Dividend Aristocrats and Dividend Kings seem to get all the love these days from Dividend Growth Investors (DGIs). Shareholders love these companies because there is no substitute for decades of strong performance and business models that are built to last (especially when the time comes to retire and you need the income).
Although consistency and long-term track records carry a lot of weight, it is important to remember that many Dividend Aristocrats and Dividend Kings have already experienced their prime growing years. With this in mind, we should ask ourselves "where do young DGI go to find above-average returns from dividend-paying stocks?"
With each stock that makes my list, I provide my rationale for including these stocks and a brief justification for current and future prices. These estimates are calculated from analyst ratings and historical pricing.
Why Young DGIs Need These Stocks
For most young DGIs, it can be difficult to find companies that strike a balance between growth and dividend payments. Here are some examples of what I'm talking about:
- Companies like Amazon (AMZN), Netflix (NFLX), and Google (GOOG) are growing rapidly but will likely take a decade (or more) before they begin paying out a dividend.
- At the other end of the spectrum, there tend to be high-yielding Real-Estate Investment Trusts (REITs), Business Development Companies (BDCS), and Master Limited Partnerships (oil-related/infrastructure) that can achieve dividend yields of 10% or more.
I find these two extremes to be pretty ironic given the fact that as a society we have a tendency to choose one extreme or the other. Striking a balance by adopting the "middle ground" is usually the best solution. Unfortunately, the reality is that retirees with inadequate capital will almost always reach for a stock with an unsustainable yield in order to compensate for their lack-of-savings.
When it comes to investing, the "middle ground" is one of the best places for an investor to focus on. Companies that fall in this range tend to produce consistently strong results and do a great job of growing the business and generating value for shareholders. One reason why these companies tend to be ignored is that their business models are rather boring along with a dividend yield that many investors would consider trivial at best. The benefit of investing in these companies is hidden over the long-term as each one has the potential to be the next Johnson & Johnson (JNJ) or 3M (MMM) decades down the road.
The primary driver for creating this series is that young investors will have a difficult time making it by only investing in companies that have already experienced significant growth. In other words, it is great to have a core holding of companies like JNJ or MMM in your current portfolio but achieving long-term wealth requires identifying companies that have the same value proposition decades down the road.
Any stocks included in this article are not intended as a recommendation; however, I do believe that all of them have a reason to exist and therefore would make sense as long-term holdings to the DGI's portfolio. Although this series is focused on dividend stocks with a short track record there are a few exceptions where I believe Dividend Champions and Dividend Aristocrats are worthy of consideration.
Intuit, Inc. (INTU)
Intuit, Inc. engages in the provision of business and financial management solutions. The company operates through the following segments: Small Business, Consumer Tax, and ProConnect. The Small Business segment targets small businesses and the accounting professionals. The company is best known for its development of QuickBooks which offers small business management services such as payroll and payment processing solutions. On the consumer side, it offers tax filing services through its TurboTax product line. The company was founded in 1983 and is headquartered in Mountain View, CA.
Here are some important operating metrics for INTU:
Current Ratio: .72
Quick Ratio: .72
Payout Ratio: 36.77%
Dividend Yield: 1.07%
3-Year Dividend Growth Rate: 21.3%
5-Year Dividend Growth Rate: 24.0%
On August 22, 2017, INTU announced that it was increasing its dividend from $.34/share per quarter to $.39/share per quarter. The new dividend of $.39/share represents an increase of 14.7% over the $.34/share per quarter. The ex-dividend date was on October 6th and is payable on October 18th.
Why INTU Makes My List
INTU recently reaffirmed it's fiscal Q1-2018 and FY 2018 numbers and the growth in revenue, operating income, EPS, and subscriber growth look strong all around. Reaffirmed numbers include both GAAP and Non-GAAP measurements.
- FY Revenue of 5.640 billion to 5.740 billion (growth of 9% to 11%).
- GAAP Operating Income of $1.485 billion to $1.535 billion (6% to 10% growth).
- Non-GAAP Operating Income $1.885 billion to $1.935 billion (9% to 12% growth).
- GAAP EPS of $4.00 to $4.10 ( 8% to 10% growth).
- Non-GAAP EPS of $4.90 to $5.00 (11% to 13% growth).
- Total QuickBooks subscribers of 3.275 million to 3.375 million.
I want to point out that the total number of QuickBooks paying customers has seen tremendous growth from 2.276 million in FY 2015 to an estimated 3.362 million in FY 2017.
