Target Is The Only 'Above Average' Dividend Champion

| About: Target Corporation (TGT)
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Now before I get an onslaught of challenging comments, rest assured that this article's title is meant to be a bit tongue-in-cheek. However that is not to suggest that the underlying premise does not carry weight. I'll say it again: Target (NYSE:TGT) is the only "above average" dividend champion. Allow me to explain.

For anyone familiar with Seeking Alpha and the concept of dividend growth investing, you likely recognize the tremendous work of fellow contributor David Fish. Each month he compiles and updates a list of companies that have not only paid but also increased the yearly dividend for at least 5, 10 or 25 years. The latter such companies - with consecutive increase streaks over the quarter century mark - being deemed "Champions."

Sure Standard & Poor's has a "Dividend Aristocrat" list that works towards a similar goal, but for anyone in the know, David's list is THE list for consistent dividend payout boosters. Thus if your strategy is to focus on income - or more aptly rising income - then David's list might be of interest to you.

In viewing the most recent inventory, there were 105 companies that had not only paid but also increased their dividends for at least two and a half decades. Companies like Coca-Cola (NYSE:KO), Johnson & Johnson (NYSE:JNJ) or Exxon Mobil (NYSE:XOM) - you know the names. If you're looking for research candidates, this would be a reasonable place to begin searching for companies that at the very least have a strong propensity to give you more income each year.

Yet with 105 companies, doing your homework on each and every one of them would be quite time consuming. Wouldn't it be great if you could whittle this list down to just a handful of household names? The answer, of course, is to screen the companies based upon important criteria - a filter amongst the best if you will. In fact, even David Fish has regularly created such screens.

In theory it seems like a perfectly plausible way to begin looking for research candidates. So if you're focusing on a growing stream of income, what factors might you consider to be the most important? Surely there are a bevy of options available - and some might favor one factor over another - but in general I would contend that the average Dividend Growth Investor is looking for three basic characteristics: Income, Sustainability and Growth. In essence you're thinking about how much income you might collect, when you'll receive it and how sure you are that it will actually come.


Although the attributes of a company's income component should be reviewed thoroughly for the purpose of this screen we'll settle on the column "Dividend Yield" found in Fish's "Champion" tab. The average dividend yield amongst the 105 Dividend Champions is 2.6%. Using a quick excel filter, we can observe that there are 52 companies with a yield at or above this mark. This makes sense, as you might guess that roughly half of the companies have dividend yields above the average and half have dividend yields below the average.


Much like the income component, how "safe" a payout is can be difficult to quantify. However, for our purposes let's imagine that the "Payout Ratio" serves as a reasonable baseline. The average payout ratio for the Dividend Champions is around 47% - adjusting for a few data inconsistencies. Filtering the information, there are 51 companies that have a payout ratio below the average. Again, this makes sense as you might surmise that roughly half of the companies have above average payout ratios and half have below average payout ratios.


Finally a DGI investor isn't just concerned with current income, but rather the likelihood of this income stream increasing by an appropriate rate into the future. Obviously this is highly debatable, but let's use "Estimated 5-year Growth" as a screening proxy. The average estimated growth rate for Champions is 8.4%. Ignoring some companies due to lack of data, this indicates that there are 49 companies that have "above average" estimated growth rates. Once more this is roughly in line with what you might expect from simple statistics.

Now a few readers might be clamoring for some type of valuation metric to be added to our hypothetical screen. However, this effectively takes care of itself: interestingly, any candidate that meets the first two criterions simultaneously must also have a price-to-earnings ratio under 18. It's just how the math works out.

Viewed individually, each of these three components appears to shed some light on the data set in which you are viewing. Yet what if you wanted to go for the trifecta and only look into companies that meet all three criterions? Intuitively, if the companies were distributed somewhat evenly, you might expect to see a dozen or so formidable candidates.

In theory it works great, but in reality that's not what we find. After screening the 105 companies that have not only paid but also increased their dividends for 25+ years for an above average yield, below average payout ratio and above average growth prospects, how many companies are we left with? Just one: Target - hence the article's title.

Having previously expressed commentary on Target here and here you might believe this is another foray into why TGT appears worthy of further consideration. But that's not the point of this article. The point is that, as reasonable as the hypothetical screen appeared to be, it's all too easy to miss out on opportunity by relying on theory.

For instance, such a screen missed out on the idea that Genuine Parts (NYSE:GPC) had a payout ratio of 48% at the time rather than 46% - not to mention that GPC just announced a dividend increase.

More to the point, it ignores the underlying business power of companies like PepsiCo (NYSE:PEP), McDonald's (NYSE:MCD) or Colgate-Palmolive (NYSE:CL). For that matter, it doesn't even consider companies like General Electric (NYSE:GE) or Apple (NASDAQ:AAPL).

Overall it can be all too easy to see some underlying data and automatically filter to your desired results. Yet I would express both caution and prudence on this front. First, you might be unnecessarily screening away the exact types of companies in which you would like to partner with. More importantly, even if you get the criteria correct the parameters may not be as straightforward as they appear. Data is stagnant such that it is only useful if that you know its limitations.

With thousands of companies in which to choose from you certainly couldn't be expected to dig through all of them. By getting down to a hundred or so candidates - i.e. the Dividend Champions - you might become impressed with the progress and continue with the drill-down process. Yet realize that you can't short-cut everything. As demonstrated in my last article you can't simply look at a single yield metric and make a determination. The same holds for researching companies. There's no single screen that will provide you with a failsafe short-list. The best we can do is qualitatively evaluative the types of companies we want to partner with and then quantitatively determine what each potential investment might look like in the future.

Disclosure: I am long TGT, JNJ, KO, GE, MCD, PEP. 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.