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In previous installments of the Smackdown series, I screened the Dividend Champions list of companies that have paid higher dividends for at least 25 straight years (which can be found here) using fundamental factors that are important to dividend-oriented investors. I also hinted that I might perform the same screens on the listing of Dividend Contenders, which is composed of companies that have paid higher dividends for 10-24 years. This group represents the Champions of the future, so investing in them now may be a wise choice. (As always, it's also important to screen for other positive qualities before choosing any investment.) So I screened the October 29 update, first eliminating companies that have not increased their dividend for over a year (and any that are being acquired), which gave me a group of 121 companies that will be screened in the same manner as the Champions:

Smackdown 1: Back in June, the first Smackdown started with companies with the highest percentage most recent dividend increases. You can find that article here.

Step1: Isolate companies (among the Contenders) whose most recent increase was 10% or more. That gave me 42 companies to consider.

Step 2: Eliminate any company whose last increase was more than a year ago. See above.

Step 3: Eliminate the lowest yields. The payouts ranged from 0.55% to 4.55%. Since I used a cut-off of 2.39% to isolate the top eight Champions, I repeated that to further investigate the top 12 Contenders.

Step 4: Sort the remaining companies by their 5- and 10-year Dividend Growth Rates, from high to low. (In June, I only had total percentages for the 5- and 10-year periods.) Half of the candidates had 5-year DGRs of 12.6% or better; the others were below 9%, so I cut the list to six companies.

Step 4: Compare the current annual dividend rate with the consensus estimates for this year and next to ensure that the payout ratio is reasonable. Following are the “final six”:

On the negative side, Meridian's earnings do not seem to adequately cover its payout, which has grown at the fastest rates; UniSource is expected to earn less in 2011 than in 2010, but its payout is well covered. Harleysville, just a year from Champion status, recently declared an “extra” $1.44-per-share dividend and seems to have the best EPS growth, but the other companies also appear to be good choices in their respective industries.

Smackdown 2: In July, the Champions Smackdown focused on yield, and you can find that article here.

Step 1: Sort the companies by yield, focusing on those with a yield of 3% or more. That included 54 Contenders.

Step 2: Sort those companies by most recent percentage increase. Eliminating those with increases of less than 4% cut the list down to 23 companies. Many of the companies eliminated were MLPs (or Master Limited Partnerships) that may have increased their payouts more than once during the past year (and may still be of interest to some investors). The Champions included no MLPs.

Step 3: Sort those companies by 5- and 10-year Dividend Growth Rates. Eliminating those with 10-year rates of less than 5% cut the list to 18 companies. (All had 5-year rates of at least 5%.)

Step 4: Sort those companies by the A/D (Acceleration/Deceleration) ratio, which divides the 5-year DGR by the 10-year DGR. Dropping those with an A/D ratio below 0.80 cut the list to 15 companies.

Step 5: Compare the remaining companies by price/earnings ratio, according to Yahoo Finance (for the trailing twelve months). That list follows:

No.

10/29/10

DGR

DGR

%

TTM

Company

Symbol

Yrs

Price

Yield

A/D*

5-yr

10-yr

Inc.

P/E

ConocoPhillips

COP

10

59.39

3.70

1.505

16.4

10.9

10.00

9.43

Chevron Corp.

CVX

23

82.60

3.49

1.475

11.7

7.9

5.88

9.82

NextEra Energy

NEE

16

55.04

3.63

1.263

7.8

6.2

5.82

12.15

Tompkins Financial Corp.

TMP

24

38.60

3.52

1.124

6.5

5.8

10.00

12.22

Harleysville Group

HGIC

24

34.33

4.19

1.413

12.9

9.2

10.77

12.95

Ohio Valley Banc Corp.

OVBC

15

18.51

4.54

0.875

6.2

7.1

5.00

13.92

Community Bank System

CBU

17

23.37

4.11

0.915

5.9

6.5

9.09

14.98

1st Source Corp.

