A Dividend Stock Bubble In The Making?

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Includes: ED, O, T
by: Early Retiree Reality

Summary

Throughout history, bubbles of one sort or another have come and gone.

Is there a dividend stock bubble today?

Have a plan and stick to it.

The definition of insanity is doing the same thing over and over again, but expecting different results.

-- Albert Einstein (or Mark Twain, Chinese proverb, or Benjamin Franklin, depending on who you ask)

Modern human history provides cautionary lessons from asset bubbles. In all instances, when the bubble does finally pop, economic collapse follows. I've been through two of them as an investor - the dot-com bubble of 1997-2000, and the housing bubble of 2007-2009. In both instances, my portfolio lost over 50% of its value, albeit temporary. I reference the famous quote above because this time, I am determined not to repeat the same mistakes the last two times, such as being fully invested during a bubble, not paying careful attention to stock market valuations, and not paying attention to macro factors.

Another aspect of bubbles is that people have short memories. They tend to forget after a while, allowing subsequent bubbles to form. There's always a reason (excuse really) for overvaluation. These dot-coms aren't making any money now, but they will make gobs of it in a few years, you'll see! Sure, this house is a little expensive, but I'll be able to flip it to the next buyer for a tidy profit! Caught in the middle of a mania, it can be hard too see the absurdity happening inside the bubble.

There have been rumblings of a dividend stock bubble for the last year or so. I started to take it seriously when I noticed my Realty Income (NYSE:O) holding was up something like 17% in February, excluding dividends. Sure, there was a flight to safety movement since January, but this was ridiculous. A "normal" total return for O would be something in the 10-15% range for the entire year. There were plenty of other examples too; staid stocks like AT&T (NYSE:T) and Consolidated Edison (NYSE:ED) were behaving like rock stars of the investing world. (For the record, I did initiate a position in T last week, but it was a "trading-up" move and not a brand new position.)

So what got me to write this article was David Fish's release of his latest Dividends CCC List this past week. I was looking through it for ideas, since it's been a while since I looked at it. I immediately noticed some very high PEG Ratio numbers for some of the Dividend Champions. I thought to myself, "cool, what if I could compare today's PEG Ratio numbers to the last market top in October 2007"? That should give me an idea how high PEG Ratios got before bad things happen. Alas, the Dividends CCC List archive does not go back that far; the earliest one available is December 2007. Close enough, I thought, but there was another problem. The earlier versions do not have PEG Ratios. I hunted through the archive and the earliest one that holds PEG Ratios was the one for September 30, 2010.

All is not lost. September 2010 happens to be very close to the midpoint between the 2007 top and the 2009 bottom, after it has a chance to revalue things after the Great Recession. In other words, it's close to "fair value" for all intents and purposes. Here's the S&P 500 chart from TradingView for reference:

Click to enlarge

What follows is a comparison of PEG ratios, Price/Sales ratios, and Price/Book ratios for Dividend Champions that appear in both the March 31, 2016 and September 30, 2010 editions.

Methodology

  1. Get all Dividend Champions from March 2016 that have PEG ratios
  2. Remove all columns I'm not interested in
  3. Remove all entries that did not appear in the September 2010 Dividend Champions list (there was only a handful.) No, I did not keep the Contenders-to-Champions graduates.
  4. Copy the PEG ratio, P/S, and P/B ratio columns from September 2010

Results

Here is the table comparing the PEG, P/S, and P/B ratios, sorted by the highest percentage change in the PEG ratio:

