Dividend Champions Smackdown III: Low Prices

by: David Fish

In previous installments of the Smackdown series, I screened the Dividend Champions list of companies that have paid higher dividends for at least 25 straight years (which can be found here) starting with companies whose latest increase was by 10% or more (in June) and those with the highest yields (in July). This month, I decided to focus on companies with the lowest prices first, hoping to highlight some undervalued stocks. We know that a stock's absolute price doesn't necessarily equate to “bargain” status, but it's also clear that lower-priced stocks do attract many investors (and traders), who provide some upside momentum. Naturally, it's important to screen for other positive qualities, especially if we are looking for stocks that can be accumulated over the long term. So I screened as follows:

Step 1: Sort the companies by price, from low to high. This gave me a group of 15 companies whose July 30 price was $25 or lower. I eliminated two of these that hadn't increased their dividend in the past year.

Step 2: Sort those companies by yield. The results ranged from 1.02% to 6.32%. Although many investors demand at least 3%, I decided to eliminate only those below 2% at this point (since others may find the 2% initial level acceptable. That left 11 companies.

Step 3: Sort those companies by most recent percentage dividend increase. I decided to eliminate four companies whose latest increase was less than 2%. Those eliminated were Middlesex Water (NASDAQ:MSEX), Old Republic International (NYSE:ORI), Pitney Bowes (NYSE:PBI), and Vectren Corp. (NYSE:VVC), which have yields ranging from 4.35% to 5.98%, so if you can look past the miniscule percentage of the latest dividend increase, they might still be candidates for purchase.

Step 4: Sort the remaining companies by the 5- and 10-year compound annual growth rates (CAGRs) of their dividend increases. Eliminating any with increases of less than 5% cut only Connecticut Water Service (NASDAQ:CTWS), which has a yield of 3.92%, but a history of increasing its dividend by less than 2% annually.

Step 5: Sort those companies by the A/D (Acceleration/Deceleration) ratio, which divides the 5-year CAGR by the 10-year CAGR. All but one company (ABM Industries (NYSE:ABM), at 0.84) had A/D ratios above 1, so five of the final six companies advanced.

Step 5: Compare the remaining companies (all of which had dividend streaks of at least 36 years) by price/earnings ratio, according to Yahoo Finance. That list follows, with price, yield, P/E (as of July 30) (in Bold), and 5- and 10-year Dividend CAGR:

Altria Group Inc. (NYSE:MO), $22.16, 6.32%, 13.33, 15.04%, 13.94%

Leggett & Platt (NYSE:LEG), $20.84, 4.99%, 17.38, 12.12%, 11.18%

Lowe's Companies (NYSE:LOW), $20.74, 2.12%, 16.96, 37.97%, 27.85%

RPM International (NYSE:RPM), $18.77, 4.37%, 13.31, 7.15%, 5.42%

SJW Corp. (NYSE:SJW), $24.89, 2.73%, 29.01, 5.29%, 5.14%

And the Winner is...

...different for each investor. All five of these companies have attractive properties, but selecting a winner will depend on the individual investor. Since we began with the premise of low price, the nod might go to RPM, but not by much. Not many would choose SJW because of its high P/E and relatively low yield...not to mention that its price barely made the cut...but it might be attractive for anyone in search of a water utility to round out their portfolio. Lowe's has the lowest yield of all, but it also has the highest percentage of its latest dividend increase (22.22%) and 5- and 10-year CAGRs, so it could be the best “growth” candidate among the finalists. Altria Group easily has the highest yield, but a tobacco stock may not be acceptable to some. And finally, Leggett & Platt has the distinction of having appeared in Smackdown II, and its yield is still an attractive 5% or so. So all five finalists are winners and deserving of further study for possible purchase.

Disclosure: Author owns MO and RPM among 28 of 100 Dividend Champions