We screened the list of Dividend Champions, looking for those that offered the potential for the highest future total return based on analyst estimates for earnings growth over the next five years. We consider using analyst estimates as a rational starting point based on the theory that analysts assigned to a specific stock have likely conducted a comprehensive research effort with which they based their growth estimates on. Furthermore, in addition to analyst estimates, current valuation was the second most important component of assessing future potential total returns.
As you will soon see, the five names that rose to the top of the list possess very interesting operating histories. As most readers know, a Dividend Champion is a company that has increased its dividend for at least 25 consecutive years. The five companies on our list to achieve the following dividend increase achievements: Nacco Industries CL A (NYSE:NC), has increased their dividend for 26 straight years, in spite of a very cyclical earnings history. Aflac Inc. (NYSE:AFL) has increased their dividend every year for 29 consecutive years, but has a much more consistent operating earnings history. Tennant Co. (NYSE:TNC), has increased their dividend every year for 39 consecutive, but also has a very cyclical earnings history. Stanley Black & Decker Inc. (NYSE:SWK), has increased their dividend for 44 consecutive years with a semi-cyclical history of moderate earnings growth. Finally, Stepan Co. (NYSE:SCL), increased their dividend for 44 consecutive years even though earnings growth has been inconsistent.
The following table summarizes five Dividend Champions with the Highest Potential Total Returns Based on Analyst Estimates that appear to be attractively valued, and lists them in order of dividend yield highest to lowest. From left to right, the table shows the company's stock symbol and name. Next, two valuation metrics are listed side-by-side, the current PE ratio followed by the historical normal PE ratio for perspective. Then the five-year estimated earnings per share growth is shown next to each company's historical EPS growth, providing a perspective of the past versus the future growth potential of each company. The final three columns show the current dividend yield, the company sector and its market cap.
click to enlarge
A Closer Look at the Past and the Future Potential
Since a picture is worth 1,000 words, we'll take a closer look at the past performance and future potential of each of our five candidates through the lens of F.A.S.T. Graphs™.
Earnings Determine Market Price: The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph, the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal PE ratio line (dark blue line with*) depicts a PE ratio that the market has historically applied.
The orange True Worth™ line and the blue normal PE ratio line provide perspectives on valuation. The orange line reflects the fair value of each company's earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company's stock relative to its fair value. The blue line represents a trimmed historical normal PE ratio (the highest and lowest PEs are trimmed). These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.
About Aflac Inc. : Directly from their website
"When a policyholder gets sick or hurt, Aflac pays cash benefits fast. For more than 55 years, Aflac insurance policies have given policyholders the opportunity to focus on recovery, not financial stress. In the United States, Aflac is the number one provider of guaranteed-renewable insurance. In Japan, Aflac is the number one life insurance company in terms of individual policies in force. Aflac insurance products provide protection to more than 50 million people worldwide. For five consecutive years, Aflac has been recognized by Ethisphere magazine as one of the World's Most Ethical Companies and by Forbes magazine as one of America's Best-Managed Companies in the Insurance category. In 2012, Fortune magazine recognized Aflac as one of the 100 Best Companies to Work For in America for the fourteenth consecutive year. Also, Fortune magazine included Aflac on its list of Most Admired Companies for the tenth time in 2011."
The consensus of 18 leading analysts reporting to Capital IQ forecast Aflac's long-term earnings growth at 8.8%. We do not report debt to capital on financial companies. It is currently trading at a P/E of 7.7, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Aflac's True Worth™ valuation would be $149.30 at the end of 2017, which would be a 22.2% annual rate of return from the current price.
About Stanley Black & Decker Inc. : Directly from their website
"Stanley Black & Decker, an S&P 500 company, is a diversified global provider of hand tools, power tools and related accessories, mechanical access solutions and electronic security solutions, engineered fastening systems, and more."
The consensus of 11 leading analysts reporting to Capital IQ forecast Stanley Black & Decker Inc.'s long-term earnings growth at 14.7%. Stanley Black & Decker Inc. has low long-term debt at 29% of capital. Stanley Black & Decker Inc. is currently trading at a P/E of 14.9, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Stanley Black & Decker Inc.'s True Worth™ valuation would be $173.43 at the end of 2017, which would be a 16.8% annual rate of return from the current price.
About Nacco Industries : Directly from their website
"NACCO Materials Handling Group ("NMHG") designs, engineers, manufactures, sells and services a comprehensive line of lift trucks and aftermarket parts marketed globally under the Hyster and Yale brand names. We have been building relationships and partnering with our customers, suppliers, dealers and employees for over 80 years. We strive for innovation in our products and services, quality and efficiency, sales and service excellence, global coverage with local tailoring of products and services, and organizational excellence."