Mar 31, 2016 Sep 30, 2010
Company Ticker No. Div. EPS% +/-% vs. TTM PEG TTM MRQ PEG TTM MRQ PEG Ratio Chg %
Name Symbol Industry Yrs Yield Payout Graham P/E Ratio P/Sales P/Book Ratio P/Sales P/Book
Stepan Company SCL Cleaning Products 48 1.37 22.89 29.3 16.65 0.93 0.69 2.26 N/A 0.45 1.97 N/A
Telephone & Data Sys. TDS Telecommunications 42 1.97 29.60 (26.9) 15.05 0.72 0.63 0.80 -68.27 0.69 0.90 N/A
Wal-Mart Stores Inc. WMT Retail-Discount 43 2.92 43.86 34.5 15.02 64.19 0.45 2.71 1.33 0.47 3.02 4726%
Archer Daniels Midland ADM Agriculture 41 3.30 40.13 (18.9) 12.14 11.95 0.32 1.22 1.07 0.34 1.42 1017%
Brady Corp. BRC Business Services 30 3.02 337.50 246.1 111.83 13.98 1.19 2.41 1.78 1.22 1.53 685%
Medtronic plc MDT Medical Devices 38 2.03 89.41 102.0 44.12 6.86 3.68 2.08 1.02 2.30 2.46 573%
Coca-Cola Company KO Beverages-Non-alcoholic 54 3.02 83.83 211.9 27.78 12.63 4.53 7.88 2.00 4.27 5.31 532%
C.R. Bard Inc. BCR Medical Instruments 44 0.47 37.35 500.3 78.86 8.05 4.34 10.28 1.32 2.89 3.57 510%
ABM Industries Inc. ABM Business Services 49 2.04 75.86 74.3 37.14 7.28 0.37 1.84 1.37 0.33 1.57 431%
Colgate-Palmolive Co. CL Personal Products 53 2.21 103.31 n/a 46.79 8.11 3.93 n/a 1.80 2.42 15.41 351%
Middlesex Water Co. MSEX Utility-Water 43 2.58 65.16 64.9 25.29 9.37 3.97 2.42 2.12 2.71 1.53 342%
Kimberly-Clark Corp. KMB Personal Products 44 2.74 133.33 n/a 48.74 6.68 2.61 n/a 1.62 1.36 5.31 312%
W.W. Grainger Inc. GWW Electronics-Wholesale 44 2.00 40.07 138.2 19.99 5.13 1.44 6.39 1.34 1.27 3.96 283%
Genuine Parts Co. GPC Auto Parts 60 2.65 56.80 112.8 21.46 4.88 0.97 4.75 1.53 0.67 2.66 219%
Conn. Water Service CTWS Utility-Water 46 2.37 52.45 47.4 22.11 4.42 5.27 2.21 1.45 3.43 1.91 205%
Sysco Corp. SYY Food-Wholesale 46 2.65 95.38 227.7 35.95 4.22 0.54 6.72 1.42 0.46 4.46 197%
Lancaster Colony Corp. LANC Food/Consumer Prod. 53 1.81 50.76 179.4 28.06 3.51 2.61 6.26 1.19 1.25 2.73 195%
California Water Service CWT Utility-Water 49 2.58 73.40 58.6 28.43 5.69 2.17 1.99 2.14 1.68 1.81 166%
United Bankshares Inc. UBSI Banking 42 3.60 66.67 10.8 18.54 4.63 6.03 1.49 1.78 3.95 1.36 160%
Procter & Gamble Co. PG Consumer Products 59 3.22 87.51 111.1 27.17 4.50 3.21 3.69 1.75 2.17 2.86 157%
Illinois Tool Works ITW Machinery 41 2.15 42.88 151.6 19.97 2.42 2.76 7.13 0.95 1.57 2.70 155%
Valspar Corp. VAL Paints 38 1.23 30.99 231.8 25.12 3.08 1.99 9.86 1.21 1.00 2.02 155%
Clorox Company CLX Cleaning Products 38 2.44 61.97 863.7 25.36 3.62 2.87 82.39 1.45 1.68 111.97 150%