SRCE

21

17.67

3.62

1.085

9.1

8.4

6.67

15.37

Cullen/Frost Bankers

CFR

17

52.44

3.43

1.084

10.6

9.7

4.65

16.04

New Jersey Resources

NJR

15

40.49

3.36

1.427

7.4

5.2

9.68

17.45

Enbridge Inc.

ENB

15

55.40

3.00

0.900

7.3

8.1

4.53

19.30

Erie Indemnity Company

ERIE

20

57.18

3.36

1.127

15.9

14.1

6.67

20.28

Meridian Bioscience Inc.

VIVO

19

22.89

3.32

1.364

30.8

22.6

11.76

30.93

People's United Financial

PBCT

17

12.30

5.04

1.032

11.1

10.8

6.90

55.91

Corporate Office Properties Trust

OFC

13

35.49

4.65

1.258

9.5

7.5

5.10

82.53

As you can see, the list is topped by two major oil companies and there is a healthy dose of banking, insurance, and utility companies. On the bottom, we have a REIT (real estate investment trust) whose P/E may be misleading, since REITs are generally judged by FFO (Funds From Operations), rather than earnings per share. Just above it are some relatively high P/Es and we see some companies that also appeared in the first Smackdown, leaving us with plenty of good prospects.

Smackdown 3: The August Champions Smackdown began with low prices and high yields and can be seen here.

Step 1: Sort the companies by price, from low to high. This gave me a group of 22 companies whose October 29 price was $25 or lower.

Step 2: Sort those companies by yield. The results ranged from 0.90% to 8.56%. Although many investors demand at least 3%, I eliminated only those below 2% at this point. That left 19 companies.

Step 3: Sort those companies by most recent percentage dividend increase. I eliminated any that were less than 2%, leaving 15 companies.

Step 4: Sort the remaining companies by the 5- and 10-year Dividend Growth Rates. Eliminating any with DGRs of less than 5% in either column cut the list to 10 companies.

Step 5: Compare the remaining companies by price/earnings ratio, according to Yahoo Finance. That list follows:

No.

10/29/10

DGR

DGR

%

TTM

Company

Symbol

Yrs

Price

Yield

A/D*

5-yr

10-yr

Inc.

P/E

Republic Bancorp KY

RBCAA

12

20.44

2.80

0.841

15.3

18.2

8.33

6.66

Southside Bancshares

SBSI

16

18.81

3.62

0.736

12.2

16.6

5.00

7.13

Ohio Valley Banc Corp.

OVBC

15

18.51

4.54

0.875

6.2

7.1

5.00

13.92

Community Bank System

CBU

17

23.37

4.11

0.915

5.9

6.5

9.09

14.98

1st Source Corp.

SRCE

21

17.67

3.62

1.085

9.1

8.4

6.67

15.37

Harsco Corp.

HSC

16

23.18

3.54

1.267

7.6

6.0

2.50

19.16

Vector Group Ltd.

VGR

13

18.70

8.56

0.342

5.0

14.6

5.00

24.29

Aqua America Inc.

WTR

19

21.53

2.88

1.053

8.4

8.0

6.90

26.26

Meridian Bioscience Inc.

VIVO

19

22.89

3.32

1.364

30.8

22.6

11.76

30.93

People's United Financial

PBCT

17

12.30

5.04

1.032

11.1

10.8

6.90

55.91

Once again, a number of small banks appear on the list, including the companies with the highest and lowest P/Es. Vector Group has the highest yield, even though its increases have slowed to 5% from double-digit rates. Investors interested in low prices and reasonably high yields may want to do further research on this group.

Smackdown 4: In September, the Champions were subjected to a screen that began with the A/D (Acceleration/Deceleration) ratio and the 5- and 10-year dividend growth rates. That article can be found here.

