Standard & Poor's offers an index titled the S&P 500 Dividend Aristocrats Index. Currently the index comprises 51 large cap, blue chip companies within the S&P 500 that have increased their dividend every year for at least 25 consecutive years. One of differentiating factors between the Dividend Aristocrats versus David Fish's Dividend Champions is that all Aristocrats are part of the S&P 500, therefore, there are only 51 Aristocrats versus 103 Champions.
The five companies reviewed in this article all represent high-quality companies that appear to be very attractively valued at today's levels. In addition to having a long record of increasing their dividend every year for at least 25 consecutive years, each of these selections offers the opportunity for double-digit growth earnings growth, and therefore, growth of both capital and dividend income based on consensus analyst expectations.
The following table summarizes five Dividend Aristocrats that appear to be attractively valued, and lists them in order by estimated total return. 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.
A Closer Look at the Past and the Future Potential
Since a picture is worth a thousand 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.
Dover Corporation is a multi-billion dollar diversified global manufacturer. For over 50 years, Dover has been providing its customers with outstanding products and services that reflect the company's commitment to operational excellence, innovation and market leadership. The company focuses on innovative equipment and components, specialty systems and support services through its four major operating segments: Communication Technologies, Energy, Engineered Systems and Printing & Identification. Dover is headquartered in Downers Grove, Illinois and employs over 33,000 people worldwide.
The consensus of 11 leading analysts reporting to Capital IQ forecast Dover Corp.'s long-term earnings growth at 15%. Dover Corp. has medium long-term debt at 31% of capital. Dover Corp. is currently trading at a P/E of 13.7, 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, Dover Corp.'s True Worth™ valuation would be $141.67 at the end of 2017, which would be a 17.1% annual rate of return from the current price.
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 13 leading analysts reporting to Capital IQ forecast Stanley Black & Decker Inc.'s long-term earnings growth at 13.3%. Stanley Black & Decker Inc. has medium long-term debt at 29% of capital. Stanley Black & Decker Inc. is currently trading at a P/E of 14.5, 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 $165.41 at the end of 2017, which would be a 16.5% annual rate of return from the current price.
Emerson, based in St. Louis, Missouri (NYSE:USA), is a global leader in bringing technology and engineering together to provide innovative solutions for customers in industrial, commercial, and consumer markets through its network power, process management, industrial automation, climate technologies, and tools and storage businesses. Sales in fiscal 2011 were $24.2 billion.
The consensus of 22 leading analysts reporting to Capital IQ forecast Emerson Electric Co.'s long-term earnings growth at 13%. Emerson Electric Co. has medium long-term debt at 29% of capital. Emerson Electric Co. is currently trading at a P/E of 14.3, 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, Emerson Electric Co.'s True Worth™ valuation would be $97.83 at the end of 2017, which would be a 15.9% annual rate of return from the current price.
With nearly 100 years of history, ITW is a Fortune 200 global diversified industrial manufacturer. The Company's value-added consumables, equipment and service businesses serve customers in developed as well as emerging markets around the globe. ITW's key business platforms, including Welding, Automotive OEM, Industrial Packaging, Food Equipment, Construction, Polymers and Fluids, Test and Measurement, Electronics, Decorative Surfaces and Automotive Aftermarket, employ more than 60,000 people worldwide. ITW's revenues totaled $15.4 billion in 2010, with more than half of these revenues generated outside of the United States.
The consensus of 18 leading analysts reporting to Capital IQ forecast Illinois Tool Works' long-term earnings growth at 12%. Illinois Tool Works has medium long-term debt at 26% of capital. Illinois Tool Works is currently trading at a P/E of 14, 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, Illinois Tool Works' True Worth™ valuation would be $108.81 at the end of 2017, which would be a 14.9% annual rate of return from the current price.
Wal-Mart Stores, Inc. serves customers and members more than 200 million times per week at 10,130 retail units under 69 different banners in 27 countries. With fiscal year 2012 sales of approximately $444 billion, Walmart employs more than 2 million associates worldwide. Walmart continues to be a leader in sustainability, corporate philanthropy and employment opportunity.
The consensus of 20 leading analysts reporting to Capital IQ forecast Wal-Mart Stores Inc.'s long-term earnings growth at 11%. Wal-Mart Stores Inc. has medium long-term debt at 38% of capital. Wal-Mart Stores Inc. is currently trading at a P/E of 12.8, 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, Wal-Mart Stores Inc.'s True Worth™ valuation would be $119.66 at the end of 2017, which would be a 14.6% annual rate of return from the current price.
Summary and Conclusions
We believe that this list of blue chip companies each represents the opportunity for investors seeking growth of capital and growth of dividend income. We feel they each possess the important one-two punch offered from attractive valuation and above-average future growth expectations. When you can find strong growth at attractive prices with a dividend kicker, the prudent investor should take notice. We believe each of these are strong candidates that warrant a more comprehensive due diligence effort that appear capable of generating above-average future returns at below-average risk.
Disclosure: I am long ITW.
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.