Dividend Champions: Smackdown VII

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 |  Includes: ABT, AFL, AM-OLD, AVA, AVP, BDX, COP, CR, FLO, GEF, GIS, HAS, HGIC, HRL, IFF, ITW, KMB, KO, LANC, MDU, MKC, NSC, OKE, OMI, PEP, PNR, RTN, SON, SPGI, STRA, SXT, TMP, UGI, WEC, XOM
by: David Fish

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, such as yield, dividend growth rate, and price.

This time, I decided to focus on something that may be of more importance to young investors, the availability of a No-Fee, company-sponsored DRIP, or Dividend Reinvestment Plan. These plans typically include not only the ability to reinvest dividends, but also the option to invest additional cash, often as little as $25 or $50. This can be a big boost for young investors trying to build a diversified portfolio of high-quality dividend-paying stocks, but the presence of fees can inhibit this approach considerably, so such well known companies as Coca-Cola (NYSE:KO) and Kimberly-Clark (NYSE:KMB) won't make it through the initial screen. You can check whether a company has a DRIP, using the “Search for DRIP” option at this site: directinvesting.com.

(As always, it's also important to screen for other positive qualities before choosing any investment.) So I screened the latest update as follows:

Step 1: Sort the companies by DRIP Fees, which are designated in columns F and G as DR (Dividend Reinvestment) and SP (Stock Purchase). Only companies with an 'N' in both columns are free from costly fees. (Small commissions of 2-5¢ per share not considered fees.) This sort revealed 51 initial candidates.

Step 2: Sort those companies by yield. I didn't want to select companies that had excessively low payouts, but younger investors may have time to start fairly low and enjoy many years of dividend increases, so eliminating only yields below 2% cut the list to 39 companies.

Step 3: Sort those companies by the percentage of their most recent dividend increase, so as to eliminate companies that have been too stingy of late. Dropping those with recent increases of less than 3% shrunk the list of candidates to 20 companies and I eliminated two others that hadn't increased their dividend in over a year.

Step 4: Sort the remaining companies by price/earnings (P/E) ratios. Since it is earnings that drive stock price (and dividend) growth, I reasoned that this screen would narrow the selection process to companies whose earnings were not being adequately reflected in their stock prices. However, all 18 companies had P/Es 18.08 or lower, so none were cut.

Step 5: Compare the remaining companies by the percentage increase of Next Year's EPS estimate over This Year's EPS estimate. (See column AA in the spreadsheet.) I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases. I eliminated six companies whose earnings are expected to increase by less than 6% next year. The list of remaining candidates follows:

(Note that I've sorted all tables back into alphabetical order)

No.

11/30/10

%

TTM

NY/TY%

Company

Symbol

Yrs

Price

Yield

Inc.

P/E

Growth

Abbott Laboratories

ABT

38

46.51

3.78

10.00

15.35

11.75

AFLAC Inc.

AFL

28

51.50

2.33

7.14

11.27

11.15

Becton Dickinson & Co.

BDX

38

77.93

2.10

10.81

14.19

11.09

ExxonMobil Corp.

XOM

28

69.56

2.53

4.76

12.31

8.90

Hormel Foods Corp.

HRL

45

49.08

2.08

21.43

17.59

7.59

Illinois Tool Works

ITW

47

47.63

2.86

9.68

14.66

18.18

Lancaster Colony Corp.

LANC

48

52.07

2.54

10.00

13.42

8.54

McCormick & Co.

MKC

25

44.01

2.54

7.69

16.73

8.05

McGraw-Hill Companies

MHP

37

34.49

2.73

4.44

12.82

7.87

Pentair Inc.

PNR

34

32.90

2.31

5.56

18.08

17.26

PepsiCo Inc.

PEP

38

64.63

2.97

6.67

16.28

11.62

Sonoco Products Co.

SON

27

32.76

3.42

3.70

15.67

10.68

Click to enlarge

And the Winner is...

...subjective. All of these companies have attractive properties, but the ultimate winner (as always) will depend on what is most important to each investor. As it did in Smackdown 6, Illinois Tool Works has the highest expected earnings growth next year, followed closely by Pentair. But the highest current yields belong to Abbott Labs and Sonoco Products, whereas Hormel Foods easily had the highest percentage dividend increase. All 12 finalists are deserving of further study for possible purchase.

Bonus Smackdown: The Contenders and the Challengers

I performed the same steps on the Dividend Contenders (increases of 10-24 years) and the Challengers (5-9 years) and the “winners” were:

Contenders:

No.

11/30/10

%

TTM

NY/TY%

Company

Symbol

Yrs

Price

Yield

Inc.

P/E

Growth

Avon Products Inc.

AVP

21

28.56

3.08

4.76

19.17

14.21

ConocoPhillips

COP

10

60.17

3.66

10.00

8.16

7.65

Harleysville Group

HGIC

24

35.59

4.05

10.77

14.12

24.18

MDU Resources

MDU

20

20.44

3.18

3.17

17.18

17.74

Owens & Minor Inc.

OMI

13

28.25

2.51

15.43

14.71

8.85

Tompkins Financial Corp.

TMP

24

38.36

3.55

10.00

12.54

6.91

UGI Corp.

UGI

23

29.67

3.37

25.00

12.57

8.44

Click to enlarge

Challengers:

No.

11/30/10

%

TTM

NY/TY%

Company

Symbol

Yrs

Price

Yield

Inc.

P/E

Growth

American Greetings

AM-OLD

7

20.07

2.79

16.67

9.33

15.92

Avista Corp.

AVA

8

21.37

4.68

19.05

13.36

7.98

Crane Company

CR

6

37.48

2.45

15.00

13.73

10.51

Flowers Foods

FLO

9

26.20

3.05

14.29

17.70

8.44

General Mills

GIS

7

35.33

3.17

14.29

15.23

8.87

Greif Inc. A

GEF

7

58.44

2.87

10.53

15.06

16.24

Hasbro Inc.

HAS

7

47.66

2.10

25.00

16.61

19.78

International Flavors & Fragrances

IFF

8

52.52

2.06

8.00

16.41

9.68

Norfolk Southern

NSC

9

60.17

2.39

5.88

16.13

14.60

ONEOK Inc.

OKE

8

51.11

3.76

4.35

15.92

6.64

Raytheon Company

RTN

6

46.25

3.24

20.97

9.54

6.55

Sensient Technologies Corp.

SXT

5

33.97

2.36

5.26

17.16

7.91

Strayer Education Inc.

STRA

5

135.87

2.94

33.33

14.61

14.42

Wisconsin Energy

WEC

7

60.22

2.66

18.52

15.85

9.47

Click to enlarge

Obviously, there are a lot of great candidates to consider. Don't be put off by any single number, as items like growth estimates are subject to change and other numbers could be misleading. For example, ONEOK's latest dividend increase was for “only” 4.35%, but it was the company's third increase this year. A lot will depend on what industries the reader is interested in adding to his or her portfolio. I'll leave any further conclusions to the reader.



Disclosure: Author owns KO, KMB, ABT, AFL, BDX, XOM, HRL, ITW, MKC, PNR, PEP, AVP, MDU, OKE, and RTN.