When many investors think of stable dividends, they think of stocks like Pfizer (PFE). Many investors wrongly believe that the dividends and equity returns of blue chip stocks are guaranteed because these companies are large and familiar. On the contrary, Pfizer and its dividends are not risk-free.
Investors have many stocks to choose from. As alternatives to Pfizer, stocks across sectors were screened based on the following criteria:
A payout ratio under 0.70. Pfizer has a fairly high 0.71 payout ratio, which leaves very little earnings for reinvestmet and growth. Alternative stocks were found which have lower payout ratios, which means there are more earnings left over reinvest in the firm or increase dividend payments.
A "safe" Altman Z-score.* None of these alternative firms are alarming bankruptcy risks. Pfizer itself scores in the "grey zone."
Dividend yield. Each stock pays a dividend yield of at least 3.9%, which is greater than or equal to the dividend yield of Pfizer.
Long term historical return on equity. Each of these stocks has positive average ROE over the past 10 years. This criterion filters for stocks which were able to endure and prosper over the economic downturn. Furthermore, this long term history filters out firms that are experiencing a short burst of good fortune.
Lower valuations. Stocks with lower price-to-earnings ratios and price-to-sales ratios than Pfizer were found to help dividend investors consider them as alternatives.
Superior growth prospects. Analyst expectations for future earnings growth for the screened stocks exceed those for Pfizer. Stocks were also screened for positive earnings growth over the last five years, which is preferable to Pfizer's decline in earnings over the same timeframe.
The resulting dividend paying stocks are listed below:
10-Year Average ROE
Alliance Holdings GP, L.P.
Nonmetallic Mineral Mining
Alliance Resource Partners
Industrial Metals & Minerals
Toys & Games
H&R Block, Inc.
PetMed Express Inc.
Strayer Education Inc.
Education & Training Services
Wayside Technology Group
Drug Manufacturers - Major
This table shows how these alternative stocks are all categorized as "safe" according to the Altman Z-score, indicating that they are not considered bankruptcy risks. Moreover, the average 10-year return on equity (from the last ten reported fiscal years) demonstrates that these stocks a track record of growing shareholder wealth. It is clear from these two metrics that each of these four alternative stocks is a "high" quality stock capable of weathering bad times and delivering positive long-term results.
Our screen discovered alternative stocks are trading at cheaper price ratios, better dividend payouts, and better growth prospects:
EPS growth past 5 years
EPS growth next 5 years
Pfizer is famous dividend stock but there are many other stocks which are better choices for a dividend portfolio. Better yet, these firms are trading at cheaper price multiples. Income Investors who dare to screen other stocks might find security based on financial stability and reliable payouts rather than the perception of a stable bellwether.
*The Altman Z-Score is a measure of bankruptcy risk that is not based on stock price volatility. This score places companies into three groups: "safe" (Z-score > 2.99), "grey" (Z-score between 2.99 and 1.81), and "distressed" (Z-score < 1.81), and is surprisingly useful for identifying bankruptcy risk in the coming year. This method of segmenting companies uses of fundamental (financial statement) data and market capitalization only, not on price volatility. Beyond credit risk prediction, companies with higher Z-scores have historically outperformed companies with lower Z-scores, in aggregate. One sector has not been accurately modeled: Altman's Z-score has not accurately predicted the bankruptcy risk of financial companies.
"Distressed" was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.
Disclaimer: This article was written to provide investor information and education, and should not be construed as a guarantee or investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.