Dividend growth investing is an investment strategy that a number of Seeking Alpha contributors regularly tout on this site. Investors implementing a DGI strategy seek to grow a stream of annual dividends that can support their lifestyle. DGI investors identify stocks of high quality of companies paying dividends, evaluate these companies on whatever basis of metrics and measures they choose to use (P/E, EPS, EPS Growth, Dividend Yield, etc.) to determine which are trading at or below fair value, and identify which have the greatest opportunities to consistently increase the dividend while potentially experiencing share price appreciation as well.
Many dividend-growth investors exclusively seek out stocks that have long histories of reliable dividend increases. While many fantastic companies [such as Coca-Cola (KO), Exxon Mobil (XOM), Colgate-Palmolive Co. (CL), Wal-Mart Stores (WMT), Johnson and Johnson (JNJ), and Procter and Gamble (PG)] have long histories of annually increasing dividends and providing stability to investors' portfolios, many of these companies will see slow growth in earnings limiting price appreciation and dividend growth in the years ahead. To achieve the most from their dividend growth portfolios, investors may benefit from looking beyond stocks with established dividend growth histories to identify those who will be able to grow dividends over the next few years. To identify these stocks, investors can look to stocks that have implemented dividend payments in recent years, those with short dividend streaks, and those who froze or cut dividends in recent years but have since begun increasing dividends again.
Apple, with a market cap of over $600B, could become one of the great dividend growth stocks in the future. Apple issued its first dividend payment in August of 2012, and is currently paying an annual dividend of $10.60. Based on the current share price of $640.91, as of the close on October 10, Apple yields 1.67%. AAPL is expected to have EPS for the year ending September 30, 2012, of $44.42, giving the stock a payout ratio of roughly 24%. Apple is expected to have a 24% compound annual growth rate (CAGR) over the next five years. Shares of AAPL currently trade with TTM P/E ratio below 15, which is well below the five-year average of 20.7. The company has no long-term debt on the balance sheet, and had current assets of nearly $52B at the end of June 2012.
Apple shares appear to be undervalued at this level, trading well below the average P/E ratio. Many consider Apple to be one of the best stocks, and best companies, on the market. In addition to this, I believe that it could be one of the best dividend growth stocks on the market in years to come. The stock does not have a history of dividend growth, but with the incredible cash flow, growth in earnings, and no debt AAPL has significant room to continue to grow the dividend. Since Tim Cook took over as Apple CEO, he implemented a dividend and I believe that to continue to leave his mark on the company he will continue to grow the dividend. Clearly it is not a guarantee that AAPL will grow the dividend, so investors must weigh the opportunity carefully, but the opportunity certainly does exist for the dividend to grow significantly, and Apple will likely reward shareholders in the years to come with continued share price appreciation and dividend growth.
Johnson Controls Inc (JCI)
JCI provides automotive interiors and energy optimization services for buildings. Johnson Controls is not a typical dividend growth stock, as it froze its dividend in 2009 after a 33-year streak of increases. The company has however increased the dividend in successive years and appears poised to begin a new streak of increases.
Sales in the Automotive Industry have been impressive over the past 12 months, and as the industry continues to grow to meet the pent-up demand JCI should stand to benefit greatly. Despite the strength of the industry, JCI shares have declined over the past 12 months 13.5%. During this same 12-month period, EPS has grown by 12.5%, and JCI expects to grow EPS at a 16.7% CAGR. Shares appear to be significantly undervalued currently, trading with a TTM P/E ratio of 10.35 versus the company's five-year average of 20. JCI currently pays an annualized dividend of $0.72, which gives shares a 2.76% yield, at Wednesday's closing price of $26.07. Currently paying out just 27.5% of earnings, JCI appears to have significant room to grow the dividend without negatively affecting operations. The company has a five-year dividend growth rate of 10.35% (this includes the period when the dividend was frozen), and in 2012 increased the dividend by 12.5%.
JCI shares appear to be attractive for dividend growth investors at the level they are currently trading. The company has seen its share price decline despite increasing earnings per share, and projected double-digit growth on the horizon. After freezing the dividend in 2009 JCI management will likely look to return value to shareholders by reestablishing itself as a dividend growth stock, and investors who get into the stock now could stand to benefit greatly.