Brown-Forman Class B BF-B Beverages-Alcoholic 32 1.38 40.84 328.8 29.57 4.35 6.57 13.99 1.77 3.64 4.82 146%
Federal Realty Inv. Trust FRT REIT-Shopping Centers 48 2.41 143.51 316.1 59.56 6.79 14.85 6.54 2.77 9.24 4.35 145%
Consolidated Edison ED Utility-Electric 42 3.50 66.01 20.1 18.87 7.78 1.79 1.72 3.25 1.03 1.32 139%
PepsiCo Inc. PEP Beverages/Snack Food 44 2.94 81.79 292.9 27.85 4.31 2.37 12.47 1.81 2.19 5.39 138%
AFLAC Inc. AFL Insurance 33 2.60 28.03 (14.6) 10.79 1.75 1.26 1.52 0.78 1.27 2.42 124%
Becton Dickinson & Co. BDX Medical Instruments 44 1.74 80.73 203.0 46.43 3.43 2.87 4.45 1.53 2.28 3.34 124%
RPM International Inc. RPM Chemical-Specialty 42 2.32 59.14 131.8 25.45 2.99 1.33 4.75 1.37 0.76 2.39 118%
3M Company MMM Conglomerate 58 2.66 58.50 192.0 21.95 2.71 3.34 8.74 1.25 2.45 4.45 117%
MGE Energy Inc. MGEE Utility-Electric/Gas 40 2.26 57.28 71.9 25.36 6.34 3.21 2.62 3.02 1.78 1.79 110%
Hormel Foods Corp. HRL Food Processing 50 1.34 63.74 240.5 47.52 3.15 2.50 5.49 1.55 0.87 2.57 103%
Community Trust Banc. CTBI Banking 35 3.51 46.62 (12.4) 13.28 2.66 4.30 1.30 1.32 3.11 1.25 102%
Tennant Company TNC Machinery 44 1.55 45.98 117.6 29.59 2.37 1.12 3.60 1.20 0.91 3.02 98%
Eaton Vance Corp. EV Financial Services 35 3.16 48.18 107.2 15.24 3.41 2.80 6.34 1.74 3.19 8.90 96%
ExxonMobil Corp. XOM Oil&Gas 33 3.49 75.84 40.6 21.71 1.75 1.34 2.05 0.91 0.99 2.24 92%
Emerson Electric EMR Industrial Equipment 59 3.49 50.67 74.8 14.50 2.64 1.63 4.74 1.41 1.88 4.46 87%
Johnson & Johnson JNJ Drugs/Consumer Prod. 53 2.77 54.74 92.0 19.74 3.71 4.26 4.20 2.07 2.74 3.25 79%
Automatic Data Proc. ADP Business Services 41 2.36 69.74 257.8 29.51 2.84 3.66 9.76 1.62 2.32 3.78 75%
RLI Corp. RLI Insurance 40 1.14 24.36 83.4 21.43 2.19 3.67 3.53 1.25 2.07 1.38 75%
McDonald's Corp. MCD Restaurants 40 2.83 74.01 333.7 26.13 2.75 4.46 16.20 1.63 3.36 6.03 69%
Gorman-Rupp Company GRC Machinery 43 1.62 43.75 68.3 27.01 1.80 1.66 2.36 1.07 1.75 2.55 68%
Northwest Natural Gas NWN Utility-Gas 60 3.47 95.41 51.9 27.47 6.87 2.04 1.89 4.09 1.43 1.82 68%
VF Corp. VFC Apparel 43 2.29 51.93 127.4 22.72 2.12 2.22 5.12 1.30 1.19 2.39 63%
Dover Corp. DOV Machinery 60 2.61 44.68 43.8 17.11 1.74 1.43 2.72 1.07 1.52 2.37 63%
Commerce Bancshares CBSH Banking 48 2.00 34.88 22.9 17.42 2.34 6.57 1.95 1.44 3.42 1.58 63%
AT&T Inc. T Telecommunications 32 4.90 84.96 23.2 17.33 3.40 1.64 1.97 2.10 1.38 1.65 62%
Sonoco Products Co. SON Packaging 33 2.88 57.38 69.8 19.91 3.99 0.99 3.26 2.47 0.88 2.41 62%
Bemis Company BMS Packaging 33 2.24 46.96 95.7 20.96 2.63 1.20 4.11 1.71 0.85 1.94 54%
