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This article is a follow-up to my earlier article on March 28, that was stimulated by commentary on an article on March 16 by David Van Knapp titled Has Dividend Growth Kept Up With Inflation? However, since that article was oriented to the prudent dividend growth investor, there were a couple of weaknesses with my previous article that I would like to rectify with this current offering.

First of all, I feel that the 30 sample companies used in my first offering were not the best representation of high-quality dividend growth stocks as claimed by the book cited in both articles above, and secondly, there was a lot of overvaluation bias built into the time frame being measured. Consequently, I do not believe that a clear and fair representation of the value of a true dividend growth stock was effectively revealed. On the other hand, the first article did show that even an inferior group of dividend paying companies were capable of providing income that beat inflation over time.

Dividend Champions as the Gold Standard for Dividend Growth Investors

Because of the overvaluation bias that existed with my first article cited above, I felt that a follow-up article where valuation was a major component of the screening process would cast a brighter light on the subject. Therefore, using the review feature of the F.A.S.T. Graphs™ research tool, I was able to look at each of the 101 current Dividend Champions from 1993 (as far back as my data goes) up and through calendar year end 2000. Then I could look at the earnings and price correlated graph to determine whether each champion was overvalued, undervalued or fairly valued at the end of calendar year 2000 or the beginning of calendar year 2001.

However, before I looked at valuation, I ran my list of 101 companies through a screen that culled all Champions that did not have a record of consistently raising dividends for a minimum of 37 years. This list was applied because I would be measuring these companies for the approximately 12-year period 2001 to current time. Therefore, my list would only include companies that qualified as Dividend Champions at the beginning of 2001. The definition of a Dividend Champion is as follows: A Dividend Champion is defined as a company that has increased its dividend every year for 25 or more straight years.

This screen reduced my list to 53 surviving names. Then I ran my valuation screen as discussed above which brought my final list down to 29 Dividend Champions in calendar year 2001 that were simultaneously also at or below fair value at the time. The following graph on H.B. Fuller (FUL) is presented as a sample of the methodology that I employed to determine those Champions that were at fair value in 2001. For those who haven't seen a earnings and price correlated F.A.S.T. Graphs™ before, the orange line represents fair value, and the black line is monthly closing stock prices. Simply put, when the black line is at or below the orange line the company is determined to be fairly valued or undervalued based on widely accepted formulas for valuing a business based on earnings.

As an aside, the downside of doing this culled many of my personally biased favorite companies because they were overvalued in 2001. However, the 29 names that were left, each on their own independent basis, build a strong case for the value of investing in companies that increase their dividend every year for many years in a row. Another point that I feel is worth mentioning is the notion that regardless of whether you are in a bull market or bear market, there will always be certain companies that are fairly priced, underpriced or overpriced. Therefore, I strongly believe it is more important to make decisions one company at a time than it is to try to ascertain the level of markets in general. At least this is my personal belief.

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29 Dividend Champions Each With Their Own Story To Tell

The following table lists the 29 companies that were Dividend Champions in 2001 and in value at the same time. They are listed in order of highest annualized performance to lowest, which is a total return number that includes dividends but not reinvested. For a more comprehensive view of the dividend growth, see each individual chart that follows this summary preview. For comparison, I have included the S&P 500, which I, like many readers, do not necessarily believe it is a fair proxy to compare dividend growth stocks against. However, it is an index that many people use. What is interesting here is that every company on the list of 29 outperformed this benchmark on a total return basis.

The S&P 500 - 2001 To Current Time for Perspective

The first earnings and price correlated graph presented in this article is on the S&P 500. I offer it simply for perspective where the reader can compare each of the 29 individual companies I present against an average. To be clear, I do not necessarily consider the S&P 500 to be a fair comparison to dividend growth stocks. However, it is one of the few indices where I can provide a price and earnings comparison on the group. Therefore, and once again, is simply provided for perspective.