QuickBooks has made one of their primary initiatives to help serve the new on-demand economy that has arisen from employment through companies like Uber and Lyft. The rise of these jobs has made QuickBooks Online customers the fastest-growing category of subscribers with nearly 2.4 million total (58% YoY). Growth outside the US for this product has increased tremendously and now includes over 500,000 subscribers which translates into a 75% YoY increase (up from 45% YoY increase in 2016).
Based on the estimate of $4.00 to $4.10/share in 2018 the forward PE sits close to 36. Using the current PE of 39 suggests a share price between $156/share and $160/share. This upside seems reasonable as long as the subscriber base continues to increase at the pace estimated.
Yum China Holdings, Inc. (YUMC)
Yum China Holdings, Inc. is a leading catering company in China that manages more than 7,700 restaurants in more than 1,100 towns in mainland China. YUMC was spun off from its parent company Yum! Brands (YUM) on November 1st, 2016. YUMC owns the rights to Taco Bell, Pizza Hut, Kentucky Fried Chicken, Little Sheep brand franchises in China.
Here are some important operating metrics for YUMC:
Current Ratio: 1.69
Quick Ratio: 1.49
Payout Ratio: 31.25%
Dividend Yield: .93%
Stock Buyback: Increased share repurchase authorization to $550 million total from the current authorization of $300 million. Currently, there are approximately 384.3 million shares outstanding and use of all $550 million would reduce the number of shares outstanding by approximately 12.89 million (approximately 3.35% of the total outstanding shares).
On October 5th, 2017 the company announced it would begin paying a quarterly dividend of $.10/share per quarter. The ex-dividend date is on November 29th and is payable on December 21st.
Why YUMC Makes My List
This brand-new dividend payer was listed on November 1st, 2016 and one year later it has announced it's first dividend payment of $.10/share per quarter and an annual yield of $.40/share. Analyst estimates suggest EPS should rise approximately 14% from 2017 to 2018 ($1.41/share versus $1.62/share respectively) as the fast food industry experiences significant growth in China. YUMC is positioned to benefit greatly as Nomura notes that the organization is the largest fast food organization in China and analyst Scott Hong believes that the number of stores will more than double over the next decade.
Although little information is available because of YUMC's short time being independently listed (formerly a part of YUM! (YUM)). Scott Hong suggests a price closer to $51.60 and given a current PE of approximately 1.51, this would suggest YUMC should be priced closer to a PE of 34. In using forward earnings estimates for 2018 of $1.62 a PE of 34 would result in a price of $55/share. This represents a premium to the current share price of 31%.
Synnex Corp. (SNX)
Synnex Corp. is a Fortune 500 corporation and a leading business process services company, providing a comprehensive range of distribution, logistics and integration services for the technology industry and providing outsourced services focused on customer engagement strategy to a broad range of enterprises. The company was founded in 1980 and is headquartered in Fremont, CA.
Here are some important operating metrics for SNX:
Current Ratio: 1.61
Quick Ratio: .80
Payout Ratio: 13.59%
Dividend Yield: .90%
Stock Buyback: Authorized a share repurchase program for $300 million over the next three years. Currently, there are approximately 39.96 million shares outstanding and use of all $300 million would reduce the number of shares outstanding by approximately 2.27 million shares (approximately 5.67% of the total outstanding shares).
On September 25th, 2017, SNX announced that it was increasing its dividend from $.25/share per quarter to $.30/share per quarter. The new dividend of $.30/share represents an increase of 20% over the $.25/share per quarter. The ex-dividend date was on October 12th and is payable on October 27th.
Why SNX Makes My List
While researching SNX I stumbled across a Seeking Alpha Pro article entitled Found SYNNEX While Searching For Boring, Forgotten But Steady Tech Names by Darspal S Mann. His title couldn't be more accurate for this Fortune 500 company that has grown from #360 in 2007 to its current ranking of #198 in 2017.
SNX has hit its stride by continuing to increase revenues and adjusted operating margins. In fact, since 2013 revenues have grown by approximately 44% and operating margins have increased by just over 50%. This is produced a five-year CAGR of 8.7% (GAAP) and 16.1% (Non-GAAP).
SNX is split into two separate operating divisions with the primary revenue driver coming from their Technology Solutions segment but their increased margin driver coming from their Concentrix Division.
As you can see from the charts above, Concentrix offers the greatest potential for growth in both revenue and margins. SNX outlines in its investor report that it believes it can obtain adjusted double-digit operating margins for the Concentrix brand in FY 2018.
