- Find out what 3 household-name businesses have dividend yields north of 3%, and P/E ratios under 15.
- It has become increasingly difficult to find strong businesses trading at low P/E ratios in today's overvalued market.
- 2 of the 3 businesses have dividend yields over 4%.
- The 3 businesses include a global health care company, an oil & gas company, and a massive telecommunications company.
- 2 of the 3 businesses have not reduced their dividend payments in over 25 years.
Finding household-name stocks trading at P/E ratios below 15 is not easy in today's overvalued market. Finding strong brand name stocks with low P/E ratios and dividend yields above 3% is even more difficult. Three businesses that fit these exclusive characteristics are: GlaxoSmithKline (NYSE:GSK), ConocoPhillips (NYSE:COP), and AT&T (NYSE:T).
This article examines each of these 3 businesses based on the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identifies high quality businesses trading at fair prices based on several metrics, including number of years of dividend payments without a reduction, long-term revenue per share growth rate, and standard deviation.
The 8 Rules of Dividend Investing works by comparing every business with 25+ years of dividend payments without a reduction against each other. This type of comparison creates a quantitative way to determine and rank high quality dividend stocks. In total, there are 128 businesses with 25+ years of dividend payments in the Sure Dividend database. GlaxoSmithKline has less than 25 years of dividend payments without a reduction, but will be included in the database for this article to show how they compare to other dividend stocks with a long history of dividend increases.
Each business' current events and growth prospects will be examined as well, so each business is analyzed both quantitatively and qualitatively to give a complete view of the investment merits of GlaxoSmithKline, ConocoPhillips, and AT&T.
Consecutive Years of Dividend Payments
GlaxoSmithKline has paid increasing dividends since 2001, according to the company's investor relations. The company calculates payments in pounds, not dollars. GlaxoSmithKline has 13 years of consecutive dividend increases.
ConocoPhillips has not reduced its annual dividend payment since 1987. The company has paid steady or increasing dividends for 27 years.
AT&T has increased its dividend payments for 30 consecutive years. The company has transitioned over the last 30 years as the telecommunications market has changed. AT&T has been able to grow dividends throughout this transition.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2
- GlaxoSmithKline has a dividend yield of 4.77%, the 6th highest out of 129
- ConocoPhillips has a dividend yield of 3.26%, the 28th highest out of 129
- AT&T has a dividend yield of 5.09%, the 4th highest out of 129
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. Source: Dividends: A Review of Historical Returns
- GlaxoSmithKline has a payout ratio of 71.10%, the 105th lowest out of 129
- ConocoPhillips has a payout ratio of 42.40%, the 47th lowest out of 129
- AT&T has a payout ratio of 66.96%, the 99th lowest out of 129
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Long-Term Growth Rate
The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.
- GlaxoSmithKline has a growth rate of 4.04%, the 70th highest out of 129
- ConocoPhillips has a growth rate of 2.25%, the 101st highest out of 129
- AT&T has a growth rate of 4.02%, the 71st highest out of 129
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4
Long-term volatility for each business is calculated as the 10-year price standard deviation.
- GlaxoSmithKline has a standard deviation of 21.62%, the 26th lowest out of 129
- ConocoPhillips has a standard deviation of 30.45%, the 79th lowest out of 129
- AT&T has a standard deviation of 22.30%, the 31st lowest out of 129
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. Source: Low & Slow Could Win the Race, page 3
GlaxoSmithKline is a global health care business based in the United Kingdom. The company operates in over 150 countries, with manufacturing sites in 36 countries and large R&D centers in the United Kingdom, the United States of America, Spain, Belgium, and China. GlaxoSmithKline sells vaccines, pharmaceuticals, and branded consumer health care products. Household branded consumer products include Aquafresh, Binaca, Breathe Right, Nicorette, and Tums.
GlaxoSmithKline's revenue decreased 2% on a constant currency basis for the first quarter of 2014 as compared to the first quarter of 2013. Earnings per share increased 2% on a constant currency basis as compared to the same period in 2013. The company expects earnings per share to continue grow somewhere between 4% and 8% for the full year 2014 on a constant currency basis.
GlaxoSmithKline's revenue and growth by division for the first quarter of 2014 breaks down as follows:
% of Total
Constant Currency Growth
GlaxoSmithKline performed poorly in the US for the first quarter due to strong competition to GlaxoSmithKline's asthma treatment drug Advair. General wholesaler and retailer restocking also negatively impacted US pharmaceutical sales for the company. The company is hoping to regain market share in US asthma treatment by pushing for Breo to be used to treat asthma sufferers.
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Source: GlaxoSmithKline 1st Quarter Results
The company had strong growth in Japan and the emerging markets. GlaxoSmithKline's future revenue growth will be driven by further emerging market penetration, the company's pipeline of new pharmaceuticals, and the Novartis transaction
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Source: GlaxoSmithKline Pipeline Progress
GlaxoSmithKline has proposed a three part transaction with Novartis (NYSE:NVS) that would drastically change the makeup of both businesses. The proposed transaction is as follows:
- In the first transaction, GlaxoSmithKline and Novartis combine their consumer health care brands. This would create a world leading consumer health care business with about $11 billion in annual revenues. GlaxoSmithKline would control 63.5% of the new venture.