Step 1: Sort the companies by A/D ratio, from high to low. For greatest consistency, I decided to narrow the focus to companies whose A/D ratio was between 0.90 and 1.30. My reasoning was that a number slightly below 1 was natural for companies that couldn't be expected to maintain a high percentage increase forever; and that a ratio that was too high might be distorted by one or two exceptional increases. (These parameters are somewhat arbitrary, but I'm still in the process of figuring out how to use the A/D ratio in the best way possible.) This gave me a group of 51 companies.

Step 2: Sort those companies by their 5- and 10-year DGR. Although consistency was the primary sort, I didn't want to select companies that were, in effect, consistently stingy. I eliminated any company whose DGRs were below average (9.6% for 5-year DGR or 10.5% for 10-year DGR). That left 21 companies.

Step 3: Sort those companies by yield. I next eliminated any company whose yield was below the 3.05% average for the Dividend Contenders as a whole. This step eliminated all but four candidates.

Step 4: Compare the remaining companies by price/earnings ratios for the trailing twelve months (ttm) and the next year's estimates, according to Yahoo Finance's data provided by Capital IQ:

No.

10/29/10

DGR

DGR

%

TTM

NY Est

NY/TY%

Company

Symbol

Yrs

Price

Yield

A/D*

5-yr

10-yr

Inc.

P/E

EPS

Growth

Norwood Financial

NWFL

12

28.00

4.00

0.917

10.8

11.8

3.70

10.61

-

n/a

McGrath Rentcorp

MGRC

18

25.31

3.56

1.055

14.9

14.1

2.27

18.75

1.52

11.76

Erie Indemnity Company

ERIE

20

57.18

3.36

1.127

15.9

14.1

6.67

20.28

2.91

-4.59

People's United Financial

PBCT

17

12.30

5.04

1.032

11.1

10.8

6.90

55.91

0.56

55.56

This Smackdown obviously resulted in slim pickings and each company has some “warts.” Erie's earnings are expected to decline in 2011, People's United has a high P/E and doesn't cover its dividend, and Norwood has no estimate for 2011. McGrath's numbers look best, but its meager increase in the dividend this year may not be acceptable to some. Additional research may reveal better prospects for at least one of these companies.

Smackdown 5: October brought the addition of a column for the dividend payout ratio, so the Champions Smackdown started there and can be found here.

Step 1: Sort the companies by payout ratio, low to high. I decided to narrow 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, keeping in mind that some companies, such as utilities and tobacco companies, typically pay out a higher portion of income, so they might be considered separately. This screen gave me a group of 67 companies.

Step 2: Sort those companies by yield. I didn't want to select companies that had low payout ratios simply because they sported low yields. Eliminating yields below 2% cut the list to 31 companies.

Step 3: Sort those companies by the price/earnings (P/E) ratio, low to high. (The P/E divides the 10/29 price by the trailing twelve months ((NYSE:TTM)) earnings per share.) I eliminated any company whose P/E was higher than 15, leaving just 21 candidates.

Step 4: Sort the remaining companies by 5- and 10-year Dividend Growth Rates, high to low. Ten companies had both 5- and 10-year DGRs above 10%.

Step 4: Compare the remaining companies 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 with no 2011 estimate and two whose earnings are expected to decline next year. The list of remaining candidates follows:

No.

10/29/10

DGR

DGR

%

TTM

NY Est

NY/TY%

Company

Symbol

Yrs

Price

Yield

A/D*

5-yr

10-yr

Inc.

P/E

EPS

Growth

Atlantic Tele Network Inc.

ATNI

13

42.26

2.08

1.052

12.5

11.9

10.00

14.23

4.83

44.61

Owens & Minor Inc.

