Dividend growth stocks are for investors who want to purchase part of a company and share in the success over a long-term horizon. Sustainability of the dividend growth and entry point are both key considerations when investing in dividend growth stocks. The five companies listed below are dividend growth stock picks for the week of June 18th, 2012.
#1 - Tompkins Financial Corporation (TMP) - Tompkins Financial is a small regional bank founded in 1836. It operates in the Central New York area. Tompkins has been stable in an unstable industry. It is included on the Dividend Champions list due to maintaining a growing dividend for 25+ years. Tompkins appears to have weathered the economic issues facing the banking industry and should see continued success.
Tompkins currently is valued well below historical averages. The current dividend yield is 25% above the historical 5-year average. This presents an opportunity for dividend growth investors to find an entry point that will provide an above-average income stream starting off.
Earnings and revenue growth are well within acceptable bounds to support continued dividend growth of 5%-6%.
#2 - Walgreen Company (WAG) - Walgreen is the largest retail pharmacy in the nation. The recent decision to exit the Express Scripts (ESRX) network has caused a decline in the share price of Walgreen. Walgreen Company does have the benefit of a small economic moat as it has a large brand name recognition. With an aging population and continued introduction of clinics within the store Walgreen appears to be setting itself up for continued success.
Walgreen Company currently is below historical averages on all three valuation categories shown above. Current dividend yield is 75% above the historical 5-year average.
Dividend growth is currently outpacing earnings and revenue growth. Expectation is that dividend growth will fall back down to the 8%-10% level of revenue and earnings/share CAGR.
#3 - Tower Group Inc (TWGP) - Tower Group is a diversified property and casualty insurance company. TWGP operates within specific niche areas that it has identified as profitable segments. Key acquisitions have increased revenue but earnings growth has not followed. Tower Group will need to look to integrate the acquisitions and start realizing the value of these acquisitions. Tower Group is in a good position to provide value to shareholders and continue to grow.
Dividend yield is substantially above historical average. Tower Group has shown commitment to shareholders by returning profits with annually increasing dividends. Current dividend yield is 164% above the 5-year average. It seems that a new normal for dividend yield is being set by TWGP.
Key statistics are skewed due to acquisitions and expansion. Dividend growth has been substantial and expectation is that company will continue to raise dividends in line with future earnings growth.
#4 - Medtronic, Inc (MDT) - Medtronic is a global medical device company. It has six major businesses that focus in areas of high profitability. The healthcare industry is expected to continue to keep growing at a high rate with an aging population in developed countries. Medtronic is well positioned to be a key player in the industry and share in the profits.
Valuation is below historical averages on all three categories shown. Dividend yield is 37% above the historical norm. This is a great opportunity to find an entry point for this medical device company.
Revenue and earnings growth are well below current dividend growth. Expectation is that dividend growth will slow to the 6%-7% level of EPS. This will be a sustainable growth level for the Medtronics dividend and is a great investment opportunity.
#5 - Air Products & Chemicals Inc (APD) - APD is one of the leaders in the industry it competes in. Recently it has shed unprofitable business segments and appears to be focusing on maximizing profitability going forward. Exposure to the electronics industry will create cyclical earnings but will be a positive over the long term as demand for its product portfolio from electronics will continue to increase. Look for revenue to begin increasing at a higher rate than the current 5-year CAGR.
Current valuation has APD below historical average on all three categories shown above. Current dividend yield is 25% above the 5-year historical average.
Dividend growth has kept pace with earnings growth and current focus on profitable segments brings anticipation that revenue growth will pick up. Dividend growth of 10% per year is a realistic expectation for the next 5-10 years.