Many dividend growth investors rely on the CCC list for their research. Focusing on stocks trading on U.S. exchanges, the list contains nearly 900 stocks that have consistently increased their calendar year payouts for at least the past 5 years. An accompanying spreadsheet providing key data on the CCC stocks is maintained by Justin Law.
With my monthly 10 Dividend Growth Stocks series, 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. Having a sector-oriented ranking system avoids the problems associated with ranking dissimilar stocks.
This month I decided to rank CCC stocks in the Consumer Discretionary sector.
The CCC List: Consumer Discretionary
The latest CCC list (dated 02/28/19) contains 867 stocks. There are 133 Dividend Champions with increasing calendar year payouts for the past 25 years; 218 Dividend Contenders (past 10-24 years); and 516 Dividend Challengers (past 5-9 years).
The CCC spreadsheet contains 84 Consumer Discretionary sector stocks. I ranked 63 of these stocks after excluding stocks trading over the counter, stocks with market caps below $1 billion, and stocks with yields below 1%.
Collectively, the stocks have a fair value upside of 0.4% and an average dividend yield of 2.5%. An equal-weighted portfolio would have returned 0.7% in the past year. Over the last five years, the stocks have outperformed the S&P 500 by about 10%.
Overview of My Ranking System
I ranked the 63 Consumer Discretionary 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:
- Consistency and rate of past earnings growth
- Dividend Safety and sustainability of payments
- Financial Health of the company and quality of the stock
- Growth of dividends and earnings (history and outlook)
I assigned A, B, D, and F grades to eight stocks, and C grades to fifteen 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, I try 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 Consumer Discretionary Sector Stocks
Here are this month's top 10 stocks according to my ranking system:
Top 10 Consumer Discretionary Sector Stocks (March 2018)
The four stocks I own in my DivGro portfolio are highlighted.
1. TJX (TJX)
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.
2. Tractor Supply (TSCO)
Founded in 1938 and headquartered in Brentwood, Tennessee, TSCO operates rural lifestyle retail stores in the United States. The company provides equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment. TSCO also provides hardware, truck, towing, tools, and seasonal products as well as clothing and footwear.
3. Lowe's (LOW)
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.
4. Home Depot (HD)
Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.
5. Magna International (MGA)
MGA is an automotive supplier with manufacturing operations and product development, engineering, and sales centers in more than 30 countries. The company’s product capabilities include producing body, chassis, interior, exterior, seating, powertrain, electronic, vision, closure, and roof systems and modules. MGA was founded in 1957 and is headquartered in Aurora, Canada.
6. Lear (LEA)
LEA designs, develops, engineers, manufactures, assembles, and supplies automotive seating and electrical distribution systems to automotive OEMs worldwide. The company’s Seating segment offers seat systems and related components. Its E-Systems segment offers electrical distribution systems that route electrical signals and manage electrical power. LEA was founded in 1917 and is headquartered in Southfield, Michigan.
7. Starbucks (SBUX)
SBUX is a roaster, marketer, and retailer of specialty coffee. The company roasts and sells coffees, and other beverages and fresh food items, through company-operated stores. It also sells a range of coffee and tea products and licenses its trademarks through other channels. SBUX was founded in 1985 and is based in Seattle, Washington.
8. Texas Roadhouse (TXRH)
Founded in 1993 and based in Louisville, Kentucky, TXRH is a restaurant chain operating in the United States and internationally. The company operates and franchises restaurants under the Texas Roadhouse and Bubba’s 33 brand names. TXRH offers specially seasoned and aged steaks hand-cut daily and cooked to order over open gas-fired grills.
9. Thor Industries (THO)
THO designs, manufactures, and sells recreational vehicles, and related parts and accessories, primarily in the United States and Canada. The company operates in two segments: Towable Recreational Vehicles and Motorized Recreational Vehicles. It markets its recreational vehicles through independent dealers. THO was founded in 1980 and is based in Elkhart, Indiana.
10. Marriot International (MAR)
MAR operates, franchises, and licenses hotel, residential, and timeshare properties worldwide. The company operates nearly 7000 properties under approximately 30 hotel brands, including JW Marriott, The Ritz-Carlton, Sheraton, Westin, Courtyard, Residence Inn, Fairfield Inn & Suites, and Protea Hotels. Mar was founded in 1927 and is headquartered in Bethesda, Maryland,
Please note that the top 10 ranked stocks are candidates for further analysis, not recommendations.
Below is a finbox.io analysis of the top 10 Consumer Discretionary sector stocks for March 2018:
According to finbox.io, seven stocks are trading below fair value and, overall, the stocks have a fair value upside of about 5%. Note also the more modest dividend yield of 2.0%.
On the other hand, these stocks have returned 5.9% in the past year and 97% over the last five years! The 5-year performance is nearly double that of the S&P 500 over the same period.
Grades and Key Metrics
The table below presents letter grades, key metrics, and a fair value estimate for each stock. The letter grades are for Consistency (C), Safety (S), Health (H), and Growth (G) as described earlier. Stocks I own in my portfolio are highlighted in the Ticker column.