OMI

13

28.48

2.49

1.069

15.9

14.9

15.43

14.83

2.09

8.29

ConocoPhillips

COP

10

59.39

3.70

1.505

16.4

10.9

10.00

9.43

6.45

8.22

HCC Insurance Holdings

HCC

14

26.48

2.19

1.325

19.8

14.9

7.41

9.10

2.95

7.27

General Dynamics

GD

19

68.12

2.47

1.334

16.3

12.2

10.53

10.90

7.07

5.37

Republic Bancorp KY

RBCAA

12

20.44

2.80

0.841

15.3

18.2

8.33

6.66

3.18

2.58

Prosperity Bancshares

PRSP

13

31.09

2.25

0.382

13.9

36.2

12.90

11.60

2.76

1.85

Of these, only ConocoPhillips has a yield above 3%, whereas Atlantic Tele Network is expected to have exceptional growth in earnings next year and Owens & Minor had the largest percentage dividend increase in 2010. So there's some good potential in various industries, worthy of more study.

Smackdown 5 ½: Just after I posted Champions Smackdown 5, at least one commenter said 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. That article can be found here: seekingalpha.com/article/228897-six-divi...

Step1: Sort the companies by payout ratio. This screen gave me a group of 54 companies with payout ratios above 50%.

Step 2: Sort those companies by yield. The same commenter postulated that there are plenty of companies earning 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 33 companies.

Step 3: Sort those companies by the price/earnings (P/E) ratio, low to high. (The P/E divides the 10/29 price by the trailing twelve months (TTM) earnings per share.) As with the Champions, I decided to eliminate only companies with P/Es above 50. (They may be worth further research by anyone believing that the ratio might be distorted by unusual items.) This step left us with 27 candidates.

Step 4: Sort the remaining companies by 5- and 10-year Dividend Growth Rates, high to low. Eleven companies had 5- and 10-year DGRs above 5%. I decided not to eliminate any company whose most recent increase was for less than 2.5%, as I had with the Champions, because several were MLPs that have increased their payout in more than one quarter this year.

Step 4: Sort the remaining companies by the percentage increase of Next Year's EPS estimate over This Year's EPS estimate. I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases, so I eliminated any company whose earnings were expected to decline or which had no estimate. The list of remaining candidates follows:

No.

10/29/10

DGR

DGR

%

Payout

TTM

NY/TY%

Company

Symbol

Yrs

Price

Yield

A/D*

5-yr

10-yr

Inc.

%Ratio

P/E

Growth

Harsco Corp.

HSC

16

23.18

3.54

1.267

7.6

6.0

2.50

67.77

19.16

65.48

Harleysville Group

HGIC

24

34.33

4.19

1.413

12.9

9.2

10.77

54.34

12.95

29.67

Suburban Propane Partners LP

SPH

12

54.50

6.24

1.268

6.3

5.0

0.59

102.10

16.37

12.50

Plains All American Pipeline LP

PAA

10

63.10

6.02

1.356

9.5

7.0

0.80

145.59

24.18

12.14

McGrath Rentcorp

MGRC

18

25.31

3.56

1.055

14.9

14.1

2.27

66.67

18.75

11.76

Buckeye Partners LP

BPL

15

63.31

6.08

1.253

6.6

5.2

1.32

116.67

19.18

6.34

Community Bank System

CBU

17

23.37

4.11

0.915

5.9

6.5

9.09

61.54

14.98

4.97

Enterprise Products Partners LP

EPD

13

42.85

5.44

0.838

7.4

8.9

1.30

119.49

21.97

4.81

Once again, we get a good mixture of industries, this time including four MLPs with payout ratios that exceed 100%. But that's typical of the industry, where earnings are offset by non-cash items that allow for such generous distributions. (Investors need to consider any tax implications of investing in MLPs in taxable or retirement accounts.) At the top are a couple of stocks expected to increase earnings next year by exceptional amounts. All are worthy of more study.

Conclusion

I hope this exercise has provided some good candidates for investment from among the companies that are working toward Dividend Champion status. As always, it bears repeating that these screens should only be a starting point for more thorough research. Note that the latest Champion Smackdown, which started with companies more than 10% from their 52-week high, included a “bonus” Contenders Smackdown and can be found here.

Disclosure: Author owns NEE and WTR.

Source: Dividend Contenders Smackdown (Part 5½)