Following my recent post on the relationship between higher payout ratio and higher future earnings growth, Pierre-Olivier of www.jourly.com asked me who I thought were the best U.S. dividend plays. And while I had some ideas based on stocks I have reviewed since creating Margin of Safety Investing, I thought I should try and answer the question based on the entire U.S. stock universe, not just the stocks I have analyzed so far.
To do so, I first generated a list of U.S. companies using Morningstar’s stock screener using the following criteria:
- Market capitalization > $100 million
- Dividend yield > 2%, making sure we are looking at the highest dividend payers (current S&P dividend yield = 2.3%)
- Payout ratio of 60% or less - I usually want companies to have enough cash to keep growing and hence prefer a company with manageable payout ratios
- I excluded financial services companies as I generally do not really know how to analyze/value them
- Using Morningstar’s rating as a first pass, I set my screen to only select companies with a "financial health grade" of B or better
These criteria lead us to a list of c.180 stocks (much more than I was expecting), representing $4.6T of cumulative market cap.
You can find the list of companies and the key metrics that I will be using for the selection of the best U.S. dividend payers in this Google Doc.
Now, in order to select the best stocks among those 182, I will use filters along the three risk categories I usually review:
1 - Business risk
In order to evaluate business performance, I usually look into ROE and ROA over time as a starting point. Using ROE > 12% and ROA > 6% both on a trailing 12-month and five-year average, our list of potential best dividend payers comes down to 82 candidates.
In addition to good returns, I usually screen out companies experiencing very low growth or revenue declines. By filtering out companies having a 3-year revenue growth of 1% or less, our list of candidates drops to 53 stocks.
2 - Balance sheet risk
I prefer companies with conservative balance sheets and usually look at current ratios, debt/equity and debt/FCF. As current ratios levels are often “industry dependent” I will only use debt/equity as a criteria here. Using debt/equity < 1.0x, our universe is now down to 40 companies.
3 - Valuation risk
Finally, using a price to earnings (trailing) < 18x and FCF/Market Cap > 5% leaves us with 18 companies.
Name | Ticker | % ROE | % ROA | % | Debt to Equity | Price/ |
Abbott Laboratories | 22.9 | 10.1 | 3.6 | 0.6 | 15.6 | |
Analog Devices, Inc. | 20.1 | 15.8 | 2.3 | 0.1 | 16.2 | |
AstraZeneca PLC ADR | 38.7 | 16.6 | 5.0 | 0.4 | 8.7 | |
AZZ, Inc. | 18.8 | 11.0 | 2.6 | 0.5 | 14.8 | |
Bristol-Myers Squibb Company | 37.7 | 15.7 | 4.9 | 0.4 | 9.7 | |
Cal-Maine Foods, Inc. | 28.3 | 14.3 | 3.1 | 0.3 | 10.3 | |
ConAgra Foods, Inc. | 16.2 | 6.5 | 3.7 | 0.7 | 13.7 | |
Darden Restaurants, Inc. | 24.5 | 8.7 | 2.3 | 0.8 | 16.6 | |
Eli Lilly and Company | 19.9 | 7.9 | 5.6 | 0.6 | 8.0 | |
Flowers Foods, Inc. | 15.9 | 9.2 | 3.1 | 0.2 | 17.2 | |
General Dynamics | 20.6 | 8.5 | 2.4 | 0.2 | 10.7 | |
Harris Corporation | 18.6 | 8.8 | 2.0 | 0.5 | 9.6 | |
Johnson & Johnson | 28.1 | 15.8 | 3.4 | 0.2 | 12.7 | |
Kimberly-Clark Corporation | 32.3 | 9.6 | 4.3 | 0.8 | 13.3 | |
Medtronic, Inc. | 22.7 | 12.1 | 2.4 | 0.5 | 12.4 | |
Merck & Co Inc | 29.0 | 12.0 | 4.2 | 0.3 | 13.8 | |
Microsoft Corporation | 40.6 | 21.5 | 2.0 | 0.2 | 11.8 | |
Novartis AG ADR | 19.3 | 11.9 | 3.0 | 0.2 | 12.5 | |
PepsiCo, Inc. | 35.6 | 15.9 | 2.9 | 0.9 | 16.4 | |
Procter & Gamble Company | 19.4 | 8.7 | 3.0 | 0.4 | 17.7 | |
Raytheon Company | 15.5 | 7.0 | 3.2 | 0.2 | 9.5 | |
Telecommunications of Sao Paulo ADR | 23.9 | 12.9 | 4.1 | 0.1 | 8.8 | |
Tupperware Brands Corporation | 28.4 | 7.3 | 2.1 | 0.6 | 13.4 | |
United Breweries Company, Inc. ADR | 19.7 | 9.4 | 2.1 | 0.5 | 15.1 | |
United Technologies | 22.2 | 7.8 | 2.2 | 0.5 | 17.1 | |
VF Corporation | 16.7 | 9.3 | 2.8 | 0.2 | 16.4 | |
Wal-Mart Stores, Inc. | 20.7 | 8.3 | 2.2 | 0.7 | 12.9 |
As you can see, a lot of companies are drug manufacturers, which I tend to avoid as a lot of them face a major patent cliff and thus potential for large revenue drops. However amongst those 18 companies, I think one can find some of the best U.S.-listed dividend payers with strong returns, good dividends and conservative balance sheets and with reasonable valuations.
It’s reassuring to me to see that I have already performed a stock review of a number of these stocks and put them in my watchlist.
Are those the stocks you were expecting? Anyone missing?
Disclosure: I am long GD, JNJ, MDT, NVS, WMT.
