Is It Time To Dump These 5 Dividend Growth Portfolio Stalwarts?

by: Left Banker

Jeff Reeves at InvestorPlace is laying out a pretty bleak assessment of five stocks that he calls "dividend darlings," Cisco (NASDAQ:CSCO), Coca-Cola (NYSE:KO) Merck (NYSE:MRK), Microsoft (NASDAQ:MSFT) and Walmart (NYSE:WMT). I was a bit agog when I saw it because I felt the man was reading my mind, at least for two of three that I hold: WMT, CSCO and MSFT. I've been watching them over the past few weeks thinking, "I can find better dividend stocks -- ones that pay as much or more and have a lot less downside risk right now. I can buy ETFs that put them to shame." Then Reeves comes along and validates that point of view.

I know the DGR mantra: "Stock price doesn't matter. Buy, hold, grow old, and collect your growing dividends." But, much as I like dividends, I'm more of a total return kind of guy, and total return here is looking more than a bit under the weather.

Let's start by looking at the dividends and comparing them to SDY, the SPDR Dividend ETF that tracks the S&P High-Yield Dividend Aristocrats Index.


































Ok, each of the five does beat the yield of the ETF's yield, but four of the five are clocking in at 3% or less which is modest, at best. MRK delivers 3.6%, a bit better, but at the cost of a 102% payout and a meager dividend growth rate.


I'll take up CSCO first because I think Reeves makes the least persuasive case here. The crux of his argument is that CSCO has a history of giving back gains. He sees trouble breaking the $26 mark. On the other side of the coin, one finds superb valuation ratios (P/E = 2.63, P/B = 2.25, EV/EBITDA = 7.05), a solid balance sheet, and a growing demand for its product. Routers, switches, and all those other widgets are what makes the internet happen at every level. I think I'll hold on to my CSCO.


I don't own KO. Every time I've looked at it I thought it was overpriced and its returns simply do not justify its premium valuations (P/E over 20, P/B at 5.3 and EV:EBITDA over 12). It's up a mere 1.2% for the past 52 weeks (vs. 16% for SDY) and its earnings are off. It is, of course, an American icon. But, Americans, especially young Americans, are drinking less soda, and that looks like a trend with legs (and one to be applauded, I'll add). There's not a lot attractive here. Sure, Coke has been and will be around for next-to-forever, but it looks like some rough bits ahead on the road to getting there. Somehow that 2.9% dividend doesn't look all that attractive.


This is the other one of the five I don't hold myself. Been on my watch list for what seems like forever and I do just that: watch. I've never been seriously tempted by it. MRK has the highest yield of the set at 3.6% but it's paying out 102% to maintain that dividend and has been growing it at a snail's pace. Then there's the patent-expiration specter looming for Merck just as it is for other BigPharma companies. With a trailing P/E of 28.4 and EV/EBITDA at 10.4, it, too, feels pricey for its prospects. It's also been a performance laggard with a 52-week gain of 7.8%, about half that of SDY. I'm not an expert on Pharma, but there are many better health care opportunities for my investment dollars.


The question I ask myself much too often is "Why am I still holding Microsoft?" Here's a stock whose major upward driver in the recent past was the bowing out of the CEO. Long overdue, but does anyone really think that it's going to lead to a big enough change in the toxic Microsoft culture? It's a company that has missed boat after boat, and after missing them jumps into the water flailing away in pursuit.

Sure, it's on every desktop in the country, nay the world, but - haven't you heard? -- the PC is dead. Even if that's an exaggeration, which I believe it to be, PC sales are declining and there is no reason to think that's going to turn around any time soon. Windows and Office have been remarkable cash cows, but MSFT management has found a never-ending series of ways to spill that poor cow's milk all over the landscape.

Performance in the recent past has been dismal. In one of the market's monster bull runs, MSFT is up less than a percent for the past year. Who really has confidence that they will be able to do better in the future? Here's another 2.9% yield that is simply not worth having.


Finally, there's Walmart. While performance has been bleak for MSFT, KO and MRK, they're at least positive for the last 52 weeks. WMT is down -1.7%. Reeves asks, "if investors can get a comparable dividend elsewhere, why mess with Walmart?" Why, indeed? At 2.6% it's essentially the same yield as the ETF. So, I'm holding this, why?

WMT's multiples are not drastically off fair value (P/E =14, P/B - 3.4, EV:EBITDA =7.81) but there's nothing here that suggests a bargain that's ready to run. Walmart, much like KO, is not going to go away, but it's getting some serious competition on all ends. Target (NYSE:TGT), Costco (NASDAQ:COST) and maybe Ross (NASDAQ:ROST) laterally, and Family Dollar Store (NYSE:FDO) among others from below.

Summing Up

Reeves raises some great points here. Some hackles as well, I'm sure; each of these has its staunch advocates and defenders. But, is that defense justified? I know all the stories about the old guy who owned KO since the stone age and look how well he's done. Or about Warren Buffet's holdings. Or, any number of other justifications for holding some of these five. But, recent past and, more importantly, prospects going forward do not seem to justify the love bestowed on the likes of KO, MSFT and WMT.

Me? I'm sticking with CSCO. I think Reeves made a bad call here. But the other four? I have to agree with him, and I expect to be out of MSFT and WMT very soon. The whole point of owning individual stocks instead of an ETF is to get better total returns as your reward for doing the hard work of picking winners, right? Even a superficial look at the most obvious comparable ETF (NYSEARCA:SDY) shows that KO, MRK, MSFT and WMT fail to measure up. These are not winners.

I remind readers that I am not a professional and I am most certainly not offering advice. I'm simply sharing my own thoughts, research and conclusions. Anything you may find interesting here will need your own thorough research and due diligence to determine if it may be appropriate for your portfolio.

Disclosure: I am long CSCO, MSFT, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.