29 Dividend Champions That Beat The Market, Inflation and Two Recessions Since 2001

For reader convenience, these 29 companies are presented in alphabetical order. As each of the following earnings and price correlated graphs and performance tables are reviewed, I offer the following suggestions:

  1. Look to the right of each graph to determine the average earnings growth rate for each specific company (purple circle) and note how it relates to performance, to include the dividend growth rate.
  2. Also, look to the right of the graph to determine the values of the blue normal PE ratio line, and the orange earnings justified valuation line. Anywhere the black price line touches either these lines will represent the PE ratio that is attributed to each of the lines.
  3. Note that each of these companies possesses their own unique earnings growth rate, and therefore should be judged based on its own unique operating performance independent of the group.
  4. The light blue shaded area represents dividends paid out of earnings and is stacked on top to indicate return in addition to the market capitalizing earnings.

Notice how price tracks and correlates to earnings over the long run as you review each of these companies individually. And when earnings do deviate over the shorter run, they inevitably move back to earnings. I will provide only a very short commentary on each company in order to accentuate its own unique characteristics relative to the group. Finally, this is not offered as a study in the traditional sense. Instead, it is offered as an in-depth look at each of these select Dividend Champions and how they all produced different results based on their own specific operating histories. That is the message being delivered here.

ABM Industries Inc. (ABM)

A relatively flat history of earnings growth that averages just over 3% per annum generates a highly correlated capital appreciation component. However, dividend growth generally exceeded average earnings growth because of the variations from one year to the next. Look at the Chg/Yr column at the bottom of the graph.

C.R. Bard, Inc (BCR)

Strong earnings growth and reasonable beginning valuation led to high capital appreciation since 2001. However, a low payout ratio offers a lower yield and total cumulative dividends over time, even though they are growing.

Bowl America Inc (BWL.A)

Here we find the worst long-term earnings record but one of the highest yields of the group. Furthermore, our database shows a dividend decrease in 2009, but that has not been verified. However, it appears that they paid an extra dividend during the third quarter of calendar year 2008.

Commerce Bancshares Inc (CBSH)

Here we see one of the best earnings and price comparisons and correlations that you will ever see. Stock price tracks earnings very closely over the long run. Regarding dividends, the apparent expansion in the payout ratio has led to dividend growth in excess of earnings growth.

Connecticut Water Service Inc (CTWS)

Here we see a classic case of a utility stock with a very low earnings growth rate due to the regulatory nature of its business. Today's lower than normal yield indicates high, but not excessively so, valuation. With such low earnings growth rates, the importance of valuation is accentuated regarding low growth utility stocks.

California Water Service (CWT)

Once again we see a low growth utility stock. Even though this is a Dividend Champion it provides a rather low rate of capital appreciation and dividend growth. However, if they can be purchased at a yield of 4% or higher it may satisfy the income needs of dividend investors who are already retired.

Diebold Inc (DBD)

Here we see a company whose business model has been significantly challenged in recent years resulting in a less consistent and more cyclical earnings history. Dividend growth investors should exercise caution.

Dover Corp (DOV)

Even though this company was theoretically in value in 2001, a strong drop in earnings during this recessionary year had a major impact on the company's average annual earnings growth rate. Look to the bottom of the chart at the Chg\Yr to get a clear picture of the company's earnings power and history. Here is a case where averages don't tell the whole story.

Consolidated Edison Inc (ED)

Another classic example of a regulated utility with low earnings growth illuminating the vast differences in operating results amongst various individual Dividend Champions. A high yield would compensate for the low growth, the current valuation looks high.

Fuller Co

Here we see the advantage of a moderately above-average earnings growth rate and multiplying effect of a low starting valuation. However, the reader should also note that the growth rate of dividends did not keep up with the earnings growth rate.

Genuine Part Co (GPC)

Here we see another very strong correlation between earnings and stock price over time. Also, a low beginning valuation expanded capital appreciation in excess of earnings growth.

Gorman-Rupp Co (GRC)

Here we do see some discrepancies in the company's dividend history and therefore can't reconcile it as an actual Champion. Nevertheless, the earnings and price correlation is clear.

Hormel Foods Corp (HRL)

Here we see a very high correlation between earnings and stock price that translates into a similar correlation between earnings growth rate and the annual capital appreciation return.

Illinois Tool Works (ITW)

Price and earnings correlate over time, and dividend growth does correlate with earnings growth.

Lancaster Colony Corp (LANC)

Here we discover a moderate amount of cyclicality in earnings. Note that this company did pay a one-time special two-dollar dividend in 2005.

