5 Dividend Aristocrats With 3-Pronged Profit Potential

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 |  Includes: AFL, BDX, MDT, TGT, XOM
by: FAST Graphs

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 a previous article we provided five additional Dividend Aristocrats that met the criteria of attractive valuation, solid earnings growth, and the opportunity for dividend increases. This article provides five more attractive candidates that we believe are worthy of deeper investigation.

In addition to having a long record of increasing their dividend every year for at least 25 consecutive years, each of these companies can be bought today at valuations that are low by historical standards. However, and more importantly, each of these companies can be bought at valuations that seem low relative to their future ability to grow earnings and dividends.

Therefore, investors interested in dividend growth have the potential for a three-pronged payday. First, each company offers the opportunity for price earnings ratio expansion as valuations eventually return to more normal levels. Second, each company offers the opportunity for greater future earnings that the market could capitalize thereby offering additional capital appreciation through growth. Third, each company offers a potentially increasing dividend income stream that could mitigate the ravages of any potential future inflation.

The following table summarizes 5 Dividend Aristocrats and Champions that appear to be attractively valued, and lists them in order of dividend yield, highest to lowest. 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.

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A Closer Look at the Past and the Future Potential

Since a picture is worth 1,000 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.

About Aflac Inc. (NYSE:AFL)

When a policyholder gets sick or hurt, Aflac pays cash benefits fast. For more than 55 years, Aflac insurance policies have given policyholders the opportunity to focus on recovery, not financial stress. In the United States, Aflac is the number one provider of guaranteed-renewable insurance. In Japan, Aflac is the number one life insurance company in terms of individual policies in force. Aflac insurance products provide protection to more than 50 million people worldwide. For five consecutive years, Aflac has been recognized by Ethisphere magazine as one of the World's Most Ethical Companies and by Forbes magazine as one of America's Best-Managed Companies in the Insurance category. In 2012, Fortune magazine recognized Aflac as one of the 100 Best Companies to Work For in America for the 14th consecutive year. Also, Fortune magazine included Aflac on its list of Most Admired Companies for the 11th time in 2012. Aflac Incorporated is a Fortune 500 company listed on the New York Stock Exchange under the symbol AFL.

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The consensus of 18 leading analysts reporting to Capital IQ forecast Aflac Inc.'s long-term earnings growth at 8.7%. We do not report debt to capital on financial companies. Aflac Inc. is currently trading at a P/E of 9.5, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Aflac Inc.'s True Worth™ valuation would be $148.16 at the end of 2017, which would be a 24.3% annual rate of return from the current price.

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About Becton Dickinson & Co (NYSE:BDX)

BD is a leading global medical technology company that develops, manufactures and sells medical devices, instrument systems and reagents. The Company is dedicated to improving people's health throughout the world. BD is focused on improving drug delivery, enhancing the quality and speed of diagnosing infectious diseases and cancers, and advancing research, discovery and production of new drugs and vaccines. BD's capabilities are instrumental in combating many of the world's most pressing diseases. Founded in 1897 and headquartered in Franklin Lakes, New Jersey, BD employs approximately 29,000 associates in more than 50 countries throughout the world. The Company serves healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.

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The consensus of 20 leading analysts reporting to Capital IQ forecast Becton Dickinson & Co's long-term earnings growth at 10%. Becton Dickinson & Co has medium long-term debt at 34% of capital. Becton Dickinson & Co is currently trading at a P/E of 13.4, 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, Becton Dickinson & Co's True Worth™ valuation would be $137.26 at the end of 2017, which would be a 13% annual rate of return from the current price.

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About Medtronic Inc (NYSE:MDT)

Medtronic, Inc. (medtronic.com), headquartered in Minneapolis, is the global leader in medical technology -- alleviating pain, restoring health and extending life for millions of people around the world.

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The consensus of 29 leading analysts reporting to Capital IQ forecast Medtronic Inc's long-term earnings growth at 7%. Medtronic Inc has medium long-term debt at 34% of capital. Medtronic Inc is currently trading at a P/E of 11, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Medtronic Inc's True Worth™ valuation would be $72.36 at the end of 2017, which would be a 15.6% annual rate of return from the current price.

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About Target Corp (NYSE:TGT)

Minneapolis-based Target Corporation serves guests at 1,763 stores across the United States and at Target.com. The company plans to open its first stores in Canada in 2013. In addition, the company operates a credit card segment that offers branded proprietary credit card products. Since 1946, Target has given 5 percent of its income through community grants and programs; today, that giving equals more than $3 million a week.

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The consensus of 17 leading analysts reporting to Capital IQ forecast Target Corp's long-term earnings growth at 12%. Target Corp has medium long-term debt at 46% of capital. Target Corp is currently trading at a P/E of 13.5, 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, Target Corp's True Worth™ valuation would be $114.95 at the end of 2017, which would be a 13.9% annual rate of return from the current price.

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About Exxon Mobil Corp (NYSE:XOM)

ExxonMobil, the world's largest publicly traded international oil and natural gas company, is committed to producing the energy needed for economic progress in a safe, reliable and environmentally responsible manner. The company uses technology and innovation to help meet the world's growing energy needs, investing approximately $1 billion annually on research and technology development. ExxonMobil holds an industry-leading inventory of resources, is the largest refiner and marketer of petroleum products, and its chemical company is one of the largest in the world.

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The consensus of 19 leading analysts reporting to Capital IQ forecast Exxon Mobil Corp's long-term earnings growth at 5.5%. Exxon Mobil Corp has low long-term debt at 5% of capital. Exxon Mobil Corp is currently trading at a P/E of 10.2, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Exxon Mobil Corp's True Worth™ valuation would be $164.61 at the end of 2017, which would be a 13.4% annual rate of return from the current price.

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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. As previously stated, we feel that each possesses the opportunity for a three pronged return opportunity. Furthermore, we believe that the current low valuation also provides a margin of safety that is greater than you would normally find with this class of company. 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 AFL, MDT.

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.