This series of articles is taking a deeper look at the U.S. Dividend Champions "CCC" List to identify companies that I expect to see accelerating or declining dividend growth in the coming years.
8 Dividend Champions Destined For Declining Dividend Growth highlighted companies that I expect to see declining dividend growth rates. On the flip side, I now present the Champions that I expect accelerating dividend growth from going forward.
Research for this article was more difficult than the first, as it was fairly easy for me to identify companies with declining dividend growth. However, while I had to do more digging for this one, I was still able to find 8 hidden gems that I believe will see increasing dividend growth.
This new list is dominated by gas/electric and water utility companies, as 5 of the 8 are from those sectors, with additional companies coming from the REIT, consumer discretionary, and materials sectors. This differs significantly from the previous list, which was comprised primarily by consumer staple and industrial companies.
Atmos Energy Corp. (NYSE:ATO) is a gas utility that engages in the distribution, transmission, and storage of natural gas in the United States. The company is headquartered in Dallas, Texas, and has produced a 32-year streak of dividend growth.
Here is the recent dividend growth history for the company, as provided by the CCC List.
At just 2.5%, the 10YR dividend growth rate is fairly unimpressive, but the growth rate has steadily been increasing over the decade, culminating with a nice 7.7% boost with the most recent increase.
Looking at the 15YR trend, you can how the initially elevated payout ratio of around 80% was steadily lowered over time until reaching the 50% level in 2015. This correlates with management's guidance for a targeted 50-55% payout ratio, and bodes well for a higher growth rate going forward.
This is also visible when looking at the long term F.A.S.T. Graph of the company, which shows the payout ratio dropping over time.
At just a 2.3% yield, and a PE around 22.7, Atmos appears to be trading well above its normal valuation levels. So while it isn't one that I would recommend at current prices, I do think it is worth keeping an eye on. The payout ratio is at just 51% of expected 2016 earnings, which is on the low end of the 50-55% target.
Meanwhile, analyst expectations and company guidance are both targeting EPS growth in the 6-8% range going forward. As a result, I expect that dividend growth will slightly outpace EPS growth over the next few years.
My expected 5-year dividend growth rate: 7.5%.
Black Hills Corporation (NYSE:BKH) is a diversified energy company located in Rapid City, South Dakota, that serves 1.2 million natural gas and electric utility customers in eight states. The company's non-regulated businesses generate wholesale electricity and produce natural gas, oil, and coal. Black Hills Corp. has a 46-year streak of dividend growth, which is one of the longest in the utility sector.
Similar to Atmos, BKH has a rather pedestrian dividend growth rate of 2.4% over the last 5 and 10 year periods.
BKH hasn't seen the recent rise in increases that Atmos has, but with a payout ratio of just 55% leads me to believe this could soon be changing. Looking at the historical payout shows that it has been dropping from the 80% level in 2010 to the current mid-50% range.
On the earnings side, EPS are expected to increase significantly in 2017 on the back of the SourceGas acquisition integration, and analysts are expecting 5% growth over the long term going forward.
With the payout ratio now at a comfortable level and earnings expected to grow with the expanded natural gas service territory, I believe dividend growth will pick up as well.
My expected 5-year dividend growth rate: 6%.
Connecticut Water Service Inc. (NASDAQ:CTWS), the smallest company of this group, is a regulated water utility located in Clinton, CT that supplies water to 123,000+ customers in Connecticut and Maine.
The company has a 46-year streak of dividend increases, but has traditionally been a slow grower over the years.
CTWS has seen a similar trend to ATO and BKH in that the growth rate has increased in recent years while the payout ratio has dropped to more reasonable levels.
The payout ratio has dropped from the 100%+ level in 2006 to a current level of 51% as earnings have grown at 8.1% annually.
CTWS rewarded shareholders with a 3.9% boost with the most recent increase, which leads me to believe that future raises will now more closely match earnings growth. Analysts are currently expected 5% annual EPS growth going forward, which the dividend should closely follow.
My expected 5-year dividend growth rate: 5.0%.
Consolidated Edison, Inc. (NYSE:ED) is a utility that engages in regulated gas, electric, and steam delivery in the northeastern United States. The company was founded in 1884, and is based in New York, NY.
The company has a 42-year streak of dividend increases, but has a history of slow growth of 1 to 2% per year.
While the growth is still rather slow, it has been on the rise in recent years as the payout ratio is now solidly within the range of company guidance of 60-70% of earnings.
Looking at earnings, they have generally increased at about 3% per year over the last decade, and analysts are expecting similar growth going forward.
ConEd appears to be on expensive side at nearly 19 times earnings, which is well above the normal 15.2 level and results in a dividend yield of just 3.5%. I would be more comfortable starting a position near the $62 level, which is significantly below current levels. Circling back to the dividend, I believe dividend growth can match earnings growth from this point forward.
