Earlier this week, I updated my High Yield, Low Payout dividend growth model portfolio (DG-HYLP). This model seeks to identify value plays, as a stock with a high yield and low payout will have a low P/E. A scoring system that factors in dividend growth rates (DGRs), earnings rates, and yield is also used to narrow down the final portfolio list from a larger screened universe (you can visit the article linked above for the screening process details). Suffice it to say that the 108 survivors of this process all had yields over 2.1%, payouts below 60%, and mostly decent earnings growth rates and DGRs.
Looking over the screened group, I found 5 consumer-related stocks that did not make it into the final portfolio, generally because of lower current yield, which had a double weighting in the formula. However, these medium-yield, low-payout stocks may be of interest to dividend investors searching for income stocks with higher dividend growth rates.
The current yields are in the medium (2.1% to 3.5%) range, but the DGRs are in the double-digits across the last five years. With solid earnings projections and low payouts, the dividends for these firms appear to be quite safe and there is room for all of these companies to raise their dividend even if earnings are flat. The higher DGRs may also lead to increased price appreciation for those interested in total returns, which is my objective.
Low-Payout Consumer Stock List
Est 1-YR Earnings Growth
Est 5-YR Earnings Growth
Lowe's Companies (50)
Bob Evans Farms (6)
Tiffany & Co (10)
Wal-Mart Stores (38)
Source: June CCC list; www.dripinvesting.org
Lowe's Companies is one of the two major do-it-yourself home improvement retailers, offering both products and installation services. The stock almost doubled from its September 2011 low of around $18, and is currently 12.5% off of its high of $32. As the housing market improves, LOW's earnings should increase, though some of this expectation is likely baked into the stock given the strong run-up this year and the current PE of 18. However, LOW is due for a dividend increase in the next quarter, which could provide price support and increase an investor's income stream. LOW has also been buying back stock the last 2 years, over $2B each year.
Bob Evans Farms owns and operates full-service restaurants in 19 U.S. states, mainly in the eastern half of the country. It also produces and distributes pork sausage and frozen food products through national grocery stores. BOBE has increased its dividend by 56% since the end of 2009 (16 cents to 25 cents per quarter), and is due for another increase in the next quarter. BOBE beat earnings estimates in June, though this was due more to cost savings initiatives, as revenues lagged. BOBE is a recent addition to the CCC Challengers list. The firm has low debt levels and has been buying back stock in addition to raising its dividend.
Williams-Sonoma is a specialty retailer of home and kitchen products through its retail stores and Pottery Barn stores. In May, WSM beat Q1 earnings and revenue estimates, and raised guidance for the year. Consumers seem willing and able to spend on home improvements. While insiders were selling this stock when it was closer to $40, more recently, one director purchased $250K worth of stock at $35. As with the previous two stocks, WSM is buying back shares, spending over double the cash flow on stock buybacks as on dividends each of the last 4 quarters, and in 2011. WSM also has virtually no debt. WSM seems to be raising its dividend every third quarter, so it could possibly raise it again this October, after just raising it in January 2012 by 29%.
Tiffany & Co engages in the design, manufacture, and retail of fine jewelry worldwide, as well as the sale of high-end goods. TIF cut earnings estimates in January, and then missed earnings estimates in May. The current stock price of $54 is well off of its 52-week high of $84.49, and in fact, it triggered my -20% stop-loss rule back in early February 2012. Selling then would have avoided another 15% drop that occurred during this year. However, TIF raised its dividend in June by 10.3%, making it eligible again for holding by my criteria. Current earnings estimates of $3.70/share easily cover the $1.28/share dividend and allows for dividend growth to continue. The company relies heavily on the Christmas season, but annual cash flows cover the dividend well and TIF is buying back shares with the excess cash.
Note: Out of curiosity, I looked up Coach (COH). At a quick glance, it appears to have stronger financials and has been raising its dividend at a very strong clip (up 300% in 3 years, currently yielding 2% with 36% payout ratio). It will likely be a CCC Challenger soon.
Wal-Mart Stores is the 800-lb gorilla in discount retail and superstores. WMT is different from the others in the list, but with a 38-year history of dividend increases, double-digit DGRs, a low payout ratio, and continued earnings growth, it is certainly worth consideration for income investors as a core holding. In addition to healthy dividend increases, WMT has been aggressively buying back shares the last three years, spending twice as much for repurchases than on dividends, nearly $30B in total over that time period.
What I Like
As a total return investor, I don't mind the lower current yields. I'm looking for longer-term total performance. The high DGRs, low payouts, and stock buybacks provide support for these stocks and increase the potential for both income and price appreciation. I currently own McDonald's (MCD) and would like to pick up some Nike (NKE) since its recent decline. Both of these stocks appeared on a list of high-DGR, low-payout, low-turnover consumer discretionary stocks that I developed in March.
Of the stocks mentioned in this article and the HYLP portfolio, I am most interested in WMT, COH, and Hasbro (HAS), though I'd like to see WMT and COH fall a little bit first. HAS has been raising its dividend at a 20% clip for three years, but there is still room for 12%-15% without breaking the 60% payout threshold. LOW looks interesting, but it has had such a big run-up that I question its value at this point. I hope that this article provides some ideas for others looking for consumer stocks.