Leggett & Platt Inc. LEG Furniture/Bldg. Prod. 44 2.64 56.39 143.0 21.32 1.71 1.68 6.23 1.13 1.03 2.30 51%
Piedmont Natural Gas PNY Utility-Gas 38 2.27 77.27 120.2 33.99 6.80 3.96 3.21 4.54 1.32 2.12 50%
Air Products & Chem. APD Chemical-Specialty 34 2.39 56.86 111.3 23.81 2.37 3.21 4.22 1.59 2.00 3.37 49%
American States Water AWR Utility-Water 61 2.28 55.65 85.6 24.45 6.35 3.13 3.17 4.30 1.77 1.80 48%
Nordson Corp. NDSN Machinery 52 1.26 27.51 154.0 21.79 1.74 2.58 6.66 1.18 2.51 5.46 47%
Walgreens Boots Alliance Inc. WBA Retail-Drugstores 40 1.71 34.70 64.2 20.30 1.52 0.80 2.99 1.04 0.49 2.17 46%
Altria Group Inc. MO Tobacco 46 3.61 84.64 566.8 23.47 2.79 4.82 42.63 1.91 3.02 11.18 46%
Vectren Corp. VVC Utility-Electric/Gas 56 3.16 66.95 52.7 21.15 4.23 1.72 2.48 3.09 1.02 1.48 37%
Lowe's Companies LOW Retail-Home Improv. 53 1.48 35.33 196.9 23.90 1.40 1.19 8.30 1.07 0.64 1.64 31%
Target Corp. TGT Retail-Discount 48 2.72 42.42 63.9 15.58 1.39 0.67 3.88 1.09 0.58 2.53 28%
Clarcor Inc. CLC Auto Parts 32 1.52 34.11 61.2 22.40 2.52 1.94 2.61 1.99 2.01 2.67 27%
Tootsie Roll Industries TR Confectioner 49 1.03 34.29 115.5 33.28 3.70 3.91 3.14 2.94 2.79 2.18 26%
Cintas Corp. CTAS Business Services 33 1.17 27.06 126.1 23.15 1.95 2.01 4.97 1.62 1.13 1.64 20%
MSA Safety Inc. MSA Medical/Safety Equip. 44 2.65 69.57 102.5 26.28 1.75 1.60 3.51 1.51 1.08 2.36 16%
McGraw Hill Financial Inc. MHFI Publishing 43 1.45 34.20 1098.5 23.51 2.01 4.94 137.47 2.25 1.70 5.55 -11%
PPG Industries Inc. PPG Conglomerate 44 1.29 28.07 141.1 21.73 2.02 1.94 6.02 2.27 0.93 3.49 -11%
Carlisle Companies CSL Rubber and Plastics 39 1.21 24.90 58.6 20.64 1.29 1.80 2.74 1.47 0.73 1.43 -12%
Sherwin-Williams Co. SHW Paints 38 1.18 30.08 483.2 25.49 1.90 2.31 30.03 2.33 1.13 5.39 -18%
SJW Corp. SJW Utility-Water 49 2.23 43.78 29.8 19.65 1.40 2.43 1.93 1.75 2.15 1.82 -20%
Parker-Hannifin Corp. PH Industrial Equipment 59 2.27 41.72 59.9 18.39 1.93 1.26 3.13 2.60 1.14 2.60 -26%
H.B. Fuller Company FUL Chemical-Specialty 46 1.22 30.41 64.1 24.82 1.75 1.02 2.44 2.49 0.73 1.73 -30%
Nucor Corp. NUE Steel & Iron 43 3.17 135.14 96.6 42.61 2.11 0.91 2.04 3.09 0.87 1.67 -32%
WGL Holdings Inc. WGL Utility-Gas 40 2.69 71.96 82.3 26.70 3.34 1.43 2.80 5.17 0.72 1.60 -35%
Stanley Black & Decker SWK Tools/Security Products 48 2.09 37.04 44.4 17.71 1.76 1.41 2.65 5.67 1.82 1.52 -69%
Old Republic International ORI Insurance 35 4.10 51.37 (17.6) 12.52 1.25 0.83 1.22 4.91 0.83 0.82 -75%
Click to enlarge

