10 Dividend Growth Stocks For February 2017

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Includes: ABBV, ADM, CSCO, CVS, FLO, HRL, IBM, JNJ, LMT, MAIN, MMM, NKE, OHI, TGT, TROW, VIG, VLO, WBA, WMT
by: FerdiS

Summary

I rank a selection of the CCC dividend growth stocks and present the top 10 ranked stocks as candidates for further research.

For February's selection, I start with the top dividend growth stocks held by DGI bloggers and rank those that also appear on the CCC list.

Only one stock earns a 7-star rating this month, while the other nine are all rated 6-stars. I consider stocks rated 5-stars or better worthy of further analysis.

One of the best resources for dividend growth investors is the CCC list, a list of stocks with at least five consecutive years of higher dividend payments.

Maintained by David Fish, the CCC list contains more than 750 dividend growth stocks trading on U.S. exchanges. He updates the list every month and usually writes a Seeking Alpha article announcing the update, such as this one for February.

My monthly 10 Dividend Growth Stocks series identifies 10 CCC stocks worthy of further research. To create the list, I select stocks from the CCC list, rank them, and assign a 7-star rating to each stock. It would be too demanding to rank all the CCC stocks, so I use different screens every month to trim the CCC list to a smaller number of stocks.

Trimming the CCC List

Usually, I apply a series of screens to trim the CCC list. However, this month I decided to rank and rate CCC stocks in the Top Holdings of Dividend Growth Bloggers (the 2017 edition).

Of the 46 top holdings ranked by weight, 36 are on the CCC list. The ten stocks not on the list either have been removed from the CCC list due to frozen or reduced dividend payments or never have qualified for CCC membership.

The Ranking Process

I ranked the 36 stocks using data from the CCC spreadsheet and additional sources like Morningstar, S&P Capital IQ, Finbox.io and F.A.S.T. Graphs. My ranking system favors established dividend paying stocks with strong fundamentals and stocks potentially trading at or below fair value. Dividend safety is another important factor.

Here are the top 10 ranked stocks for February 2017:

Stocks I own in my DivGro portfolio are highlighted.

Six stocks from last month's top 10 appear in this month's top 10. These stocks are identified with a subscript that represents last month's ranking. For example, TGT2 means TGT was ranked second last month.

Ratings and Sectors

The following table presents the top 10 ranked stocks by sector, along with star ratings for each stock. Only one stock earned a 7-star rating, while the others are all rated 6 stars. I consider stocks with 5-star ratings or better worthy of further research:

Rank Company Rating Sector
1 Target Corporation (TGT) ✭✭✭✭✭✭✭ Consumer Discretionary
2 T. Rowe Price Group (TROW) ✭✭✭✭✭✭✩ Financials
3 CVS Health Corp (CVS) ✭✭✭✭✭✭✩ Consumer Staples
4 Johnson & Johnson (JNJ) ✭✭✭✭✭✭✩ Health Care
5 Cisco Systems, Inc. (CSCO) ✭✭✭✭✭✭✩ Information Technology
6 3M Company (MMM) ✭✭✭✭✭✭✩ Industrials
7 Archer Daniels Midland (ADM) ✭✭✭✭✭✭✩ Consumer Staples
8 Wal-Mart Stores, Inc. (WMT) ✭✭✭✭✭✭✩ Consumer Staples
9 International Business Machines (IBM) ✭✭✭✭✭✭✩ Information Technology
10 Lockheed Martin (LMT) ✭✭✭✭✭✭✩ Industrials

The Consumer Staples sector has three stocks in the top ten, while the Information Technology and Industrials sectors have two stocks each.

Key Statistics and Fair Value Estimates

The table below presents some key statistics as well as fair value estimates for the top 10 stocks. Unless otherwise indicated, data are from the CCC spreadsheet.

In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS (earnings per share) payout ratio, and Debt is the debt to equity ratio. The compound dividend growth rate over a 5-year period (5-Yr DGR) is provided, where available. Morningstar's Moat and Standard and Poor's Credit Rating, as well as Value Line's Safety rank and Financial Strength rating, are also provided. Finally, I present my own estimate of Fair Value, along with a calculation of the current discount to fair value (Discount).

