How 5 Dividend Kings Stack Up Against The Competition

 |  Includes: ABT, GPC, JNJ, KMB, LEG, LOW, PG
by: Dividend Kings

During uncertain market times, investors look for more safety. And what better place than sound companies, with proper valuations that provide a decent dividend while waiting for the stock to appreciate in time? Here are five companies to look into based on their dividends, dividend sustainability, growth prospects and comparison to main competitors in the market place.

Johnson & Johnson (JNJ): The stock is trading at around $65 at the time of writing, with a 52-week trading range of 57.50-68.05. The shares yield a 3.5% dividend rate, which fares well compared to its main competitors: Abbott Laboratories (NYSE:ABT) is yielding 3.42% and Novartis (NYSE:NVS) yields 3.43%, respectively. Johnson & Johnson has systematically raised dividends each year for the last 20 years, even in the midst of two recessions in that time frame. The payout ratio is at 54%, beating Novartis' 47%, while losing to the payout ratio that Abbott Laboratories has, which stands at 64%. Comparing cash flow to its main competitors, Johnson & Johnson is the most cash rich when looking at free cash flow in terms of absolute numbers of $4.49 billion and cash flow per share of $5.84. Debt to equity ratio is only 0.30, which is very positive compared to Abbott Laboratories' 0.68. The company has managed to hold the highest operating margin (22.15%) compared to its main competitors. For dividend seekers, within the large-cap, mature stock range, Johnson & Johnson is a buy, with some stock appreciation potential in addition to the dividends.

Lowe's Companies (LOW): The stock is trading at around $27 at the time of writing, with a 52-week trading range of $18.07 - $27.57. The shares yield a dividend rate of 2.05%, which is lower than that of its main competitor Home Depot (NYSE:HD). Lowe's yields 2.63%, with a payout ratio of 43% for both. When looking at the stock during recession periods, it seems to hold dividends constant, with no dividend increases, which holds true for Home Depot also. Dividend growth has been averaging 36% per year for the last five years, while Home Depot has increased dividends by only 5.2% on an annualized basis. But this seems unsustainable for Lowe's Companies as it has only $121 million in free cash flow, compared to Home Depot's $862 million. In addition, the company has a slightly lower operating margin, which means Lowe's has less room to maneuver in terms of dividend commitments. In terms of valuation, the stock has a more favorable price to earnings ratio of 17.1, compared to Home Depot's 18.8. But Home Depot has a higher ratio, justifiably, as its estimated earnings growth for the next five years is slightly higher than that of Lowe's, hence negating the price to earnings ratio difference. Investors looking for a sound, dividend yielding stock should look at Home Depot.

Kimberly-Clark Corporation (NYSE:KMB): The stock is trading at around $74 at the time of writing, with a 52-week trading range of $61.00 - $74.06, so the stock is trading at its high end of the range. The dividend yield is at 3.90%, while main competitor Procter & Gamble (NYSE:PG) is yielding a slightly lower number of 3.20%. Kimberly-Clark Corporation's payout ratio is at 66%, Procter & Gamble's is 51%. However, looking at the free cash flow of ($552 million), in comparison to Procter & Gamble's ($1.34 billion), with almost half the debt to equity ratio, the competition seems more likely for dividend increases. This said, Kimberly-Clark has not lowered nor stalled dividend growth for the last decade or more. The company actually increased dividends, even in times of recession (2008 housing/financial crisis). The same applies to Procter & Gamble. Procter & Gamble commands a higher operating margin at 18.55%, compared to Kimberly-Clark's 12.2%. Forward looking estimates don't seem to favor the company either, with average earnings growth estimated at 5.7%/year, as opposed to a higher number for Procter & Gamble, standing at 8.77%. Overall in terms of dividend sustainability, Kimberly-Clark seems to be doing fine and is a good selection for those who want a slightly higher dividend. However, for an investor looking for possible dividend growth, Procter & Gamble would be a more suitable selection.

Leggett & Platt, Incorporated C (NYSE:LEG): The stock is trading at around $23, with a 52-week trading range of $17.80 - $26.95. The dividend yield rate is at 5.51%, while main competitor Genuine Parts Company Common (NYSE:GPC) has a lower yield of 3.46%. Dividend sustainability of Leggett & Platt can be questioned as it has a payout ratio of 92%, compared to Genuine Parts which has only a 51% payout ratio. Cash flow seems to be a question also with only $82 million in free cash flow compared to its main competitor's $225 million. Operating margin is better than that of Genuine Parts, standing at 7.56%. Expected earnings growth rates for the next five years stands at 15% per year, with Genuine Parts having only 8.8% projected. The stock does seem to be reasonably valued, when pricing in growth estimates. However, a word of caution is needed as for the last four quarters analysts have only gotten one quarter estimate in line with actual reported earnings. Overall, the company does not seem to have the sustainability to keep dividends even at current levels. Consider looking at Genuine Parts for a sound stock, good dividend yield and with potential for dividend growth.

Medtronic Inc. (MDT): The stock is trading at around $39 at the time of writing, with a 52-week trading range of $30.18 - $43.33. Shares have dividend yield rate of 2.69%, compared to its main competitor St. Jude Medical, Inc. (NYSE:STJ), which yields only 1.74%. Medtronic has a payout ratio of 29%, compared to St. Jude Medical's 23%. However, Medtronic has much more free cash flow in absolute numbers ($ 971 million), as opposed to its main competitor, which has $284 million in free cash flow. The operating margin stands at an impressive 30%, Medtronic has more room to operate compared to the 22% by St. Jude Medical. Valuation-wise, the stock has a price to earnings ratio of 11.3, same as the competition. But taking growth factors into consideration, St. Jude Medical actually seems a bit cheaper. The earnings have been historically well within the grasp of analysts when it comes to Medtronic, with actual earnings reports being more or less in line with the estimates. For investors looking at this industry for dividends, Medtronic would be the way to go. If an investor has growth in mind, I would advise looking elsewhere.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.