Here is the table with only the staid utilities:

Mar 31, 2016 Sep 30, 2010
Company Ticker No. Div. EPS% +/-% vs. TTM PEG TTM MRQ PEG TTM MRQ PEG Ratio Chg %
Name Symbol Industry Yrs Yield Payout Graham P/E Ratio P/Sales P/Book Ratio P/Sales P/Book
Middlesex Water Co. MSEX Utility-Water 43 2.58 65.16 64.9 25.29 9.37 3.97 2.42 2.12 2.71 1.53 342%
Conn. Water Service CTWS Utility-Water 46 2.37 52.45 47.4 22.11 4.42 5.27 2.21 1.45 3.43 1.91 205%
California Water Service CWT Utility-Water 49 2.58 73.40 58.6 28.43 5.69 2.17 1.99 2.14 1.68 1.81 166%
Consolidated Edison ED Utility-Electric 42 3.50 66.01 20.1 18.87 7.78 1.79 1.72 3.25 1.03 1.32 139%
MGE Energy Inc. MGEE Utility-Electric/Gas 40 2.26 57.28 71.9 25.36 6.34 3.21 2.62 3.02 1.78 1.79 110%
Northwest Natural Gas NWN Utility-Gas 60 3.47 95.41 51.9 27.47 6.87 2.04 1.89 4.09 1.43 1.82 68%
Piedmont Natural Gas PNY Utility-Gas 38 2.27 77.27 120.2 33.99 6.80 3.96 3.21 4.54 1.32 2.12 50%
American States Water AWR Utility-Water 61 2.28 55.65 85.6 24.45 6.35 3.13 3.17 4.30 1.77 1.80 48%
Vectren Corp. VVC Utility-Electric/Gas 56 3.16 66.95 52.7 21.15 4.23 1.72 2.48 3.09 1.02 1.48 37%
SJW Corp. SJW Utility-Water 49 2.23 43.78 29.8 19.65 1.40 2.43 1.93 1.75 2.15 1.82 -20%
WGL Holdings Inc. WGL Utility-Gas 40 2.69 71.96 82.3 26.70 3.34 1.43 2.80 5.17 0.72 1.60 -35%
Click to enlarge

