By: Jake Mann
The average investor probably thinks of mega-caps like Coca Cola (KO) and IBM (IBM) when he or she hears the word "dividend stalwart," but the truth is, there are more interesting names swept under Mr. Market's rug that go unnoticed. Small-caps are the focus of market-beating empirical studies like these while everybody knows the bigger names, but one group of stocks that is hardly discussed is the mid-caps.
Loosely defined by companies with market capitalization between $2 billion and $10 billion, there are a few mid-cap stocks that are absolute beasts when it comes to dividends. We'll take a look at three mid-cap companies in particular that have hiked their dividends in 50 or more consecutive years.
Diebold (DBD) is No. 1 on this list because of all the mid-cap stocks publicly traded in the U.S., it takes the cake when it comes to dividend consistency. The computer peripherals provider is currently in the midst of a massive streak, generating 60 straight years of dividend hikes. Diebold pays a dividend yield of 3.8% and has boosted this payout by 85% since 2000.
On the flip side, Diebold's full-year payout ratio for 2012 clocked in above 90%, which is certainly a red flag, and it has generated a loss of $2.20 per share for its first three quarters of this year versus earnings of $1.36 per share last year. Of course, this loss is almost entirely related to Diebold's pre-tax goodwill impairment charge in Brazil, and excluding its effect, the number most investors are looking at is $1.30 to $1.40 in EPS by the end of this year.
Over the longer term, the sell-side expects Diebold's earnings to grow by 6% a year through 2018, aided by the company's electronic security business particularly at the national banking level. Latin American growth will likely continue to be stalled by lower demand for ATMs in general, but Asia should pick up the slack, if you follow that general school of thought. Wall Street expects earnings to hit $1.94 next year and if it can get close to this figure, we think the dividend growth streak will continue.
Lancaster Colony (LANC), meanwhile, is another mid-cap that has generated 51 straight years of dividend growth, but unlike Diebold, it operates in the packaged food ingredients industry. Lancaster's ability to manufacture and market specialty foods for both retail and foodservice markets has allowed it to generate remarkably stable earnings and free cash flow. The latter figure has been above $100 million for five of the past six years, and earnings have grown by 20% a year over the past half-decade.
Shares of Lancaster aren't expensive and they aren't cheap at 18 times forward earnings and a price-to-book of 4.5x, but it's this consistency that makes it a great place for dividend investors to think about. The company did just miss its third quarter earnings mark by 3% but we don't expect its dividend streak to be interrupted any time soon. Lancaster offers a yield of 1.9% on a payout ratio of just 30%, and its relatively stable spot in the packaged food space should benefit from emerging market growth. Forecasts of a dry 2014 could inhibit margins for companies like Lancaster as ingredient costs rise; shorter-term investors keep that in mind. Longer-term dividend seekers, though, should love the low payout and growth history here.
Nordson (NDSN), lastly, is the only other mid-cap we could find that has generated dividend growth in 50 or more consecutive years. The industrial machinery manufacturer makes equipment that is used in industries from auto to bookbinding; LED and solar energy is a couple of its most promising areas from a growth standpoint. Nordson pays a dividend yield of 1% at a payout of 17%, and Wall Street expects earnings to grow 14% a year over the next five years. Free cash flow has also almost doubled in the past two years, so there's nothing to worry about here. Even one insider has bought in this year.
From a macroeconomic standpoint, Nordson is obviously exposed to the same potential calamity as every industrial machinery company, but the diversity of its clientele offers it a bit more leeway. It's reasonable to expect that the U.S. and European industrial space will continue to rally in 2014, and an ISM non-manufacturing index nearly nine percentage points above 50 is a bullish signal.
Unlike Lancaster and even Diebold, we're less worried about short-term traders in Nordson, but over the long term, it's difficult for dividend investors not to like all three.