Top 14 Dividend Champions: Sweet Spot for Total Return (Part 1)

Includes: ABT, JNJ, MCD, PEP, PG, SYY, VFC
by: Chuck Carnevale
Considering today's low-interest environment, dividend paying common stocks are rapidly becoming a more and more popular option for investors seeking income. Identifying dividend paying companies that have a long history of growing their dividends provides icing on the cake. The old investing adage that says you should strive to make your money work as hard for you as you worked for it, proves sage advice.
Therefore, in this vein, the hardest working portfolio you could possess is one that gets you a raise in pay each year. You deserve it, and the right dividend paying common stocks are capable of giving you a raise each year.
Common sense would dictate that the best place to find dividend paying companies that can give you a raise in pay each year is from lists of companies that have done it. The list of Dividend Champions includes 98 companies that have raised their dividends every year for at least 25 years. This list can be found here courtesy of David Fish.
A second excellent source is the Dividend Aristocrats index, available from Standard & Poor's Corp. This index is comprised of 42 large-cap, blue-chip companies within the S&P 500 that have likewise increased their dividend every year for 25 years.
Both of the lists mentioned above provide a fertile field of excellent candidates that income-seeking investors can use to screen from. In two previous articles, we covered the 10 highest yielding companies and then the 10 lowest yielding companies of the 98 Dividend Champions (links to both of these articles can be found here: Article 1Article 2).
In this two-part article we will cover 14 Dividend Champions that we believe represent the current "sweet spot" of the 98 possible choices. As an interesting aside, 11 of these 14 Dividend Champions "sweet spot" selections are also Standard & Poor's Corp. Dividend Aristocrats.
The following graph summary and review lists these 14 "sweet spot" candidates in order of highest to lowest dividend yield within the group. Each company covered in this article, as well as our previous two articles, were reviewed since calendar year 1997. This provides an apples-to-apples time frame comparison. In order to be qualified as a "sweet spot" candidate, each company had to possess the following characteristics and criteria:
  • The current dividend yield had to be above average, exceeding 2% (S&P 500 average equals 1.8%).
  • The historical total return since 1997 had to exceed the S&P 500’s.
  • Total cumulative dividend income since 1997 should exceed the S&P 500's.
  • Historical earnings-per-share growth had to exceed the S&P 500.
  • Debt to equity had to be under 50%, the lower the better.
  • Each company had to be an industry-leading, large-cap blue-chip.
  • Of course, each company had to increase their dividend for at least 25 years consecutively.
  • Most importantly, each company had to be attractively valued based on the consensus of leading analysts reporting to FirstCall or Zacks forecasts for five-year future earnings growth.
Summary and Review: 14 Blue-Chip Sweet Spot Dividend Champions
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Fundamentals at a glance F.A.S.T. Graphs™ (First Seven-part one)
The following "fundamentals at a glance" will review the first seven "sweet spot" candidates, highlighted in blue above, through the lens of our graph research tool. Per reader requests, we have included a graph on the S&P 500 for perspective and as a benchmark comparison (click on each to enlarge). As you review each company's earnings and price correlated graph, we suggest that you make special note of the consistency of each company's operating record as compared to the average company (S&P 500).
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Abbott Laboratories (NYSE:ABT)
About Abbott Laboratories

Founded in 1888 by Dr. Wallace Abbott, a Chicago physician, Abbott is a broad-based health care company that discovers, develops, manufactures and markets products and services that span the continuum of care – from prevention and diagnosis to treatment and cure. Abbott's principal businesses are global pharmaceuticals, nutritional and medical products, including diagnostics and cardiovascular devices.

Abbott Laboratories has achieved a remarkably consistent record of earnings growth, and offers a dividend yield that exceeds the rate available on 10 year treasury bonds. Also, notice how strong operating results continued right through the great recession of 2008. This blue-chip has a debt-to-equity ratio of 33%, and trades at a historically low valuation since 1997.
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Abbott Laboratories has modestly outperformed the S&P 500 since 1997 even though beginning valuation was high and current valuation is low. Their annual dividend growth rate was often double digits, and their payout rate ratio remarkably consistent.

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The estimated earnings and return calculator based on 17 analysts reporting to Zacks indicates an above average future return.
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Johnson & Johnson (NYSE:JNJ)
About Johnson & Johnson

Johnson & Johnson's commitment to innovative health care products has resulted in consistent financial performance. The Company has 26 consecutive years of adjusted earnings increases and 48 consecutive years of dividend increases. Johnson & Johnson, employing approximately 114,000 people worldwide, is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson's primary interest, both historically and currently, has been in products related to health and well-being. Johnson & Johnson was organized in the State of New Jersey in 1886.

