Is Dividend Growth Doomed To Slow? What You Can Do About It

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Includes: AAPL, AMGN, ANCTF, ANCUF, BBL, BHP, BIIB, CELG, CSCO, FB, GILD, GOOG, GOOGL, HRL, IBB, KMI, MCD, NKE, ORCL, QCOM, REGN, SBUX, SPY
by: Canadian Dividend Growth Investor

Summary

Earnings growth is slowing and so is dividend growth.

But it doesn't mean we can't get high earnings growth or dividend growth.

Healthcare and technology is where a big portion of future growth is going and that's where investors can get higher returns.

I'm watching these high-growth companies. Which ones are YOU watching?

From June 13's Morningstar video, Josh Peters, a CFA and Morningstar's DividendInvestor newsletter editor, states that the general trend is that Dividend Growth Dwindles as Earnings Growth Slows.

He goes on to say that

year-over-year in the first quarter, according to Standard & Poor's dividend growth for the index slipped to less than 5% on a year-over-year basis and this continues a trend of slowing growth that had been in place for a couple of quarters and it's finally starting to reflect the fact that earnings are not growing at all.

Earnings are dropping and... that in the trailing 12 months through the first quarter of 2016, the payout ratio of the market on GAAP earnings--Generally Accepted Accounting Principles earnings--for the Index is at 50%. That's first time it's been historically normal outside of a recession-type of periods since the mid- to early 90s.

As a result, Peters thinks

if everybody is going to... be drawing from this pool of 5 percentage type of growth, then why not try to get it with stocks that yield 4% instead of 2%.

So, generally speaking, earnings growth is slowing and we can expect the market to grow dividends by 5%.

What does this mean for you?

  • If your dividend-growth portfolio grows its dividend by more than 5% per year, you're doing better than the market.

  • If your portfolio yield is more than 2.5% yield, you're doing better than the market. (The portfolio that Peters manages targets a 4% yield, which is an advantage over the SPDR S&P 500 Trust ETF's (NYSEARCA:SPY) 2.5% in terms of current income.)

Where can you get high growth?

Higher earnings growth leads to higher dividends. And a big portion of future growth will come from healthcare and technology due to innovation and an aging population.

The biotechnology industry has pulled back substantially from its 52-week high as illustrated by the iShares NASDAQ Biotechnology Index (NASDAQ:IBB).

IBB Chart

IBB data by YCharts

IBB's top 5 holdings

Here are the ones that pay a dividend, have expected earnings growth of 5% or higher, and are reasonably priced.

(I'm using expected earnings growth of 5% or higher because if the market is expected to grow dividends at a rate of 5%, then, such healthy growth can only come with the same amount of earnings growth.)

Company

Ticker

Price

Yield

Payout Ratio

P/E

S&P Credit Rating

Debt/Cap

Est. Earnings Growth

Amgen, Inc.

(NASDAQ:AMGN)

$153

2.6%

36%

14.5

A

50%

8.3%

Gilead Sciences, Inc.

(NASDAQ:GILD)

$84

2.2%

15.4%

6.8

A

58%

2.9%

Click to enlarge
  • Price and Yield from Google Finance as of June 13, 2016.

  • S&P Credit Rating, Debt/Cap, Consensus Earnings Growth Estimates from FAST Graphs.

  • Payout Ratio based on consensus fiscal year 2016 earnings (estimates) from FAST Graphs and current annual payout.

Wait! Gilead Sciences has estimated earnings growth of 2.9%?! That's lower than the required 5% growth. Yes, good catch. I'm just checking that you're still with me.

Seriously, though, a company founded in 1987 that remains very profitable today, a P/E of less than 7, a solid financial position, a newly initiated dividend in 2015 that's expected to grow, and a low payout ratio - Gilead Sciences is priced at a value. It has room to double its payout before it catches up with Amgen's payout ratio, and by that time, Gilead might very well have resumed its growth.

And here are the biotechs that are focused on growth and don't pay a dividend, including:

Company

Ticker

Price

P/E

S&P Credit Rating

Debt/Cap

Est. Earnings Growth

Celgene Corporation

(NASDAQ:CELG)

$101

20

BBB+

73%

22.2%

Biogen Inc.

(NASDAQ:BIIB)

$244

13.9

A-

38%

8.7%

Regeneron Pharmaceuticals Inc.

(NASDAQ:REGN)

$367

31.9

-

9%

20.8%

Click to enlarge
  • Price from Google Finance as of June 13, 2016

  • S&P Credit Rating, Debt/Cap, Consensus Earnings Growth Estimates from FAST Graphs

Technology investing opportunities

Let's move on to technology companies. Unfortunately, not all of them pay a dividend. Those that do, have above-average earnings growth, and are priced at reasonable valuations include:

Company

Ticker

Price

Yield

Payout Ratio

P/E

S&P Credit Rating

Debt/Cap

Est. Earnings Growth

Apple Inc.

(NASDAQ:AAPL)

$97.50

2.3%

27.5%

11.5

AA+

32%

11.3%

Cisco Systems, Inc.

(NASDAQ:CSCO)

$29

3.6%

44.6%

12.5

AA-

26%

7.3%

Oracle Corporation

(NASDAQ:ORCL)

$39.70

1.6%

22.9%

14.8

AA-

46%

7.5%

QUALCOMM, Inc.

(NASDAQ:QCOM)

$53

4%

52%

12.7

A+

24%

12.2%

Click to enlarge
  • Price and Yield from Google Finance as of June 13, 2016.