General Electric (GE)
I have written previously on the potential for GE as a future great among dividend growth stocks. (Article can be found here) This often debated conglomerate seems to be involved in everything. It provides locomotives, airplane engines, gas powered turbines, home appliances, financing, and seemingly anything else individuals or businesses could need. Many dividend-growth investors shunned the company when it slashed the dividend in 2009 thanks to weakness in the GE Capital unit. These investors may want to re-evaluate the more focused GE that has emerged in the past few years focused on industrials, and rewarding shareholders.
GE has performed very well over the past 12 months, and the stock has risen 39% in that time. Over the last 12 months, GE has actually seen EPS decline slightly, coming in down 3%, but over the next five years, GE is expected to grow EPS at a 12% annualized rate. The company currently trades with TTM P/E of 18, above the five-year average of 14, however the five-year P/E ratio is significantly impacted by the negative effect that the GE Capital unit had on the company during the recession period. The company has focused its business more on industrials, is working to improve margins, and the GE Capital unit has begun paying a quarterly dividend back to the parent company.
As far as the GE dividend, in 2009 the company slashed the dividend from $1.24 cent annualized dividend to just $0.40 annually. In 2010, the company resumed dividend increases, and between 2010 and 2011 has increased the dividend four times. At this time, GE currently pays a $0.68 dividend, but the stock is likely to announce an additional increase prior to the next dividend payment (ex-div late December 2012). Based upon TTM earnings GE currently pays out 53% of earnings as dividends.
With double-digit earnings growth expected in the years to come, a focus on higher margin industrials, and a renewed commitment to providing shareholder value GE is poised to provide market-beating results and dividend growth in the years ahead. With that being said, I believe investors should wait for a pull back in the stock before starting a new position or increasing their current position. If GE shares were to drop below $22, I would take a close look at the company.
Sturm, Ruger & Company (RGR)
Sturm Ruger designs, manufactures, and sells firearms, primarily here in America. In operation since 1949, RGR operates in four product categories - rifles, shotguns, pistols and revolvers. The company currently has increased its dividend for four years, and as it hits the five-year mark, many additional dividend growth investors will take interest in this stock.
RGR has performed well in the past 12 months, seeing its share price rise 54.8% in that time, but over the past 6 months it has not fared as well. Since April, shares have declined about 10% from around $49/share to where they currently trade, $44.71/share. At today's price RGR shares have a TTM P/E ratio of less than 16, well below the company's five-year average of 24. Over the past 12 months, EPS has grown at an incredible 76%. The company has not issued long-term projections, but expects EPS to decline slightly in the next year.
RGR, which carries no long-term debt, pays a current annualized dividend of $1.054, which equates to a 2.36% yield at today's price. Paying out just 28% of earnings, RGR appears to have significant room to grow the dividend, and over this past 12 months has increased the dividend quarterly from $0.141 in Q4 of 2011 to, $0.212 in Q1 of 2012, $0.324 in Q2, and $0.377 in Q3 of 2012 (187% increase).
RGR does not have the long-established dividend history that other dividend-growth stocks often have, but the company has experienced explosive growth in recent years. While growth may be slowing the company has a lot of room to grow its dividend and additional earnings growth is likely in years to come. At the current level shares appear to be fairly valued given the lower growth the company is experiencing, but as RGR enters year five of dividend increases interest in the stock will likely climb again. Investors with some tolerance for risk could be rewarded in years to come with capital appreciation and strong dividend growth.
While many dividend growth investors seek the comfort and stability of long-established dividend stocks like Clorox (CLX), ADP (ADP) and Pepsi (PEP), by looking beyond these dividend greats and identifying the stocks like these companies that will build long dividend histories, investors can reap substantial rewards. These long-established dividend payers make up an important part of a dividend growth portfolio, and should be the core holdings of the portfolio. However, investors can look beyond the most established dividend payers to identify additional opportunities to grow their income by identifying the next great dividend growth stocks.