As part of my research into dividend growth stocks, I track the dividend payouts for the components of the S&P High Yield Dividend Aristocrats index. This index consists of stocks that are part of the S&P 1500 index - that's the combination of the S&P 500, S&P Mid Cap 400 and the S&P Small Cap 600 indices - that have increased their regular dividends each year for the last 20 years.
Last month, I commented that 8 members of the S&P High Yield Dividend Aristocrats index were scheduled to announce dividend increases in January, and provided my predictions about how much each company would increase its dividends. I also carried my predictions on Archer Daniels Midland (NYSE:ADM) and 3M (NYSE:MMM) forward from December; both companies announced their last dividend increase in December 2014, but are moving back to announcing increases in February. Along with Archer Daniels and 3M, we should see 14 other companies announce annual increases in February.
Before I go to my predictions for the dividend increases, I need to do a mea culpa. In my predictions for January dividend increases, I missed Realty Income's (NYSE:O) announcement. The REIT, which pays dividends monthly, announced a 5% dividend increase to an annualized rate of $2.382 in mid-January.
Here's how I did with my predictions from January:
A. O. Smith (NYSE:AOS)
Prediction: 18.4-31.6% increase to $0.90-1.00
Actual 26.4% increase to $0.96
Forward yield: 1.4%
The manufacturer of industrial, commercial and residential water heaters and boilers continues to reward investors with annual dividend increases in the double digits. This is the 5th year in a row of 20%-plus increases, and over that time, A. O. Smith has more than tripled its dividend payout.
Black Hills Corporation (NYSE:BKH)
Prediction: 2.5-4.9% increase to $1.66-1.70
Actual 3.7% increase to $1.68
Forward yield: 3.4%
As I expected, Black Hills' debt load from the SourceGas acquisition limited the dividend increase below the 5.6% increase in earnings per share, but slightly higher than the company's 5-year average dividend growth of 2.4%. Dividend growth going forward will be limited by the debt-to-equity ratio that's above 200%.
Cincinnati Financial Corporation (NASDAQ:CINF)
Prediction: 4.3-8.7% increase to $1.92-2.00
Actual 4.3% increase to $1.92
Forward yield: 3.3%
Cincinnati Financial's 55th year of dividend growth was in line with the 10-year dividend growth rate of 4.2%. The insurer saw very nice income growth over the first 9 months of 2015, with net income up 33% to $2.89 over the same period in 2014. While this would usually lead to a large dividend increase for most companies, Cincinnati Financial rewarded investors with a special dividend of 46 cents in November. This strategy leaves the company free to moderate its regular dividend increases, while still rewarding investors when it has excess cash on its books.
With the 4.3% increase this year, Cincinnati Financial's 5-year dividend growth rate (from 2011 to 2016) increases to 3.6%.
Consolidated Edison (NYSE:ED)
Prediction: 0.8-3.1% increase to $2.62-2.68
Actual 3.1% increase to $2.68
Forward yield: 3.9%
The New York-based utility hit the high end of my prediction for its 42nd year of dividend growth, substantially higher than the 10-year rate of 1.1%. While the increase was within my predicted range, I was still a bit surprised, as Con Ed saw no earnings growth in the first 3 quarters of 2015 as compared with the same period in 2014. However, this excludes the effect of a 9-cent per share loss in 2014 from the sale of solar electric production projects, and that apparently made all the difference. Adjusting the earnings for this and other transactions, Con Ed saw a 4.8% increase in earnings over the 9 months, which supported the company's dividend increase in January.
HCP, Inc. (NYSE:HCP)
Prediction: 2.7-4.4% increase to $2.32-2.36
Actual 1.8% increase to $2.30
Forward yield: 6.4%
I overestimated the dividend increase from the only REIT in the S&P Dividend Aristocrats index. The 1.8% increase is well below the company's 5-year growth rate of nearly 4%, and below the expected increase in adjusted funds from operation of 3.6%. Nevertheless, HCP has kept its record of dividend growth intact with its 31st consecutive year of dividend growth.
Linear Technology Corporation (NASDAQ:LLTC)
Prediction: 5.0-8.3% increase to $1.26-1.30
Actual 6.7% increase to $1.28
Forward yield: 3.0%
The manufacturer of integrated circuits had a good fiscal 2015, but saw 2016 first-quarter revenues and income drop compared to the first quarter in 2015 due to the worldwide economic slowdown. Nevertheless, the company confirmed its 24th year of dividend growth. The increase was right in line with Linear Technology's 5-year dividend growth average of 5.9%.
