The Dividend Champions list of companies that have paid higher dividends for at least 25 straight years can be found here and has been updated through September 30. Yesterday, I posted the fifth in the series of Dividend Champions Smackdowns, which focused on the newly added fundamental data, beginning with the dividend payout ratio. (You can read that here.)
I narrowed 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. But at least one commenter thought that this approach unfairly eliminated some excellent companies, such as utilities, tobacco companies, and real estate investment trusts, all of which deliberately pay out more than 50% of earnings to shareholders. Investors looking for higher yield immediately would be interested in just the opposite approach, starting with companies that pay out more than 50% of earnings.
So I screened as follows:
Step 1: Sort the companies by payout ratio. This screen gave me a group of 43 companies with payout ratios above 50% (once I eliminated three that hadn't increased their dividends in the past year).
Step 2: Sort those companies by yield. The same commenter postulated that there are plenty of companies earnings 7% or more and also wondered about companies yielding 3.5% that might grow the dividend to a 7% yield on cost. Eliminating yields below 3.5% cut the list to 25 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.) In yesterday's Smackdown, I eliminated any company whose P/E was higher than 15, but the commenter mentioned above also asked why the P/E had to be that low, so I decided to eliminate only three companies that had extremely high P/Es. (Those were Old Republic International (NYSE:ORI), with a P/E of 55.40, Nucor Corp. (NYSE:NUE), with a P/E of 81.28, and Investors Real Estate Trust (NASDAQ:IRET), with a P/E of 419.00. They may be worth further research by anyone believing that the ratio might be distorted by unusual earnings items.) This step left us with 22 candidates.
Step 4: Sort the remaining companies by 5- and 10-year Dividend Growth Rates, high to low. Eleven companies had 5-year DGRs above 5% and, of these, only one (Genuine Parts (NYSE:GPC)) had a 10-year DGR below 5%. (Yesterday's screen required 10%, but for these higher-payout companies, 5% is a reasonable hurdle.) I also decided to eliminate any company whose most recent increase was for less than 2.5%. That eliminated AT&T Inc. (NYSE:T), Community Trust Banc (NASDAQ:CTBI), and Cincinnati Financial (NASDAQ:CINF).
Step 5: Compare the remaining seven companies (all of which had dividend streaks of at least 33 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 (CenturyLink Inc. (NYSE:CTL)) whose earnings are expected to decline by 4.41% next year. The list of remaining candidates follows:
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And the Winner is...
...subjective (again). All of these companies have attractive properties, but the ultimate winner will depend on what is most important to each investor. The first three companies listed have double-digit expected earnings growth next year. But MSA and LEG, along with MO, have the highest payout ratios and MO, the winner of last month's Smackdown, easily has the highest yield. The bottom four (in the listing) have the lowest P/E ratios. MSA is the only one with a market cap below $1 billion, whereas the bottom three range from $16.78 to $50.06 billion in market cap. MSA, RPM, and Sysco were all more than 10% below their 52-week high, while LEG was close at 9.5%. (KMB was just 3.3% below its 52-week high and MO was just 1.3% lower.) So, once again all six finalists are deserving of further study for possible purchase.
Disclosure: Author owns GPC, T, CTL, RPM, KMB, and MO.