The consensus of 1 leading analyst reporting to Capital IQ forecast Nacco Industries' long-term earnings growth at 59.6%. Nacco Industries has medium long-term debt at 44% of capital. Nacco Industries is currently trading at a P/E of 7.7, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 48. If the earnings materialize as forecast, Nacco Industries' True Worth™ valuation would be $5529.75 at the end of 2017, which would be a 98.0% annual rate of return from the current price.
About Tennant Co. : Directly from their website
"Tennant Company is a recognized leader in designing, manufacturing and marketing solutions that help create a cleaner, safer, healthier world. With a vision to become a global leader in chemical-free cleaning and other technologies, Tennant creates innovative solutions that are changing the way the world cleans. Tennant products include equipment used to maintain indoor and outdoor surfaces, as well as equipment parts, service, maintenance, and financing. Products are marketed under the Tennant®, Nobles®, Green Machines®, Orbio® and Alfa brands."
The consensus of 5 leading analysts reporting to Capital IQ forecast Tennant Co.'s long-term earnings growth at 18.2%. Tennant Co. has low long-term debt at 11% of capital. Tennant Co. is currently trading at a P/E of 21.2, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 21.9. If the earnings materialize as forecast, Tennant Co.'s True Worth™ valuation would be $98.05 at the end of 2017, which would be a 17.3% annual rate of return from the current price.
About Stephan Co. : Directly from their website
"Stepan Company is a global manufacturer of specialty and intermediate chemicals used in consumer products and industrial application. Stepan is a leading merchant producer of surfactants, which are the key ingredients in consumer and industrial cleaning compounds. Manufacturers of detergents, shampoos, lotions, toothpastes and cosmetics depend on surfactants to achieve the foaming and cleaning qualities of their products. Other applications include lubricating ingredients and emulsifiers for spreading of agricultural products. Stepan also produces germicidal quaternary compounds. Stepan produces other specialty products which are often custom-made to meet individual needs. These include flavors, emulsifiers and solubilizers used in the food and pharmaceutical industries. The company is also a principal supplier of phthalic anhydride, a commodity chemical intermediate which is used in polyester resins, alkyd resins and plasticizers. Polyurethane polyols and foam systems sold by the company are used in the expanding thermal insulation market primarily by the construction and refrigeration industries. Headquartered in Northfield, Illinois, Stepan utilizes a network of modern production facilities located in North and South America, Europe and Asia."
The consensus of 2 leading analysts reporting to Capital IQ forecast Stepan Co.'s long-term earnings growth at 12%. Stepan Co. has medium long-term debt at 31% of capital. Stepan Co. is currently trading at a P/E of 12.2, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Stepan Co.'s True Worth™ valuation would be $235.27 at the end of 2017, which would be a 19.9% annual rate of return from the current price.
Summary and Conclusions
The five Dividend Champions portrayed in this article cover a group of companies with very different operating histories. Nevertheless, each of these companies has shown a commitment to paying dividends to their shareholders that have spanned long periods of time. On the other hand, a closer examination of their dividend histories, shows close relationships between earnings growth rates and dividend increases.
This earnings and dividend growth relationship is very interesting when examining the more cyclical companies covered. For example, Nacco Industries has a record of very slow rates of dividend increases when earnings are falling, and then very rapid increases in dividends as earnings rise off of cyclical bottoms. Aflac, on the other hand, with a more consistent record of earnings growth, also shows a more consistent record of increasing their dividend consistent with their earnings growth.
In the final analysis, even though all of the selections are dividend champions with long records of growing their dividends, prospective investors are well-advised to recognize how those achievements were created. In our opinion, as long as investors recognize these realities, then they are capable of making rational decisions relative to their own goals and objectives and risk tolerances. On the other hand, having the stomach to be a long-term owner of a company like Nacco Industries with its extreme earnings and stock price volatility would pose a challenge. It should also be noted that the reason they have the highest potential total return, is based on a forecast for a cyclical explosion in earnings due to infrastructure spending coming out of a recession. Of course the critical question is: how long would that explosive growth really last?
Most dividend investors are interested in investing in companies that offer the opportunity to see their income increase every year. However, as we hope this article has clearly illustrated, not all dividend champions are consistent performers, as their dividend records might indicate. This is why we believe that having a clear picture for a company's history based on fundamentals is an important perspective to have before investment decisions are made. Nothing replaces a comprehensive due diligence effort.
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.
Disclosure: I am long (AFL).