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In the most recent installments of the Smackdown series, I screened the Dividend Champions (which can be found here) starting with beta and, last month, with the stocks' most recent (percentage) increase.

(Note that I have separated the Champions, Contenders, and Challengers into different articles to fit more closely into the format preferred by Seeking Alpha. Champions are companies that have paid higher dividends for at least 25 straight years; Contenders have streaks of 10-24 years; Challengers have streaks of five to nie years. I use the same Roman numeral for all three articles.)

This month, I decided to focus on the relationship between earnings and dividends, since the former should drive the latter. So I screened as follows:

Step 1: After eliminating companies that had not increased their dividend in more than a year and those that had agreed to be acquired, I sorted by Estimated Earnings Per Share Growth for the Next Five Years (column AC), high to low. Eliminating companies that had percentages below 7% cut the list to 101 companies.

Step 2: Sort the companies by their Five-Year Dividend Growth Rate (column AN) in order to ensure that the remaining candidates had consistent histories of dividend increases, an indication that these companies had not only achieved good earnings growth, but had also passed that along to their owners. I eliminated any company with a DGR of less than 7%. Meeting this threshold were 85 companies.

Step 3: Sort the candidates by their Yield (column I), high to low. Dropping those with yields below 2% cut the list to 43 companies.

Step 4: Sort the companies by their Price/Earnings Ratio (column U), in order to avoid stocks that may be overvalued. Dropping those with P/Es over 15 cut the list to 19 companies, which appear below.

(Note that I've sorted the table back into alphabetical order.)

Company

Stock

No.

5/31

Div.

TTM

Est 5-yr

DGR

Name

Symbol

Yrs

Price

Yield

P/E

Growth

5-yr

ACE Limited

(ACE)

20

72.33

2.71

10.76

8.5

7.2

Alliance Resource Pnrs

(ARLP)

10

57.01

7.19

7.43

7.0

13.6

Alterra Capital Holdings

(ALTE)

11

22.21

2.52

12.20

8.8

16.7

Axis Capital Holdings

(AXS)

10

32.90

2.92

8.16

10.5

8.9

BancFirst Corp. OK

(BANF)

18

37.93

2.85

12.20

10.0

9.1

Cardinal Health Inc.

(CAH)

16

41.38

2.30

13.93

11.8

30.7

Caterpillar Inc.

(CAT)

18

87.62

2.10

11.06

17.5

10.4

First of Long Island

(FLIC)

16

26.96

3.41

12.04

10.0

14.6

General Dynamics

(GD)

21

64.01

3.19

9.32

9.1

15.5

Linear Technology

(LLTC)

20

29.02

3.45

14.96

9.6

9.9

McGrath Rentcorp

(MGRC)

20

25.25

3.72

12.56

11.0

8.1

Meredith Corp.

(MDP)

18

29.59

5.17

12.43

9.3

12.4

Nippon Tel&Tel

(NTT)

10

21.40

3.84

9.34

8.1

23.4

Norfolk Southern

(NSC)

11

65.52

2.87

11.32

14.1

19.5

NTT DoCoMo Inc.

(DCM)

10

15.98

4.30

11.33

7.7

16.7

Occidental Petroleum

(OXY)

10

79.27

2.72

9.49

10.0

17.1

PartnerRe Limited

(PRE)

19

70.87

3.50

8.00

9.2

8.0

Republic Bancorp KY

(RBCAA)

14

21.10

3.13

4.22

10.0

10.8

Teva Pharmaceutical

(TEVA)

13

39.19

2.51

12.17

8.6

24.1

Conclusion

The result includes many familiar names from other recent Smackdowns, which confirms their worthiness to some degree. As mentioned in those recent Smackdowns, potential investors should carefully consider the impact of tax issues with MLPs (Master Limited Partnerships), along with currency issues with foreign companies, even though they may trade as ADRs (American Depository Receipts). As always, please consider this no more than a starting point for more in-depth research.

As an extra step, I'm including one of Chuck Carnevale's F.A.S.T. Graphs for the company that appears to be the most undervalued, as indicated by its price line being in the green-shaded earnings area, just below.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Dividend Contenders Smackdown XXVII