- Six large-cap stocks with payout ratios below 40%.
- All have consecutive annual dividend increases ranging from 8-23 years.
- All have a dividend growth rate of 10%-25% over the last 5 years.
- IBM looks like a screaming "BUY!" at the moment.
For this article, I'm going to offer 6 companies I've found that sport an impressive payout ratio with scope to improve their dividends by a huge amount. We have all witnessed the growing number of articles recently regarding a correction being due within the market. Whether it be a 10%-15% correction or an all-out market crash, I understand the implications that all companies will trade down as nervous investors sell and consumers tighten their wallets or purses. With this in mind, investing in companies that show very little risk with regard to dividend cuts or freezes would be an advantage to you. Especially to the investor who is retired and can't afford to sell stocks that will impact their income.
In the conclusion at the bottom of the article, I will include a quick fact sheet if you wish to skim-read most of this article and just want the statistics for all the companies.
Qualcomm Inc (NASDAQ: QCOM)
Qualcomm engages in the design, development, manufacture and marketing of digital wireless telecommunications products and services based on its Code Division Multiple Access technology. It markets its products through direct sales force, partnerships and distributors worldwide.
This is an impressive company with no long-term debt, providing it with a very robust balance sheet. Revenues have grown every year since 2009, with that being the only down year due to the financial collapse of 2008. Analysts over at Reuters have given an average estimate revenue of $26,832m, giving a growth rate of 7.90% compared to the previous year ending September 2013. The EPS is estimated at $5.30 compared to $3.99 last year for a massive increase of 32.83%. Cash flow from operations last year was $8,778m, and from this, $1,578m was used on investing and a further $4,845m on financing, giving a net change in cash of $2,335m.
The DPS last year was $1.20, giving a safe payout ratio of 30.07% or the inverse dividend cover of 3.32. This has grown to $1.54, giving a 28.33% increase in dividends! Qualcomm is a dividend contender with 11 years of consecutive annual dividend increases. With a current price of $76.10, this gives a yield of 2.02%
Union Pacific Corp (NYSE: UNP)
Union Pacific Corporation is one of America's leading transportation companies. Its principal operating company, Union Pacific Railroad, is North America's premier railroad franchise, covering 23 states across the western two-thirds of the United States.
Once again, revenues have grown every year since 2009 (this could be a recurring theme!) and analysts have given an average estimate revenue of $23,741m, giving a growth rate of 8.09% compared to the previous year ending December 2013. The EPS is estimated at $5.54 compared to $4.74 last year for a respectable increase of 16.87% Cash flow from operations last year was $6,823m, and from this, $3,405m was used on investing and a further $3,049 on financing, giving a net change in cash of $369m.
The DPS last year was $1.48 (everything has been adjusted due to the number of stock splits, the most recent being last month), giving a safe payout ratio of 31.42% or the inverse dividend cover of 3.18. This is expected to grow to $1.84, providing the dividend stays at $0.46 or increases in the next 2 quarters. This would give a 24.32% increase in dividends. Union Pacific is a dividend challenger with 8 years of consecutive annual dividend increases. With a current price of $101.66, this gives a yield of 1.80%.
International Business Machines Co. (NYSE: IBM)
International Business Machines is the world's largest computer maker. IBM designs, develops, and manufactures computer systems, software, storage systems and microelectronics. It's also the largest business and technology services provider and largest IT financier in the world. IBM Research also ranks as the world's largest information technology research organization, with more than 3,000 scientists and engineers working from eight labs in six countries around the world.
The revenue of IBM has been fluctuating from $95,000m-$105,000m for the past 10 years, while the net income has slowly increased over time due to efficient margin growth. IBM is committed to a huge share buyback scheme especially during times where their stock price is depressed. The recent negative news due to missing earnings targets makes this company a perfect one to buy! The EPS is estimated at $17.90 compared to $15.06 the previous year ending December 2013. If achieved, this would be a satisfying 18.85% growth rate from such a large company -- who says you need to buy micro/small caps for growth! Cash flow from operations last year was $17,485m, and from this, $7,326m was used on investing and a further $9,883m on financing, giving a net change in cash of $304m.
The DPS last year was $3.70, giving a safe payout ratio of 24.56% or the inverse dividend cover of 4.07. This is expected to grow to $4.25 if the next 2 quarters see dividends of $1.10 each. This would give a 14.86% increase in dividends. International Business Machines is a dividend contender with 14 years of consecutive annual dividend increases. With a current price of $194.40, this gives a yield of 2.18%.
Occidental Petroleum Corp (NYSE: OXY)
Occidental Petroleum is one of the world's largest independent oil and gas exploration and production companies and a major North American chemical manufacturer. Over 60% of the company's worldwide production is in the United States. Its international operations are located in Colombia, Ecuador, Oman, Pakistan, Qatar, Russia, United Arab Emirates and Yemen, with exploration interests in several other countries. The chemicals business manufactures and markets basic chemicals, vinyls and performance chemicals.
This is pretty much considered the underdog of the oil world, as most people hold positions in Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS.A) and BP (NYSE:BP). There could be a reason for this; due diligence would be required (I may save this for another article!) to ascertain if this company deserves being among the other oil companies.
Revenue has been growing at a slow pace, and is actually estimated to decline with an average of $25,115m, down from $25,736 for a net loss of -2.42%. This is not helped by the fact that other operating charges have been increasing; this is impacting its bottom line slightly. The EPS is estimated at $7.29 compared to $7.33, so could be relatively neutral for the year. Cash flow from operations last year was $12,927m, and from this, $8,193m was used on investing and a further $2933 on financing, giving a net change in cash of $1,801m.
