Data Mining The CCC List: Part 2 - The Contenders

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 Contenders list?

Which one has the highest dividend growth rate?

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

In the beginning stages of building a portfolio, company and sector allocation shouldn't be much of a concern. On a $25,000 portfolio an additional $2,000 purchase would represent a 7% weight in the now $27,000 portfolio. At those portfolio levels a purchase can drastically alter the weight given to a specific company or sector.

However, my portfolio is now hovering around the $170k level and as such I think it's much more important to take allocation into account. One idea that I had was to look into the CCC list that David Fish so graciously updates to see if there's any guidance it can provide in regards to allocation for a dividend growth portfolio.

This is Part 2 of my series on data mining the CCC list. You can find Part 1 which covered the Challengers here.

In order to qualify as a Contender on the CCC list a company must have grown dividends each year for at least the past 10 years. Ten years is a significant amount of time in the business world and is generally long enough for at least one full economic/market cycle to come full circle. If a company was able to continue growing dividends throughout the financial crisis in 2008/9 I'm interested.

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

Sector Breakdown

The Contenders are currently made up of 250 companies which is a notable drop-off from the 396 that make up the Challengers list. Of course that's expected as a 10 year dividend growth streak is much harder to obtain and means they were raising dividends each year through the "Great Recession". Here's the breakdown of Contenders by sector.

Surprisingly enough the Financials lead the way among the Contenders, just like with the Challengers, making up 28% of the 250 companies. That's about 80% higher than the next largest faction of the Contenders, the Industrials, at 16%. I have to say I was surprised to see Financials leading the way yet again considering that they took the brunt of the damage during the financial crisis.

The third largest contingent of Contenders fall within the Utilities sector. Given the relatively stable nature of their business an increase in the Utilities sector was expected. Combined the top 3 sectors (Financials, Industrials, and Utilities) account for 55% of the 250 companies on the Contenders list.

In absolute percentage terms, i.e. percentage of Contenders versus percentage of Challengers, the Utilities showed the largest gain increasing 8%. The next largest gainer was Industrials at 5% followed by Consumer Staples at 4%. Financials and Consumer Discretionary both saw double digit declines in their weighting with declines of 10% and 12%, respectively.

Consecutive Years of Dividend Growth

Let's take a look to see how the average dividend growth streak looks among each sector.

As a group, the Contenders average a 15.0 year streak of growing dividend payments.

Among the Contenders, the Financials have the longest average streak at just over 16 years. Technology companies have the second longest average streak around 15.4 years. This surprised me since many technology companies haven't traditionally paid dividends. That's even more impressive considering there's 17 Contenders that fall in the Information Technology sector.

The lowest average streak belongs to the Telecommunications sector with just over a 13 year average. Although we have to keep in mind that there's only 3 Telecommunications companies on the Contenders list and just 1 on the Challengers list.

How's the growth?

The growth rate of the dividend is the "X-factor" for dividend growth investors. The requirement to be considered a Contender is 10 consecutive years of dividend growth so we get to examine companies/sectors that were able to successfully navigate the financial crisis and continue to grow their dividends.

The following table shows the sector with the highest average 1, 3, 5 and 10 year dividend growth rates.

Highest Average Dividend Growth Rate by Sector
Dividend Growth Period Sector
1 Year Industrials
3 Year Consumer Staples
5 Year Consumer Staples
10 Year Health Care

Here's where the Consumer Staples shine. Among the Contenders the Consumer Staples have the highest 3 and 5 year dividend growth rates. They're also a close second for 1 year growth rate but come in sixth for 10 year growth rate. Although don't be alarmed by their low ranking, the average 10 year growth rate among the 16 Consumer Staples Contenders is an excellent 14%.

One thing you'll notice in the above chart is that for every sector except Utilities there's a noticeable decline from the 10 year growth rate to the 1 year growth rate. Over time a decrease is expected as the payout ratio is like to rise as well, but some of the decreases are greater than 7% in the absolute dividend growth rates.

A deceleration of dividend growth could be a signal of further slowing in the years ahead. The payout ratios might not have as much room to increase meaning that dividend growth will more closely track the underlying earnings growth. This could also signify that the companies on average are expecting slower growth of their business or are just more uncertain of the direction of the economy.

