'Safe' Champion Dogs Equal Dow Dogs' Dividend Price And Overbought Bloat

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Includes: ABM, APD, BDX, BEN, BMS, BRC, CINF, CTBI, DCI, DOV, EFSI, EMR, EV, GD, GPC, HRL, KMB, KO, T, THFF
by: Fredrik Arnold

Summary

38 of 54 Dividend Champion (25+ annual dividend hikes) stocks showed free cash flow yields greater than dividend yields 2/27/17. Those 38 were tagged "safe" with current cash to cover dividends.

The top 10 "safe" February Champion annual yields ranged from 2.73% to 4.69% from APD, GPC, and T. Their cash flow yields ranged from 3.59% to 8.15%.

Besides safety margin, "safe" Champion stocks also reported payout ratios (lower is better), total annual returns, and dividend growth as of 2/27/17 to further reinforce their financial soundness.

Matched against the top ten Dow Dogs, the "safe" Champions ten produced 10% less dividend returns (from $1k invested in each) at 84% of the top ten Dow Dog aggregate single share price.

Analyst one-year targets revealed ten top "safe" Champion stocks projecting 85.79% less gain from $5k invested in the lowest-priced five than from $5K invested in all ten.

The Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest-yielding stocks in any collection became known as "dogs." More specifically, these are, in fact, best called, "underdogs."

February Champion Dogs

David Fish's Dividend Champions Index members listed as of 1/31/17 were paired with annual dividends and prices posted as of February 27, 2017, on YCharts. Results from that data charted below and screened for "safe" supporting cash flow yields showed the top ten represented by six of eleven business sectors in the Morningstar scheme.

Which Sectors Are "Safe" In The Champion List?

Eight Morningstar sectors were represented by the full set of 38 firms whose dividends were bolstered by adequate cash as of February 27. The sector representation broke out thus: Communication Services (1); Financial Services (9); Consumer Defensive (6); Industrials (11); Consumer Cyclical (3); Basic Materials (3); Healthcare (3); Technology (1); Real Estate (0); Utilities (0); Energy (0).

The top ten Champion "safe" dogs showing the widest safety margin of cash to cover dividends by this screen as of February 27 represented the first six sectors on the list above.

Champion Firms With "Safe" Dividends

Periodic Safety Inspection

You see grouped below the list of 38 that passed the "safety" check with sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the boldfaced "Safety Margin" column.

Corporate financial solvency, however, is easily adjusted by a malevolent, spendthrift, or tightwad board of directors promoting company policies cancelling or varying the payout of dividends to shareholders. This article contends that wherewithal (in the form of cash) is a strong motivation to sustain a track record of annual dividend hikes.

Three additional columns of financial data, listed after the Safety Margin figures above, reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select reliable payout stocks. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.

Dividend vs. Price Compared to Dow

Ten top "safe" Champion dividend dog stocks by yield as of 2/27/17 were compared to those of the Dow. Annual dividend amounts from $1000 invested in each of the ten highest-yielding stocks and their aggregate single share price created the data points shown in green for price and blue for dividends.

Actionable Conclusions: (1) Top Champions' Dog Price Exceeds Dividend By 69%, While (2) Dow Dogs' Price Exceeds Dividend By 70%

"Safe" Champion dogs' aggregate single share price for top ten by yield was 69% more than the dividend derived from $10k invested as $1k in each of the top ten stocks.

Meanwhile, Dow dogs' aggregate single share price for the top ten yielding dogs was 70% more than the dividend derived from $10k invested as $1k in each of the top ten stocks.

As a result, both the Champions and Dow dogs' overbought conditions (where the aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k in each) show neither is the pack to back for new investors.

The Overbought Dow And Champions

The Dow Dogs and Champions are becoming more overbought and overpriced. Meaning, these are low-risk and low-opportunity dogs. The Dow top ten average price per dollar of annual dividend was $28.39 as on February 27.

Exceeding the Dow, "safe" Champion top ten average price per dollar of annual dividend was $32.49 as of 2/22/17. That's 14.4% more than the price for a dollar of Dow annual dividends. Matched against top ten Dow Dogs, the "safe" Champions ten produced 10% less dividend returns (from $1k invested in each) at 84% of the top ten Dow Dog aggregate single share price.

To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates provided another tool to dig out bargains.

Actionable Conclusion (3): Wall St. Analysts Predicted a 0.53% 1-year Average Upside and 1.67% Net Gain From the Top 30 "Safe" Champion 1000 Index Stocks

Top dogs on the "safe" Champion stock list were graphed above to compare relative strengths by dividend and price as of February 27, 2017 with those projected by analyst mean price target estimates to the same date in 2018.

Historical prices and actual dividends paid from $10,000 invested as $1K in each of the ten highest-yielding stocks and the aggregate single share prices of those ten stocks created the data points applied to 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest-yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2018 data points shown in blue for dividend and green for price. Note: one year target prices from one analyst were usually not applied (n/a).

Analysts projected 0.24% higher dividend from $10K invested as $1k in the top ten February Champion "safe" dogs, while aggregate single share price was projected to increase by 0.26% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the next-to-the-last column on the above chart. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were usually not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower-than-market movement. Higher than 1 showed greater-than-market movement. A negative beta number indicated the degree of a stock's price movement opposed to market direction.