The DPS last year was $2.56 giving a safe payout ratio of 34.92%, or the inverse dividend cover of 2.86. This is expected to grow to $2.88 for the year, giving a 12.49% increase in dividends. Occidental Petroleum is a dividend contender with 11 years of consecutive annual dividend increases. With a current price of $100.09, this gives a yield of 2.87%.
General Dynamics Corp (NYSE: GD)
General Dynamics is a leading supplier of sophisticated defense systems to the United States and its allies. It operates in four primary business groups: Aerospace, Combat Systems, Information Systems and Technology, and Marine Systems. The Virginia-based company occupies leading market positions in mission-critical information systems and technologies, land and amphibious combat systems, shipbuilding and marine systems and aviation.
The same situation applies for this company as Occidental Petroleum, being that most investors in this sector have chosen the likes of Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Raytheon (NYSE:RTN), Boeing (NYSE:BA) or BAE Systems (OTCPK:BAESF).
Its revenue has decreased slightly since 2012, and that seems to be continuing for this year as analysts estimate revenue of $30,314m for the year compared to $31,218m for December 2013. However, looking at the assets and liabilities, the company's equity is the highest it's ever been and with retained earnings over $19,500m, I wouldn't be too concerned. The EPS is estimated at $7.51 compared to $6.72 last year for a growth rate of 11.75%. This is being supplemented with share buybacks at a rate of 3%-4% a year. Cash flow from operations last year was $3,106m, and from this, $367m was used on investing and a further $725m on financing, giving a net change in cash of $2005m.
The DPS last year was $2.19, giving a safe payout ratio of 32.58% or the inverse dividend cover of 3.06. This is expected to grow to $2.42 if the next 2 quarters give dividends of $0.62 each. This would give a 10.50% increase in dividends. General Dynamics is a dividend contender with 23 years of consecutive annual dividend increases. With a current price of $121.14, this gives a yield of 1.99%.
Raytheon Co (NYSE: RTN)
Raytheon is an industry leader in defense and government electronics, space, information technology, technical services, and business aviation and special mission aircraft. It serves all branches of the United States military and other US government agencies, NATO and many allied governments. The Massachusetts-based company also operates a commercial electronics business and provides business and special mission aircraft to corporate and government customers worldwide through its Raytheon Aircraft business.
Raytheon is a company that I've written an article about recently, if you wish to take a look, then please check out "Raytheon: Play Defensive With Military Precision". It's getting very close to my recommended buy area of $88 as the price currently stands at $92.07. This is a company that most investors love and is well-known for its dividend growth abilities.
Its revenue is expected to decrease slightly with an estimate of $22,739m compared to $23,706m for the year ending December 2013. However, EPS is expected to grow to $6.92 from $6.17 for a growth rate of 12.15%. This is due to increasing its margins and improving its bottom line. Net income is still increasing at a satisfactory pace along with share buybacks around 3%-4% a year. Cash flow from operations last year was $2,378m, and from this, $473m was used on investing and a further $1,797m on financing, giving a net change in cash of $108m.
The DPS last year was $2.20, giving a safe payout ratio of 35.65% or the inverse dividend cover of 2.80. This is expected to grow to $2.40 as the last dividend distribution should be declared in September for $0.60. This would give a 9.09% increase in dividends. Raytheon is a dividend contender with 10 years of consecutive annual dividend increases. With a current price of $92.07, this gives a yield of 2.60%.
All of the companies listed above have room to grow not only their revenues, but also their dividends by quite a wide margin compared to other companies. The aim was to give the investor a diversified list, and not regurgitate the same companies that you find articles on nearly everyday. They have the potential to offer both long-term capital appreciation and a rising income way above the current rate of inflation. The 6 listed have a strong possibility of surviving an economic downturn without having to cut dividends to their shareholders.
If we are looking at current value, all are below a forward P/E of 20, with IBM currently at 10.85. In my opinion, this is a hand-over-fist buy for such a well-established company. The only reason for the huge discount is due to being out of favor with Wall Street analysts by missing earnings over the last 8 periods. In my opinion, it's the fundamentals that matter, and IBM is a shining example of a solid company.
If we were to look at the ROE, which is the amount of net income returned as a percentage of shareholders equity, IBM is once again well ahead of the pack. Even if the results weren't skewed and we removed the liabilities (known as the ROCE), IBM is still leading by a huge margin.
Below are the quick facts provided for all of the companies I have listed above. All have a very safe payout ratio, offering big dividend increases in the future, providing the cash flow from the businesses grows.
Union Pacific and General Dynamics have yields of only 1.80% and 1.99%, respectively, so a little on the small side, but you would have been rewarded with price appreciation of 21% and 27% YTD.
Qualcomm and Union Pacific are offering dividend growth over 20% for the year. Bear in mind that this is unsustainable and expect it to decrease over the next 5 years to be in-line with most dividend growth stocks.
IBM has the safest payout ratio with an estimate of 23.74% for the financial year while still offering 15% dividend growth. This is the number 1 choice out of the list when also considering its forward P/E, but to be honest I would be sleeping well at night investing in any of the 6 companies mentioned.
Additional disclosure: All information is provided by Gurufocus.com with help from David Fish's CCC List. All analyst forecasts are provided by Reuters.com. Would like to thank YCharts for the 2 graphs at the bottom.