Finding Value In The Dividend Aristocrats List

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Includes: AFL, BEN, CB, CINF, CVX, JNJ, MCD, NOBL, NUE, PEP, XOM
by: Scott Shander

Summary

This article will screen the Dividend Aristocrats list for value by looking at companies with higher earnings yields, lower payout ratios, and proximity to the 52-week low price.

The S&P 500 Aristocrats is an exclusive list of US blue-chip stocks that have been able to increase dividend payments without interruption for over twenty-five years.

I propose simply using a little scrutiny in evaluating the price income investors pay for Dividend Aristocrats as the permanent loss in principal in stock investing is increasing.

Since the last bull market after the financial crisis, many companies that traditionally never paid dividends began doing so when earnings started improving. I posit that this trend happened for a number of reasons: companies were hesitant to make serious capital investments and ended up piling up excess cash and some companies wanted to attract income investors to their stock who otherwise would not have given them a look. Now it seems that everyone is paying a dividend. For investors who neglect to do their homework and evaluate the long record of a company's dividend history, the quality dividend payers seem indistinguishable from the rest. This is where the S&P 500 Aristocrats group comes in.

The S&P 500 Aristocrats is an exclusive list of US blue-chip stocks that have been able to increase dividend payments without interruption for over twenty-five years. This is an elite list of 54 companies that many passive long-term investors have relied upon to generate consistent dividend income either whether they are in retirement or conversely have a long investment horizon and are looking to let their reinvested dividend earnings compound with time. ProShares has listed an ETF (BATS:NOBL) that tracks this index - I encourage income investors to look into it if they are not looking to evaluate individual stocks.

Below is a summary table for the individual 54 constituents in the index as of market close on 1/30/2015. The table shows the number of constituents by sector and the average attribute value for those constituents. For example, 6 companies are from the Health Care Industry in the Aristocrats group and on average the price of these stocks are above their 52-week low prices by 29% and 8% below their 52-week high prices. 50% of all Aristocrats are within 22% of their 52-week low price, although 50% are also within 7% of the 52-week high (a product of a bull market!). The average earnings yield for all 54 companies is 5%, with an average dividend yield at 2% and average payout ratio at 52%.

Along with most of the US market today, the Aristocrats currently trade at a high premium to earnings. Currently only the Aristocrats in the Oil & Gas, Financials, and Utilities sectors have average earnings yields above 5%.

Source: Own compiled using S&P 500 Dividend Aristocrat constituents list and the latest trailing 12-month EPS and DPS for each company using Morningstar.

The full company list is provided in the next table. A few observations:

  1. Four out of five companies in the Basic Materials industry are in the Chemicals sector.
  2. Constituents in the Consumer Services industry are limited to Food & Drug Retail and General Retail sectors.
  3. The Financial industry constituents are comprised of Insurance and Financial Services companies and one REIT company.
  4. Some industries have very little representation in the Aristocrats: Telecommunications (1), Utilities (1), and Oil & Gas (2).

Value Metrics

This article will screen the Aristocrats list for value by looking at companies with higher earnings yields, lower payout ratios, and proximity to the 52-week low price. First let's take a look at some visuals to see how these companies compare on earnings yield, dividend yield, payout ratio, and versus the 52-week high and low prices.

High dividend yield and low relative payout ratio

As a long-term investor seeking yield, it is important to understand the perils of chasing high yield companies - the likelihood of a company maintaining its lofty dividend decreases since payout ratio increases. I highlighted in blue a slice of the companies that have attractive dividend yield between 2.6% and 4.2% and a low payout ratio given the dividend yield ratio. I call this the "relative payout ratio."

Source: Own compiled using S&P 500 Dividend Aristocrat constituents list and the latest trailing 12-month EPS and DPS for each company using Morningstar.

The Aristocrats has ten companies that meet the criteria. Of this list, the most recent first dividend increase was in 1988 with Chevron (NYSE:CVX). Impressively, all other companies on the list have an even longer record of consecutive annual dividend increases. Also with the exception of PepsiCo (NYSE:PEP), all have earnings yields above 5%. Note, McDonald's (NYSE:MCD) and Nucor (NYSE:NUE) both have payout ratios over 65% which although are not extremely high, suggest future dividends could grow slower than future earnings.

The next section will take a closer look at earnings yield - a much more important metric than dividend yield.

