Data Mining The CCC List: Part 1 - The Challengers

by: Passive Income Pursuit

Can the CCC list give us any insight into ideal portfolio sector allocation?

Which sectors have the highest representation on the Dividend Challengers list?

Which one has the highest dividend growth rate?

Highlighting a few companies that look intriguing as potential investments or further research candidates.

Now that my portfolio is quite sizable and fluctuating around the $170k mark, I feel that portfolio allocation, both among individual companies as well as sectors, should play a bigger role in its construction.

One idea I've had to get a rough estimate of how my portfolio should be allocated is by using the trusty CCC list that David Fish so graciously provides for us. Before I go any further I just want to say thank you to David for such a valuable resource.

So the thought that crossed my mind was that maybe I could glean some information from the CCC list in regards to portfolio sector allocation for my actual portfolio. This will be the first of a four-part series where I look at the sector makeup of the Challengers, Contenders, Champions and then wrap it all up by relating my current portfolio allocation to my findings.

The Challengers are the companies that have paid and grown dividends for between 5 and 10 years. These are the companies in the beginning stages of rewarding owners with what will hopefully turn into a decades long streak.

David already provides some analysis on the averages for each list, but I wanted to take it a step further and add in a sector comparison as well.

Part 1 of this series will cover the Challengers. Part 2 will cover the Contenders. Part 3 will cover the Champions and Part 4 will cover the CCC list in its entirety as well as comparing it to my portfolio's current allocation in search of sector allocation optimization.

All charts/images reference data found in the CCC Spreadsheet downloaded on January 12, 2016.

Sector Breakdown

The Challengers list is currently comprised of 396 different companies across all sectors of the economy.

Financial companies have the largest concentration among the Challengers, comprising 38% of the 396 companies. I'm not too surprised to see a lot of financials on the list since the financial sector as a whole took the brunt of the financial crisis. However, the fact that financials are clearly the largest contingent among the Challengers does surprise me a bit.

Consumer discretionary makes up the second largest group, accounting for 21% of the Challengers, followed by Industrials in third with 11%. The top three sectors combine to make up 70% of the Challengers list.

The Energy sector has 30 representatives among the Challengers, however, given the large decline in the price of oil with seemingly no end in sight, this contingent is likely to drop if the price of oil doesn't begin to recover soon.

The other thing that really surprised me was the lack of Consumer staples and Health Care companies among the Challengers. Consumer staples only have 8 representatives, or 2% of the Challengers, while Health Care has 16 representatives, or 4% of the Challengers. However, I suspect that number will grow for both sectors as we move through the Contenders and Champions.

Consecutive Years of Dividend Growth

While sector representation is one thing, what do the average dividend streaks look like across each sector?

Overall the Challengers carry an average streak of 5.8 years of dividend growth. Among the Challengers, the sector with the longest average streak is the Consumer Staples with a 6.6-year average.

While Financials were high on the list of number of companies represented, they carry the lowest average streak at just 5.6 years. Seeing as how we're six years removed from the financial crisis, it makes sense that the financials are grouped around the 5-6-year mark.

How's the growth?

I love dividends, but what I love even more is a growing dividend. Since the requirement to be a Challenger is 5 years of dividend growth, I'll display the 1-, 3-, and 5-year growth rates per sector. Although most sectors did show 10-year growth rates, it's just that the companies had either frozen or cut their dividend between 6-10 years ago, so the streak wasn't maintained.

The following table shows the sector with the highest average 1-, 3- and 5-year dividend growth rates.

Highest Average Dividend Growth Rate by Sector - Challengers
Dividend Growth Period Sector
1-Year Materials
3-Year Materials
5-Year Financials

Not too surprisingly, financials are the highest for 5-year dividend growth rates. Given the likelihood of frozen or cut dividends during the financial crisis among the financial sector, that led to higher potential for future dividend growth as the crisis subsided. While the 5-year growth rate for financials is excellent at just above 29% per year, there's been a rapid deceleration in the growth rate with the average 1-year rate less than half of the 5-year at 14%. This could signal a further slowing of dividend growth among the Financial sector Challengers.

The Technology sector has the second-highest 5-year growth rate at 28%, and similar to the financials they've seen a marked deterioration in their growth rate with the average 1-year growth rate coming in at just 16%.

Energy companies have seen some rather impressive growth over the last 5 years with the average annual increase coming in at 27%. However, given the declining dividend growth and precipitous fall in the price of oil, I wouldn't be surprised to see the dividend growth rate continue to fall into the low single digits.

The previous sectors have all shown significant deceleration in dividend growth between the 5-year and 1-year rates, but what sectors are showing acceleration?

Surprisingly Utilities have seen an average 77% improvement in their dividend growth when comparing the 1-year to the 5-year rate with annual increases of 14% and 8%, respectively.

The only other sector that has shown an acceleration in annual dividend growth is Health Care, which has an average 5-year growth rate of 12% and an average 1-year growth rate of 15%.