My expected 5-year dividend growth rate: 3.0%.
LEG has a 44-year streak of dividend growth that has traditionally been in the high-single digits, yet has slowed in recent years coming out of the Great Recession.
This has been the result of an elevated payout ratio due to the significant drop in earnings during the recession, yet you can see this has been normalizing in recent years as earnings have increased and the dividend growth has slowed.
The company's earnings come primarily from home furnishings, making it a bit more susceptible to cyclical earnings than some of the others on the list. However, with the economy back in growth mode, Leggett & Platt has benefited and has seen double-digit EPS growth in recent years.
Management has provided a targeted payout ratio of 50-60% of earnings. With a current $1.28 dividend and $2.43 in expected earnings, the payout ratio of 52.7% now sits on the low end of this range. Analysts are expecting earnings growth of 10-12% over the next 5 years, and I suspect that dividend growth will be able to match it.
My expected 5-year dividend growth rate: 12.0%.
National Retail Properties, Inc. (NYSE:NNN) is a real estate investment trust "REIT" that specializes in high-quality properties subject to long-term net leases. The company was founded in 1984 and is headquartered in Orlando, FL.
National Retail has a 26-year streak of dividend growth, during it has growth the payout at a 2.8% annual rate over the last decade.
Earnings took a hit during the Great Recession, which caused the payout ratio to grow to 115% of FFO. This resulted in several years of 1-2% dividend growth to bring that ratio back into more comfortable levels.
FFO growth has consistently been in the 6-10% range since the recession, yet analysts are a bit pessimistic looking forward, as they expect growth to slow to 4.5% over the next 5 years.
The payout ratio is now at 74% of expected 2016 FFO, which is on the low end of historical levels. Looking to before the recession, this mid-70% levels appears to be the sweet spot for management. As a result, I expect that dividend growth should roughly match FFO growth going forward.
Like Consolidated Edison, the stock is currently trading well above normal valuation levels, so caution should be used when considering a new purchase at this time.
My expected 5-year dividend growth rate: 5.0%.
PPG Industries, Inc. (NYSE:PPG) manufactures and distributes coatings, specialty materials, and glass products in three segments: Performance Coatings, Industrial Coatings, and Glass. The company was founded in 1883 and is based in Pittsburgh, PA.
PPG has a 44-year streak of dividend growth, and has seen its growth rate increase steadily over the last decade.
This is a similar situation to others on the list, as the company's earnings were hit hard during the Great Recession, which led to a few years of elevated payout ratios. The payout ratio got as high as 72% in 2009 before steadily dropping to the current level of 23% of expected 2016 earnings.
Growth has been spectacular recently as EPS has increased at a ~15% annualized rate over the last 5 years. This is expected to slow to 10% going forward, but this is still an attractive rate.
I haven't found any guidance from management regarding a targeted dividend payout ratio, but the current 23% level is the lowest seen in the last 18 years according to FAST Graphs. As a result, I think its reasonable to expect that dividend growth could follow EPS growth going forward.
My expected 5-year dividend growth rate: 10.0%.
Vectren Corporation (NYSE:VVC) is the final company on the list. The company is located in Evansville, Indiana and operates as a diversified gas and electric utility and also provides infrastructure and energy services.
Vectren has a 56-year streak of dividend increases, and like others on the list, is coming out of a period of slower dividend growth.
This lower growth trend appears to be coming to an end though, as the most recent increase was 5.3%, which is more than double the 5YR and 10YR annual growth rates. Additionally, the dividend payout ratio has now fallen to about 63% of expected 2016 earnings, which compares favorably to company guidance of funding 90% of the dividend with a payout ratio of 70% of utility earnings.
Looking at the F.A.S.T. Graph, the company has seen an inflection point in earnings growth coming out of the recession, as growth has picked up from what was generally 0-2% annual growth to a more attractive 5-8%.
Both management and industry analysts are expecting this trend to continue, as they are both projecting EPS growth of 5%+ going forward. With the payout ratio now at comfortable levels, I expect that dividend growth can follow EPS growth over the coming years.
Valuation-wise, the stock is expensive, along with much of the utility sector. At a 3.1% yield, this may not be the best time to open a new position, but Vectren is certainly an attractive one to add to your watch list should there be a pullback. I see the ~$39 level and a 4% yield as a point where I would get interested.
My expected 5-year dividend growth rate: 5.5%.
This list was dominated by utility stocks, many of which are currently trading at rich valuations due to the market's recent flight to safety. While this may not be the opportune time to open new positions in them, I do think they are some interesting names that are worth a close look on a pullback.
In addition to the utility names, companies like Leggett & Platt and PPG Industries are offering the potential opportunity for double-digit growth, which is attractive coming from companies with such a long track record of dividend growth.
Next up will be the Dividend Contenders, which I hope to tackle in the coming weeks.
Disclosure: I/we 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: I am an engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.