10 Dividend Growth Stocks For February 2019

Summary

• I rank a selection of the CCC stocks and present the top 10 for consideration.
• Given increased market volatility, I'm focusing on defensive sectors.
• This month I'm ranking CCC stocks in the Health Care sector.

The CCC list is a great resource for dividend growth investors. The list contains 861 stocks trading on U.S. exchanges with the distinction of having paid higher dividends for at least 5 consecutive years. The list is maintained by Justin Law.

In this article, I rank a subset of CCC stocks and present the 10 top-ranked stocks for further research. My ranking system assigns letter grades to stocks relative to their performance among sector peers.

Given increased market volatility, I'm focusing on defensive sectors. This month I decided to rank CCC stocks in the Health Care sector.

The CCC List: Health Care

The latest CCC list (dated 01/31/19) contains 861 stocks. There are 132 Dividend Champions — stocks trading on U.S. exchanges with higher dividend payments for 25 or more consecutive years; 205 Dividend Contenders (10-24 year streak); and 524 Dividend Challengers (5-9 year streak).

The CCC spreadsheet contains 37 Health Care sector stocks. I ranked 22 of these stocks after excluding stocks with yields below 1%, stocks with market capitalization below $1 billion, and stocks trading over the counter.

Collectively, the stocks have a fair value upside of 6.3% and an average dividend yield of 2.3%. An equal-weighted portfolio would have returned 5.4% in the past year. Over the last five years, 2 of the stocks have outperformed the S&P 500 by about 29%!

Overview of My Ranking System

I ranked the 22 Health Care sector stocks 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 assigns letter grades to each stock relative to its performance among sector peers, in each of the following four categories:

1. Consistency and rate of past earnings growth
2. Dividend Safety and sustainability of payments
3. Financial Health of the company and quality of the stock
4. Growth of dividends and earnings (history and outlook)

I assigned A and B grades to five stocks, and C, D, and F grades to four stocks in each category.

The letter grades are assigned based on scores for different metrics in each category. Metrics are weighted relative to how important I consider them to be. For example, I have one metric in each category with a relative weight of 3, three metrics with weights of 2 each, and several additional metrics with weights of 1 each. The maximum score per category is 25, so the total score for each stock is out of 100.

Stocks are ranked from the highest to the lowest based on total score.

I don't consider valuation metrics in my ranking system. Instead, it attempts to identify top-quality dividend growth stocks regardless of valuation. However, I do provide fair value estimates of the top-ranked stocks to help readers identify potential candidates for further research.

Top 10 Health Care Sector Stocks

Here are the top 10 Health Care Sector stocks according to my ranking system:

Top 10 Health Care Sector Stocks (February 2019)

December's Edition of 10 Dividend Growth Stocks Click to enlarge

Click to enlarge

The six stocks I own in my DivGro portfolio are highlighted.

1 • UnitedHealth (UNH)

Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and in more than 125 other countries.

2 • Anthem (ANTM)

ANTM operates as a health benefits company in the United States, offering a spectrum of network-based managed care health benefit plans to large and small group, individual, Medicaid, and Medicare markets. It also provides a range of managed care services to self-funded customers. ANTM was founded in 1944 and is headquartered in Indianapolis, Indiana.

3 • AmerisourceBergen (ABC)

ABC sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. The company distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, and home healthcare supplies and equipment. ABC was founded in 1985 and is headquartered in Chesterbrook, Pennsylvania.

4 • Stryker (SYK)

SYK is a medical technology company that markets its products to doctors, hospitals, and other healthcare facilities in the United States. The company sells its products through company-owned sales subsidiaries and branches, as well as third-party dealers and distributors. SYK was founded in 1941 and is headquartered in Kalamazoo, Michigan.

5 • Amgen (AMGN)

Based in Thousand Oaks, California, AMGN is a biotechnology company. The company discovers, develops, manufactures, and delivers human therapeutics worldwide. It offers products for the treatment of serious illnesses in the areas of oncology/hematology, cardiovascular disease, inflammation, bone health, nephrology, and neuroscience. AMGN was founded in 1980.

6 • Quest Diagnostics (DGX)

DGX provides diagnostic information services and solutions in the United States and internationally. The company offers diagnostic information services to patients, clinicians, hospitals, and health plans. It also offers risk assessment services for the life insurance industry. DGX was founded in 1967 and is headquartered in Secaucus, New Jersey.

