Seeking Alpha
Long/short equity, deep value, special situations
Profile| Send Message|
( followers)  

Summary

  • Despite the fact that dividend aristocrats have increased their payments for 25 years or more, they aren't all created equal.
  • Some aristocrats pay dividends that yield less than 1%.
  • However, despite having ultra low yields a couple are great growth (and low income) stories.

Dividend aristocrats (stocks in the S&P 500 with more than 25 years of dividend increases) are great places for solid dividends. Not all aristocrats are created equal. Some of the longest dividend increase streaks are by companies that have dividend yields less than the S&P 500 average yield and well below the long-term inflation rate.

So should investors continue to hold these stocks against the backdrop of an average dividend yield on the S&P 500 of 1.9% or look for income investments elsewhere?

First on the list is The Sherwin-Williams Company (NYSE:SHW). The company has recorded 79 straight years of dividend increases and its dividend yield is around 1.1%.

The company has extremely strong brands and wide ranging distribution and shareholders have done well in the past five years being rewarded with a 240% run up in the stock's price.

For the first quarter of 2014, consolidated revenues grew by more than 9% to $2.37 billion, mainly because of higher volumes in the paint stores segment, as well as acquisitions. Earnings per share were up from $1.11 per share, to $1.14 per share year on year. However, its abandoned acquisition of Comex, the Mexican paint maker that is the fourth largest in North America, is the key focus.

The deal, worth $2.34 billion, would have doubled the revenues of Sherwin-Williams, but fell through. Issues ranged from the unwillingness of Mexican regulators to allow a takeover by a U.S. company, to Comex's own hesitation to do the deal.

Yet, in hindsight, this could be a positive. Comex was seeking concessions that would have diluted its appeal, even though the added revenues and earnings would have been welcome. Sherwin-Williams is now free to look at other investment options.

One of the main reasons why the dividend yield is so low is the price of the stock, which appears relatively expensive. Its forward P/E ratio is around 20 times, and its trailing EV/EBITDA ratio is almost 16.

There are other attractive investments in the industry, such as DuPont, which has a dividend yield of around 2.7%. Though it is three times as large as Sherwin-Williams and has a broader range of products, its P/E ratio is only 14, and its EV/EBITDA ratio is under 12. There is no doubt that Sherwin-Williams is a solid company, but there are better investments in the space.

Second is Ecolab Inc. (NYSE:ECL). The company offers a dividend yield of around 1% and has a record of dividend payments without a reduction for 40 years, and dividend increases for 22 consecutive years.

The company is a leader when it comes to water technology, providing services to customers in more than 170 countries. Its 1Q results were stellar, with an increase in sales of 16% year on year, thanks to a 78% increase in the global energy segment -- driven by the integration of the newly acquired Champion Technologies. With that, the growth rate won't be as robust going forward.

The low dividend yield comes after the company has seen a run up in the stock price, putting its P/E ratio to over 33 times, which is well above its peers. But the payout ratio is only around 29%, which leaves the company with plenty of room to increase its dividend.

Third is Franklin Resources Inc. (NYSE:BEN). The stock presently offers a dividend yield of around 0.9% and has a dividend record going back 82 years.

Retail investors are familiar with the company because of the wide range of mutual funds that it offers, such as the Templeton Global Bond. A major asset is the strength of the balance sheet with net cash of almost $8 billion -- or $13 per share -- compared to the stock price of just $58. The company manages over $900 billion and approximately 35% are from investors outside the United States.

The total payout ratio to investors by way of dividends and share repurchases is less than 50%, so there is plenty of room for growth. The company looks to have a bright future, with the return of investors to the market. As well, it could leverage its balance sheet for further growth via acquisitions. However, its conservative policies mean that there is unlikely to be major increases in dividend payouts. It's priced attractively, with a P/E ratio of around 15 based on next year's earnings estimates (11 times if you exclude net cash), which makes the company relatively attractive despite the unlikeliness of a major change in its share buybacks or dividend.

Fourth is Sigma-Aldrich Corporation (NASDAQ:SIAL). The stock has a current dividend yield of around 0.9% and a 76-year record.

The company, which is in the business of laboratory chemicals and health sciences, reported higher earnings for the first quarter. Its decline in sales for its research business (due to the harsh winter) was offset by increases in the Applied and SAFC Commercial segments. Profit rose by approximately 3% to $126 million ($1.05 per share) compared to $122 million ($1.01 per share) in the previous year. In February 2014, the company announced a 7% increase in its dividend.

The company remains committed to compensating its shareholders by way of dividends and share buybacks. But there looks to be little room for capital appreciation. Shares trade at a P/E to growth ratio of 3.5, and its forward P/E of 22 is well above its top peers. LyondellBasell trades at a forward P/E of 11 and PPG trades at 18. As well, both of their dividend yields and returns on investment are higher than Sigma-Aldrich.

Rounding out the list, fifth is CR Bard Inc. (NYSE:BCR). The company presently has a dividend yield of 0.6% and a record going back 72 years.

For the first quarter of 2014, the company reported an 8% increase in sales over the previous year. Net income was $134.9 million and EPS was $1.91 per share, increases of 12% and 19% respectively over the same quarter of the previous year. The company also managed to increase its quarterly dividend by 5% to $0.22 a share.

However, the recently announced Medtronic (NYSE:MDT) and Covidien (NYSE:COV) merger may create some headwinds for the company in terms of market share and analysts expect the market to be split 20% for Bard and 80% for Medtronic. Based on these factors, Barclays has cut its target price on the share from $155 to $150.

Even still, CR remains one of the most compelling investments in the medical device space. It trades at just under 16x earnings, compared to Covidien's P/E of 20.5, Baxter's 20.8 and Becton, Dickinson & Co.'s 25. And on a P/E to growth basis, CR trades with a PEG ratio of 1.2, while all three of its major peers trade at a PEG ratio of over 2.5. Its return on investment and profit margin is also above the other three.

Bottom line

Although some of the leading dividend aristocrats offer yields of only around 1%, they can still be long-term investments given their growth prospects. Die-hard income investors should look elsewhere, but a select number of these low-yielding aristocrats do offer attractive stock appreciation opportunities.

Source: Should You Avoid The 5 Lowest Yielding Dividend Aristocrats?