For dividend growth investors, it's been tough finding good points among the blue-chips lately. We now live in a world where Altria (MO) is trading at 18x earnings, Procter & Gamble (PG) trades at 19x earnings and Kraft (KFT) is trading at 20x earnings. While the recent share price run-up has been great news for those looking to sell their stocks, it has been less joyful for those investors looking to buy the greatest amount of future earnings at the lowest risk-adjusted prices. Despite the recent price run-up for many Dividend Aristocrats, I still think there are bargains out there. Here are two that have caught my attention:
1.Walgreen (WAG): Walgreen is a dividend aristocrat that has been increasing dividends for 36 years and has been paying them for 317 quarters (that translates to 79 years). Walgreen has managed to catch my attention for two reasons: the firm's current P/E ratio of less than 12 is well below its recent historical average of 17, and the company has been raising dividends by 22% annually for the past five years (16.5% over the past ten). When I did a little more digging, I was impressed to find out that the company has raised dividends by 14% annually (on a compounded basis) since the year I was born, 1989. Despite this impressive dividend growth, the company's payout ratio is still only around 30%. Furthermore, Walgreen is currently in the middle of a share buyback that has seemed to escape the newspaper headlines. Walgreen has managed to reduce the share count from 988 million in 2009 to 889 million by the end of 2011, and I have found the 11% share reduction over two years to be quite intriguing, especially combined with the 20%+ dividend growth.
So why have the company's shares fallen more than 20% since their summer peak? Well, the share price has taken a hit from the contract dispute with Express Scripts (ESRX) that resulted in the discontinuation of service for Express Scripts customers as of December 31, 2011. Express Scripts accounted for $5 billion out of the firm's total $72 billion sales. In their recent guidance statement, Walgreen management estimated that this loss of business will cost shareholders $0.14 per share in earnings (Walgreen earned $2.64 per share in 2011). It seems to me that the share price decline from the Express Scripts fallout is a bit overblown, and the attractive qualities about this firm (the 30% payout ratio, recent record of 22% annual dividend growth, 10% bi-annual share buyback, and a historically low P/E of 12) seem to overshadow the concerns brought about from the Express Scripts kerfuffle.
2. Becton Dickinson (BDX): Like Walgreen, Becton Dickinson is a company that has a surprisingly (at least to me) impeccable record of dividend growth. The company has raised its dividends by 11% annually since 1982, and more recently, the firm has managed to raise its dividend by 18.0% annually over the past five years, and 14.5% annually over the past ten. Until the financial crisis, Becton Dickinson was trading at 18-19x earnings, and the current compression to 14x earnings has caught my attention. Like Walgreen, Becton Dickinson is currently in the middle of a share buyback program that seems to have gotten little attention. The firm is committed to repurchasing $1.5 billion worth of stock, and based on recent prices, that ought to reduce the share count 9-10%. Like Walgreen, the firm sports a dividend payout ratio of only 30%. The downside about this stock is that the initial dividend yield is only slightly above 2%, the current exchange rates are weakening the firm's earnings abroad (especially if the dollar gains relative to the euro), and the company recently reduced its research and development spending. Despite this, the promise of sustained double-digit dividend growth, the 30% payout ratio, the 10% share buyback, and the historically low P/E ratio seem to compensate for these concerns.