McGraw-Hill Financial, Inc. (MHFI)
Prediction: 6.1-10.6% increase to $1.40-1.46
Actual 9.1% increase to $1.44
Forward yield: 1.7%
My call for a larger-than-normal dividend increase from McGraw-Hill Financial due to the strong earnings growth - but tempered by the company's debt - played out as I expected. The company followed up last year's 10% dividend increase with another increase above the 5-year dividend growth average of 7.0%.
Prediction: 8.4-11.9% increase to $3.10-3.20
Actual 4.9% increase to $3.00
Forward yield: 3.0%
I am disappointed with Praxair's dividend announcement. Although earnings were flat from 2014 to 2015, I expected that the company would be able to support a larger increase. It's playing it safe, though, and with 2015 earnings reduced by 11% due to the strong U.S. dollar, I probably should have anticipated it. The increase still counts, though, and makes 2016 Praxair's 23rd year of dividend growth.
Expected High Yield Dividend Aristocrat Increases for February
Based on historical patterns, I expect the following 16 members of the S&P High Yield Dividend Aristocrats to announce their annual dividend increases in January:
Albemarle Corporation (NYSE:ALB)
The specialty chemical company is a recent addition to the High Yield Dividend Aristocrats index, having completed two decades of dividend growth at the end of 2014. Since beginning its record of annual dividend growth in 1994, Albemarle has compounded its payout at nearly 12.4% and at 15.7% over the last 5 years.
Albemarle will probably have to push pause on the rapid dividend growth as the company digests the acquisition of fellow specialty chemical manufacturer, Rockwood Holdings (NYSE:ROC). While the acquisition, which closed in January 2015, boosted sales in fiscal 2015, it also hit earnings. The company is guiding to full-year EPS of between $3.65 and $3.80, down from $4.20 in fiscal 2014. While I believe the negative effects are temporary, it will slow the dividend growth this year. However, with a current payout of $1.16 a share, Albemarle still has room for a dividend increase on par with last year's 5.5% increase.
Prediction: 5.2-6.9% dividend increase to an annualized rate of $1.22-1.24.
Bemis Company, Inc. (NYSE:BMS)
This former Dividend Aristocrat (it was dropped from the S&P 500 index and moved to the S&P Mid Cap 400 index in 2015) recently reported strong full-year 2015 earnings of $2.55 per share, up 10.9% from 2014. This increase was in spite of a 16-cent EPS hit from the strong U.S. dollar. Furthermore, the company provided earnings guidance of between $2.68 and $2.83 per share for 2016 EPS - a minimum increase of 5%. The company's payout ratio is below 50%, giving room for Bemis to grow the dividend for the 33rd straight year.
One of the headwinds to a large dividend increase is the company's fairly heavy debt load, which is currently more than 100% of equity. Given that and the 10-year dividend growth rate of 4.5%, I'm expecting an increase this year in the mid-single digits, with a slight bias towards an increase in the high-single digits.
Prediction: 3.6-8.9% dividend increase to an annualized rate of $1.16-1.22.
Commerce Bancshares Inc. (NASDAQ:CBSH)
Commerce Bancshares provides banking services across the nation's midsection - Kansas, Missouri, Illinois, Oklahoma and Colorado. The company has increased dividends for 47 years, and over the last decade, has compounded dividends at an average of 4.3% annually. Furthermore, since 1994, it has also paid a 5% stock dividend to investors.
Commerce Bancshares just reported full-year results for fiscal 2015 - an increase in earnings per share of 2.8% to $2.56. I'm looking for a dividend increase in line with the earnings growth over the last year.
Prediction: 2.0-5.0% dividend increase to an annualized rate of $0.918-0.945.
Essex Property Trust (NYSE:ESS)
The West Coast-focused REIT reported $7.19 in core funds from operations (FFO) in the first 9 months of 2015 - an increase of 14.5% over the same period in 2014 - and is projecting a full year-over-year increase of 14% to a range of $9.70-9.78.
Back in 2014, the company increased dividends by 12.7%, after growing core FFO by 12.4% from 2013. I expect Essex to grow its payout at roughly the same rate as the increase in core FFO, so I'm looking for a nice double-digit increase, which should be about double the company's 10-year dividend growth rate of 5.92%.
Prediction: 12.2-16.0% dividend increase to an annualized rate of $6.46-6.68.