What really impressed me though is that every sector except for Utilities have 10 year growth rates well into double digits annual growth. Five of the sectors (Industrials, Consumer Staples, Health Care, and Consumer Discretionary) have double digit growth rates across all four measurement periods. Materials just missed the mark with a 9.9% average 1 year growth rate across 18 companies.

Dividend Contenders Company Spotlights

The Contenders list is less daunting of a task to keep up to date on than the much larger Challengers list; however, 250 companies is still a Herculean undertaking. As such there's a limited number of companies on the Contenders list that I follow.

I wanted to highlight some companies found on the Contenders list that I currently track in some capacity and consider excellent companies that should continue to reward shareholders. Not all of the companies are at compelling valuations right now but I consider all of them to be candidates for further research. The companies will also have some valuation metrics included regarding their valuation and outlook.

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 the valuation on the expected earnings announced for a fiscal year ending in 2016.
  • Current Yield - Many investors have a minimum yield requirement for their investment capital and yield is a vital data point for dividend growth investors.
  • Forward Payout Ratio - Current dividends dividend by 2016 EPS estimates for a quick look at the "safety" of the dividend.
  • 5-Year EPS Growth Estimate - To get an idea of the 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 a proxy of future dividend growth. This assumes that management would maintain a constant payout ratio.

Valuations and yields are based on the closing price from January 25, 2016.

Ross Stores Inc. (NASDAQ:ROST) - Consumer Discretionary / 21 year dividend growth streak

TTM P/E Ratio 22.1
2016 Forward P/E Ratio 19.7
Current Yield 0.87%
Forward Payout Ratio 17.1%
5 Years EPS Growth Estimate 11.3%
Forward Chowder Rule 12.2%

Ross Stores is a pretty compelling growth play in the retail space especially since management has already shown a willingness to increase dividends year after year. The valuation is solid given the rapid growth the company still has ahead of it if their market penetration plans play out.

Church & Dwight Co. Inc. (NYSE:CHD) - Consumer Staples / 19 year dividend growth streak

TTM P/E Ratio 26.7
2016 Forward P/E Ratio 23.1
Current Yield 1.65%
Forward Payout Ratio 38.2%
5 Years EPS Growth Estimate 9.1%
Forward Chowder Rule 10.7%

Church & Dwight is a lesser known player in the consumer staples sector but that doesn't mean that the company doesn't have valuable brands under their control. I would love to add this Contender to my portfolio but the valuation looks a bit rich at this time. Returns could potentially lag behind the operational performance of the company due to the expensive valuation.

CVS Health Corporation (NYSE:CVS) - Consumer Staples / 13 year dividend growth streak

TTM P/E Ratio 21.2
2016 Forward P/E Ratio 16.1
Current Yield 1.81%
Forward Payout Ratio 29.2%
5 Year EPS Growth Estimate 14.2%
Forward Chowder Rule 16.0%

CVS Health is a solid counterpart to Walgreens-Boots Alliance (NASDAQ:WBA). The retail pharmacy market has been consolidated over the years leaving these two big players. CVS offers a relatively low dividend yield but should be able to continue growing the dividend at a double digit rate is the earnings growth plays out. I would consider CVS a candidate for further research.

General Mills, Inc. (NYSE:GIS) - Consumer Staples / 12 year dividend growth streak

TTM P/E Ratio 22.6
2016 Forward P/E Ratio 19.2
Current Yield 3.21%
Forward Payout Ratio 61.5%
5 Year EPS Growth Estimate 5.6%
Forward Chowder Rule 8.8%

General Mills is a wonderful company and a higher yielding offering among those highlighted thus far. However, given the slow expected earnings growth of just 5.6% per year the forward Chowder Rule doesn't look all that compelling at just 8.8%. Especially when you factor in that shares are likely on the high end of fair value currently with a forward P/E ratio of 19.3. General Mills would make for a solid defensive pick at the current prices and likely won't disappoint if your expectations are held in check.

The J. M. Smucker Company (NYSE:SJM) - Consumer Staples / 18 year dividend growth streak

TTM P/E Ratio 36.2
2016 Forward P/E Ratio 21.0
Current Yield 2.20%
Forward Payout Ratio 46.3%
5 Years EPS Growth Estimate 8.1%
Forward Chowder Rule 10.3%

I've been eyeing J. M. Smucker and nearly initiated a position in the second half of 2015 but reluctantly had to hold off. The valuation isn't excessive; however, shares are currently expensive based on the earnings estimates for 2016. Market returns could potentially underperform the business performance with a forward Chowder Rule estimate of 10.3% returns due to valuation contraction. J. M. Smucker is still a quality company and one that I hope to add to my portfolio at more attractive valuations.

