By: Jake Mann
In the financial sector, the stocks that get the most press are banking giants like Bank of America (BAC) and JPMorgan (JPM), or the many different types of REITs out there, but when it comes to dividends, you may be missing the best this space has to offer.
When parsing through the dividend histories of all publicly traded financial companies in the U.S., three names stand out in particular because each has generated at least 25 straight years of dividend increases. In this sector, the trio we'll discuss is the only group that qualifies to be in this elite club.
Now, these streaks are a rarity, and only a select group of stocks offer income investors this type of consistency. Aside from one market-beating small-cap strategy we can think of, this is a pretty good way to find unheralded names. Let's take a look:
We'll start with Eaton Vance (EV), a mid-cap investment manager that has upped its dividend in 32 consecutive years, and currently offers a yield of 2.1%. The company paid a one-time special dividend of $1.00 per share last December, which represents about five quarters of normal payments. Although a payout ratio near 80% is a bit worrisome, Eaton has enough cash flow growth and earnings stability to continue its dividend expansion for at least the next few years in a worst-case scenario.
On the back of strong growth in investment advisory and administration fees, Eaton has more than doubled its free cash flow in the last two years, and earnings has averaged 10% annual growth in the last five. Over the next half-decade, Wall Street expects EPS to expand by an even quicker rate of about 14% annually, and a PEG ratio near 1.9 indicates the valuation isn't scary yet.
The bears may cite Eaton's somewhat lackluster investment performance versus peers in the equity markets as a reason to think about passing on this stock, but its ability to introduce new products via a strong sales team largely makes up for this fault. Eaton's ability to expand beyond traditional advisory channels into high net-worth clients, pension plans, and endowments also allowed it to grow total AUM by almost 15% last year.
In the hedge fund world, a ton of new interest from guys like Israel Englander, David Harding and David Shaw indicates that the smart money may be jumping on this growth and stable income as well. We're not saying the valuation is beautiful, but the dividend streak is.
Franklin Resources (BEN), meanwhile, is a larger, more multi-faceted investment manager and bank, and it has boosted its dividend payments in 33 straight years. Of all the U.S.-listed stocks in the financial sector, Franklin has the longest streak, one year ahead of Eaton Vance. Richard Pzena and Ken Griffin (see his favorite stock picks) are a couple of the biggest hedge fund managers who are bullish, and unlike Eaton, there's some value here as well.
Franklin Resources' dividend currently yields 0.7% on a modest payout of 41% of earnings. The company has consistently generated strong free cash flows with lower debt levels than industry norms, and earnings are expected to grow by 14% over the next five years. This is a major uptick of nearly threefold from the past half-decade, and at 14.5 times forward estimates, the stock is fairly cheap.
Franklin's specialty is fixed income products, but don't overlook its development of alternative asset options, and emerging markets are another place to watch. Generally speaking, this is one of the most profitable companies in the investment management industry, and aside from the monster dividend consistency, Franklin has also bought back plenty of stock since 2011.
Special dividends with mid-single digit yields have been paid in three of the past four years as well; don't sleep on that possibility either.
T. Rowe Price Group
T. Rowe Price Group (TROW) is the only other financial stock with consecutive annual dividend growth for more than two and a half decades, with its streak sitting right at 26 years. Poetically enough, T. Rowe sits right in between Eaton Vance and Franklin Resources in terms of valuation at a fair PEG ratio of 1.5 and a forward earnings multiple of 18, and earnings growth estimates are nearly identical to the latter peer.
T. Rowe pays 67% of its earnings out as dividends, and free cash flow growth of more than 30% since 2010 with no debt indicates there's nothing on the horizon that suggests liquidity will be a problem any time soon.
Expect the streak to continue at least for the intermediate future, and keep watching the performance of T. Rowe Price's mutual funds. Over the last three years, nearly three-fourths of its funds in this area have beaten peer averages, and investment advisory fees were up 16% year-over-year last quarter. T. Rowe Price currently pays a dividend yield of 1.9%, and shares are up 19% year-to-date.