Genuine Parts Company (NYSE:GPC)
Sales are flat this year for the automobile aftermarket parts manufacturer, and once again, currency effects are to blame. Over the first 9 months of the fiscal year, revenue growth is 1% year over year, but 4% on a currency-neutral basis. The company also reported that currency effects reduced EPS year to date by 11 cents. Including this reduction, EPS for the first 9 months is up 1% to $3.56 year to date.
Genuine Parts' annual dividend right now is $2.46; with 2014's full-year earnings of $4.61, this gives the company a payout ratio of 53%. There's no way that the company skips the dividend, as there's plenty of headroom for a dividend increase. Furthermore, this year marks a significant achievement for Genuine Parts - the 60th straight year of dividend growth. The company has a decent record in this regard, with respective 5-year and 10-year dividend growth rates of 8.45% and 7.00%. My expectations are that the company will match last year's dividend increase of 7.0%, albeit there is the possibility of a slightly smaller increase.
Prediction: 4.9-7.3% dividend increase to an annualized rate of $2.58-2.64.
Kimberly-Clark Corporation (NYSE:KMB)
Kimberly-Clark just announced full-year adjusted earnings of $5.76, up 4.5% from 2014. In the same earnings report, the company announced that it expects to increase the dividend in the mid-single digits, consistent with the growth in earnings. This is slightly lower than the 5-year and 10-year dividend growth rates of 6.82% and 7.39%, respectively, and keeps the payout ratio in the mid-60s.
Prediction: 4.5-5.7% dividend increase to an annualized rate of $3.68-3.72.
The Coca-Cola Company (NYSE:KO)
Revenue growth has stalled at Coca-Cola recently, and the company is going through a series of "strategic initiatives" as it tries to regain its earnings growth momentum. In addition to a slowing in revenue growth, the company recently reported that currency effects would reduce operating income by 13%. In the first 9 months of 2015, Coca-Cola reported net income per share of $1.39, down 2% from the comparable period in 2014. It didn't provide full-year earnings guidance, but if the trend holds and income per share is flat to slightly down from 2014, the company will see income of around $1.60 per share. With the current dividend payout of $1.32, Coca-Cola has a fairly high payout ratio of over 80%, limiting this year's dividend increase (its 54th consecutive year). It's for this reason that I expect this year's dividend increase to be significantly less than Coca Cola's 10-year dividend growth rate of 8.95%.
Prediction: 3.0-6.1% dividend increase to an annualized rate of $1.36-1.40.
Old Republic International Corporation (NYSE:ORI)
Insurer Old Republic saw a slight gain in earnings per share, from $1.44 to $1.48. The good news is that the company saw strong gains in income from its underlying general and title insurance businesses, offset by a decrease in investment gains.
I'm going to go out on a limb and make an exact prediction for Old Republic. Since 2008, the company has increased the dividend by a penny a share each year. Given the slow overall income growth, I see the company continuing the pattern. This should keep the payout ratio around 50%, and is consistent with Old Republic's 5-year dividend growth rate of 1.4%.
Prediction: 1.4% dividend increase to an annualized rate of $0.75.
Ross Stores (NASDAQ:ROST)
The discount retailer is due to report full-year 2015 earnings in February, and Ross Stores has been guiding for full-year earnings of $2.45-2.48. This is an increase of 11-12% from the $2.21 earned per share in 2014, and is a slower rate of growth than what the company has previously generated, with growth in recent years being in the high teens to low 20s.
Ross Stores has a 5-year dividend growth rate of over 24% and has grown its dividend nearly 9-fold over the last 10 years. Despite the slowing growth rate, the company's current payout of 47 cents provides plenty of headroom for its 22nd straight year of dividend growth. I believe it'll be on par with last year's 17.5% increase.
Prediction: 14.9-21.3% dividend increase to an annualized rate of $0.54-0.57.
The Sherwin-Williams Company (NYSE:SHW)
S&P Dividend Aristocrat Sherwin-Williams should announce its 38th year of dividend increases in mid-February, as the company saw some very nice earnings growth in 2015. It recently announced record earnings of $11.16 per share, an increase of more than 27%, powered by higher same-store sales and higher sales of HGTV HOME™ by Sherwin-Williams paint. Furthermore, Sherwin-Williams expects the strong growth to continue, guiding 2016 earnings to $12.20 to $12.40 a share.
With earnings results like this, the company's strong dividend growth should continue. In two of the last three years, Sherwin-Williams has increased the dividend by more than 20%. I believe we'll see another increase of about the same size or larger.