And finally, here is the table with only the very recognizable names (my opinion of course):

Mar 31, 2016 Sep 30, 2010
Company Ticker No. Div. EPS% +/-% vs. TTM PEG TTM MRQ PEG TTM MRQ PEG Ratio Chg %
Name Symbol Industry Yrs Yield Payout Graham P/E Ratio P/Sales P/Book Ratio P/Sales P/Book
Wal-Mart Stores Inc. WMT Retail-Discount 43 2.92 43.86 34.5 15.02 64.19 0.45 2.71 1.33 0.47 3.02 4726%
Medtronic plc MDT Medical Devices 38 2.03 89.41 102.0 44.12 6.86 3.68 2.08 1.02 2.30 2.46 573%
Coca-Cola Company KO Beverages-Non-alcoholic 54 3.02 83.83 211.9 27.78 12.63 4.53 7.88 2.00 4.27 5.31 532%
Colgate-Palmolive Co. CL Personal Products 53 2.21 103.31 n/a 46.79 8.11 3.93 n/a 1.80 2.42 15.41 351%
Kimberly-Clark Corp. KMB Personal Products 44 2.74 133.33 n/a 48.74 6.68 2.61 n/a 1.62 1.36 5.31 312%
Genuine Parts Co. GPC Auto Parts 60 2.65 56.80 112.8 21.46 4.88 0.97 4.75 1.53 0.67 2.66 219%
Sysco Corp. SYY Food-Wholesale 46 2.65 95.38 227.7 35.95 4.22 0.54 6.72 1.42 0.46 4.46 197%
Procter & Gamble Co. PG Consumer Products 59 3.22 87.51 111.1 27.17 4.50 3.21 3.69 1.75 2.17 2.86 157%
Valspar Corp. VAL Paints 38 1.23 30.99 231.8 25.12 3.08 1.99 9.86 1.21 1.00 2.02 155%
Clorox Company CLX Cleaning Products 38 2.44 61.97 863.7 25.36 3.62 2.87 82.39 1.45 1.68 111.97 150%
Consolidated Edison ED Utility-Electric 42 3.50 66.01 20.1 18.87 7.78 1.79 1.72 3.25 1.03 1.32 139%
PepsiCo Inc. PEP Beverages/Snack Food 44 2.94 81.79 292.9 27.85 4.31 2.37 12.47 1.81 2.19 5.39 138%
AFLAC Inc. AFL Insurance 33 2.60 28.03 (14.6) 10.79 1.75 1.26 1.52 0.78 1.27 2.42 124%
3M Company MMM Conglomerate 58 2.66 58.50 192.0 21.95 2.71 3.34 8.74 1.25 2.45 4.45 117%
Eaton Vance Corp. EV Financial Services 35 3.16 48.18 107.2 15.24 3.41 2.80 6.34 1.74 3.19 8.90 96%
ExxonMobil Corp. XOM Oil&Gas 33 3.49 75.84 40.6 21.71 1.75 1.34 2.05 0.91 0.99 2.24 92%
Emerson Electric EMR Industrial Equipment 59 3.49 50.67 74.8 14.50 2.64 1.63 4.74 1.41 1.88 4.46 87%
Johnson & Johnson JNJ Drugs/Consumer Prod. 53 2.77 54.74 92.0 19.74 3.71 4.26 4.20 2.07 2.74 3.25 79%
Automatic Data Proc. ADP Business Services 41 2.36 69.74 257.8 29.51 2.84 3.66 9.76 1.62 2.32 3.78 75%
McDonald's Corp. MCD Restaurants 40 2.83 74.01 333.7 26.13 2.75 4.46 16.20 1.63 3.36 6.03 69%
VF Corp. VFC Apparel 43 2.29 51.93 127.4 22.72 2.12 2.22 5.12 1.30 1.19 2.39 63%
AT&T Inc. T Telecommunications 32 4.90 84.96 23.2 17.33 3.40 1.64 1.97 2.10 1.38 1.65 62%
Walgreens Boots Alliance Inc. WBA Retail-Drugstores 40 1.71 34.70 64.2 20.30 1.52 0.80 2.99 1.04 0.49 2.17 46%
Altria Group Inc. MO Tobacco 46 3.61 84.64 566.8 23.47 2.79 4.82 42.63 1.91 3.02 11.18 46%
Lowe's Companies LOW Retail-Home Improv. 53 1.48 35.33 196.9 23.90 1.40 1.19 8.30 1.07 0.64 1.64 31%
Target Corp. TGT Retail-Discount 48 2.72 42.42 63.9 15.58 1.39 0.67 3.88 1.09 0.58 2.53 28%
Sherwin-Williams Co. SHW Paints 38 1.18 30.08 483.2 25.49 1.90 2.31 30.03 2.33 1.13 5.39 -18%
Click to enlarge

Short Analysis

Over 40% of stocks listed in the first table (all entries) have a 100% or higher PEG ratio today compared to September 2010. Of the utilities, the most well known, Consolidated Edison, has its PEG ratio increased an amazing 139%. Over half of the "recognizable names" have PEG ratios that have at least doubled.

Conclusions

I agree with many that the rise in valuation of dividend stocks is due mostly to the low interest rate environment, whereby investors crowd into what they perceive as the most dependable dividend stocks.

Is this a bubble? Based on the evidence, I'd have to say yes. Not a huge a bubble as the Dot-Com mania, but it's still a bubble.

When will it blow up? The real answer is that nobody knows, but lots of people will offer their opinion. There have been numerous bearish articles that state a crash will occur shortly based on a single economic indicator chart. I don't read much into them, but I will take what they say under consideration. In the end, the best indicator is the price. As long as [your favorite] moving average is moving up, the bubble hasn't popped yet.

What everyone should have is a plan when things go south. I have formulated mine in a previous article. Whether you buy a Dividend Champion today is based on your risk level and other circumstances. However it pays to heed lessons of bubbles past.

P.S. Maybe you should look outside the Dividend CCC List for ideas. There are some very strong companies that have a short dividend history, but have strong potential for DGR due to their moats.

Disclosure: I am/we are long T, O.

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.