Actionable Conclusion (4): Analysts Forecast Top Ten Champion "Safe" Dog Stocks to Net 2.4% to 13.3% Gains By February 2018

Three of the ten top "safe" dividend Champion dogs (tinted gray in the chart above) were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. Thus, the dog strategy for this R1K group as graded by analyst estimates for February proved just 30% accurate.

Ten probable profit-generating trades were illustrated by YCharts analytics for 2018.

Hormel Foods (HRL) netted $132.96 per estimates from three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 51% less than the market as a whole.

Air Products & Chemicals (APD) netted $97.09 based on estimates from twenty-three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 26% more than the market as a whole.

Coca-Cola Company (KO) netted $64.71 based on a median target price from twenty-five analysts, combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 31% less than the market as a whole.

ABM Industries (ABM) netted $64.16 based on dividends plus the median of annual price estimates from six analysts less broker fees. The Beta number showed this estimate subject to volatility 18% less than the market as a whole.

General Dynamics (GD) netted $52.69 based on dividends plus median target price estimate from twenty analysts less broker fees. The Beta number showed this estimate subject to volatility 25% less than the market as a whole.

AT&T, Inc. (T) netted $35.95 based on mean target price estimates from twenty-nine analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 61% less than the market as a whole.

Becton, Dickinson and Co. (BDX) netted $30.32 based on target price estimates from eighteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility equal to the market as a whole

Brady Corp. (BRC) netted $25.33 based on dividends plus target price estimates from six analysts plus dividends with broker fees subtracted. The Beta number showed this estimate subject to volatility 12% more than the market as a whole.

Dover Corp. (DOV) netted $24.72 based on dividends plus a median target price estimate from twenty-one analysts less broker fees. The Beta number showed this estimate subject to volatility 19% more than the market as a whole.

Bemis Co. (BMS) netted $24.09 based on median target estimates from fifteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 10% less than the market as a whole.

Average net gain in dividend and price was 5.52% on $1k invested in each of these ten "safe" Champion dogs. This gain estimate was subject to average volatility 14% less than the market as a whole.

Actionable Conclusion (5): (Bear Alert) Analysts Anticipated Five "Safe" Champion 1000 Index Dogs To Lose 4.96% By February 2018

Five probable losing trades revealed by Thomson/First Call in Yahoo Finance for 2018 were:

Kimberly-Clark (KMB) projected a loss of $38.47 based on dividend and a median target price estimate from fifteen analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 35% less than the market as a whole.

Eaton Vance (EV) projected a loss of $54.64 based on dividend and a median target price estimate from nine analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 79% more than the market as a whole.

Donaldson Co. Inc. (DCI) projected a loss of $53.80 based on dividend and a median target price estimate from eleven analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 2% less than the market as a whole.

Community Trust Bancorp (CTBI) projected a loss of $68.76 based on dividend and a median target price estimate from four analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 39% less than the market as a whole.

Franklin Resources (BEN) projected a loss of $101.01 based on dividend and a median target price estimate from thirteen analysts, including $20 of broker fees. The Beta number showed this estimate subject to volatility 78% more than the market as a whole.

The average net loss in dividend and price was 6.5% on $5k invested as $1k in each of these five "safe" dividend Champion dog stocks. This loss estimate was subject to average volatility 16% more than the market as a whole.

Dog Metrics Found Bargains From Lowest-Priced "Safe" Dividend Dividend Champion Stocks

Ten "safe" Champion stocks with the biggest yields as of February 27 per YCharts data ranked themselves by yield as follows:

Actionable Conclusions: (6) Analysts Expected 5 Lowest Priced of Ten "Safe" Dividend High Yield Dividend Champion Dogs to Deliver 1.08% Vs. (7) 1.37% Net Gains from All Ten by February 2018

$5000 invested as $1k in each of the five lowest-priced stocks in the "safe" ten Champion pack by yield were determined by analyst 1-year targets to deliver 21.09% less net gain than $5,000 invested as $.5k in all ten. The highest-priced safe dividend Champion dog, APD, showed the best net gain of 9.7% per analyst targets.

The five lowest-priced "safe" dividend Champion dogs as of February 27 were: Eagle Financial Services (OTCQX:EFSI); Coca-Cola Co.; AT&T Inc.; Community Trust Bancorp; and First Financial (NASDAQ:THFF), with prices ranging from $27.95 to $47.05.

Five higher-priced "safe" Dividend Champion dogs as of February 27 were: Emerson Electric (NYSE:EMR); Cincinnati Financial (NASDAQ:CINF); Genuine Parts (NYSE:GPC); Kimberly-Clark; and Air Products & Chemicals, with prices ranging from $60.43 to $139.39.

This distinction between five low-priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a "here and now" equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

Caution is advised, however, as analysts are historically 20-80% accurate on the direction of change and about 0-20% accurate on the degree of the change.

The net gain estimates mentioned above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article and this instablog to aid your safe investing.

The stocks listed above were suggested only as possible starting points for your safe dividend S&P 500 dog stock research process. These were not recommendations.

Two of these Russell 1000 Index dividend pups qualified as great catches! Find them among the now 52 Dogs of the Week (DOTW) I or among 28 and growing DOTWII found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

Root for the Underdog.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from www.ycharts.com; www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo from: breedyourdog.com.

Disclosure: I am/we are long CSCO, PFE, VZ, T, GE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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