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Dividend Champions Smackdown XI

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 factors such as yield, payout ratio, and, most recently, the Price/Book Value ratio. This time, I decided to start with the PEG ratio, which compares a stock's Price/Earnings ratio with its expected earnings growth rate (in the case of Yahoo data, the 5-year expected growth rate). The PEG ratio is a basic measure of how the stock market is valuing not only current but expected earnings and is sometimes associated with GARP (Growth at a Reasonable Price). The lower a PEG ratio is, the better, and ratios of less than 1 are considered undervalued situations, but typical ratios may now be a higher. So, while a P/E of 15 may be considered better than a P/E of 20, if earnings are expected to grow at 20%, then the higher P/E may be considered justified (as indicated by a PEG ratio of 1.00), when compared with a stock that has a P/E of 15 but is only expected to grow earnings at a 10% rate (indicated as a PEG ratio of 1.50). So I screened as follows:

Step 1: Sort the companies by PEG ratio (column W), from low to high. Only five Champions had a PEG of less than 1, so I proceeded with a group of 47 stocks with PEG ratios of 1.50 or less and once I eliminated one company that had not increased its dividend in more than a year, there were 46 candidates.

Step 2: Eliminate companies with yields and latest increase percentages below 2%. I didn't want to select companies that had excessively low payouts or increases that were negligible. This cut the field down to 24 companies.

Step 3: Compare the remaining companies by the percentage increase of Next Year's EPS estimate over This Year's EPS estimate (column AB). I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases. I eliminated companies whose earnings are expected to increase by less than 10% in 2012. That cut the field in half.

Step 5: Compare the candidates by their 1-, 3-, 5-, and 10-year Dividend Growth Rates (columns AJ to AM). I eliminated any company that had a DGR of less than 3% in any of these periods. The list of remaining candidates follows:

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



No.

2/28


%

PEG

NY%

DGR




Company

Symbol

Yrs

Price

Yield

Inc.

Ratio

Growth

1-yr

3-yr

5-yr

10-yr

Becton Dickinson & Co.

BDX

38

80.00

2.05

10.81

1.44

10.71

12.1

14.7

15.5

14.9

Eaton Vance Corp.

EV

30

31.30

2.30

12.50

1.34

21.11

5.6

9.0

14.2

20.6

ExxonMobil Corp.

XOM

28

85.53

2.06

4.76

1.04

13.01

4.8

8.3

8.8

7.1

Leggett & Platt Inc.

LEG

39

23.06

4.68

3.85

1.13

26.52

4.0

14.5

11.1

10.1

Pentair Inc.

PNR

35

37.08

2.16

5.26

1.08

17.17

5.6

8.2

7.9

8.9

Wal-Mart Stores Inc.

WMT

36

51.98

2.33

11.01

1.13

10.16

11.8

12.6

15.3

17.8


Conclusion

This screen produced a half dozen companies with relatively low PEG ratios that may be worthy of further study. The companies (with one exception) all have yields below 3%, which may indicate that higher yields have attracted enough investor buying to push their stock prices to levels above what is justified by their earnings growth. The strongest Dividend Growth Rates might help to boost an investor's yield-on-cost to a more attractive level in a reasonable amount of time. All of these stocks have been strong enough to have increased their dividends for at least 28 straight years.

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.

2/28


%

PEG

NY%

DGR




Company

Symbol

Yrs

Price

Yield

Inc.

Ratio

Growth

1-yr

3-yr

5-yr

10-yr

Avon Products Inc.

AVP

22

27.81

3.31

4.55

1.18

12.81

4.8

5.9

5.9

9.1

Graco Inc.

GGG

14

40.71

2.06

5.00

1.02

19.80

5.3

6.6

9.0

17.0

Norfolk Southern

NSC

10

65.58

2.44

11.11

0.95

14.62

2.9

13.4

23.9

5.8

Polaris Industries

PII

16

75.45

2.39

12.50

1.01

16.32

2.6

5.6

7.4

13.8

Thomson Reuters Corp.

TRI

18

39.45

3.14

6.90

1.45

22.07

3.6

5.8

8.0

5.4

Unilever plc

UL

11

29.70

3.85

2.66

1.25

10.50

11.0

4.2

6.8

9.2

(Note that I kept both NSC and PII even though their 1-year DGR was below 3%, as the list had already been pared to six companies.)

Challengers:



No.

2/28


%

PEG

NY%

DGR




Company

Symbol

Yrs

Price

Yield

Inc.

Ratio

Growth

1-yr

3-yr

5-yr

10-yr

Alliance Holdings GP LP

AHGP

6

55.14

3.83

5.50

1.16

11.11

12.8

22.6

n/a

n/a

Darden Restaurants

DRI

6

47.13

2.72

28.00

1.12

12.76

26.7

24.6

36.6

35.8

Digital Realty Trust

DLR

7

58.82

4.62

28.30

1.32

11.08

43.7

19.2

16.9

n/a

Greif Inc. A

GEF

7

64.66

2.60

10.53

1.26

11.79

5.3

20.3

32.0

19.9

Hasbro Inc.

HAS

8

44.90

2.67

20.00

1.43

15.21

18.8

16.6

23.5

14.7

Lockheed Martin

LMT

8

79.16

3.79

19.05

1.30

24.21

12.8

21.6

20.2

19.6

Pharmaceutical Product Development

PPDI

6

27.47

2.18

5.71

1.01

18.01

8.8

48.8

90.4

n/a

Raytheon Company

RTN

6

51.21

2.93

20.97

1.26

11.85

18.6

12.6

10.8

111.5

Ryder System

R

6

47.83

2.26

8.00

1.35

20.96

6.3

6.7

9.8

5.4

Safeway Inc.

SWY

6

21.82

2.20

20.00

1.19

13.61

20.5

20.1

34.5

n/a

TransAlta Corp.

TAC

5

21.16

5.28

8.12

0.87

15.74

8.1

6.0

5.0

n/a

Watsco Inc.

WSO

9

64.58

3.22

8.33

1.03

24.51

7.9

15.9

26.9

35.2

(Note that Challengers don't always have a 10-year dividend history; I eliminated those with negative 10-year DGRs – which indicate a dividend reduction – but kept those with “n/a.”)

Clearly, there are some higher yields among the Contenders and Challengers, which may indicate that their stock prices have not been pushed higher to the same extent that the Champions have. Keep in mind that growth estimates are subject to change, as are other numbers. Whatever industries the reader is interested in adding to his or her portfolio, there seem to be some good candidates. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long BDX, XOM, PNR, AVP, PII, LMT, RTN, R.

Source: Dividend Champions Smackdown XI: PEG Ratio Edition