Dividend Champions: Halloween Edition

by: David Fish

The Dividend Champions spreadsheet has been updated through 10/29/10

To download the latest version of the U.S. Dividend Champions spreadsheet or PDF, click here.

During the past month, my focus has been on companies subject to deletion because of back-to-back years of paying the same amount in dividends. This dividend streak “death watch” is not as horrific as it may sound, since it does not involve dividend reductions or eliminations. The companies involved might even be viewed in a positive light, since they maintained their payouts throughout the recent recession, logging increases in 2008 and/or 2009. They simply have not boosted their dividends of late, so they must be removed from this listing of the dividend “elite.”

This Time It's Different

I know that many of us cringe when we read that sentence, but it's demonstrably true for the latest round of seasonal contraction. Whereas many companies dropped from the listings in 2008 and 2009 because of dividend cuts or eliminations, those deleted recently have simply recorded at least eight quarters without a dividend increase.

The numbers tell the story (and the detail can be found on the Changes tab). In 2008, I deleted nine companies due to dividend cuts and two whose 2008 payout was the same as in 2007. In 2009, there were 29 dividend cuts or eliminations and 15 “frozen” dividend rates. Note that there was no Challengers listing at the time and the Contenders listing was smaller, including only companies with at least 15 years of increases. This year there have been 54 deletions through the end of October, including 35 Challengers (5-9 year streaks). Of these, 50 have been due to payouts that were unchanged from 2009 and four due to acquisitions, with exactly ZERO reductions or eliminations. So, yes, it's different this time.

To be sure, some familiar names (and long streaks) have fallen victim to the latest spate of deletions. After losing BancorpSouth (NYSE:BXS) and its 25-year streak in September, four more Champions were deleted in October, including Integrys (NYSE:TEG) (51 years), Eli Lilly (NYSE:LLY) (42), Teleflex (NYSE:TFX) (31), and Bank of Hawaii (NYSE:BOH) (30 years). The best-known Contenders to be deleted in October were Paychex (NASDAQ:PAYX) (20 years), Federated Investors (NYSE:FII) (13), and Energy Transfer Partners (NYSE:ETP) (12). The good news is that there are no more Champions subject to deletion this year and only five Contenders and four Challengers remain at risk if they do not increase their payouts before year-end. Again, it's worth emphasizing that the companies deleted this year should not be viewed as carrying the same stigma as those that were forced by the recession to cut their payouts in 2008 and 2009. At worst, these “frozen” payouts may be the residual effect of that recession. The companies are to be commended for maintaining their commitment to shareholders.

Less is More?

Although the shrinkage of the Champions “universe” (including Contenders and Challengers) may seem like an alarming trend, the deletion of companies that have gone at least eight quarters without an increase actually can be viewed as improving the quality of the groupings. The remaining companies have not only withstood the ravages of the recent recession, but continued to enhance their payouts. The majority of those deleted came from the shorter end of the spectrum, boasting less than 10 years of increases, so they may not yet have developed a “culture of dividend increases,” as SA Contributor David Van Knapp has termed it. Essentially, this culling process tends to “separate the wheat from the chaff” and concentrate the listings on those companies that have a continuing commitment to enhance shareholder returns. Deleting the lesser contributors should provide a subtle boost to the average percentage increase, dividend growth rates, and yield.

The Dividend Champions' average latest percentage increase has already improved from earlier in the year, an indication that companies may be on the verge of stepping up their dividend growth. At the end of October, that average was 5.71%, up from a low of 5.10% at the end of February. (See the Summary tab) That's still well below the 5- and 10-year Dividend Growth Rates of 9.1% and 7.5%, respectively, but I believe that more generous dividend increases will soon begin to resemble those longer-term averages. Some key companies to watch include Champions Emerson Electric (NYSE:EMR) (which should boost its dividend in November), Sysco (NYSE:SYY) (in December), and Contender Beckman Coulter (NYSE:BEC) (in November). Their Boards of Directors are among those that have been more conservative during the recession, but should loosen the purse strings sooner rather than later.

Final Words

I have now completed most of the deletions of companies that failed to extend their streaks this year, and there's reason to be optimistic that the listings will be replenished in 2011. One Contender, McCormick & Co. (NYSE:MKC) should graduate to Champion status by year-end, and there are five other companies that should extend their streaks to 25 years in 2011. Meanwhile, there are 20 Challengers with 9-year streaks that should be promoted to Contender status next year. In addition, I have started writing down companies with four-year streaks that might join the Challengers listing next year and already have 15 such companies in just a handful of weeks, so I think there's plenty of potential to add to the current totals of 97 Champions, 131 Contenders, and 189 Challengers (a total of 417 companies with dividend streaks of at least five years).

There were no major structural changes to the spreadsheet (and PDF) this month, but I did add a Notes column to the Challengers listing in order to list a couple of stocks splits, one a 2-for-1 split on November 15 by Reynolds American (NYSE:RAI) and the other a 3-for-2 split by Rollins (NYSE:ROL) on December 10. (There's also one on the Contenders tab for A.O. Smith (NYSE:AOS), which will split its stock 3-for-2 on November 15.) I plan to add more columns to the Challengers tab, but will concentrate first on dividend changes and the creation of a DivHistory column that summarizes dividends paid in 2010 (and switching the 5- and 10-year DGRs to that column at year-end). As always, feedback is welcome.

Disclosure: Author owns EMR, MKC, and PAYX.

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