The current PE of 18 is a poor indicator of the value SNX brings to the table and with analyst estimates for 2018 at $9.65 EPS suggests that the forward PE is closer to 13.5. Using the 2018 EPS average of $9.65/share and the current PE of 18 suggests a share price closer to $170/share. This represents an upside of approximately 31% over the current share price.
The Goodyear Tire & Rubber Company (GT)
The Goodyear Tire & Rubber Company is involved in the development, manufacturing, distribution, and sale of tires and related products across three segments including The Americas (North, Central, and South), EMEA (Europe, Middle East, and Africa), and The Asia Pacific. GT owns the rights to Goodyear, Dunlop, Debica, Sava and Fulda Brands. The company was founded in 1898 and is headquartered in Akron, OH.
Here are some important operating metrics for GT:
Current Ratio: 1.31
Quick Ratio: .68
Payout Ratio: 7.89%
Dividend Yield: 1.69%
3-Year Dividend Growth Rate: 83.7%
On October 11th, 2017, GT announced that it was increasing its dividend from $.10/share per quarter to $.14/share per quarter. The new dividend of $.14/share represents an increase of 40% over the previous dividend of $.10/share per quarter. The ex-dividend date is on October 31st and is payable on December 1st.
Why GT Makes My List
GT outlines their strategy with the statement that they are looking for profitable growth and that they aren't chasing volume for volume's sake; but trying to find the right tires at the right mix. This is contributed to their ability to more than double operating income since 2010 while generating operating EPS that is nearly 8 times greater than its EPS in 2010.
GT has established itself as the #1 OE brand share in the US and Canada and as the #1 OE brand for consumer replacement options. GT has figured out that 17-inch to 22-inch rim sizes offer the highest retail price and therefore come with a higher margin. I like that GT acknowledges this because is becoming increasingly difficult to profitably compete for market share in smaller rim sizes.
Major growth projects include expansion in facilities across a number of continents with the primary focus being on increasing capacity of 17-inch rim tires. Although sales may be shrinking, it is important to remember that the focus for GT is to maximize margin while building the best tire possible.
With the last three years of major dividend increases under its belt, I believe that GT's share price is currently in a lull due to falling sales. Outlook for the remainder of 2017 and 2018 appears to be more optimistic.
- Nine analysts current average revenue for 2017 is predicted to be $15.3 billion while their 2018 estimate is predicted to be closer to $15.7 billion.
- Ten analysts predict EPS for 2017 of approximately $3.05/share while 2018 estimates are closer to a whopping $4.24/share.
Even if we use the current forward PE based on 2018 EPS we arrive at a potential value of approximately $46.64/share. This represents an upside of nearly 28% over current share price.
Penske Automotive Group, Inc. (PAG)
Penske Automotive Group, Inc. is an international transportation services company, which engages in the distribution of commercial vehicles, diesel engines, gas engines, power systems, and related parts and services. The company operates through the following segments: Retail Automotive, Retail Commercial Truck, Other, and Non-Automotive Investments. The company was founded in October 1992 and is headquartered in Bloomfield Hills, MI.
Here are some important operating metrics for PAG:
Current Ratio: 1.02
Quick Ratio: .21
Payout Ratio: 28.15%
Dividend Yield: 2.91%
3-Year Dividend Growth Rate: 21.1%
5-Year Dividend Growth Rate: 35.6%
On September 7th, 2017 PAG announced that it would be increasing its ownership of Penske Truck Leasing to 35% by acquiring an additional 5.5% from General Electric (GE) and the remaining 65% was purchased by a US subsidiary of Mitsui (OTCPK:OTCPK:MITSY). PAG expects $.10/share accretive earnings on an annualized basis from the deal.
On October 11th, 2017, GT announced that it was increasing its dividend from $.32/share per quarter to $.33/share per quarter. The new dividend of $.33/share represents an increase of 3.1% over the previous dividend of $.32/share per quarter. The ex-dividend date is on November 9th and is payable on December 1st.
Why PAG Makes My List
When I think of PAG, I typically only think of their commercial vehicles but in reality, they have positioned themselves to benefit from the new and used retail car market with a heavy emphasis in North America and the UK. In fact, 94% of worldwide revenue comes from the retail automotive segment and only 4% of revenue comes from the retail commercial trucking segment.
With car sales beginning to lag (although I do acknowledge the increased sales in the aftermath of hurricane damage) PAG has done an excellent job of diversifying its brand offerings.
The only reason why PAG made my list is that the dealerships gross profit contribution more dependent on service and parts more than it is on the profits from new or used car sales.
- Service and parts make up only 10% of revenues but over 41% of gross profit contribution.
