Dividends are great. They act as a form of corporate governance and they provide income.
However, in a world that is chasing yield, I am concerned that stock investors have overdone it. The discourse surrounding dividends implies that investors don't have to be concerned about the stock market or capital appreciation as a component of total return. This idea is largely false. This article will demonstrate how stocks in the consumer goods sector do not pay enough dividends so that investors can ignore the stock market.
Calculating Payback Periods
The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. 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 later in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making earlier distributions worth more.)
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.
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.
Consumer goods stocks 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 |
Crown Crafts | 5.6% | 33.9% | -8.1% | 18.0% | |
Diebold | 3.9% | 37.3% | 6.6% | 11.0% | |
General Mills | 3.3% | 47.8% | 8.2% | 7.7% | |
Gentex | 3.1% | 42.1% | 9.3% | 15.1% | |
Hasbro | 4.0% | 48.0% | 16.9% | 8.0% | |
Kellogg Company | 3.3% | 52.0% | 6.2% | 6.9% | |
Mattel | 3.4% | 47.2% | 7.3% | 9.1% | |
Superior Industries | 3.8% | 30.2% | 22.1% | 2.0% | |
True Religion Apparel | 3.1% | 22.1% | 14.3% | 20.0% |
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.)
Many consumer goods sector stocks have distribution rates which are high enough that the sum of future dividends would equal your initial investment by the end of two decades:
Ticker | Industry | P/E | P/B | Return on Equity | Payback Period |
CRWS | Textile - Apparel Clothing | 10.3 | 1.6 | 16.1% | 19 |
DBD | Business Equipment | 9.7 | 2.2 | 21.4% | 18 |
GIS | Processed & Packaged Goods | 15.6 | 3.9 | 26.0% | 20 |
GNTX | Auto Parts | 14.2 | 2.2 | 16.6% | 20 |
HAS | Toys & Games | 13.8 | 3.4 | 24.5% | 17 |
K | Processed & Packaged Goods | 16.1 | 8.8 | 51.1% | 20 |
MAT | Toys & Games | 15.2 | 4.3 | 31.3% | 20 |
SUP | Auto Parts | 7.9 | 1.0 | 12.8% | 20 |
TRLG | Textile - Apparel Clothing | 14.0 | 2.1 | 15.9% | 19 |
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 consumer goods stocks would require more than a decade for payback, investors should rethink a singular focus on dividends before investing in the consumer goods sector.
What can dividend investors do with these stocks? Since they cannot "buy, forget, and cash the check" they must consider total return including capital appreciation. They have to consider how these firms will grow its market capitalizations in the long-term in addition to reading off a dividend yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.