- In the second transaction, GlaxoSmithKline would acquire Novartis's global vaccines business (excluding influenza) for $5.25 billion up front, and milestone payments of $1.8 billion plus royalties.
- In the third transaction, GlaxoSmithKline would sell its Oncology portfolio and related R&D departments to Novartis for between $14.5 and $16 billion (depending on COMBI-d trial).
GlaxoSmithKline would return around $7.8 billion of the proceeds from the sale of its Oncology portfolio to shareholders in the form of B shares. This is around a 6% 'dividend' at current market prices. The deal would be accretive to shareholders for several reasons. The first is the $7.8 billion pay out. Secondly, the proposed deal is expected to generate annual savings of $1.7 billion per year annually in 5 years. Finally, the proposed transaction will better align both companies' product offerings and allow management to focus more closely on its pharmaceutical portfolio while strengthening the geographic markets of both companies. The proposed transaction is expected to close in the first half of 2015, assuming it passes shareholder approval and regulatory approval.
ConocoPhillips is the 7th largest publicly traded oil company in the world based on its market capitalization of about $104 billion. The company has 18,400 employees operating across 27 countries to find and produce oil and natural gas.
ConocoPhillips expects to grow its production at between 3% and 5% for the next several years. The company has allocated 95% of its invested capital to production under $30 per BOE (barrel of oil equivalent).
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Source: ConocoPhilips 2014 Investor Update
ConocoPhillips grew revenues 9.5% for the first quarter of 2014 versus the first quarter of 2013. The company also realized strong adjusted earnings per share growth compared to 2013. The company increased total production by about 3% versus the first quarter of 2013, at the low end of the company's expected year-over-year production growth.
ConocoPhillips generated $6.3 billion in cash flows from operations during the first quarter of 2014. The company repaid $0.5 billion in debt, paid $0.9 billion in dividends, and spent $3.9 billion on capital expenditures. The company's cash position increased for the quarter as well. Going forward, ConocoPhillips' growth will come from increased production from the company's current and future oil and gas operations. ConocoPhillips' management also expects margin improvement between 3% and 5% per year from increasing production in the company's lower costing operations.
AT&T is the second largest publicly traded domestic telecommunications company by market capitalization. AT&T has a market cap of $188 billion, just behind Verizon's (NYSE:VZ) $210 billion market cap. AT&T has rapidly adapted to changes in the telecommunications industry. Currently, about 55% of the company's revenue comes from its wireless division.
AT&T recently announced its decision to acquire DirecTV (NASDAQ:DTV) for $95 per share in a stock ($66.50) and cash ($28.50) transaction. The deal will be immediately accretive to shareholders by increasing both cash flow and earnings per share within the first 12 months of completion of the transaction. In addition, the deal opens up the Latin America market to AT&T services. DirecTV is the leading pay TV provider in Latin America, and has significant room to grow in the region. AT&T will likely bundle DirecTV services in Latin America with its other offerings to gain traction in the region.
Source: AT&T Press Release
AT&T posted strong first-quarter results. The company increased revenue 3.6% for the first quarter of 2014 as compared to the first quarter of 2013. In addition, the company gained more than 1 million wireless subscribers in the quarter. The company achieved free cash flow of $3 billion for the first quarter of 2014, and paid out $3.6 billion to shareholders in the form of dividends ($2.4 billion) and share repurchases ($1.2 billion).
AT&T is expecting revenue growth of around 4% in 2014, at the very high end of the company's expected long-term growth rate of between 2.5% and 4%. AT&T is achieving its growth primarily through expanding its wireless division. The company's wireless division experienced strong revenue growth of 7% for the first quarter of 2014, while increasing operating margins.
AT&T is shifting from a pricing model that subsidizes smart phone upgrades and purchasing to a model focused on paying for data usage. More than 25% of subscribers are on the no subsidy plan. EBITDA margin increased from 43.2% in 2013 Q1 to 45.4% in 2014 Q1. AT&T has the 2nd highest smartphone data provider market share, behind only Verizon. As consumers continue to adopt smart phones and use ever greater amounts of data, AT&T will benefit and grow.
AT&T, GlaxoSmithKline, and ConocoPhillips all have strong dividend yields and trade at attractive valuation multiples. AT&T is the 17th highest ranked stock based on the 8 Rules of Dividend Investing. If GlaxoSmithKline had a longer history of dividend payments, it would rank in at 20 out of 129. Despite its fair valuation, ConocoPhillips only ranks averagely compared to other businesses with a long history of dividend increases due to the company's lackluster growth and relatively high volatility.
AT&T and GlaxoSmithKline are both involved in transactions that could potentially change the shape of both companies. The deals should increase shareholder value going forward. Both companies are relatively inexpensive based on their respective P/E multiples, and are likely to reward shareholders through both business growth and dividend payments in the future.
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.