In previous installments of this series (Part I, II, III, and IV), 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), those with the lowest prices (in August) and those with the most desirable 5- and 10-year Dividend Growth Rates and A/D (Acceleration/Deceleration) ratios (in September). Since I have added fundamental data to the listing that was posted on September 30, it's only natural that I use that as a starting point for this month's Smackdown. (As always, it's also important to screen for other positive qualities before choosing any investment.) So I screened as follows:
Step1: Sort the companies by payout ratio, from low to high. I decided to narrow the field to companies whose payout ratio was below 50%. My reasoning was that these companies' dividends are relatively safe and that there is still plenty of room for increases. (Keep in mind that some companies, such as utilities and tobacco companies, typically pay out a higher portion of income, so they might be considered separately.) This screen gave me a group of 51 companies once I eliminated three that hadn't increased their dividends in the past year.
Step 2: Sort those companies by yield. I didn't want to select companies that had low payout ratios simply because they sported low yields. Eliminating yields below 2% cut the list almost in half, leaving a total of 27 companies.
Step 3: Sort those companies by the price/earnings (P/E) ratio, low to high. (The P/E divides the 9/30 price by the trailing twelve months (TTM) earnings per share.) I eliminated any company whose P/E was higher than 15, leaving just 15 candidates.
Step 4: Sort the remaining companies by 5- and 10-year Dividend Growth Rates, high to low. Eight companies had 5-year DGRs above 10% and, of these, only one (Chubb Corp. (CB)) had a 10-year DGR below 10%.
Step 4: Compare the remaining companies (all of which had dividend streaks of at least 28 years) by the percentage increase of Next Year's EPS estimate over This Year's EPS estimate. (See column AC in the spreadsheet.) I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases. This eliminated one company (RLI Corp. (RLI)) whose earnings are expected to decline by over 11% next year. The list of remaining candidates follows:
No. | 9/30/10 | DGR | DGR | Payout | TTM | NY/TY | ||||
Company | Symbol | Yrs | Price | Yield | A/D* | 5-yr | 10-yr | %Ratio | P/E | Growth |
Procter & Gamble Co. | 54 | 59.97 | 3.21 | 1.12 | 11.97 | 10.65 | 46.89 | 14.59 | 9.62 | |
AFLAC Inc. | 28 | 51.71 | 2.32 | 1.06 | 24.13 | 22.68 | 30.85 | 13.29 | 9.51 | |
Wal-Mart Stores Inc. | 36 | 53.52 | 2.26 | 0.94 | 17.06 | 18.09 | 31.11 | 13.76 | 9.48 | |
Valspar Corp. | 29 | 31.85 | 2.01 | 1.07 | 10.76 | 10.06 | 29.36 | 14.61 | 9.42 | |
Medtronic Inc. | 33 | 33.58 | 2.68 | 1.10 | 20.23 | 18.40 | 28.48 | 10.63 | 7.60 | |
Johnson & Johnson | 48 | 61.96 | 3.49 | 0.89 | 12.00 | 13.48 | 44.63 | 12.80 | 6.79 |
And the Winner is...
...subjective. All of these companies have attractive properties, but the ultimate winner will depend on what is most important to each investor. Procter & Gamble (PG) has the highest expected earnings growth next year, followed closely by AFLAC (AFL), Wal-Mart (WMT), and Valspar (VAL). But it also had the highest payout ratio, followed closely by Johnson & Johnson (JNJ), which had the highest yield. Medtronic (MDT) had the lowest P/E and payout ratio, and is the only one of these companies that is more than 10% below its 52-week high (not shown above) at 28% below that peak. Valspar is the only mid-cap, with a market value of just $3.14 billion, whereas Procter & Gamble, Wal-Mart, and Johnson & Johnson are each worth more than $100 billion. All six finalists are deserving of further study for possible purchase.
Disclosure: Author owns PG, AFL, MDT, and JNJ.
