Top 7 Dividend Champions Based on Expected 5-Year Total Returns - Week of 08/17/2011

Includes: LEG, NC, NUE, PBI, SCL, SWK
by: Chuck Carnevale
The benefits of investing in dividend paying companies is widely written about and respected. Investors who are interested in achieving an above-average total return through a combination of growth and income should find the following seven example companies to be a great place to begin their search. Although the seven companies on this list are “Dividend Champions,” the focus with this group is on above-average total return with a dividend kicker. Therefore, this group may appeal more to those investors who still have some time before they enter their retirement years.
The list of Dividend Champions contains 100 companies that have raised their dividends every year for at least 25 years straight. This list is compiled by Seeking Alpha Author David Fish and can be found here. The following graphic generated from F.A.S.T. Graphs™ lists the top 7 Dividend Champions in order of expected total return based on consensus analyst estimates reporting to Capital IQ. This screen of seven dividend champions with the highest expected total return represents an attractive "fishing hole" (pun intended) for investors seeking a high total return with a dividend kicker.
The five-year estimated annual total return calculation is derived as a function of the consensus five-year estimated EPS growth rate and each individual company’s current valuation. The calculated total return figure assumes that each company will trade at an appropriate valuation based on widely accepted formulas for valuing earnings growth by year-end calendar year 2016.
The following portfolio review summarizes important basic fundamental metrics on each of the current seven Dividend Champions offering the highest expected total return. However, the numbers alone do not always tell the whole story. On the basis that a picture is worth 1000 words we offer the below graphic, which is a miniature version of our research tool in a live and interactive form.

Clicking on the gray button with the stock symbol generates a full working version of each respective company’s graph. Therefore, the reader will be able to instantly evaluate the earnings and price relationship on each of these seven companies. These seven companies do currently offer the highest expected total return based on forecast earnings in conjunction with valuation of all the Dividend Champions; however, there is no guarantee that any of these companies will meet these targets.
(Click chart to expand)
Helpful Hints and Tips
  • We suggest that you run each company's graph over numerous time periods. For example, after reviewing the default 15-year graph, run a 20-year then perhaps a 10-year and a 5-year, etc., doing this will help the user determine whether the company’s business has been growing or shrinking. In other words, this will allow you to see how the company's more recent operating results stack up against their longer-term historical history and vice versa. With each graph drawn the respective growth rates will be recalculated and listed to the right of each graph.
  • When reviewing the performance results associated with each graph that you draw, pay careful attention to the effect that beginning and ending valuation have on performance. A high starting valuation will result in a lower starting dividend yield which will affect growth yield, also known as yield on cost. High starting valuation will also limit the capital appreciation component and vice versa.
  • Remember, the graphs are dynamic and will automatically recalculate all the important data each time a different length graph is drawn.
  • When reviewing the dividend columns in the performance report associated with each graph there are a couple of tips to look out for. For example, if a company pays a special dividend in addition to their normal dividend in one year, the next year will appear to be a cut, even though the actual regular dividend increased. Also when drawing graphs covering long periods of time due to rounding, it may appear that the dollar amount of the dividend remains the same from one year to the next. In these cases if you look to the cash dividend column you would discover that the actual dollar amount of the dividend increased. When dealing with companies that have spun off businesses, the historical data will reflect the company prior to the spinoffs. Therefore, it may appear that the dividend has been cut; however, the dividend attributed to the remaining entity could have increased for the requisite 25 years in a row. Altria Group Inc. (NYSE:MO) is a case in point.
  • Since the graphs represent the first step in a more comprehensive research process, a link to each respective company's website will be found at the top of each graph (link in blue ink). This feature is designed to facilitate the user's ability to go deeper into the research process if the graph inspires them to do so.
  • When reviewing REITs or MLPs, we suggest that you take off the Earnings Growth Rate line and the Normal PE Ratio line and measure the valuation of these enterprises through the perspective of dividends (cash payments).
This report covers the seven Dividend Champions with the highest potential five-year rate of return based on a combination of factors. There are primary attributes that these seven companies possess that in various combinations contribute to the expectations of their future return. The estimated earnings growth rate is a major factor as it will contribute to both capital appreciation and the rate of change of dividend growth over time. In theory, the dividend growth for each company should be a function of its overall earnings growth.
Valuation is, in our opinion, the second most important contributing factor. This is based on our thesis that inevitably a company’s stock price will move to its intrinsic value. Therefore, extreme undervaluation would represent an arbitrage opportunity that would accelerate future returns as the company stock price reverts to the mean. With some of the companies on this list a cyclical explosion off of a low earnings base will be indicated. Finally, the starting current yield will also be a major contributor to the ultimate total return that shareholders will receive.
One of the primary benefits of conducting a more comprehensive research effort utilizing a tool like this is the ability to recognize where future returns might come from. Without the benefit of this graphical interface, investors are left to rely solely on statistics and numbers. However, it should be clear to the researcher after examining the graphs on each of the seven companies how misleading mere statistical references can be. Therefore, it's up to each prospective investor to conduct thorough due diligence in order to verify the apparent opportunities before them.
Disclosure: I am long AFL.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.