Dividend Champions: Smackdown IV

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 |  Includes: ADP, CINF, CLX, KMB, LEG, MO, MSA, ORI
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), those with the highest yields (in July), and those with the lowest prices (in August). This month, I decided to focus first on the Acceleration/Deceleration (A/D) ratio and the 5- and 10-year Dividend Growth Rates (DGRs). What I hoped to isolate were companies that consistently raise their dividends at above-average rates and provide good dividend yields. Of course, it's also important to screen for other positive qualities, but this approach should give us a good start in identifying high-quality candidates. So I screened as follows:

Step1: Sort the companies by A/D ratio, from high to low. For greatest consistency, I decided to narrow the focus to companies whose A/D ratio was between 0.90 and 1.30. My reasoning was that a number slightly below 1 was natural for companies with long streaks that couldn't be expected to maintain a high percentage increase forever; and that an A/D ratio that was too high might be distorted by one or two exceptional increases and also might be somewhat unsustainable. (I realize that these parameters are somewhat arbitrary, but I'm still in the process of figuring out how to use the A/D ratio in the best way possible.) This gave me a group of 49 companies and I eliminated one that hadn't increased its dividend in the past year.

Step 2: Sort those companies by their 5- and 10-year DGR. Although consistency was the primary sort, I didn't want to select companies that were, in effect, consistently stingy. I eliminated any company whose DGRs were below average (8.8% for 5-year DGR or 7.5% for 10-year DGR). That left 25 companies.

Step 3: Sort those companies by yield. I next eliminated any company whose yield was below the 3.33% average for the Dividend Champions as a whole. This step eliminated 17 companies, leaving just eight candidates:

Name

Symbol

Yrs

Price

Yield

A/D

DGR5

DGR10

Incr

Altria Group Inc.

MO

42

22.32

6.81

1.26

15.04

11.94

8.57

Cincinnati Financial

CINF

50

26.67

6.00

0.93

9.37

10.05

1.27

Leggett & Platt Inc.

LEG

39

19.17

5.63

1.08

12.12

11.18

3.85

Old Republic Int'l

ORI

29

12.78

5.40

1.10

11.05

10.03

1.47

Mine Safety Appliances

MSA

39

22.80

4.39

1.03

21.01

20.31

4.17

Kimberly-Clark Corp.

KMB

38

64.40

4.10

1.04

9.10

8.74

10.00

Automatic Data Proc.

ADP

35

38.61

3.52

1.19

18.71

15.78

3.03

Clorox Company

CLX

33

64.82

3.39

1.26

12.20

9.71

10.00

Click to enlarge

(Although I was tempted to eliminate the two insurance companies because of their very low percentage recent increase, I decided to let them advance to the next screen.)

Step 4: Compare the remaining companies (all of which had dividend streaks of at least 33 years) by price/earnings ratios for the trailing twelve months (ttm) and the next fiscal year, according to Yahoo Finance's Key Statistics pages, data provided by Capital IQ. That list follows:

Name

Symbol

Yrs

Price

Yield

A/D

DGR5

DGR10

Incr

P/E

FP/E

Altria Group Inc.

MO

42

22.32

6.81

1.26

15.04

11.94

8.57

13.65

11.29

Cincinnati Financial

CINF

50

26.67

6.00

0.93

9.37

10.05

1.27

8.79

16.85

Leggett & Platt Inc.

LEG

39

19.17

5.63

1.08

12.12

11.18

3.85

16.78

12.34

Old Republic Int'l

ORI

29

12.78

5.40

1.10

11.05

10.03

1.47

51.24

11.86

Mine Safety Appliances

MSA

39

22.80

4.39

1.03

21.01

20.31

4.17

20.96

15.48

Kimberly-Clark Corp.

KMB

38

64.40

4.10

1.04

9.10

8.74

10.00

13.96

12.55

Automatic Data Proc.

ADP

35

38.61

3.52

1.19

18.71

15.78

3.03

16.34

14.94

Clorox Company

CLX

33

64.82

3.39

1.26

12.20

9.71

10.00

15.40

13.13

Click to enlarge

And the Winner is...

...Altria Group. All of these companies have attractive properties, but the ultimate winner was chosen by process of elimination. Cincinnati Financial had an A/D below 1. It also had at least one DGR below 10%, as did Kimberly-Clark and Clorox. Old Republic had that low percentage recent increase and a very high current P/E. Leggett & Platt, Mine Safety Appliances, and ADP had somewhat low recent percentage dividend increases and marginally higher current P/Es, although their Forward P/Es were lower. But Altria Group excelled in all these categories. The only slightly questionable inconsistency might be its relatively high A/D ratio, but that appears to be a product of its spin-offs of Kraft and Philip Morris International in 2007 and 2008, respectively, after which the payouts were ratcheted up a tad more than usual, but that anomaly shouldn't be repeated. Of course, a tobacco stock might not be acceptable to some. (They could choose one of the runners-up.) All eight finalists are deserving of further study for possible purchase.

Disclosure: Author owns MO and KMB.