Analyzing the Top 5 Holdings of the S&P Dividend ETF

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 |  Includes: CINF, CTL, HCP, LEG, PBI
by: Frank J. Constantino

As investors' search for yield continues, the ability for a company to continue raising payouts year after year becomes even more important. That search can begin with a group of stocks known as the dividend aristocrats. These companies have increased their dividend every year for at least the past 25 years. It is important to note that purchasing the top 50 dividend aristocrats can be accomplished through the exchange traded fund, SPDR S&P Dividend ETF (NYSEARCA:SDY).

In this article, I will break down the top five holdings of SDY. These five holdings represent some of the highest yielding stocks in the fund.

Pitney Bowes (NYSE:PBI)

Pitney Bowes provides mail processing and integrated mail solutions in the United States and internationally. The company has a market cap of $5.2 billion. The stock has a dividend yield of 5.7%. Pitney Bowes has grown its dividend at an annual rate of 3.3% over the last five years. One concern is that the company has 104% dividend payout ratio, meaning it is paying out a higher rate of cash than it generates. The stock trades at an inexpensive 11 times forward earnings. It also has an attractive price/owner earnings ratio of 8 (for a detailed description of price/owner earnings click here).

Despite Pitney Bowes' growing dividend, it has struggled to grow revenue and earnings. Revenue and earnings have grown at an annualized rate of 0.20% and -5.9%, respectively. The stock is up more than 15% over the last twelve months.

CenturyLink (NYSE:CTL)

CenturyLink is an integrated communications company. The company provides a range of communications services, including local and long distance voice, wholesale network access, high-speed Internet access, other data services, and video services in the United States. The company has entered into an agreement to purchase Qwest Communications (NYSE:Q). The acquisition is expected to be completed in April. CenturyLink has a market cap of $12.5 billion. The stock yields 6.88%, making it the highest yielder in this group. CenturyLink has grown its dividend 64% annually over the past five years. The company pays out 93% of cash in its dividend.

CenturyLink has grown revenue 23% annually over the past five years, although much of the growth is through acquisitions. The company has an attractive price/owner earnings ratio of 9. The stock trades at 13.5 times forward earnings. The stock price is up more than 17% in the last twelve months.

HCP, Inc. (NYSE:HCP)

HCP is an independent hybrid real estate investment trust. The fund invests in real estate in the United States. It primarily invests in properties serving the healthcare industry including senior housing, life science, medical office, hospital and skilled nursing facilities. HCP has a market cap of $11.5 billion. The stock yields 5.2%. HCP has grown its dividend at an annual rate of 2.2% over the past five years.

A concern is that HCP has a payout ratio of 186%. Payout ratios this high are rarely sustainable. The company has grown revenue and earnings at an annualized rate of 28% and 12.5%, respectively. The stock trades at 26 times forward earnings. It is up more than 27% in the last twelve months.

Leggett & Platt (NYSE:LEG)

Leggett & Platt designs and produces a wide range of engineered components and products worldwide. It operates in four segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials, and Specialized Products. The company has a market cap of $3.5 billion. The stock yields 4.6%. Leggett & Platt has grown its dividend at an annualized rate of 11% over the past five years. Its dividend payout ratio is 90%. Revenue growth has been non-existent at -4.6% annually over the past five years.

The company has managed to grow earnings by 0.5% annually over the same period of time. The price/owner earnings ratio is attractive at 16.4. The stock trades at 18 times forward earnings. It is up 21.5% in the last twelve months.

Cincinnati Financial (NASDAQ:CINF)

Cincinnati Financial, through its subsidiaries, operates a property casualty insurance business in the United States. It operates in four segments: Commercial Lines Property Casualty Insurance, Personal Lines Property Casualty Insurance, Life Insurance, and Investment. Cincinnati Financial has a market cap of $5.6 billion. The stock yields 4.72%. The company has grown its dividend at an annualized rate of 5.7% over the past five years. At 69%, it has the most reasonable payout ratio in this group.

Cincinnati Financial has not grown revenue over the past five years. Its earnings growth rate is an annualized -7.4%. The company has an attractive price/owner earnings ratio, at 11.5. The stock trades at 23 times forward earnings. Cincinnati Financial is up 29% in the last twelve months.

Below is a comparison chart of the valuation metrics for each of the five companies.

Metric PBI CTL HCP LEG CINF
Market Cap $5.2 B $12.5 B $11.5 B $3.5 B $5.6 B
Recent Price $25.75 $41.23 $37.19 $23.62 $34.18
Forward PE 11.05 13.49 26.34 17.87 23.09
Dividend Yield 5.70% 6.88% 5.21% 4.60% 4.72%
5 Year Div. Growth Rate 3.30% 64.60% 2.20% 11.40% 5.70%
Payout Ratio 104.00% 93.00% 186.00% 90.00% 69.00%
Price/Book N/A 1.33 1.98 2.25 1.09
Price/Cash Flow 6.34 5.65 18.97 11.75 14.8
Price/Earnings Growth 1.34 N/A 7.37 1.35 1.47
Price/Owner Earnings 7.95 9.06 34.12 16.4 11.46
Return on Equity N/A N/A 4.85% 43.45% 7.52%
Debt/Equity N/A N/A 0.61 2.13 0.17
Revenue TTM $5.45 B $7.15 B $1.26 B $3.33 B $3.97 B
Operating Cash Flow FYE $824 M $2.05 B $580 M $363 M $525 M
Capex FYE $167 M $864 M $305 M $68 M $42 M
Capex/Cash Flow FYE 0.2 0.42 0.53 0.19 0.08
5 Year Rev. Growth Rate 0.20% 23.20% 28.00% -4.60% 0.00%
5 Year Cash Flow Growth Rate N/A 22.40% 31.00% -4.50% N/A
5 Year Earnings Growth Rate -5.90% 4.60% 12.50% 0.50% -7.40%
Net Profit Margin 5.73% 10.28% 27.44% 5.44% 10.00%
Current Assets $2.85 B $1.23 B $1.14 B $1.31B N/A
Return on Assets 3.69% 2.27% 23.00% 6.09% 2.50%
Long-term Debt $4.24 B $7.06 B $4.65 B $833.5 M $790 M
Click to enlarge

The analysis of the five companies above is not meant as a recommendation of any of the individual stocks. Of the five companies, I personally would only recommend CTL (which I own) and CINF. CenturyLink operates in a declining business, but as the company matures it has become a cash cow. The biggest benefit of owning CTL is that it passes most of that cash on to shareholders with its hefty dividend. Cincinnati Financial operates in a good industry and is a well run company despite its struggle to grow earnings. There is a reason Warren Buffett likes insurance companies. I am attracted to the combination of the lower payout ratio and the price/owner equity ratio. Cincinnati Financial also has very little debt for a company its size.

All five of these stocks are up handsomely over the past twelve months. In my opinion, this is a reflection of the companies willingness to pass on cash to shareholders. The dividend aristocrats are good place for investors to begin a search for yield. Analyzing the holdings of dividend ETF's can provide you with further research opportunities.

Charts were provided by I-Metrix.

Disclosure: I am long CTL.