The Dividend Aristocrat That Presents The Best Value
Summary
- I examine the holdings of the S&P 500 Dividend Aristocrats.
- I use a multi-step process to find the best value within the group.
- Based on my findings, Target currently presents the best value out of the S&P 500 dividend aristocrats.
In this article, I will be searching through the holdings of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) for the dividend aristocrat that currently presents the best value. Dividend aristocrats are classified as companies that have increased their dividend for 25 consecutive years, which is difficult to do through different market cycles, business environments, etc.
My Process
I used a multi-step process to search for companies that meet the following criteria. Once I went through each of these steps, I was left with 3 companies out of the original 51 holdings of NOBL, and for each of those I conducted a dividend projection as well as a stressed dividend projection in the event cash flows were to decline by 20% over a five year period, to ensure the stability and ability to continue increasing each of their dividends.
Trading at a discount to their corresponding sector SPDR PE
Have a dividend yield that is higher than their corresponding sector SPDR
Trading at a discount to their historical 5 year PE
Have increasing cash flows year/year
Test #1: Discount to sector and higher dividend than sector
For this test I combined the first two bullet points since the source of the data for both was the corresponding sector SPDR page. After compiling all the data for all 51 companies held by NOBL, I found that 14 of those companies have a current PE that is below their corresponding sector PE and have a higher dividend than their corresponding sector dividend yield.
Sector | PE | Sector SPDR PE | Dividend Yield | Index Dividend Yield | ||
ABBVIE INC | (ABBV) | Health Care | 18.5 | 23.21 | 3.56% | 1.68% |
AFLAC INC | (AFL) | Financials | 12.62 | 15.93 | 2.22% | 1.68% |
AIR PRODUCTS AND CHEMICALS INC | (APD) | Materials | 23.82 | 24 | 2.66% | 1.98% |
FRANKLIN RESOURCES INC | (BEN) | Financials | 14.62 | 15.93 | 1.76% | 1.68% |
CARDINAL HEALTH INC | (CAH) | Health Care | 18.3 | 23.21 | 2.41% | 1.68% |
GENUINE PARTS CO | (GPC) | Consumer Discretionary | 18.25 | 22.45 | 3.20% | 1.48% |
JOHNSON & JOHNSON | (JNJ) | Health Care | 22.06 | 23.21 | 2.56% | 1.68% |
LEGGETT & PLATT INC | (LEG) | Consumer Discretionary | 20.14 | 22.45 | 2.74% | 1.48% |
NUCOR CORP | (NUE) | Materials | 17.68 | 24 | 2.58% | 1.98% |
AT&T INC | (T) | Technology | 17.9 | 22.02 | 5.36% | 1.72% |
TARGET CORP | (NYSE:TGT) | Consumer Discretionary | 10.51 | 22.45 | 4.92% | 1.48% |
T. ROWE PRICE GROUP INC | (TROW) | Financials | 14.67 | 15.93 | 3.03% | 1.68% |
VF CORP | (VFC) | Consumer Discretionary | 20.63 | 22.45 | 3.02% | 1.48% |
EXXON MOBIL CORP | (XOM) | Energy | 33.68 | 34.5 | 3.82% | 2.95% |
Test #2: 5 year historical PE
For my second test I looked at historical valuation data from Morningstar for each of the above 14 companies and found that 9 of them were currently trading at a discount to their 5 year historical PE.
Current PE | 5 Yr Historical | ||
ABBVIE INC | ABBV | 18.5 | 24.72 |
CARDINAL HEALTH INC | CAH | 18.3 | 27.82 |
GENUINE PARTS CO | GPC | 18.25 | 19.4 |
LEGGETT & PLATT INC | LEG | 20.14 | 23.42 |
NUCOR CORP | NUE | 17.68 | 29.36 |
AT&T INC | T | 17.9 | 23.83 |
TARGET CORP | TGT | 10.51 | 17.29 |
T. ROWE PRICE GROUP INC | TROW | 14.67 | 18.17 |
VF CORP | VFC | 20.63 | 22.28 |
Test #3: Cash flow growth
For each of the 9 companies, I looked to see if cash flows from operations were growing year/year. I found that only three companies have grown cash flows over the last year and those three companies are listed in the table below and are my finalists.
AT&T INC | T |
TARGET CORP | TGT |
T. ROWE PRICE GROUP INC | TROW |
Dividend Tests
For each of my final three companies, I conducted a dividend projection as well as a stressed dividend projection in the event cash flows were to decline by 20% over a five year period, to ensure the stability of each of their dividends. Based on these tests, Target is the clear winner as dividends make up the lowest percentage of CFFO under my dividend projection as well as my stressed dividend projection.