Ameriprise Financial, Inc. (NYSE:AMP) - Financials / 11 year dividend growth streak

TTM P/E Ratio 10.4
2016 Forward P/E Ratio 8.7
Current Yield 2.97%
Forward Payout Ratio 25.9%
5 Year EPS Growth Estimate 11.9%
Forward Chowder Rule 14.9%

I've never looked into Ameriprise Financial before but it's been on my list to investigate. The valuation looks compelling and the starting yield is relatively strong at 2.87% considering the expected double digit growth in earnings over the next 5 years. Ameriprise Financial is a company that I consider to be a further research candidate.

Digital Realty Trust Inc. (NYSE:DLR) - Financials / 11 year dividend growth streak

TTM P/Core FFO Ratio 14.7
2016 Forward P/Core FFO Ratio 13.7
Current Yield 4.49%
Forward Payout Ratio 61.5%

Digital Realty Trust specializes in the ownership and management of technology related real estate, especially data centers. Data centers are vital to the information/data economy that we are constantly consuming. I like what DLR offers as an investment with operations set to continue to expand, strong current yield, relatively low payout ratio and strong dividend growth for a real estate investment trust with a 10 year growth rate solidly over 10%. However, dividend growth has slowed dramatically and DLR is also a bit risky since they rely on the capital markets to fund future growth. DLR looks promising at the current valuation and is a candidate for further research.

Owens & Minor, Inc. (NYSE:OMI) - Health Care / 18 year dividend growth streak

TTM P/E Ratio 24.5
2016 Forward P/E Ratio 16.3
Current Yield 3.03%
Forward Payout Ratio 49.3%
5 Year EPS Growth Estimate 7.1%
Forward Chowder Rule 10.1%

In December shares of Owens & Minor seemed either slightly overvalued or on the high end of fair value. However, the share price has since retreated almost 12% which has increased the expected returns given the same business performance. The yield is strong, payout ratio conservative and now the valuation looks appealing. A forward Chowder Rule of 10% plus the likelihood of valuation expansion makes OMI a solid purchase candidate.

Stryker Corporation (NYSE:SYK) - Health Care / 23 year dividend growth streak

TTM P/E Ratio 30.6
2016 Forward P/E Ratio 16.9
Current Yield 1.61%
Forward Payout Ratio 27.2%
5 Year EPS Growth Estimate 9.2%
Forward Chowder Rule 10.8%

Stryker Corporation was an attractive investment candidate to me when I last looked at it during mid-December. Unfortunately the share price has actually increased since then opposite of the market as a whole. Stryker doesn't have a compelling initial yield at just 1.6%, but should continue to deliver 10%+ annual dividend growth with a slight expansion in the payout ratio if the earnings estimates pan out.

Cummins Inc. (NYSE:CMI) - Industrials / 10 year dividend growth streak

TTM P/E Ratio 9.0
2016 Forward P/E Ratio 10.3
Current Yield 4.64%
Forward Payout Ratio 47.7%
5 Year EPS Growth Estimate 5.1%
Forward Chowder Rule 9.7%

Cummins is currently facing lots of headwinds with declining engine sales. Declining earnings aren't something I usually want to buy into; however, Cummins looks solid here with a 4.5% dividend yield, low payout ratio even after accounting for the declining earnings, and a supressed valuation. It might not be a winner over the next year or two but over the next 5+ years I expect shareholders will be happy with the returns. A forward Chowder Rule approaching 10% with a high likelihood of valuation expansion over the next 5 years make CMI attractive at current levels. Due to the variable nature of its business more research is needed.

United Technologies Corporation (NYSE:UTX) - Industrials / 22 year dividend growth streak

TTM P/E Ratio 13.2
2016 Forward P/E Ratio 13.0
Current Yield 3.01%
Forward Payout Ratio 39.3%
5 Years EPS Growth Estimate 10.5%
Forward Chowder Rule 13.5%

United Technologies has seen a large decline in its share price due to concerns of slowing of their operations. However, the dividend yield is solid and the payout ratio is very conservative at just 39%. A forward Chowder Rule at 13.5% is compelling especially when you consider the valuation is low at just 13.2x 2016 EPS estimates which could lead to excess shareholder returns with valuation expansion.