In the table, 5-Yr DGR is the compound dividend growth rate over a 5-year period and 10-Yr EGR is the adjusted operating earnings growth rate over a 10-year period. When available, I provide Standard & Poor's Credit Rating. I also provide the Dividend Safety Score (out of 100) from Simply Safe Dividends and my own estimate of Fair Value.
To estimate fair value, use 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 two stocks are trading below my fair value estimates.
Of the stocks I don't own, MGA looks most interesting. Its yield of almost 3% is attractive, while the stock's price appears to be discounted by at least 20%. Furthermore, the stock's payout ratio provides ample room for further dividend increases, provided earnings growth can be sustained. According to Simply Safe Dividends, MGA's dividend is Safe (at 78, the dividend safety score is just below the Very Safe level that starts at 81). MGA's dividend increase streak is 9 years, and a quick look confirms that MGA had to cut its dividend during the financial crisis due to plummeting revenue.
Despite not having an S&P 500 credit rating, my ranking system puts TSCO in second place within the Consumer Discretionary sector. One reason is the stock's impressive dividend growth rate of about 20% over the last five years. Equally impressive is TSCO's 10-year adjusted operating earnings growth rate of about 18%. TSCO's dividend is considered Safe, and with a low earnings payout ratio of 28%, there is ample room for future increases. Unfortunately, TSCO's dividend yield is lowish at only 1.34%. That could be a deal-breaker for income investors, but I don't mind to own a few low-yielding, high dividend growth rate stocks.
Of the stocks I do own, HD looks attractive for more investment dollars. Discounted by about 15%, HD's yield of about 3% is at its highest level relative to the 5-year average of 2.11%. The company recently increased its dividend by 32% and the stock price is down about 16% from its 52-week high. The dividend is deemed Very Safe and the stock's 5-year dividend growth rate of 21.4% is spectacular. At 42%, the stock's payout ratio provides more room for future dividend increases. Unlike MGA, HD did not cut its dividend during the financial crisis, but the dividend was frozen for about 3 years.
I'm surprised by the absence of some dividend growth stalwarts, like Genuine Parts (GPC), Leggett & Platt (LEG), McDonald's (MCD), Target (TGT), and V.F. (VFC). These are all Dividend Champions with dividend increase streaks of well over 25 years. Here's a summary of these stocks and their rankings:
- GPC: rank #29, streak 63 years, yield 2.15%
- LEG: rank #21, streak 47 years, yield 3.37%
- MCD: rank #30, streak 43 years, yield 2.55%
- TGT: rank #28, streak 51 years, yield 3.33%
- VFC: rank #22, streak 46 years, yield 2.39%
These stocks have long track records of increasing dividend payments and reasonable to solid dividend yields, yet my ranking system considers 20 other Consumer Discretionary sector stocks to be "better" candidates. This is curious and something I'll need to investigate.
So far, I've used my new ranking system to rank the following sectors:
- Utilities — October 2018
- Consumer Staples — December 2018
- Health Care — February 2019
- Consumer Discretionary — this article
I'd like to complete one round of sector-based ranking before considering and making adjustments to my ranking system. However, so far the system seems to favor growth over income. Perhaps this is not surprising, as two of my four letter grade categories are growth-related.
Some Good-Looking Charts
Below, I'm including charts from F.A.S.T. Graphs for three of the top-ranked Consumer Discretionary sector stocks I don't own.
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).
TSCO's chart shows strong and consistent growth over the coverage period of about 10 years. The stock recorded an earnings growth rate of 18.2% and an annualized RoR (rate of return) of 24.3%. These are spectacular growth rates! Over the same period, the S&P 500 had an RoR of 12.6%.
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 TSCO's payout ratio.
Next, let's look at MGA:
MGA's adjusted earnings growth rate is indicated as 13.2% over the coverage period of about 9 years. In comparison, MGA's annualized RoR over the same period is 10%.
Finally, consider TXRH:
TXRH's chart is attractive and the stock's earnings growth rate of 13.1% is quite impressive! Over the 10-year period represented in the chart, TXRH's annualized RoR (with dividends included) is 21.2%.
The stock is trading at a premium to fair value, so I think it is prudent to wait for a better entry point.
In this article, I ranked 63 stocks in the Consumer Discretionary 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 two of the ten top-ranked stocks are trading below my fair value estimates. Of the stocks I don't own, MGA looks most attractive but I'm also planning to research TSCO. At a lower entry point around $50 per share, TXRH would be a good candidate, too.
Of the stocks I already own, HD, LOW, and TJX are trading below my fair value estimates. Of these, HD offers the highest current yield (about 3%) and trades about 15% below my fair value estimate.
I've now ranked four of eleven sectors with my new sector-oriented ranking system. The system seems to favor growth over income, which is something I'll need to investigate and possibly adjust for. Before doing so, however, I'd like to complete one round of sector-based ranking using the present system.
Thanks for reading!
Disclosure: I am/we are long HD, LOW, MCD, SBUX, TJX. 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.