  • S&P Credit Rating, Debt/Cap, Consensus Earnings Growth Estimates from FAST Graphs.

  • Payout Ratio based on consensus fiscal year 2016 earnings (estimates) from FAST Graphs and current annual payout.

Of course, some investors would argue that if you're looking for real growth companies, they're the ones that don't pay a dividend. That'd include:

Company

Ticker

Price

P/E

S&P Credit Rating

Debt/Cap

Est. Earnings Growth

Alphabet Inc.

(NASDAQ:GOOG)

$720

22.9

AA

2%

16.7%

(NASDAQ:GOOGL)

$734

23.4

AA

2%

16.6%

Facebook Inc.

(NASDAQ:FB)

$114

40.6

-

0%

32.4%

Click to enlarge
  • Price from Google Finance as of June 13, 2016.

  • S&P Credit Rating, Debt/Cap, Consensus Earnings Growth Estimates from FAST Graphs.

Then, there are select high growth dividend-growth companies that are experiencing a correction or sideways action collectively. Could this be a side effect of slowing earnings growth?

Sideways action

Starbucks Corporation (NASDAQ:SBUX) has been in a sideways action since July 2015. It's expected to grow its earnings north of 18% in the medium term. This is only a few percentages lower than a few years before.

Click to enlarge

The sideways action is likely caused by the company being overvalued as it traded at a multiple of 39 before!

At $55, Starbucks is trading at a more reasonable multiple of 30.6 for its high growth rate.

Its payout ratio is about 42.3%, it has an S&P credit rating of A-, and debt/cap of 30%.

Starbucks has increased its dividend for 6 consecutive years, and it last increased it by 25% in November 2015.

Here's Amgen again with some sideways action since September 2015. This maybe because it traded at too high a multiple of over 18 in July coupled with earnings growth rate expected to slow down by about half from the previous few years.

Click to enlarge

Amgen has raised its dividend for 6 consecutive years, and it last increased it by 26.6% in February.

Alimentation Couche-Tard [TSX:ATD.B](OTCPK:ANCUF)(OTC:ANCTF) has traded sideways since July 2015. Attributable to its exceptional high earnings growth rates, it traded at a high multiple of over 25 in September 2015.

Click to enlarge

Since its earnings growth is expected to decline to 17% and 12% this year and next, the sideways action is understandable. In the medium term, Couche-Tard is expected to grow its earnings at a rate north of 13%.

After having increased its dividend for six years, essentially increasing it by 575% over the period, Couche-Tard's payout ratio is still only about 10% - thanks to its exceptional high growth.

Correction

Nike Inc. (NYSE:NKE) has corrected roughly 15% from November 2015's high of $65 to under $55. It turns out that at the recent high of $65, Nike was trading at a high multiple of 33.1.

In the fiscal year 2015, Nike's earnings per share grew 24%. So at the time, the multiple of 33 didn't seem so high, but since then, earnings growth is expected to slow down some.

Click to enlarge

Specifically, in the medium term, its earnings growth is expected to be roughly 15% per year. So, the correction on Nike is due to having a multiple contraction from slower earnings growth expectations.

Nike has raised its dividend for 14 consecutive years and its payout ratio is only 26.1%. In the past 10 years, its dividend grew at a CAGR of 16.3%, and in the past 5 years, it was 15.3%. And its last increase was 14.2%.

I think Nike is fair to fully valued today.

Hormel Foods Corp. (NYSE:HRL) is an amazing company with 50 consecutive years of dividend growth. Its dividend is still growing strong - it's 20.8% higher than a year ago. And its payout ratio is still only about 36%.

However, its share price has corrected about 23% from its 52-week high and its earnings growth for 2017 is estimated to be 1%. It's no question that it's experiencing a multiple contraction from a multiple of over 30 to a multiple of 23.3 so far.

The company has a strong S&P credit rating of A and a low debt/cap ratio of 5%. In the medium term, its earnings are expected to grow at a rate of 14%.

In the next article, we'll explore where to get high income. So, stay tuned!

Conclusion

Some sectors, industries, and companies are experiencing slower earnings growth and as a result slowing their dividend growth. Some are worse, experiencing earnings decline and cutting their dividends. Look to mining companies such as BHP Billiton plc (NYSE:BHP)(NYSE:BBL) and energy companies such as Kinder Morgan (NYSE:KMI) as examples.

However, for any sector, industry, or company that loses out (temporarily or not), another sector, industry, or company is bound to benefit from it. So, I think exceptional earnings growth and as a result outstanding dividend growth and returns can be obtained if you do your due diligence.

In this article, I introduced some high growth candidates (whether they pay dividends or not) for your further research.

Share your thoughts in the comments below

  • What kind of investor are you? Do you look for dividends, growth, or a blend?

  • Would you buy a stock that doesn't pay a dividend?

  • Which high-growth stocks are you accumulating today?

  • Some say investors with a long investment horizon for compounding should focus more on growth stocks such as Starbucks instead of high-yield stocks such as McDonald's (NYSE:MCD). Do you agree?

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Disclaimer: This article consists of my opinions and is for educational purposes only. Please do your own research and due diligence and consult a financial advisor and or tax professional if necessary before making any investment decisions.

Disclosure: I am/we are long AAPL, AMGN, ANCUF, FB, GILD, QCOM, SBUX.

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: I'm long TSX:ATD.B.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.