10 Dividend Growth Stocks For May 2019

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Includes: AOS, BA, CMI, FAST, FDX, HON, ITW, LUV, MMM, NOC, RHI, ROL, RTN, SNA, TTC, UNP
by: FerdiS
Summary

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

This month, I ranked 98 CCC stocks in the Industrials sector.

The top 10 list contains only two stocks I own, so I have several candidates to consider.

The CCC list was created by the late David Fish and now is maintained by Justin Law. The list contains nearly 900 stocks trading on U.S. exchanges that have paid higher dividends for at least five consecutive calendar years. An accompanying spreadsheet provides valuable data for dividend growth investors. The spreadsheet is updated every month.

In this article, I rank a subset of the 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. A sector-oriented ranking system avoids the problems associated with ranking dissimilar stocks.

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

The CCC List: Industrials

The latest CCC list (dated 04/30/19) contains 878 stocks. There are 135 Dividend Champions with increasing calendar year payouts for the past 25 years; 226 Dividend Contenders (past 10-24 years); and 517 Dividend Challengers (past 5-9 years).

The CCC spreadsheet contains 126 Industrials sector stocks. I ranked 98 of these stocks after excluding stocks trading over the counter, stocks with market caps below $1 billion, and stocks with yields below 1%.

Source: Finbox.io

Collectively, the stocks have a fair value downside of about 10% and an average dividend yield of 2.1%. An equal-weighted portfolio would have returned 4.4% in the past year. Over the last three years, the stocks have essentially matched the performance of the S&P 500.

Overview of My Ranking System

I ranked the 98 Industrials 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)

In each category, I assigned A and F grades to 14 stocks, B and D grades to 21 stocks, and C grades to the remaining 28 stocks.

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 Industrials Sector Stocks

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

Top 10 Industrials Sector Stocks (May 2019)

April Edition of 10 Dividend Growth Stocks

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

1. Southwest Airlines (LUV)

LUV operates a passenger airline that provides scheduled air transportation services. The company serves in 40 states in the USA and several near-international countries, including Puerto Rico, Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. LUV was founded in 1967 and is based in Dallas, Texas.

2. Fastenal (FAST)

FAST sells industrial and construction supplies, including threaded fasteners such as bolts, nuts, screws, studs, and related washers, in the United States, Canada, and internationally. The company distributes the supplies through a network of company-owned stores. Customers are in the manufacturing and non-residential construction markets. FAST was founded in 1967 and is headquartered in Winona, Minnesota.

3. AO Smith (AOS)

AOS manufactures and markets water heaters, boilers, and other products for residential and commercial end markets in the United States, China, Canada, Europe, and India. The company provides electric, natural gas, gas tankless, and liquid propane water heaters, as well as solar tank units for use in residences and businesses. AOS is headquartered in Milwaukee, Wisconsin.

4. Toro (TTC)

TTC manufactures and markets turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, and residential yard and snow thrower products worldwide. It operates in two segments, Professional and Residential. TTC was founded in 1914 and is headquartered in Bloomington, Minnesota.

5. Boeing (BA)

BA is an aerospace firm based in Chicago, Illinois. The company, together with its subsidiaries, designs, manufactures, markets, and maintains commercial jetliners, military aircraft, satellites, missile defense systems, and human space flight systems, and launch systems and services worldwide. BA was founded in 1916.

6. Robert Half International (RHI)

Founded in 1948 and headquartered in Menlo Park, California, RHI provides staffing and risk consulting services to customers in about 400 locations worldwide. The company operates through three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services. RHI markets its staffing services to clients as well as to employment candidates.

7. Snap-on (SNA)

SNA manufactures and markets tools, equipment, diagnostics, repair information, and systems solutions. It serves aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation, and technical education industries, as well as vehicle dealerships and repair centers. SNA was founded in 1920 and is headquartered in Kenosha, Wisconsin.

8. Northrop Grumman (NOC)

Founded in 1939 and based in Falls Church, Virginia, NOC is a leading global security company with both government and commercial customers. NOC provides systems, products, and solutions in unmanned systems; cybersecurity; command, control, communications and computers intelligence; surveillance and reconnaissance; and logistics and modernization.

9. Union Pacific (UNP)

Omaha, Nebraska-based UNP operates the largest public railroad in North America, with 32,000 miles of track linking 23 states in the western two-thirds of the United States. UNP hauls coal, industrial products, intermodal containers, agricultural goods, chemicals, and automotive products. UNP owns a quarter of Mexican railroad Ferromex. The company was founded in 1862.