- New and used cars, on the other hand, provide 81% of total revenues while accounting for only 38% of the gross profit margin.
- Finance and insurance segment is also critical because it provides 3% of revenues but 20% of gross profit margins.
PAG has also begun to compete with companies like Carmax (KMX) in the used vehicle segment. CarShop and CarSense are intended to offer vehicles with low miles between 2 to 6 years old and with a "no haggle experience" that differentiates it from traditional dealerships.
The safety mechanism for PAG's revenues and gross profit is that even as new and used car profit margins drop the increased sales volume generates additional finance and insurance opportunities that come with high-profit margins. EPS for the last four quarters is $4.14/share which gives us a current PE of just under 11. Considering PAG's increased share of Penske Truck Leasing I believe that the company is fairly valued with a PE closer to 13 or 14 which would result in a share price of approximately $54-$58/share.
Brown & Brown Insurance, Inc. (BRO)
Brown & Brown, Inc. is the United States sixth largest independent insurance intermediary and engages in the provision of insurance brokerage services and casualty insurance underwriting services. It operates through the following segments: Retail, National Programs, Wholesale Brokerage, and Services. The company offers insurance products and services to commercial, public entity, professional and individual customers. BRO was founded in 1939 and is headquartered in Daytona Beach, FL.
Here are some important operating metrics for BRO:
Current Ratio: 1.25
Payout Ratio: 28.60%
Dividend Yield: 1.23%
3-Year Dividend Growth Rate: 10.7%
5-Year Dividend Growth Rate: 9.1%
10-Year Dividend Growth Rate: 9.1%
Stock Buyback: Authorized a share repurchase program for $400 million over on July 20th, 2015. Currently, there are approximately 140.9 million shares outstanding and use of all $400 million would reduce the number of shares outstanding by approximately 8.17 million shares (or approximately 5.8% of the total outstanding shares).
On October 12th, 2017, BRO announced that it was increasing its dividend from $.135/share per quarter to $.15/share per quarter. The new dividend of $.15/share represents an increase of 11.1% over the previous dividend of $.135/share per quarter. The ex-dividend date is on October 26th and is payable on November 8th.
Why BRO Makes My List
BRO may be one of the older companies on my list but the pace of its acquisitions and growth has not slowed down as it grows existing proficiencies and acquires businesses with the goal of diversifying advisory services. Here are some of the more recent acquisitions for 2017:
- August 21, 2017 - Acquired Herronpalmer, LLC - Revenues of $3.5 million.
- August 14, 2017 - Acquired Shenkel Insurance Agency, Inc - Revenues of $1 million.
- June 20, 2017 - Acquired Spann Insurance, Inc - Revenues of $3 million.
- June 20, 2017 - Acquired TriCoast Insurance Services, LLC - Revenues of $2.4 million.
In fact, over the last 15 years, BRO has acquired over 460 insurance companies of $1 million or more in annual revenues. These acquisitions often work as bolt-on's that enhance and grow the company's portfolio of insurance offerings.
For a more in-depth view of BRO's operations and growth prospects, I highly suggest reading the recent article by Pinxter Analytics entitled Brown & Brown: Acquisition Fueled Growth At A Discount. My fair value for the company is slightly lower than the author's estimate with mine sitting between $53 and $60 per share based on the last four quarters of EPS at $1.87/share. This represents a PE ratio between 28 and 32.
PolyOne Corp. (POL)
PolyOne Corp. engages in the business of thermoplastic compounds. It specializes in polymer materials, services and solutions with operations in specialty polymer formulations, color and additive systems, plastic sheet and packaging solutions and polymer distribution. The company also involved in development and manufacture of performance-enhancing additives, liquid colorants, fluoropolymers and silicone colorants. The company was founded on August 31st, 2000 and is headquartered in Avon Lake, OH.
Here are some important operating metrics for POL:
Current Ratio: 2.08
Quick Ratio: 1.54
Payout Ratio: 12.30%
Dividend Yield: 1.68%
3-Year Dividend Growth Rate: 27.8%
5-Year Dividend Growth Rate: 24.6%
On October 12th, 2017, POL announced that it was increasing its dividend from $.135/share per quarter to $.175/share per quarter. The new dividend of $.175/share represents an increase of 30% over the previous dividend of $.135/share per quarter. The ex-dividend date is on December 14th and is payable on January 10th.
Why POL Makes My List
POL is an extremely innovative company that is positioned to grow in the following five areas:
- Color, additives, and inks
- Specialty engineered materials
- Designed structures and solutions
- Performance product and solutions
- PolyOne distribution
PolyOne has the rights to more than 35,000 polymer solutions and 60 manufacturing and distribution facilities located on every major continent in the world. POL's solutions are critical to almost every industry and every country on the planet.