Since the Challengers list should theoretically be full of companies that are in the early stages of dividend growth streaks, I have to say I was quite surprised to see how much the growth rates have declined across most sectors. Being early in the dividend growth stage should coincide with lower payout ratios and likely faster-growing companies. As a whole, the Challengers fit the mold with average dividend growth well into the mid-teens, although dividend growth could disappoint if the deceleration trend continues.

Investment Candidates

As I mentioned earlier, the Challengers list is currently comprised of 396 different companies with every sector having at least one representative. That's an overwhelming number of companies to keep track of and I only follow a select few from this list since I typically look for companies with lengthier dividend growth streaks. A five-year streak has only seen good, or at least not bad, economic times and doesn't encompass the previous recession.

I wanted to highlight a few companies among the Challengers that I would be interested in adding to or adding more to my portfolio given the right valuation as well as a few metrics regarding the companies.

The metrics that I will include are:

  • TTM P/E Ratio - To get a sense of current valuation based on the last 12 months of earnings.
  • 2016 Forward P/E Ratio - To look at valuation on the expected earnings for the next year.
  • Current Yield - Many investors have a minimum yield requirement for their investment capital.
  • Forward Payout Ratio - Current dividends divided by 2016 EPS estimates for a quick look at the "safety" of the dividend.
  • 5-Year EPS Growth Estimate - To get an idea of medium-term growth projections using the consensus analyst estimate compiled by Yahoo Finance.
  • Forward Chowder Rule - The "Chowder Rule," current yield plus 5-year dividend growth rate, is a quick estimate of total dividend return potential of an investment. The downside of the Chowder Rule" is that it's a backward-looking measure. To look at the returns with purchase at current prices, I've modified the Chowder Rule into the Forward Chowder Rule by using the 5-year EPS growth estimate as an estimate of future dividend growth assuming management at each company would maintain a constant payout ratio.

Starbucks Corporation (NASDAQ:SBUX) - Consumer Discretionary

TTM P/E Ratio 36.3
2016 Forward P/E Ratio 31.3
Current Yield 1.35%
Forward Payout Ratio 42.3%
5-Year EPS Growth Estimate 18.2%
Forward Chowder Rule 19.6%

I currently own a small position in Starbucks and would love to add more to my portfolio. However, the current valuation looks a bit rich for me to feel comfortable adding shares at the current levels.

The Walt Disney Company (NYSE:DIS) - Consumer Discretionary

TTM P/E Ratio 19.8
2016 Forward P/E Ratio 17.1
Current Yield 1.47%
Forward Payout Ratio 25.1%
5-Year EPS Growth Estimate 12.3%
Forward Chowder Rule 13.7%

Disney could be a compelling investment at the current prices. However, the current yield is low at just 1.47%. Dividend growth would have to continue at a double-digit pace for many dividend growth investors.

Harley-Davidson, Inc. (NYSE:HOG) - Consumer Discretionary

TTM P/E Ratio 10.9
2016 Forward P/E Ratio 10.1
Current Yield 3.04%
Forward Payout Ratio 30.6%
5-Year EPS Growth Estimate 10.4%
Forward Chowder Rule 13.4%

I don't follow Harley-Davidson but the valuation and expected growth looks good here. Harley-Davidson is very dependent on the health of the economy to spur sales, so a slowdown could potentially hurt the company, and investment returns, more than others. However, I believe that Harley-Davidson could be a candidate for further research. Harley-Davidson is also due for a dividend increase announcement in early February, which would get the dividend growth started right away.

Dr. Pepper Snapple Group, Inc. (NYSE:DPS-OLD) - Consumer Staples

TTM P/E Ratio 24.0
2016 Forward P/E Ratio 20.9
Current Yield 2.12%
Forward Payout Ratio 44.3%
5-Year EPS Growth Estimate 7.2%
Forward Chowder Rule 9.3%

Dr. Pepper Snapple looks a bit expensive at current prices but not obscenely so. As a smaller play on the beverage market, it could be a good option if you wanted to diversify away from The Coca-Cola Company (NYSE:KO) or PepsiCo (NYSE:PEP). Before I would feel comfortable adding DPS to my portfolio, I would likely need the valuation to come down slightly, especially given the relatively low yield that isn't compensated with a likelihood of double-digit dividend growth.

The Hershey Company (NYSE:HSY) - Consumer Staples

TTM P/E Ratio 37.8
2016 Forward P/E Ratio 19.4
Current Yield 2.74%
Forward Payout Ratio 53.1%
5-Year EPS Growth Estimate 7.3%
Forward Chowder Rule 10.0%

I currently own a small position in Hershey and while the valuation isn't outstanding, I believe the return and growth expectation would be adequate at current prices.

