Seeking Alpha

10 Dividend Growth Stocks For April 2019

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Includes: AAPL, ACN, ADP, AVGO, BR, INTC, JKHY, KLAC, SWKS, TXN
by: FerdiS
Summary

Every month I rank a selection of the CCC stocks and present the top 10 for consideration.

This month I'm focusing on stocks in the Information Technology sector.

The top 10 include some surprises and I note some surprising absentees too.

The CCC list is a great resource for dividend growth investors. The list contains nearly 900 stocks trading on U.S. exchanges with the distinction of having paid higher dividends for at least 5 consecutive calendar years. The list was created by the late David Fish and now 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. Having a sector-oriented ranking system avoids the problems associated with ranking dissimilar stocks.

This month I decided to rank CCC stocks in the Information Technology sector.

The CCC List: Information Technology

The latest CCC list (dated 03/29/19) contains 875 stocks. There are 135 Dividend Champions with increasing calendar year payouts for the past 25 years; 222 Dividend Contenders (past 10-24 years); and 518 Dividend Challengers (past 5-9 years).

The CCC spreadsheet contains 55 Information Technology sector stocks. I ranked 44 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 downside of 5% and an average dividend yield of 2.0%. An equal-weighted portfolio would have returned 17.5% in the past year. Over the last five years, the stocks have outperformed the S&P 500 by about 80%.

Overview of My Ranking System

I ranked the 44 Information Technology 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, B, D, and F grades to eight stocks, and C grades to twelve 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 Information Technology Sector Stocks

Here are this month's top 10 stocks according to my ranking system:

Top 10 Information Technology Sector Stocks (April 2019)

March Edition of 10 Dividend Growth Stocks

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

1 • Texas Instruments (TXN)

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.

2 • Apple (AAPL)

Headquartered in Cupertino, California, AAPL designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. The company also sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. AAPL was founded in 1977.

3 • Skyworks Solutions (SWKS)

Founded in 1962 and headquartered in Woburn, Massachusetts, SWKS, designs, develops, manufactures, and markets proprietary semiconductor products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets. SKWS has a collaboration agreement with MediaTek Incorporated to deliver standards-based 5G solutions.

4 • Intel (INTC)

INTC designs, manufactures, and sells computer, networking, and communications platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, and All Other segments. INTC was founded in 1968 and is based in Santa Clara, California.

5 • Jack Henry & Associates (JKHY)

JKHY offers information and transaction processing solutions, core data processing solutions, and specialized financial performance, imaging, and payment processing, as well as information security and risk management, retail delivery, and online and mobile solutions to financial institutions and corporations. JKHY was founded in 1976 and is headquartered in Monett, Missouri.

6 • Accenture (ACN)

Founded in 1989 and based in Dublin, Ireland, ACN provides management and technology consulting services to clients in various industries and geographic regions, including North America, Europe, and Growth Markets. ACN’s operating segments are Communications, Media & Technology; Financial Services; Health and Public Service; Products; and Resources.

7 • KLA-Tencor (KLAC)

Founded in 1975 and headquartered in Milpitas, California, KLAC is a supplier of process control and yield management solutions for the semiconductor and related nano-electronics industries. KLAC’s products are used in a number of high technology industries, including the light emitting diode and data storage industries, as well as general materials research.

8 • Automatic Data Processing (ADP)

ADP provides technology-enabled human capital management solutions and business process outsourcing solutions. These offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services. ADP was founded in 1949 and is headquartered in Roseland, New Jersey.

9 • Broadcom (AVGO)

AVGO designs, develops, and supplies a range of semiconductor devices for use in a variety of applications, including enterprise and data center networking, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation, and alternative energy systems, and electronic displays. AVGO is based in San Jose, California.

10 • Broadridge Financial Solutions (BR)

BR provides investor communications and technology-driven solutions for the financial services industry in the United States, Canada, the United Kingdom, and internationally. Customers include banks, broker-dealers, mutual funds, and corporate issuers globally. BR was founded in 1962 and is headquartered in Lake Success, New York.

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 Information Technology sector stocks for April 2018:

According to finbox.io, three stocks are trading below fair value and, overall, the stocks have a fair value downside of about 7%. The dividend yield of 2.0% matches the sector's average yield.

On the other hand, these stocks have returned 20.6% in the past year and 196% over the last five years! The 5-year performance is more than triple 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.

Commentary

Only three stocks are trading below my fair value estimates.

I already own shares of AVGO, but my position is small at only 0.79% of portfolio values, so I should consider adding more shares. And TXN will be attractive below $106 per share.

Of the stocks I don't own, ACN and ADP look attractive based purely on the fundamentals presented in the summary table. While these stocks have relatively low yields (below 2%), their double-digit percentage dividend growth rates are quite attractive and both have Very Safe dividend safety scores, according to Simply Safe Dividends. Of course, I'm not really interested in opening positions in these stocks as they're both trading at premium prices.

I'm surprised that Microsoft (MSFT) did not make the top 10. In addition to MSFT, I also own Cisco Systems (CSCO) and International Business Machines (IBM), which also did not make the top 10. Here's a summary of these stocks and their rankings:

  • MSFT: rank #11, streak 17 years, yield 1.47%
  • CSCO: rank #19, streak 9 years, yield 2.47%
  • IBM: rank #27, streak 23 years, yield 4.47%

Only IBM is trading below my fair value estimate, but I'm not interested in adding to my IBM position at this time.

So far, I've used my new ranking system to rank the following sectors:

Based on the rankings completed so far, it appears that my system favors growth over income.

I'd like to complete one round of sector-based ranking before considering and making adjustments to my ranking system.

Some Good-Looking Charts

Below, I'm including charts from F.A.S.T. Graphs for three of the top-ranked Information Technology 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).

JKHY's chart shows strong and consistent growth over the coverage period of about 10 years. The stock recorded an earnings growth rate of 11.3% and an annualized RoR (rate of return) of 22.7%. Over the same period, the S&P 500 had an RoR of 14.4%.

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 JKHY's payout ratio.

Next, let's look at ACN:

ACN's adjusted earnings growth rate is indicated as 9.5% over the coverage period of about 10 years. In comparison, ACN's annualized RoR over the same period is 15.9%.

Finally, consider ADP:

ADP's chart shows an earnings growth rate of 9.4%. Over the same 10-year period, ADP's annualized RoR (with dividends included) is 19.8%.

All these stocks are trading at premium prices, so I think it is prudent to wait for better entry points.

Concluding Remarks

In this article, I ranked 44 stocks in the Information Technology sector. Only three of the ten top-ranked stocks are trading at discount prices. Of the stocks I don't own, ACN and ADP look most attractive, but only at significantly lower prices. My fair value estimate for ACN is $166, while I estimate ADP's fair value to be $141.

Of the stocks I already own, AVGO and TXN (at a lower price) are worth considering. AVGO offers the best yield of the top 10 stocks and the best discount price as well.

I've now ranked five 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. Before making any adjustments, though, I'd like to complete one round of sector-based ranking using the present system. Thanks for reading and happy investing!

Disclosure: I am/we are long AAPL, AVGO, CSCO, IBM, INTC, MSFT, TXN. 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.