Over the last three years, POL has improved cash-flow tremendously even as its sales revenue decreased over the same time period. The following charts from Charles Schwab (CS) demonstrate the improvements to cash flow and EPS in the face of lower sales revenues.
Source: Charles Schwab - Earnings
The improvements made to cash flow and EPS demonstrate that POL is focused on divesting low margin products in its portfolio and reinvesting those funds to acquire companies like Rutland and Mesa which serve to increase POL's presence in the color and additive fields. With the divestiture POL's Designer Structures & Solutions unit behind it (acquired in 2012 for nearly $400 million and was sold for hundred and $15 million on June 30th, 2017) the company can continue to focus on high margin products. For full-year 2016, the Designer Structures & Solutions unit posted an operating loss of approximately $4 million.
The final reason POL makes my list is due to management's recent announcement that the company will be increasing the dividend by at least 60% or more cumulatively over the next three years. With the most recent increase of 30%, we can expect another increase in 2018. My low-end estimate for a 2019 dividend is approximately $.864/share annually with a high-end of $.91/share annually.
Eaton Vance (EV)
Eaton Vance Corp. engages in the management of investment funds and provides counseling services. It offers a range of engineered portfolio implementation services, including tax-managed core and specialty index strategies, futures- and options-based portfolio overlays and centralized portfolio management of multi-manager portfolios. The company was founded on April 30, 1979, and is headquartered in Boston, MA.
Here are some important operating metrics for EV:
Current Ratio: 3.79
Quick Ratio: 3.79
Payout Ratio: 48.61%
Dividend Yield: 2.43%
3-Year Dividend Growth Rate: 8.9%
5-Year Dividend Growth Rate: 7.7%
10-Year Dividend Growth Rate: 9.7%
Stock Buyback: Increased its share repurchase program from 6 million shares to 8 million shares on January 11th, 2017. Currently, there are approximately 116.6 million shares outstanding and the repurchase of 8 million shares would be would reduce the number of outstanding shares by approximately 6.86%.
On October 12th, 2017, EV announced that it was increasing its dividend from $.28/share per quarter to $.31/share per quarter. The new dividend of $.31/share represents an increase of 10.7% over the previous dividend of $.28/share per quarter. The ex-dividend date is on October 30th and is payable on November 15th.
Why EV Makes My List
EV is one of five mid-cap asset managers that started to receive coverage from Deutsche Bank and is one of three with a buy rating. Although there has been concern about assets under management (AUM) outflows, EV has increased its assets under management from $334.4 billion on July 31, 2016, to $405.6 billion as of July 31, 2017. The $71.2 billion increase is broken down into the following:
- $34.7 billion of net inflow.
- $26.5 billion of market appreciation.
- $9.9 billion of new managed assets from their acquisition of Calvert.
These increases aren't just year-over-year (YoY), but also quarter over quarter:
- Q3-2017 Net Inflows - $9.1 billion
- Q3-2016 Net Inflows - $7.1 billion
AUM and the fees associated with these is ultimately what drives EPS growth as evidenced by the strong bottom line YoY growth.
Source: Eaton Vance - Q3-2017 10-Q
I maintain my current BUY rating on EV and share prices have increased from my first article on January 10th with a closing price of $43.21 to a current value of $51.52. Excluding dividends, this represents an increase of approximately 16.1% over a ten-month timeframe.
All four of these companies have a reason to exist and with reasonable payout ratios and a history of large dividend increases, I see a very bright future for each company on this list. All companies that make this list are considered to be great long-term holds with the potential for capital appreciation and most importantly, the ability to continuously support annual dividend increases.
To hit this point home, I want to present you with a chart that demonstrates how powerful dividend increases over time can be on the effective yield. All figures are in USD.
This chart is not intended to make us regret having not taken action but rather to support the idea that a low-yielding stocks have the potential to rapidly appreciate in value while building the foundation of a strong dividend with a high yield on cost. For young investors, this is literally the opportunity of a lifetime.
If the same strategy is implemented over the next 10, 20, or 30 years the results are phenomenal.
What do you think about the stocks on this list? I would love to hear from readers about any potential stocks they believe are worthy of consideration. My goal is to spend the next year building this list so that I can accurately track as many of these lesser known companies as possible.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in POL over 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: This article reflects my own personal views and is not meant to be taken as investment advice. It is recommended that you do your own research. This article was written on my own and does not reflect the views or opinions of my employer.