To estimate fair value, I use a multi-stage DDM analysis with proprietary adjustments. Generally, I set a required rate of return of 10% and use estimates of the annual EPS growth rate for the next 5 years. Thereafter, I taper the growth rate to a perpetual growth rate of 3% after 10 years. Adjustments to the calculated fair value are based on various factors, including an assessment of dividend safety.

Finbox.io provides a comprehensive set of analysis tools to estimate fair value. Below I include snapshots for the four stocks trading below fair value. Note that Finbox.io includes range visualizers not only for its own estimates but also for Wall Street analysts' targets and the stock's 52-week trading range:




While we're in agreement that these stocks are trading at a discount to fair value, we differ on the discount amount. What I like about Finbox.io's analysis tools is that you can adjust several input parameters based on your own assumptions and see the impact on the fair value estimate.

Bonus List

Only four of the top 10 stocks are trading at discounts to fair value. In ranking and rating the stocks, I estimated fair values for all 36 candidates. The following table presents the 10 stocks that are trading at a discount of at least 5% to my fair value estimates. The table is sorted by Discount.

Rank Company Rating Sector Discount
33 Omega Healthcare (OHI) ✭✭✭✩✩✩✩ REITs 24.2%
23 AbbVie Inc (ABBV) ✭✭✭✭✭✩✩ Health Care 23.4%
3 CVS Health ✭✭✭✭✭✭✩ Consumer Staples 20.8%
1 Target Corporation ✭✭✭✭✭✭✭ Consumer Discr. 17.4%
31 Flowers Foods (FLO) ✭✭✭✭✩✩✩ Consumer Staples 10.8%
36 Main Street (MAIN) ✭✭✩✩✩✩✩ Financials 4.3%
21 Walgreens (WBA) ✭✭✭✭✭✩✩ Consumer Staples 3.1%
8 Wal-Mart ✭✭✭✭✭✭✩ Consumer Staples 3.1%
13 Valero Energy (VLO) ✭✭✭✭✭✩✩ Energy 3.0%
5 Cisco Systems ✭✭✭✭✭✭✩ Information Technology 2.7%

As mentioned above, I consider stocks with 5-star ratings or better worthy of further research.

Looking Back

Having celebrated the first anniversary of my monthly 10 Dividend Growth Stocks series in January, I decided to add this section and review the performance of the top 10 stocks from last year.

Here is a chart showing the price performance (excluding dividends) of my top 10 ranked stocks from February 2016:

Hormel Foods Corporation (HRL) is by far the worst performer, while Nike Inc. (NKE) is the other stock with a negative return. Overall, though, the selection performed quite well. The arithmetic average of these returns is 21.5%. In comparison, the Vanguard Dividend Appreciation ETF (VIG) returned 18.4% over the same period (excluding dividends).

I'm comparing the performance of last year's top 10 ranked stocks to VIG's performance for fun - I'm certainly not implying that a small portfolio of 10 stocks, while carefully selected and ranked, would outperform a well-diversified ETF like VIG.

Concluding Remarks

I explore various ways to identify candidate dividend growth stocks for further analysis and possible investment. With my 10 Dividend Growth Stocks series, I rate and rank different selections of CCC stocks every month to find interesting candidates.

The basis for this month's analysis is a list of stocks I compiled from the top holdings of dividend growth investment bloggers.

Of the top 10 ranked stocks, only CVS and ADM are not in my DivGro portfolio. CVS is trading below my fair value estimate and ADM is trading at about fair value. I'll be looking into these stocks soon to see if it makes sense to add them to my portfolio.

Please note that the top 10 ranked stocks are candidates for further analysis. I'm not recommending any of these stocks.

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Disclosure: I am/we are long TGT, TROW, JNJ, CSCO, MMM, WMT, IBM, LMT, OHI, ABBV, MAIN, WBA, VLO.

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.

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