Prediction: 17.9-29.8% dividend increase to an annualized rate of $3.16-3.68.
Telephone and Data Systems, Inc. (NYSE:TDS)
Telephone and Data Systems provides landline and cellular service to 6 million customers in the midwestern United States. The company has a very consistent dividend growth history over the last decade, with annual increases between 4% and 6% since 2006. It is projecting full-year earnings of between $280 and $310 million, roughly flat from 2014's earnings of $298 million. Given the flat earnings and a payout ratio in the low 20s, I expect Telephone and Data Systems to continue the historical trend for its 42nd year of dividend growth.
Prediction: 4.3-5.7% dividend increase to an annualized rate of $0.588-0.596.
T. Rowe Price Group, Inc. (NASDAQ:TROW)
Despite a difficult year for the stock market, earnings for investment manager T. Rowe Price Group were up, albeit less than 2% to $4.63 in 2015. Assets under management were up 2.2% in 2015 to more than $763 billion. The company remains debt-free and is using its excess cash to buy back its shares, repurchasing 5% of the common stock in 2015, and expanding the current stock buyback program to nearly 21 million shares (representing more than 8% of outstanding shares).
The company has an outstanding 10-year dividend growth rate of 15.7% and a current payout ratio of 45%. The flattening AUM and earnings will slow the dividend growth this year. I'm expecting an increase in the mid- to high-single digits.
Prediction: 5.8-9.6% dividend increase to an annualized rate of $2.20-2.28.
WGL Holdings, Inc. (NYSE:WGL)
The holding company for Washington Gas, which serves the Greater Washington, D.C., area, reported a nice increase in earnings back in November. Led by a 500% increase in earnings from the retail sales of natural gas and electricity, the fiscal year operating earnings were up nearly 18% to $3.16. This is consistent with the company's guidance for next fiscal year's earnings of between $3.00 and $3.20.
From a historical dividend growth perspective, WGL Holdings has been very consistent with dividend increases. However, the larger-than-normal earnings growth gives the company room to make its 40th year of dividend growth a good one, potentially double the 5-year average of 4.03%.
Prediction: 4.7%-8.1% dividend increase to an annualized rate of $1.94-2.00.
Wal-Mart Stores, Inc. (NYSE:WMT)
Wal-Mart has been hit by declining sales in the United States. International sales, while increasing on a constant currency basis, have been declining when accounting for the strong U.S. dollar. The company reported back in November that total revenues were down by 0.5% and operating income was down by 9.0% for the first 9 months of fiscal 2015. Furthermore, the company is projecting full-year earnings to drop by 6.8% and 9.8% to $4.50-4.65, from last year's $4.99. Nearly half of the drop is due to currency effects.
Over the last 5 years, Wal-Mart has compounded dividends by an average of 10% a year. However, it has increased the quarterly dividend by only a penny a share over the last two years. Given the expected drop in revenues, I project that the company will conserve its cash, while still keeping its dividend growth record intact. Look for a quarterly dividend increase of between a half a cent and a cent per share.
Prediction: 1.0-2.0% dividend increase to an annualized rate of $1.98-2.00.
Finally, as I mentioned above, I'm carrying forward my predictions from December for Archer Daniels Midland and 3M:
Archer Daniels Midland Company
Original Prediction: 5.4-8.9% increase to $1.18-1.22
My prediction for an increase in the mid-single digits is based on the expected 10% drop in earnings that the company has seen over the first three quarters. Although ADM's 10-year compounded dividend growth rate is about 13% a year, I'm maintaining my prediction of a smaller increase due to the drop in commodity prices and its effect on the company's earnings.
Original Prediction: 7.8-11.2% increase to $4.42-4.56
I based my original prediction on 3M's projection of earnings growth in the 3-4% range for the full year. In late January, the company reported full-year earnings growth of 1.2%, with the impact from currency effects reducing sales by nearly 7%. Given that the currency headwinds haven't abated and earnings growth was lower than expected, I'm going to revise downward my prediction for 3M's dividend increase in February.
Revised Prediction: 4.9-9.8% dividend increase to an annualized rate of $4.30-4.50.
For everyone invested in these stocks, enjoy the upcoming dividend increases. March will be relatively quiet, with only 5 members of the S&P High Yield Dividend Aristocrats index announcing annual dividend increases. I'll post my predictions for these companies at the end of February, along with the results from my predictions above.
Disclosure: I am/we are long ADM, ROST, TROW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to being long ADM, ROST and TROW, I may take positions in any of the stock mentioned above in the near future.