comments, concerns or corrections Seeking Alpha readers have with either the approach or the list.

Source: Find Easy Street At The Intersection Of Dividend Growth Drive And Buyback Lane

Additional disclosure: I am looking closely at several of the stocks mentioned and may initiate a long position in one or more over the next 72 hours.