10 Dividend Growth Stocks For May 2018

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Includes: CMCSA, CMI, CVS, GD, ITW, LOW, TJX, TROW, TXN, WBA
by: FerdiS

Summary

Every month, I rank a selection of the CCC stocks, an invaluable source for dividend growth investors compiled by David Fish.

To introduce variation, I use different screens to trim the CCC list of more than 800 stocks.

This month, I used a new screener to select candidate stocks from the CCC list.

This article introduces the new screener as well as the top 10 ranked stocks for May.

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 800 dividend growth stocks trading on U.S. exchanges. He updates the list every month and provides an accompanying spreadsheet with lots of useful data.

Every month, I identify 10 CCC stocks worthy of further research by ranking a trimmed list of candidate stocks. I trim the CCC list using various screens, rank the remaining stocks, and assign a 7-star rating to each stock.

This article presents the top 10 ranked stocks for May.

Trimming the CCC List

The latest CCC list (dated 4/30/18) contains 882 stocks.

This month, I prototyped a new CCC screener to simplify the process of trimming the CCC list. The screener allows me to set value ranges for up to twenty different fundamental metrics and to extract matching CCC stocks.

The screener produced a remarkable list of twenty stocks — and a few surprises, too!

First, six of the twenty stocks are stocks I already own in my DivGro portfolio. Of course, this means there are fourteen high-quality stocks that I don't own yet! Perhaps I should look at these stocks to see if adding them to DivGro would make sense.

Second, the list is dominated by two sectors, Consumer Discretionary and Industrials, which account for fourteen of the twenty stocks! And four sectors have no representation in the list (Energy, Real Estate, Telecommunication Services, and Utilities).

Finally, eleven of the twenty stocks are Dividend Challengers. These are stocks with at least five years, but less than ten, consecutive years of higher dividend payments.

Following is my spreadsheet presenting the twenty stocks. It is split into two parts that correspond to the sets of filters above. All data are extracted from the latest CCC list, except I added two columns, Recent Price and Recent Yield, for information.

Cells shaded green contain values equal or above (or, alternatively, below) the median value in each column. For example, the median Div. Yield is 1.85 (not shown), so dividend yields equal to or above 1.85 are shaded green. Similarly, the median EPS% Payout is 31.12 (not shown), so payout ratios equal to or below 31.12 are shaded green.

The green-shaded tickers are those with the most green-shaded cells across all fundamentals metrics. CVS Health (CVS) have the most green-shaded cells (18), followed by Royal Caribbean Cruises (RCL) and Thor Industries(THO) with 14 each.

For this month's top 10 analysis, I decided to add the 20 CCC stocks to the dividend growth stocks in my portfolio. Here is an analysis of the 62 candidates, courtesy of finbox.io:

Collectively, the 62 stocks have a small fair value upside and a respectable one-year return of 13.4%. Furthermore, the stocks have outperformed the S&P 500 by about 93% over the last five years.

The Ranking Process

I ranked the 62 candidates using data available in the CCC spreadsheet and additional sources like Morningstar, F.A.S.T. Graphs, finbox.io, and Simply Safe Dividends.

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.

Below are the top 10 ranked stocks for May 2018. Stocks I own in my portfolio are highlighted:

Top 10 Ranked Stocks for May 2018

Last Month's List: 10 Dividend Growth Stocks For April 2018

Five 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, TJX2 means TJX was ranked second last month.

Ratings and Sectors

Here are the top 10 ranked stocks by sector, along with my star ratings for each stock (out of 7 stars). The top four stocks each earned 7 stars, while the remaining stocks each earned 6-star ratings. I consider stocks with a 5-star rating or better worthy of further analysis:

1 • Lowe's (NYSE:LOW) ✭✭✭✭✭✭✭ Consumer Discretionary

Dividend Champion LOW is a home improvement retailer. The company offers a complete line of products for maintenance, repair, remodeling, and home decorating. It also offers installation services through independent contractors, as well as extended protection plans and repair services. LOW was founded in 1946 and is based in Mooresville, North Carolina.

2 • Illinois Tool Works (NYSE:ITW) ✭✭✭✭✭✭✭ Industrials

Dividend Champion Founded in 1912 and headquartered in Glenview, Illinois, ITW is a diversified, global company that manufactures and sells industrial products and equipment worldwide. ITW operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

3 • Comcast (NASDAQ:CMCSA) ✭✭✭✭✭✭✭ Consumer Discretionary

Founded in 1963 and headquartered in Philadelphia, Pennsylvania, CMCSA is a media and technology company. The company's Comcast Cable business provides video, Internet, and voice services to residential customers under the XFINITY brand. CMCSA’s NBC Universal business consists of cable networks, broadcast television, filmed entertainment, and theme parks.

4 • TJX (NYSE:TJX) ✭✭✭✭✭✭✭ Consumer Discretionary

Founded in 1956 and based in Framingham, Massachusetts, TJX operates as an off-price apparel and home fashions retailer in the United States and internationally. The company sells family apparel, home fashions, seasonal items, jewelry, and other merchandise. TJX operates stores under various names, including T.J. Maxx, Marshalls, and Sierra Trading.

5 • T. Rowe Price (NASDAQ:TROW) ✭✭✭✭✭✭✩ Financials

Dividend Champion Founded in 1937, TROW is a financial services holding company that provides global investment management services to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios, as well as through variable annuity life insurance plans. TROW is based in Baltimore, Maryland.