7 • Pfizer (PFE)

Headquartered in New York and founded in 1849, PFE is one of the world's largest pharmaceutical firms. The company discovers, develops and manufactures healthcare products. Prescription drugs and vaccines account for almost 90% of PFE's sales. Its brands include Prevnar 13, Xeljanz, Eliquis, Lipitor, Celebrex, Pristiq and Viagra.

8 • Medtronic (MDT)

MDT manufactures and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. The company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. MDT was founded in 1949 and is headquartered in Dublin, Ireland.

9 • ResMed (RMD)

RMD designs, manufactures, distributes, and markets medical devices and cloud-based software applications that diagnose, treat, and manage respiratory disorders, including sleep-disordered breathing, chronic obstructive pulmonary disease, neuromuscular disease, and other chronic diseases. RMD was founded in 1989 and is headquartered in San Diego, California.

10 • Johnson & Johnson (JNJ)

Founded in 1886 and based in New Brunswick, New Jersey, JNJ has grown into one of the largest companies in the world. The company is a leader in the pharmaceutical, medical device, and consumer products industries. JNJ distributes its products to the general public, retail outlets and distributors, wholesalers, hospitals, and health care professionals.

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

Below is a finbox.io analysis of the top 10 Health Care Sector stocks for February 2019:

According to finbox.io, seven stocks are trading below fair value and, overall, the stocks have a fair value upside of about 7%. Note also the more modest dividend yield of 2.1%.

On the other hand, these stocks have returned 11% in the past year and 120% over the last five years! The 5-year performance is more than double that of the S&P 500 over the same period.

Grades and Key Metrics

The table below presents key metrics, a fair value estimate, and letter grades for each stock. The letter grades are for Consistency (C), Safety (S), Health (H), and Growth (G) as described earlier.

In the table, Years are the years of consecutive dividend increases and Payout Ratio is the earnings payout ratio. When available, I provide Standard & Poor's Credit Rating and the compound dividend growth rate over a 5-year period (5-Yr DGR). I also provide the adjusted operating earnings growth rate for a 10-year period (10-Yr EGR) and the Dividend Safety Score (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 finbox.io, Morningstar, and F.A.S.T. Graphs. 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.

All but one stock are trading below my fair value estimates and, of the stocks I don't own, ABC seems worth a look.

Commentary

In September 2018, I ranked 240 stocks using my previous ranking system and presented the 10 top-ranked dividend growth stocks by sector. Here are the top-ranked Health Care sector stocks from that article:

UNH tops both lists, while CVS Health (CVS) and Cardinal Health (CAH) did not "survive" my ranking system change. CVS is no longer in the CCC list, while CAH is ranked #20 out of the 22 Health Care sector stocks.

The only other Health Care stock I own is Gilead Sciences (GILD), which is not (yet) in the CCC list.

Some Good-Looking Charts

Below, I'm including charts from F.A.S.T. Graphs for three of the top-ranked Health Care sector stocks.

In these charts, the black line represents the share price, and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the time frame in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).

ANTM chart shows strong and consistent growth over the coverage period of about 10 years. The stock recorded an earnings growth rate of 12.1% and an annualized RoR (rate of return) of 20.6%. Over the same period, the S&P 500 had an RoR of 12.2%.

Dividends are shown as the light green area above the orange line, but also as the white line within the dark green shaded area and relative to the orange line. The white line graphically represents ANTM's payout ratio.

Next, let's look at ABC:

While ABC's adjusted earnings growth rate is 14.1% over the coverage period of about 10 years, the stock's price failed to match that growth rate. ABC's annualized RoR over the period is 15%.

I think ABC is a good candidate for further research and possible investment.

Finally, consider SYK:

SYK's chart is a model of consistency and the stock's earnings growth rate of 10.3% is strong! Over the 10-year period represented in the chart, SYK's annualized RoR is 15.6%.

The stock is trading at a premium to fair value, so I think it is prudent to wait for a better entry point.

Concluding Remarks

In this article, I ranked 22 stocks in the Health Care sector.

While I don't consider valuation metrics in my new ranking system, I continue to provide fair value estimates of the ranked stocks.

All but one of the ten top-ranked stocks are trading below my fair value estimates. Of the stocks I don't own, ABC looks most attractive. ANTM and SYK would be good candidates at lower entry points.

Of the stocks I already own, UNH, AMGN, and DGX are trading well below my fair value estimates. For investors seeking higher yields, AMGN (3.12%) and PFE (3.39%) look attractive.

Thanks for reading!

Analyst’s Disclosure: I am/we are long AMGN, CVS, DGX, GILD, JNJ, MDT, PFE, 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.