AT&T Dividend Projection
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 1.96 | 6186 | $12,124.56 | $42,361.67 | 28.62% |
2018 est. | 2.00 | 6186 | $12,380.84 | $44,132.39 | 28.05% |
2019 est. | 2.04 | 6186 | $12,642.53 | $45,977.12 | 27.50% |
2020 est. | 2.08 | 6186 | $12,847.89 | $47,898.97 | 26.82% |
2021 est. | 2.12 | 6186 | $13,119.46 | $49,901.14 | 26.29% |
AT&T Stressed Dividend
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 1.96 | 6186 | $12,124.56 | $38,887.21 | 31.18% |
2018 est. | 2.00 | 6186 | $12,380.84 | $37,189.88 | 33.29% |
2019 est. | 2.04 | 6186 | $12,642.53 | $35,566.63 | 35.55% |
2020 est. | 2.08 | 6186 | $12,847.89 | $34,014.24 | 37.77% |
2021 est. | 2.12 | 6186 | $13,119.46 | $32,529.60 | 40.33% |
Target Dividend Projection
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 2.44 | 555.2 | $1,354.69 | $6,840.62 | 19.80% |
2018 est. | 2.52 | 555.2 | $1,398.36 | $7,207.96 | 19.40% |
2019 est. | 2.60 | 555.2 | $1,445.05 | $7,595.03 | 19.03% |
2020 est. | 2.68 | 555.2 | $1,489.41 | $8,002.88 | 18.61% |
2021 est. | 2.76 | 555.2 | $1,531.29 | $8,432.64 | 18.16% |
Target Stressed Dividend
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 2.44 | 555.2 | $1,354.69 | $6,208.64 | 21.82% |
2018 est. | 2.52 | 555.2 | $1,398.36 | $5,937.65 | 23.55% |
2019 est. | 2.60 | 555.2 | $1,445.05 | $5,678.49 | 25.45% |
2020 est. | 2.68 | 555.2 | $1,489.41 | $5,430.63 | 27.43% |
2021 est. | 2.76 | 555.2 | $1,531.29 | $5,193.60 | 29.48% |
T. Rowe Price Dividend Projection
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 2.28 | 245.5 | $559.74 | $315.67 | 177.32% |
2018 est. | 2.36 | 245.5 | $578.69 | $347.21 | 166.67% |
2019 est. | 2.44 | 245.5 | $598.44 | $381.89 | 156.70% |
2020 est. | 2.52 | 245.5 | $619.04 | $420.04 | 147.37% |
2021 est. | 2.60 | 245.5 | $638.06 | $462.01 | 138.11% |
T. Rowe Price Stressed Dividend
Calendar Year | Est. Div/Share | Shares | Divs $ Paid | Proj. CFFO | Proj. Div as % of CFFO |
2017 est. | 2.28 | 245.5 | $559.74 | $274.47 | 203.93% |
2018 est. | 2.36 | 245.5 | $578.69 | $262.49 | 220.46% |
2019 est. | 2.44 | 245.5 | $598.44 | $251.04 | 238.39% |
2020 est. | 2.52 | 245.5 | $619.04 | $240.08 | 257.85% |
2021 est. | 2.60 | 245.5 | $638.06 | $229.60 | 277.90% |
Why Target?
Value
Target is worthy of further research because the stock is trading at a PE of 10.51 compared to the consumer discretionary sector SPDR at 22.45, which is over a 50% discount. In addition, looking at the 5 year historical PE for Target, shares have traded at a PE of 17.29, therefore, with shares currently trading at a PE of 10.51, this represents a deep discount to Target’s historical valuation.
Dividend Growth
Target has grown its dividend for 46 consecutive years and currently has a yield just slightly under 5%. Even in a world where Amazon (AMZN) is dominating retail, Target should easily be able to continue increasing their dividend given their long history of dividend increases, their easy passing of my dividend stress test, and their large share buybacks, which will significantly lower the share count and allow for continued increases.
Technical Divergence
The long-term technical outlook is appealing because of a divergence that is occurring. As you can see in the following chart, the weekly MACD hit a low a couple months ago that corresponded to the low MACD hit during the great recession. Since that bottom, the MACD has been increasing, yet the share price has continued falling. This divergence has the same setup as what occurred during the great recession, which leads me to believe that a bottom has been made or will be made shortly for shares of Target.
(ThinkorSwim)
Closing Thoughts
In closing, I believe Target currently presents the best value out of the S&P 500 dividend aristocrats because of the deep discount in valuation the company is trading at. In addition, Target has the potential to continue increasing the dividend even under a stressed scenario and in the face of Amazon’s domination of the retail landscape. Finally, Target has a long-term technical divergence that is occurring, with a setup that is nearly identical to the great recession, which I believe shows that shares are at or near a bottom.
This article was written by
Analyst’s 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.
I may purchase Target sometime in the future.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.