10. Rollins (ROL)

ROL is a service company that provides pest and termite controls services to residential and commercial customers in the United States and internationally. The company's pest control services include protection against termite damage, rodents, and insects. The company also provides pest management and sanitation services. ROL was founded in 1948 and is headquartered in Atlanta, Georgia.

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 Industrials sector stocks for May 2018:

According to finbox.io, two stocks are trading below fair value and, overall, the stocks have a fair value downside of about 8%. The dividend yield of 1.9% is lower than the sector's average yield.

On the other hand, these stocks have returned about 9% in the past year and 64% over the last three years, outperforming the S&P 500 by about 24%.

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, I 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

Three stocks are trading at discounts of at least 10% to my fair value estimates.

LUV is the top-ranked stock. With a relatively small earnings payout ratio and a dividend safety score of 99 according to Simply Safe Dividends, LUV's dividend appears to be very safe. Furthermore, the company has been growing its dividend at an impressive rate of 34% over the past five years. LUV's dividend yield is rather small at 1.22%, but I think the stock is worth looking into given that exceptional dividend growth rate.

Another stock worth looking into is Dividend Champion AOS, which offers a dividend yield of 1.75% and an equally impressive five-year dividend growth rate of 27%. With no debt and a low earnings payout ratio, the company's dividend seems quite safe and, in fact, Simply Safe Dividends gives AOS a dividend safety score of 99, which is deemed Very Safe.

I previously owned NOC, and it looks like it would be opportune to revisit the stock. Trading at about 22% below my fair value estimate, NOC yields 1.65% and has a five-year dividend growth rate of about 15%. NOC's dividend safety score of 81 is Safe, though the debt level seems a bit high. Nevertheless, I think it would be good to dig a little deeper to see if an investment in NOC is warranted at this time.

Finally, SNA looks interesting, too. It offers a yield of 2.26%, a compelling five-year dividend growth rate of nearly 17% and, overall, seems to have strong fundamentals including an A- credit rating and a Very Safe dividend safety score of 99. At a lower price (and even higher yield), SNA would be even more attractive.

I own no fewer than 12 Industrials sector stocks in my DivGro portfolio, yet only two of these appear in the top 10. Fortunately, several just missed the cut:

  • Cummins (NYSE:CMI): Rank #13, streak 13 years, yield 2.76%
  • Illinois Tool Works (ITW): Rank #14, streak 44 years, yield 2.64%
  • FedEx (FDX): Rank #15, streak 17 years, yield 1.45%
  • Honeywell International (HON): Rank #16, streak 8 years, yield 1.92%
  • Raytheon (RTN): Rank #17, streak 15 years, yield 2.09%

I'm not too surprised to see 3M (MMM) down at rank #26. The stock is facing some challenges, as evidenced by its dismal Q1 performance. However, MMM remains a rock-solid dividend aristocrat, and I'm planning on holding my shares for the long-term.

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

I've noted before that my ranking system appears to favor growth over income. I'm planning on completing 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 Industrials 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).

LUV's chart shows strong earnings growth over the coverage period of about 10 years and, as mentioned earlier, it's trading at a discount to fair value. The stock recorded an earnings growth rate of 32.8% and an annualized RoR (rate of return) of 18.2%. Over the same period, the S&P 500 had a RoR of 12.5%.

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 LUV's payout ratio.

Next, let's look at SNA:

SNA's adjusted earnings growth rate is indicated as 10.2% over the coverage period of about 10 years. In comparison, SNA's annualized RoR over the same period is 16.3%.

Finally, consider UNP:

UNP's chart confirms that the stock is trading at a premium to fair value and shows an earnings growth rate of 16.7%. Over the same 10-year period, UNP's annualized RoR (with dividends included) is 21.2%.

Concluding Remarks

In this article, I ranked 98 stocks in the Industrials sector.

Three of the ten top-ranked stocks are trading at discounts of at least 10% to fair value, LUV, AOS, and NOC. SNA is only discounted by about 3%, but I'm quite impressed with the stock's fundamentals. Below $156, the stock would be quite attractive.

I've now ranked six of eleven sectors with my new sector-oriented ranking system. The system favors growth over income. Before making any adjustments, though, I'm planning on completing one round of sector-based ranking before making any adjustments to the present system.

Thanks for reading and happy investing!

Disclosure: I am/we are long BA, CMI, FDX, HON, ITW, MMM, RTN, UNP. 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.