Johnson & Johnson has also achieved a very consistent record of earnings growth that held up very well during the recession of 2008. They offer a dividend yield approximately equal to the 10 year treasury bond, with a low debt-to-equity ratio of only 14%. Johnson & Johnson shares are priced at one of their lowest historical valuations since 1997.
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Johnson & Johnson has outperformed the S&P 500 on both capital appreciation and total dividends paid. Double-digit dividend increases, or close to it, have been the norm since 1997. Their payout ratio has only modestly increased since the great recession of 2008 in order to maintain their unblemished dividend growth record.
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The graph estimated earnings and return calculator shows that Johnson & Johnson has the lowest forecast earnings growth of the group, and is one of the few that does not exceed double-digit forecasts. Nevertheless, attractive future return potential is apparent thanks to current low valuation, and the possibility that the FirstCall consensus earnings estimates are biased to the low side due to recent product recalls.
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McDonald’s Corporation (NYSE:MCD)
About McDonald’s’ Corporation

McDonald's is the leading global foodservice retailer with more than 32,000 local restaurants serving more than 60 million people in 117 countries each day. More than 75% of McDonald's restaurants worldwide are owned and operated by independent local men and women.

McDonald's has generated double-digit earnings growth with only a minor lull during the recession of 2001. At its current valuation, McDonald's stock appears reasonably valued based on historical norms. McDonald’s debt-to-equity ratio is 43% and their dividend yield is over 3%, and growing.
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McDonald's has substantially outperformed the S&P 500 on both capital appreciation and total cash dividends paid. The company's dividend growth has been superb and their payout ratio has recently settled at the 50% level.
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The graph estimated earnings and return calculator shows McDonald's to be fairly valued. Therefore, according to the forecast of 26 analysts reporting to FirstCall, McDonald's Corp. could offer double-digit total returns going forward.
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Sysco Corporation (NYSE:SYY)
About Sysco Corporation

Sysco is the global leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, lodging establishments and other customers who prepare meals away from home. Its family of products also includes equipment and supplies for the foodservice and hospitality industries. For fiscal 2010, Sysco reported sales of $37.2 billion and net earnings of $1.2 billion.

Sysco Corporation has a strong and consistent record of earnings growth since 1997 with only a modest hiccup here and there. It's interesting to notice that the market has historically priced this blue chip at a valuation significantly above its earnings justified level. Therefore, the current valuation is near historical lows. Sysco has a dividend yield of 3.3% and a debt-to-equity ratio of only 39%. Sysco is one of only three companies we will cover that is not also a Standard & Poor's Dividend Aristocrat.

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Sysco Corp. has soundly outperformed the S&P 500 on both a capital appreciation and a total cash dividends paid basis. In recent years their payout ratio has increased to slightly over 50%.
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The graph estimated earnings and return calculator shows a consensus forecast of above average double-digit five-year earnings growth. Therefore, Sysco stock appears attractively valued at today's levels.
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VF Corporation (NYSE:VFC)
About VF Corporation

VF is a $7.6 billion apparel powerhouse, with an incredibly diverse, international portfolio of brands and products that reach consumers wherever they choose to shop. Over the years, we have built a foundation for sustainable, long term success, based on our diversity, a culture that is perpetually driven to succeed and our ability to manage large-scale complexity.

VF Corporation has a solid record of earnings growth that is higher than the S&P 500 and less cyclical. The company offers low debt and a 3% dividend yield. Current valuation is historically attractive.
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VF Corporation has outperformed the S&P 500 on both a capital appreciation and total cash dividends paid basis. The company's dividend growth rate has reasonably correlated to their earnings per share growth.
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The graph estimated earnings and return calculator shows VF Corporation to be attractively valued based on the consensus of 18 analysts reporting to FirstCall.
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PepsiCo Inc. (NYSE:PEP)
About PepsiCo Inc.

PepsiCo is a world leader in convenient snacks, foods, and beverages, with revenues of $60 billion and over 285,000 employees. PepsiCo owns some of the world's most popular brands, including Pepsi-Cola, Mountain Dew, Diet Pepsi, Lay's, Doritos, Tropicana, Gatorade, and Quaker. Our brands are available worldwide through a variety of go-to-market systems, including direct store delivery (DSD), broker-warehouse, and food service and vending.

Since calendar year 1999, PepsiCo has strung together a very consistent string of earnings growth. This blue chip had been generously valued by the market in excess of its earnings justified level, until the recession of 2008 brought their share price down to reasonable valuations. Their dividend yield is just under 3% and their debt-to-equity ratio is a solid 30%.