Leggett & Platt Inc (LEG)

Weak earnings results led to very weak capital appreciation. However, a higher than average dividend yield, although it grew slowly, contributed to total results exceeding the index.

Lowes Companies Inc (LOW)

Earnings and price correlate over time, and performance closely matches the company's average earnings growth rate. Although earnings did slow down during the recession, dividend growth was maintained thanks to an expanding payout ratio.

Mine Safety Appliances Co (MSA)

Once again we see a highly correlated earnings and price relationship. More importantly, we see that capital appreciation is very closely correlated to the average annual earnings growth rate. Also note that the company paid a special dividend of $1.46 on November 12, 2003.

Nordson Corp (NDSN)

Once again, price follows earnings, and performance matches earnings growth adjusted for a modest ending overvaluation.

Nucor Corp (NUE)

Although very cyclical operating history, we find a solid record of dividend growth. Also, the company has a history of offering special bonus dividends from time to time. Even though there's a lot of cyclicality in earnings, the real story here is total cumulative dividends including bonuses.

Northwest Natural Gas Co (NWN)

Another low growth utility stock with a history of increasing dividends consistent with earnings growth.

Procter & Gamble Co (PG)

We had to stretch to include this stalwart based on a moderately high beginning valuation. However, a long steady history of dividend increases allowed me to include it.

Parker-Hannifin Corp (PH)

Once again, the earnings and price relationship is profoundly clear. Also, capital appreciation closely correlates to earnings growth rate. However, dividend growth rates are somewhat erratic.

PPG Industries Inc (PPG)

Here we again see the relationship between earnings and price over the long run.

RPM International Inc. (RPM)

Although the earnings and price relationship is never perfect, the trendline correlation is undeniable.

Stanley Black & Decker Inc (SWK)

Once again the earnings price and capital appreciation all line up.

Tennant Co (TNC)

A low level earnings growth correlates to performance. However, a surge in earnings off of a low base in 2010 and 2011 led to accelerated dividend growth.

Untied BankShares Inc (UBSI)

A weakening earnings picture coming out of the financial debacle of 2008 led to a very low rate of average earnings growth. Dividend growth also slowed along with earnings.

VF Corp (VFC)

The double-digit growth rate of earnings produces double-digit capital appreciation with a healthy increase in dividends.

Summary and Conclusions

As I stated in the first article,I want readers to understand that I acknowledge that what I've produced here is not in the strictest sense a scientific study. However, I would argue that the information presented here is far superior to what a study based on crunching a bunch of unrelated data points could produce. Even though all the companies in this report are Dividend Champions, it is clear that all similarities stop there. Yes, these companies have all increased their dividends every year for at least 37 years. However, the individual performance results are clearly a function of each company's individual business results.

Therefore, I believe that looking at each company on an individual basis provides far more insight and understanding into what individual Dividend Champions offer individual investors, and why, than any study could ever hope to accomplish. However, what fascinated me most about this group in comparison to the group covered in my previous article was how they all outperformed the S&P 500 benchmark. To me, the most important factor I'd like the reader to consider is how this was accomplished because initial valuations were reasonable even for the companies with the lowest growth rates. Also, effectively the S&P 500 was overvalued in 2001, which enabled even to slowest growers to outperform the average.

Unfortunately, many of my favorite Dividend Champions with the strongest records of earnings growth were excluded because they were overvalued in 2001. Names such as Wal-Mart (WMT), Target (TGT), Abbott Labs (ABT), Johnson & Johnson (JNJ), Coca-Cola (KO) and PepsiCo (PEP) to name just a few were excluded because of high valuation. However, even though they were excluded on valuation, each of these names support above-average earnings growth and dividend growth. And although this dampened their capital appreciation performance, it had very little effect on dividend growth which would have exceeded inflation in all cases. I believe that this analysis, even though it's not a perfect scientific study, does speak volumes about the opportunity that high-quality blue-chip Dividend Champions present to investors seeking an increasing dividend income stream over time. Then of course there's the matter of safety, as many Dividend Champions hold long-established records of solid operating performance.

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.

Disclosure: I am long PEP, JNJ, GPC, BCR, ITW.

Source: 29 Dividend Champions That Beat The Market, Inflation And 2 Recessions Since 2001