5 Dividend Growth Giants For Your Radar

Includes: BAX, HAS, MO, MSFT, PG
by: Brian M. Nelson, CFA


Dividend growth investing is in vogue.

Let's walk through the earnings releases of five dividend growth giants.

The Dividend Cushion continues to be the primary metric we use in deciding which companies to add to the Dividend Growth portfolio.

History has revealed that the best performing stocks during the previous decades have been those that shelled out ever-increasing cash to shareholders in the form of dividends. In a recent study, S&P 500 stocks that initiated dividends or grew them over time registered roughly a 9.6% annualized return since 1972 (through 2010), while stocks that did not pay out dividends or cut them performed poorly over the same time period.

Such analysis is difficult to ignore, and we believe investors may be well rewarded in future periods by finding the best dividend-growth stocks out there. Let's take a look at the recent performance of five high-dividend payers and disclose their most recent Valuentum Dividend Cushion scores. Valuentum updates each firm's cash-flow derived valuation rating and Dividend Cushion scores at least on a quarterly basis (or after material events). The Valuentum Dividend Cushion is a pure financially-derived cash-flow coverage ratio that considers a dividend payer's future free cash flow, expected future cash dividend payments and balance sheet (net cash/debt information).

Altria (NYSE:MO) - Dividend Cushion: 1.1 - Dividend Yield: 4.8%

Altria is one of our favorite dividend growth ideas. The company continues to raise the dividend at a nice clip and holds a prized 27% ownership stake in SABMiller, which continues to perform well. SABMiller currently sports a ~R800 billion market capitalization (or about $80 billion USD at current exchange rates), which means Altria is effectively sitting on $21.6 billion in potential cash (about 30% of its market capitalization) at current price levels. We think this hidden asset within Altria's portfolio is the primary difference between our fair value of Altria and its market price. The firm grew first quarter adjusted diluted earnings per share by nearly 6% and reaffirmed its 2014 full-year diluted earnings per share range. Altria expects to maintain a dividend payout ratio target of about 80% of earnings, so whenever earnings advance, its dividend payout will as well. If it needs excess cash to fund a one-time dividend or boost annual dividend expansion, it can tap its valuable stake in SABMiller. Altria has financial flexibility that most firms would love to have, and we love holding it in the Dividend Growth portfolio.

Baxter (NYSE:BAX) - Dividend Cushion: 1.8 - Dividend Yield: 2.6%

Baxter is one of the many dividend growth ideas in the healthcare space. Its strong image and brand is augmented by an extensive global footprint and channel strength. The company continues to enhance its position in hemophilia and advance its pipeline to late-stage development - all good things. There are close to 20 phase III pipeline programs compared to just a couple in 2005. On an adjusted basis, first quarter earnings per share advanced 9%, while worldwide sales jumped 5%, excluding the contribution of Gambro revenues. We like the company's product pipeline, its Dividend Cushion score and annual dividend yield. We're strongly considering adding it to the Dividend Growth portfolio.

Hasbro (NASDAQ:HAS) - Dividend Cushion: 1.9 - Dividend Yield: 3.1%

Hasbro has fared much better than its peer Mattel (NASDAQ:MAT), and we made a great call in choosing Hasbro over its peer in the Dividend Growth portfolio. Hasbro owns well-known brands such as Transformers, Nerf, Playskool, My Little Pony, G.I. Joe, Magic: The Gathering and Monopoly. The company has been paying dividends since 1977 and has an excellent track record of consistency. In a difficult revenue environment for physical toys, Hasbro still grew revenue 2% in its first quarter thanks to strength in its international segment and its licensing business. The company is solidly profitable, has strong cash-flow generating capacity and a healthy balance sheet. It remains a position in the Dividend Growth portfolio, and we're fine with that.

Microsoft (NASDAQ:MSFT) - Dividend Cushion: 3.4 - Dividend Yield: 2.8%

Microsoft is one of the largest weightings in the Dividend Growth portfolio, and very few other firms pack the punch of its elevated Dividend Cushion score. Its name should be synonymous with dividend growth and safety. The company's calendar first quarter (fiscal third quarter) results were solid, and we don't have any qualms with its conservative fourth quarter outlook. We think the real story with Microsoft, however, is its undervaluation coupled with a fortress balance sheet that will propel years and years of future dividend growth. Microsoft will be one of the best dividend growth gems over the next two decades, in our view, and we continue to like shares quite a bit.

Procter & Gamble (NYSE:PG) - Dividend Cushion: 1.4 - Dividend Yield: 3.1%

Procter & Gamble's brands include Tide, Ariel, Gillette, Venus, Bounty, Charmin, Pantene, Olay, Pampers, Crest, Oral-B, Duracell and Vicks. The firm boasts 120-plus consecutive years of dividend payments and 55-plus consecutive years of dividend increases. Its payout is rock-solid. There's very little that one quarter could ever do to make or break Procter & Gamble, but we were generally pleased with its calendar first quarter (fiscal third quarter) performance. It's no surprise that the company is operating in a highly-competitive, slow-growth environment, but it still put up 3% organic growth and 17% core earnings-per-share expansion during the period. Innovation, pricing expansion and productivity will be the keys to the company's future dividend expansion, and we think Procter & Gamble's proven track record speaks to continued success. We like the firm as a position in the Dividend Growth portfolio.

Wrapping Things Up

The Valuentum Dividend Cushion continues to be the primary metric we use in deciding which companies to add to the Dividend Growth portfolio, and we've yet to have a dividend cut in the portfolio to date. Only the best of the best dividend growth giants are included in the portfolio.

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.

Additional disclosure: Several of the firms mentioned in this article are included in Valuentum's Dividend Growth portfolio, which is included in its monthly Dividend Growth Newsletter.