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Summary

  • The dividend aristocrats generally outperform the market, but not all are so far this year.
  • All 4 stocks have boosted their dividends for at least 37 years straight.
  • Just because they've underperformed the market doesn't mean they are all solid investments for the second half of the year.

The S&P 500 is up roughly 6% for the last quarter and for year-to-date. The market is trading near all-time highs, but not all stocks are feeling the love. Despite the fact that dividend aristocrats tend to outperform the broader market, there are 4 that are underperforming the market. Below are the 4 worst-performing dividend aristocrats so far this year. All 4 are down YTD and for the current quarter.

First up is Target (NYSE:TGT), which is down 7% YTD and around 2.5% for the quarter. Its shares are down over 12% on the year. The company's dividend yield is 3.6% and it's boosted its annual dividend payment for 46 straight years.

Target's credit breach issue has kept the stock trading below major peers and the market. It ousted its CEO in an effort to revamp its brand image. There's speculation that Target could hire Rosalind Brewer, the Sam's Club CEO, as its new CEO.

But its Canadian operations are still a drag. The Canadian business had an operating loss of nearly $1 billion in its first year. It remains to be seen whether Target has fully addressed its inventory issues in Canada, but it has continued to push ahead with marketing plans in the country.

Its current dividend yield is well above its five-year average dividend yield of 2%. And it has also been steadily buying back shares; it's reduced its shares outstanding by 15% over the last five years.

Going forward, Target has a big opportunity in turning to smaller stores. This includes its Target Express and CityTarget stores. These smaller stores (which are around 15% to 50% the size of regular stores) are designed to tap into the success that dollar stores have seen over the last half decade. The convenience (smaller format) appeal will be a big positive, but it also allows Target to get into smaller, higher traffic areas.

Pentair (NYSE:PNR) is down 5% YTD and second on the list. Pentair offers the lowest dividend yield of the four - at 1.37%. It has boosted its dividend payment for 37 consecutive years. Pentair delivers products and solutions for water and other fluids. The underperformance isn't too surprising considering the market is trading boring stocks or exciting tech stocks.

Pentair merged with Tyco's Flow Control business in 2012. This turned Pentair from a water company to more of a diversified industrial company with equal exposure to infrastructure and food & beverage. During 4Q, Pentair saw $50 million in cost synergies thanks to the merger. For all of 2013 it realized $130 million, surpassing its original forecast of $90 million. By the end of 2015, it plans on achieving more than $310 million in annual cost synergies.

It's other near-term goals are to hit $5 in earnings a share and 12% return on invested capital by 2015. It's current earnings a share is $2.97 (TTM) and ROIC is 9.5% (as of 2013). What drives this long-term growth is the need to replace deteriorating water pipes. The American Water Works Association (AWWA) notes that the cost of water pipe replacement will double to $30 billion annually by the 2040. The EPA projects that total investments for U.S. drinking water system repairs and improvements will be $384 billion through 2030.

Representing one of the biggest opportunities for Pentair is the stabilization of Europe. It generates nearly 20% of sales from Western Europe. Sales in the region has seen positive growth for three consecutive quarters. Thanks to a stabilizing real estate market, its electronics business is growing as demand in residential and commercial areas pick up. Then there's the developing markets, which should also be big demand drivers for many of Pentair products. Two areas of focus are the Middle East and Africa.

Third is Wal-Mart (NYSE:WMT), which is down close to 4% YTD. Its dividend yield is 2.55%, and it has increased its dividend yield for 39 years in a row. Earnings for the last fiscal quarter were below expectations, dragging shares down, but it might also be indicative of a larger problem.

Wal-Mart only managed to grow its international revenue by 1% last fiscal year. It's also seen comparable-store sales weaken, which indicates a weak spending environment, as well as increased competition (i.e. dollar stores and Target) that's taking share from the world's largest employer.

Wal-Mart's comp sales in the U.S. have fallen for five straight quarters, so the company has focused more on e-commerce. However, Amazon is still light years ahead of it in this part of the market. Last year, Wal-Mart generated $10 billion in sales online compared to Amazon's $67 billion. However, Wal-Mart's online strategy has a bright spot. Wal-Mart grew its online sales by 30% year-over-year in its last fiscal year, compared to Amazon's 20% growth.

Target and Wal-Mart trade in line with each other with P/E ratios of 13.5 based on next year's earnings estimates. But with Wall Street's earnings estimates taken into account, Target looks to be the better buy. Target's P/E to growth, or PEG, ratio is 1.65, while Wal-Mart's ratio is 1.9. Target also has the superior dividend yield versus Wal-Mart.

Wal-Mart's biggest opportunity lies in e-commerce. It has revamped its mobile app and implemented a new search engine for its websites. Sales related to e-commerce was up more than 30% in fiscal 2014, and contributed approximately 30 basis points to total Wal-Mart U.S. comps during 4Q 2014. Another key is the build out of fulfillment centers to makes its e-commerce business more efficient. In 2013, it bought up four companies that build tools to compress data and speed up websites. The company believes that its global e-commerce will be over $13 billion in fiscal 2015.

Procter & Gamble (NYSE:PG) is fourth and down around 2% YTD. It's down the least of the four and has the longest streak of dividend increases - standing at 57 years. It offers a 3.25% dividend yield.

But of the major consumer products companies (which includes the likes of Kimberly-Clark, Colgate-Palmolive, and Unilever), P&G is expected to grow earnings at a faster rate over the next five years, according to Wall Street, and it has a lower debt-to-equity ratio.

With the help of cost cutting, earnings are expected to come in 3.7% higher for the current fiscal year, but then grow by 7.6% year-over-year in fiscal 2015. This comes as the company plans to focus on its most profitable products and markets. Earlier this year, it sold off its pet food business to Mars, and it's also trying to boost prices in emerging markets in an effort to offset currency weakness.

Procter & Gamble is looking to rightsize its portfolio to optimize future growth. The initial step was a sell-off of the pet food business. Before that, in 2009, it sold its pharmaceutical business. In 2012, it divested the Pringles business, then in 2013 it divested its bleach business in Italy and Portugal. The focus going forward will be on the consumer oriented healthcare business. A few years ago, it formed a joint venture with the world's largest generic drug maker, Teva Pharmaceuticals.

Bottom line

Although these are the worst-performing dividend aristocrats, they all could rebound. However, only a couple are likely to play catch up with the market in the second half of the year. Target looks to be selling at a discount to Wal-Mart due to its image issues. However, it could get a relief rally once it appoints a new CEO. Wal-Mart's issues with declining sales could take time to sort out. Pentair offers the lowest dividend yield, and it'll likely not see marked growth until the market realizes the potential for water pipe repair. P&G should see marked growth in earnings next year, in part, driven by its aggressive costs cuts. In the meantime, it's still paying the best dividend yield in the consumer products market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: 4 Worst-Performing Dividend Aristocrats