Dividend Challengers Smackdown XX (Part i)

 |  Includes: ARCH, CBRL, CR, CSX, DE, HAS, KOF, LMT, THG
by: David Fish

In previous installments of the Smackdown series, I have screened the Dividend Champions (which can be found (here) using factors such as payout ratio, dividend growth rate, and, most recently, the “sweet spot” of dividend yields between 3% and 5%.

Beginning this month, I'm separating the Champions, Contenders, and Challengers into different articles to fit more closely into the format preferred by Seeking Alpha. (Champions are companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of 5-9 years.) I'll use the same Roman numeral for all three articles.

This month, I decided to return to the very first Smackdown, published on June 7, 2010, starting with the most recent dividend increase (by percentage) by each company. Back then, many boards of directors seemed to be taking a very conservative approach – some might say they were being stingy – whereas 2011 has been marked by more generous increases. Note that I'm using my “working copy” for November, which already has a handful of dividend changes, but retains the October 31 prices and other data. I screened as follows:

Step 1: After eliminating companies that had not increased their dividend in more than a year and those that had agreed to be acquired, I sorted by Most Recent Increase (column L), high to low. I eliminated companies with increases of less than 10%. That cut the list to 90 initial candidates.

Step 2: Sort the companies by Yield. Eliminating any with yields below 2% cut the field to 49 companies.

Step 3: Sort the companies by their 5- and 10-year Dividend Growth Rates (columns AN and AO), in order to eliminate any “historical stinginess” for dividend increases. I eliminated any company with a DGR of less than 5% (or “n/a”) in either of these columns. Meeting these thresholds were 19 companies.

Step 4: Sort the companies by Payout Ratio, low to high, dropping any that were over 50%, which reduced the field to 15 companies.

Step 5: Sort the companies by their Next Year and 5-year estimated earnings per share growth rates. (Columns AC and AD). I eliminated any that had expected earnings growth of less than 9% in either column. (I used a 5% threshold for the Contenders in order to reduce the list to a manageable size.) This left nine candidates, which appear below.

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

As an extra step, I'm including one of Chuck Carnevale's graphs for the company that appears to be the most undervalued, as indicated by the price line being in the green-shaded earnings area, just below. Besides Lockheed Martin, both Cracker Barrel and Deere & Company have very attractive charts. Only Hanover appears to be overvalued.

Click to enlarge
(Click to enlarge)


This group offers a trio of very attractive companies, but only one of them has what could be called a high yield. The negative is that the defense industry may be facing cutbacks in government spending. Growth estimates are subject to change and attractive prices can disappear quickly. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long ACI, CSX, DE, LMT.