6 • Texas Instruments (NYSE:TXN) ✭✭✭✭✭✭✩ Information Technology

TXN designs, manufactures and sells semiconductors to electronics designers and manufacturers globally. The company operates through two segments, Analog and Embedded Processing. It markets and sells semiconductor products through a direct sales force and through distributors, as well as online. TXN was founded in 1930 and is headquartered in Dallas, Texas.

7 • General Dynamics (NYSE:GD) ✭✭✭✭✭✭✩ Industrials

Dividend Champion Headquartered in Falls Church, Virginia, GD is an aerospace and defense company offering products and services in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies. Formed in 1952, GD has grown steadily through the acquisition of many businesses.

8 • CVS Health (NYSE:CVS) ✭✭✭✭✭✭✩ Consumer Staples

CVS provides integrated pharmacy health care services. The company advises patients on medications at CVS Pharmacy locations; provides cost control programs through CVS Caremark; delivers care to patients through CVS Specialty; and provides pharmacy care for seniors through Omnicare. CVS was founded in 1892 and is headquartered in Woonsocket, Rhode Island.

9 • Cummins (NYSE:CMI) ✭✭✭✭✭✭✩ Industrials

Founded in 1919 and headquartered in Columbus, Indiana, CMI is one of the leading designers and manufacturers of diesel engines. The company also produces natural gas engines and engine components and subsystems. CMI sells its products to original equipment manufacturers, distributors, and other customers worldwide.

10 • Walgreens Boots Alliance (NASDAQ:WBA) ✭✭✭✭✭✭✩ Consumer Staples

Dividend Champion WBA operates a network of drugstores in the United States. The company sells prescription and non-prescription drugs as well as general merchandise products, including household items, convenience and fresh foods, personal and beauty care products, and photofinishing services. WBA was founded in 1901 and is based in Deerfield, Illinois.

Please note that the top 10 ranked stocks are candidates for further analysis, not recommendations.

The table below presents some key metrics as well as fair value estimates for the top 10 stocks.

In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS payout ratio and Debt is the ratio of debt to equity. When available, the compound dividend growth rate over a 5-year period (5-Yr DGR) is provided. Standard & Poor's Credit Rating, as well as Value Line's Safety and financial strength (Fin. Strength) ratings also are provided. I've added Safety and Growth scores (out of 100) from Simply Safe Dividends. Finally, I present my own estimate of Fair Value.

To estimate fair value, I calculate my own fair value estimates using proprietary implementations of the multi-stage Dividend Discount Model and the Gordon Growth Model. I also reference fair value estimates and target prices from other sources, including Morningstar, finbox.io, and Simply Wall St. With up to nine estimates available, my final fair value estimate ignores the lowest and highest, then averages the median and mean of the remaining estimates.

Commentary

Four stocks are trading at discounts of at least 10% to my fair value estimates: CMCSA, CVS, CMI, and WBA.

Since adding CMCSA to my DivGro portfolio in April, the stock moved lower to about $30.50 per share before recovering somewhat. CMCSA closed at $32.72 on Friday, 18 May, and now yields 2.32%.

CVS continues to trend down and now yields 3.08% at $64.92 per share. The company purchased Aetna (NYSE:AET) and will not be raising its dividend until its assumed debt has been worked down sufficiently. I'm holding my CVS position and won't be increasing it in the foreseeable future.

WBA is also trending lower as concerns linger about Amazon's potential impact on the drugstore market. For the time being, I'm happy to hold onto my WBA shares and to continue collecting WBA's dividends.

With an annualized return of 14%, my CMI position has performed reasonably well. The stock recorded an all-time high of $194.18 in January but now trades about 23% lower at $148.90 per share. I'll be looking at CMI to see if increasing my position is appropriate.

The two stocks I don't own, ITW and TJX, are trading at about fair value.

I enjoy using F.A.S.T. Graphs to view the relationship of stock price performance to operating results. In one glance, I can see where the stock price is relative to the stock's normal P/E ratio (the blue line) and the so-called primary valuation line (in orange). I can also see if earnings and earnings growth is consistent.

The charts below suggest that ITW and TJX are trading just above fair value. However, the charts also show a long track record of consistent earnings and steady earnings growth. As such, these are quality stocks and paying a small premium is acceptable, in my view.

Since January 2009 (the period covered in the chart), ITW has delivered annualized total returns of 17.9%. The stock yields 2.13% at $146.80 and has a 5-year DGR of 13%. The other metrics for ITW look great, too.

TJX has performed even better, delivering annualized total returns of 25.5% since March 2009. The chart is one of the most impressive F.A.S.T. Graphs charts I've ever seen —notice that each line in is monotonically increasing, which is quite an accomplishment over a timeframe spanning about a decade!

TJX yields 1.84% at $84.79 and has an impressive 5-year DGR of 22%. The other metrics for TJX look quite impressive, too.

I'm planning to do detailed analyses of ITW and TJX to see if adding these stocks to my portfolio would be appropriate.

Concluding Remarks

Every month, I write an article presenting a ranked selection of the CCC stocks. I use different screens to select candidates from the CCC list. This month I screened for stocks using a new screener that simplifies the process of trimming the CCC list.

This month's list of top 10 ranked stocks provides four candidates that are trading at least 10% below my fair value estimates. I own all of these stocks, but I'll be looking at CMI to see if increasing my position would be appropriate.

ITW and TJX are two stocks I don't own that look impressive. Both are trading either at or just above fair value. Perhaps I can find suitable options trades to create more favorable entry points. Either way, I'll need to do detailed analyses first.

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Disclosure: I am/we are long LOW, CMCSA, TROW, TXN, GD, CVS, CMI, WBA, AAPL, SWK, UNH.

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.