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Even though PepsiCo has been mostly overvalued since 1997, thanks to their consistent earnings growth they were still able to outperform the S&P 500 on both a capital appreciation and total cash dividends paid basis. Dividend growth is strongly correlated to earnings growth, and their payout ratio has been relatively consistent.
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The graph estimated earnings and return calculator shows PepsiCo to be fairly valued. The consensus five-year earnings growth estimate by 13 analysts reporting to FirstCall expect future earnings growth to mirror their historical growth since 1997.
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Procter & Gamble Co. (NYSE:PG)
About Procter & Gamble

Four billion times a day, P&G brands touch the lives of people around the world. The company has one of the strongest portfolios of trusted, quality, leadership brands, including Pampers®, Tide®, Ariel®, Always®, Whisper®, Pantene®, Mach3®, Bounty®, Dawn®, Gain®, Pringles®, Charmin®, Downy®, Lenor®, Iams®, Crest®, Oral-B®, Duracell®, Olay®, Head & Shoulders®, Wella®, Gillette®, Braun® and Fusion®.

Procter & Gamble has produced a very consistent record of earnings growth since 1997. They represent yet another example of the market richly valuing their shares in excess of their earnings justified levels. Once again, the recession of 2008 has brought this blue-chip’s shares down to more reasonable valuations. The company pays a dividend of just under 3% and has a debt-to-equity ratio of 26%.
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Procter & Gamble has outperformed the S&P 500 on both a capital appreciation and total cash dividends paid basis. Their payout ratio has remained reasonably consistent and their dividend growth has closely correlated to their earnings per share growth.
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The graph estimated earnings in return calculator shows that Procter & Gamble is currently valued on the high side of fair valuation. However, the consensus earnings growth estimates of 25 analysts reporting to FirstCall are expecting double-digit growth over the next five years. Therefore, current valuation may represent an attractive opportunity to begin accumulating their shares.
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Summary and Conclusions
In this first of our two-part series, on 14 dividend champions representing the "sweet" spot for total return, we covered the seven highest dividend yielding stocks of the group. In part two, we will cover the remaining seven companies based on the highest five-year estimated total return expectation. Once again, as we saw with our previous two articles, there is an inverse relationship between yield and total return. In other words, higher yielding stocks will tend to generate lower total returns than lower yielding stocks. What we believe this tells us is that higher yield is typically associated with a lower rate of earnings growth, and lower yield is typically associated with a higher rate of earnings growth. Of course, there will always be a few exceptions to the rule.
These relationships will only hold true when valuation is sound and reasonable when purchases are made. In other words, you could buy a high yielding low growth dividend paying company at a very low intrinsic valuation and receive a higher total return, than you would get from buying a lower yielding faster growing company at a very high valuation. The point being that valuation is an important factor of return that must be considered when evaluating performance results. Our mantra is: "measuring performance without simultaneously measuring valuation is a job half done."
Unfortunately, completely ignoring valuation is one of the flaws that we have found with many statistical studies and analysis. This is due to the fact that most academics buy into the absurd argument that the markets are always efficient. As Warren Buffett so aptly put it: "I'd be a bum on the street with a tin cup if the markets were always efficient ."
This is why we believe our graph research tool is so valuable. Instead of relying on mere statistical references, it allows us to specifically evaluate thousands of individual companies. Most importantly, the perspective of valuation, over or under, is vividly depicted. When specific analysis is conducted in this manner, we believe the true relevance and importance of earnings, dividends and valuation become more rationally and truthfully expressed.
We believe the "sweet spot" for investing in dividend paying common stocks for growth and income occurs when the big three; valuation, above-average earnings growth and above average dividend yield, are aligned. This is one reason why we chose 1997 as our starting point. Valuations were only modestly high that year. The second reason: our graph will skip every other year of data for any chart over 15 years (which always includes one-year forecasting) due to space constraints. Otherwise, 1995 to current time, would have been a better starting date because valuations were generally at fair value in 1995. The year 1997 was chosen because we wanted the reader to be able to see every data point plotted on the graphs.
In part 2, we will examine the seven remaining "sweet spot" Dividend Champion companies that hypothetically should generate the highest estimated total returns based on forecast earnings growth and valuation. What you will find is that these companies will have the lowest current yields but a more attractive current valuation and generally higher forecast earnings growth than this first group. Finally, we want to emphatically state that this article and our graph research tool should represent only a strong foundation and starting point of a more comprehensive research effort.

Disclosure: I am long ABT, JNJ, MCD, SYY, VFC, PEP, PG, CL, MDT, XOM, AFL.

Continue to Part 2 >>