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Investors often characterize large caps as mature, dividend-paying behemoths and smaller companies as dynamic growth companies which are strapped for cash. This is simply not true: we find that there are only 19 large caps that meet screens for payback periods inside of two decades.

Large Cap Payback Period Calculations

The number of years it takes for an investment to pay you back is called the payback period. Payback period estimates depend on earnings growth and dividend-payout ratios. Payout ratios were assumed constant, and dividend yield was projected by taking the minimum of the following:

  • Earnings growth over the past five years
  • Analyst estimates for earnings growth for the next five years
  • Return on equity times the earnings reinvestment rate

The minimum of these measures was then used to estimate dividend growth for the next three years.

Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)

Large caps were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield and payout ratios below 60%. The values of these inputs are provided below:

Ticker

Company

Div Yield

Payout Ratio

EPS Growth Past 5 Years

EPS Growth Next 5 Years

AEP

American Electric Power

4.3%

56.1%

5.4%

3.4%

BNS

The Bank Of Nova Scotia

4.3%

38.6%

5.5%

8.8%

BP

BP plc

4.6%

29.7%

3.9%

3.1%

CA

CA Technologies

4.0%

30.5%

53.8%

9.3%

ETR

Entergy

4.8%

59.0%

7.1%

1.0%

INTC

Intel

4.2%

34.1%

22.8%

10.7%

LMT

Lockheed Martin

5.0%

43.9%

6.3%

7.1%

MAT

Mattel

3.4%

47.8%

7.3%

8.4%

MCD

McDonald's

3.3%

50.3%

18.1%

9.4%

OKS

ONEOK Partners

4.4%

42.5%

6.0%

5.8%

PEG

Public Service Enterprise Group

4.4%

53.1%

15.8%

5.5%

RCI

Rogers Communications

3.9%

49.5%

18.7%

8.5%

RTN

Raytheon Co.

3.6%

31.9%

14.9%

8.6%

RY

Royal Bank of Canada

4.2%

46.2%

5.8%

8.6%

SI

Siemens AG

3.9%

44.7%

24.2%

23.5%

SSL

Sasol Ltd.

5.0%

49.3%

7.6%

6.3%

STO

Statoil ASA

4.2%

26.7%

9.4%

3.5%

STX

Seagate Technology PLC

4.6%

12.8%

33.1%

16.4%

TOT

Total SA

6.1%

47.8%

1.3%

7.1%

Many large-cap stocks have distribution rates that are high enough that the sum of future dividends would equal your initial investment inside of two decades:

Ticker

Industry

P/E

P/B

Return on Equity

Payback Period

AEP

Electric Utilities

13.21

1.43

11.2%

18

BNS

Money Center Banks

10.6

1.67

19.1%

17

BP

Major Integrated Oil & Gas

7.78

1.18

15.7%

17

CA

Application Software

12.68

2.12

16.8%

17

ETR

Electric Utilities

12.56

1.33

11.3%

17

INTC

Semiconductor - Broad Line

9.1

2.21

25.4%

16

LMT

Aerospace/Defense

10.89

13.69

102.4%

15

MAT

Toys & Games

16.22

4.74

30.3%

19

MCD

Restaurants

17.39

6.65

37.9%

19

OKS

Oil & Gas Pipelines

16.13

2.93

20.5%

17

PEG

Diversified Utilities

12.4

1.54

12.8%

17

RCI

Wireless Communications

13.97

6

43.1%

17

RTN

Aerospace/Defense

9.54

2.11

20.9%

18

RY

Money Center Banks

11.93

1.9

19.3%

17

SI

Telecom Services - Foreign

11.53

2.1

18.6%

17

SSL

Major Integrated Oil & Gas

9.68

1.9

20.3%

15

STO

Major Integrated Oil & Gas

5.95

1.53

28.7%

18

STX

Data Storage Devices

4.35

3.18

96.0%

13

TOT

Major Integrated Oil & Gas

7.94

1.21

16.3%

14

Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality-check for how long payback based on dividend payments could take. Unfortunately, reality is not compatible with a dividend-only investment perspective.

Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)

Conclusion

If you want to ignore what prices your securities fetch in the markets, you will be waiting a long time to get paid back. Since all the dividend large-cap stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing. Essentially, investors must consider capital gains as a source of returns since there are no dividend stocks (at least in the large-cap space) that provide compelling dividend-only returns.

What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check" they are stuck considering total return including capital appreciation. Fortunately, many of these stocks offer compelling low price-multiples, which are promising for future stock prices. However, to avoid value traps, investors should weigh how cheaply these dividend-paying stocks are trading against measures of quality. In short, prudent investment for income requires more than reading a stock's yield.

Disclaimer: This article was written to provide investor information and education, and should not be construed as 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.

Source: Are There Large Caps With Quick Paybacks?