Ticker

Constituent Name

% above 52 week low

% below 52 week high

T12 Earnings Yield

12 Dividend Yield

T12 Payout Ratio

First Year of Dividend Increase

*AFL

Aflac Inc

3.8%

13.5%

11.2%

2.6%

23.2%

1983

*CVX

Chevron Corp

3.7%

24.1%

9.9%

4.0%

40.9%

1988

*XOM

Exxon Mobil Corp

1.6%

16.6%

9.1%

3.0%

33.2%

1983

ED

Consolidated Edison Inc

32.6%

4.1%

6.1%

3.6%

59.3%

1975

*CINF

Cincinnati Financial Corp

12.5%

8.7%

5.8%

3.4%

59.9%

1961

*JNJ

Johnson & Johnson

16.3%

8.5%

5.7%

2.7%

47.7%

1963

EMR

Emerson Electric Co

2.0%

18.6%

5.4%

3.0%

56.4%

1957

MCD

McDonald's Corp

5.5%

10.9%

5.2%

3.5%

67.1%

1977

NUE

Nucor Corp

1.7%

25.7%

5.1%

3.4%

66.5%

1974

PEP

PepsiCo Inc

21.8%

6.9%

4.8%

2.6%

54.2%

1973

Earnings yield versus % above 52-week low price

This next comparison will identify which Aristocrat companies have the strongest trailing 12-month earnings yields while still trading relatively close to their 52-week low price. The problem with this analysis is it typically would identify a company that the market projects declining earnings and the stock price suffered as a consequence, hence a higher earnings yield and a price closer to its 52-week low. This list of elite companies has a long record of increasing dividends and a demonstrated ability to consistently course correct to deliver value to its shareholders, so in this case I am seeking out companies with these traits in search of value. I targeted companies in the top quartile of earnings yield (above 5.4%) and within 20% of their recent low price. This yields a list of 11 companies:

Source: Own compiled using S&P 500 Dividend Aristocrat constituents list and the latest trailing 12-month EPS for each company using Morningstar.

Of this screen, Aflac (NYSE:AFL) has the highest earnings yield, followed the two Oil & Gas companies, Chevron and Exxon Mobil (NYSE:XOM). Aflac, given its strong balance sheet and relative stance in the Aristocrats group merits a very good look for a long investment. Given the recent macroeconomic story developing with the global oil surplus, it might be a good time to add to your position in these two Aristocrat constituents as well. Chubb (NYSE:CB) and Franklin Resources (NYSE:BEN) both look overdue for a substantial increase in dividends and show strong relative earnings yield too.

Ticker

Constituent Name

% above 52 week low

% below 52 week high

T12 Earnings Yield

12 Dividend Yield

T12 Payout Ratio

First Year of Dividend Increase

*AFL

Aflac Inc

3.8%

13.5%

11.2%

2.6%

23.2%

1983

*CVX

Chevron Corp

3.7%

24.1%

9.9%

4.0%

40.9%

1988

*XOM

Exxon Mobil Corp

1.6%

16.6%

9.1%

3.0%

33.2%

1983

CB

Chubb Corp/The

18.0%

7.0%

8.8%

2.0%

22.4%

1966

BEN

Franklin Resources Inc

4.9%

13.3%

7.3%

0.9%

12.8%

1982

DOV

Dover Corp

4.3%

23.7%

6.6%

2.2%

32.9%

1956

TROW

T Rowe Price Group Inc

9.7%

11.2%

5.8%

2.2%

37.3%

1987

*CINF

Cincinnati Financial Corp

12.5%

8.7%

5.8%

3.4%

59.9%

1961

*JNJ

Johnson & Johnson

16.3%

8.5%

5.7%

2.7%

47.7%

1963

WMT

Wal-Mart Stores Inc

17.6%

6.6%

5.6%

2.2%

39.9%

1975

PNR

Pentair Ltd

4.6%

25.9%

5.4%

1.7%

31.3%

1977

Applying both screens

Crossing screens one (high dividend and low relative payout ratio) and two (high earnings yield and proximity to 52-week low price) yields a list of five companies that deserve investment consideration today. I added an asterisk (*) next to the tickers for convenience, but the companies are listed below as well: Aflac Inc., Chevron Corp, Exxon Mobil Corp, Cincinnati Financial Corp (NASDAQ:CINF), and Johnson & Johnson (NYSE:JNJ).

Passively Investing in companies with a strong record of dividends (Aristocrats) has proven to be a good strategy over the long term and the popularity of its index ETFs will likely increase. I propose simply using a little scrutiny in evaluating the price to pay for such a stock. The US stock market has been exuberant of late and the risk of permanent loss in principal is increasing. Applying this simple approach and re-evaluating every 12 months or so should yield a great return in the long term.

Disclosure: The author is long AFL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.