UnitedHealth Group, Incorporated (NYSE:UNH) - Health Care

TTM P/E Ratio 18.6
2016 Forward P/E Ratio 14.8
Current Yield 1.75%
Forward Payout Ratio 25.9%
5-Year EPS Growth Estimate 13.6%
Forward Chowder Rule 15.4%

I don't have any exposure to the Health Care insurance industry and there's big bucks to be made there. The valuation for UnitedHealth looks excellent and a forward Chowder Rule result of 15% leaves a bigger margin of safety to still earn adequate returns if the dividend growth comes in lower than expected. The yield is a bit on the low side, but UNH is a candidate for further research.

Cisco Systems, Inc. (NASDAQ:CSCO) - Information Technology

TTM P/E Ratio 12.5
2016 Forward P/E Ratio 10.3
Current Yield 3.59%
Forward Payout Ratio 37.0%
5-Year EPS Growth Estimate 9.4%
Forward Chowder Rule 13.0%

Cisco Systems has a very cheap valuation and a relatively high dividend yield. I haven't analyzed Cisco in a year or so and believe it's probably a candidate for further research. Cisco is also due for a dividend increase in February, which would kick start the dividend growth and boost your current yield.

Visa Inc. (NYSE:V) - Information Technology

TTM P/E Ratio 28.2
2016 Forward P/E Ratio 25.3
Current Yield 0.77%
Forward Payout Ratio 19.5%
5-Year EPS Growth Estimate 16.1%
Forward Chowder Rule 16.9%

I've owned shares of Visa for a couple years now and it's been an excellent holding for me. The biggest drawback to Visa at current prices is the low yield of just 0.77%. However, I believe there's a high likelihood of continued double-digit earnings and dividend growth, which will continue to propel the share price forward. Visa is an excellent candidate as part of a low yield-high growth portion of a portfolio. As such it's more of a total return play than a dividend growth investment. The current valuation looks decent on a forward basis, although I would obviously love to purchase shares at a lower price.

United Parcel Service, Inc. (NYSE:UPS) - Industrials

TTM P/E Ratio 20.6
2016 Forward P/E Ratio 15.6
Current Yield 3.25%
Forward Payout Ratio 50.7%
5-Year EPS Growth Estimate 9.9%
Forward Chowder Rule 13.1%

I liked United Parcel Service in July and have been eyeing United Parcel Service since December of last year and believe that the current valuation looks excellent for a potential purchase. If I had capital available, I would purchase shares.

Eaton Corporation plc (NYSE:ETN) - Industrials

TTM P/E Ratio 11.3
2016 Forward P/E Ratio 11.4
Current Yield 4.54%
Forward Payout Ratio 51.8%
5-Year EPS Growth Estimate 5.2%
Forward Chowder Rule 9.7%

Eaton Corporation is another company that I've been intrigued by for as a purchase candidate since I analyzed the company in August. The current yield is solid at 4.54% and despite the slowdown and dip in earnings, the dividend is still well covered at just 51.8%. Eaton is subject to higher variance of earnings and therefore dividend growth, but does well over the entire economic cycle.

Paychex, Inc. (NASDAQ:PAYX) - Financials

TTM P/E Ratio 24.0
2016 Forward P/E Ratio 23.6
Current Yield 3.49%
Forward Payout Ratio 82.4%
5-Year EPS Growth Estimate 9.6%
Forward Chowder Rule 13.1%

Paychex provides a variety of services including payroll processing, human resource and benefits outsourcing for medium-sized businesses. I like the business model and believe that more companies could move to outsource the services for their employees. The dividend yield and forward Chowder Rule look excellent, however, the payout ratio is a bit high at over 80%. Earnings held up pretty well during the 2008/9 financial crisis, which is encouraging given the high payout ratio. Paychex looks like a candidate for further research, but likely isn't a solid buy at the current valuation.

BlackRock, Inc. (NYSE:BLK) - Financials

TTM P/E Ratio 15.2
2016 Forward P/E Ratio 15.5
Current Yield 2.90%
Forward Payout Ratio 45.0%
5-Year EPS Growth Estimate 9.8%
Forward Chowder Rule 12.7%

I like the asset management business model and currently only own T. Rowe Price (NASDAQ:TROW). What can be much better than taking a small cut of other people's investments year after year whether your funds show gains or declines? BlackRock has a strong foothold on the ETF market, which I expect will continue to grow over the years and take more market share from mutual funds. If you're bullish on the markets over the long term, BlackRock could be a solid purchase candidate based on current valuation and growth expectations. BlackRock is definitely a candidate for further research for my own portfolio.

In Part 2 of this series, I'll examine the Contenders to see how the sector allocation changes as the dividend growth streaks get longer.

A full list of my holdings can be found here.

Disclosure: I am/we are long SBUX, DIS, DPS, KO, PEP, HSY, V, TROW. 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: I am not a financial professional. Information provided in this article is not a recommendation to purchase shares of said companies. Investing involves risks and you should consult a financial professional prior to investing.