Accenture plc (NYSE:ACN) - Information Technology / 11 year dividend growth streak

TTM P/E Ratio 21.4
2016 Forward P/E Ratio 19.5
Current Yield 2.16%
Forward Payout Ratio 42.2%
5 Year EPS Growth Estimate 9.9%
Forward Chowder Rule 12.0%

Accenture provides a variety of services for its business customers and is a company I've been meaning to investigate further as a potential investment. The yield is a bit lower than I like considering earnings growth is only expected to come to 9.9% per year over the next five years. That puts the forward Chowder Rule at 12.0%. Currently it looks like shares are on the high end of fair value but Accenture is definitely a company for further research.

Microsoft Corporation (NASDAQ:MSFT) - Information Technology / 14 year dividend growth streak

TTM P/E Ratio 34.8
2016 Forward P/E Ratio 18.8
Current Yield 2.78%
Forward Payout Ratio 52.2%
5 Year EPS Growth Estimate 9.1%
Forward Chowder Rule 11.9%

Microsoft Corporation's rise came with the proliferation of personal computers into every household. They were late to the move towards mobile and tablets, but are making progress on that front and are continuing to expand other offerings such as cloud services, Xbox and Skype. Even more exciting is that they have over $60 B in cash, after subtracting debt, which amounts to over $7.50 per share. There's a lot of bullets left in their chamber.

Ecolab Inc. (NYSE:ECL) - Materials / 24 year dividend growth streak

TTM P/E Ratio 27.7
2016 Forward P/E Ratio 21.7
Current Yield 1.36%
Forward Payout Ratio 29.5%
5 Year EPS Growth Estimate 12.1%
Forward Chowder Rule 13.4%

Ecolab is a company that I've been meaning to look into for a while now. They provide a variety of cleaning products and services for consumers as well as other industries such as manufacturing, food and beverage, mining, oil and gas, commercial laundry and many more. What's encouraging about Ecolab as a dividend growth investment is that their dividend growth rate has been increasing with the 1 year growth rate > 3 year growth rate > 5 year growth rate > 10 year growth rate. Given their low forward payout ratio that could continue to be the trend. Ecolab is a candidate for further research.

Verizon Communications Inc. (NYSE:VZ) - Telecommunications / 11 year dividend growth streak

TTM P/E Ratio 10.8
2016 Forward P/E Ratio 11.8
Current Yield 4.80%
Forward Payout Ratio 56.6%
5 Year EPS Growth Estimate 5.6%
Forward Chowder Rule 10.4%

The constant need for connectivity is no doubt a great potential driver of growth for Verizon and the wireless telecommunications industry. Many people have multiple electronics they use on a daily basis that require connectivity and data, whether it's a smart phone, computer or tablet everyone wants fast and reliable service. Verizon has a dominant market position and should do well for the more stable/conservative portion of a portfolio.

WEC Energy Group, Inc. (NYSE:WEC) - Utilities / 13 year dividend growth streak

TTM P/E Ratio 22.9
2016 Forward P/E Ratio 18.2
Current Yield 3.72%
Forward Payout Ratio 67.6%
5 Year EPS Growth Estimate 6.3%
Forward Chowder Rule 10.0%

I've heard good things about WEC Energy Group, formerly known as Wisconsin Energy, but have never investigated the company as a potential investment. WEC provides electricity to customers in Wisconsin and Michigan which is a vital resource for modern living. They generate electricity from a wide variety of sources including coal, natural gas, oil, hydroelectric, wind and biomass which I like because they aren't a pure play on one specific energy source that could potentially be regulated into high operation costs and costly retrofits, a la coal.

In Part 3 of this series I'll examine the Champions to see how the sector allocation changes as the dividend growth streaks reach 25+ years.

A full list of my holdings can be found here.

Disclosure: I am/we are long VZ, MSFT, UTX, CMI, GIS, WBA, ROST.

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: Investing involves risks. References to any company or sector are not recommendations to purchase shares of said companies. I am not a financial professional. Perform your own due diligence and consult a financial professional prior to investing. We may initiate a position in companies that are mentioned within this article in the next 72 hours that we do not currently own.