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A Quiet Dividend Growth Summer Continues As Badger Meter, Illinois Tool Works Expected To Lead Payout Boosts In August

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Includes: BMI, CBU, CSL, DOV, FAST, FRT, IFF, ITW, JW.A, MGEE, MXIM, NDSN, NNN, OXY, PPG, SJM, SMG, SWK, UGI, WBA, WTR
by: Harvesting Dividends
Summary

I was clearly way too optimistic last month as most of my predictions were well above what the companies delivered.

I expect the summer slump to continue through August, as another 11 companies are expected to announce annual boosts. Most of these will be modest.

Badger Meter and Illinois Tool Works are expected to lead the way with double-digit increases.

Those of you who follow this series of articles know that I track the dividend increases of a variety of long-term dividend growth companies. Back in the end of June, I provided predictions for 9 dividend growth companies that have historically announced annual payout increases in July. Of these companies, one hadn’t announced its increase by the time this article was published, so I’ll hold my prediction for that company over to next month’s article.

I want to point out that utility holding company UGI Corporation (UGI) announced an increase of 8.3% to an annualized $1.30. This is UGI’s 2nd dividend increase this year; the company announced a dividend increase on schedule in April. UGI started the year with a dividend of $1.04, which makes for a total payout boost of 25% this year. The company now sports a forward yield of 2.6%. UGI has paid dividends for more than 134 years and increased them for the last 32 years.

Before I provide my predictions for eleven companies that traditionally announce their annual increases in August, we’ll take a look at how well I did with my predictions from last month. You’ll note that a majority of my predictions were optimistic – I’ll have more to say about that at the end of the article.

(All yields are based on stock prices at the market close on Friday, July 26th.)

Results For The Nine Dividend Increase Predictions From July

Fastenal Company (FAST)

Prediction: 7.0–9.3% increase to $0.92-$0.94

Actual: 2.3% increase to $0.88

Forward yield: 2.78%

The supplier of industrial and construction products missed my prediction by 4 cents. The good news is that this is the company’s 2nd dividend increase this year and the total dividend growth from 2018 to 2019 will be nearly 13%.

John Wiley & Sons (JW.A)

Prediction: 3.0% increase to $1.36

Actual: 3.0% increase to $1.36

Forward yield: 2.99%

The scientific publishing company had its 2nd straight year of a 4-cent dividend increase. This is John Wiley’s 26th year of dividend growth.

Maxim Integrated (MXIM)

Prediction: 6.5–8.7% increase to $1.96-$2.00

Actual: Announcement deferred

Integrated circuits manufacturer Maxim hasn’t announced its latest dividend increase as of the publishing of this article, so I’ll push my prediction to next month. The company may announce the increase when it announces its 4th quarter earnings on July 30th.

National Retail Properties (NNN)

Prediction: 4.0–6.0% increase to $2.08-$2.12

Actual: 3.0% increase to $2.06

Forward yield: 3.94%

The owner of nearly 3,000 properties across the United States just barely missed my expectations in its 30th year of dividend growth.

Occidental Petroleum (OXY)

Prediction: 4.5–7.7% increase to $3.26-$3.36

Actual: 1.3% increase to $3.16

Forward yield: 6.13%

Despite good EPS growth this year, this is the 4th straight year of 4-cent dividend growth for the energy company.

PPG Industries (PPG)

Prediction: 5.2–7.3% increase to $2.02-$2.06

Actual: 6.3% increase to $2.04

Forward yield: 1.73%

PPG’s 48th year of dividend growth was right in the middle of my prediction range and right in line with the company’s 10-year growth average of 6%.

The J. M. Smucker Company (SJM)

Prediction: 2.4–4.7% increase to $3.48-$3.56

Actual: 3.5% increase to $3.52

Forward yield: 3.08%

Smucker’s 23rd year of dividend growth was right in the middle of my prediction range and right in line with the EPS growth that the company saw this year and that it expects next year.

Stanley Black & Decker (SWK)

Prediction: 7.5–9.1% increase to $2.84-$2.88

Actual: 4.5% increase to $2.76

Forward yield: 1.81%

The tool maker’s 51st year of dividend growth was well below last year’s EPS growth, but right in line with the company’s 2019 adjusted EPS growth rate of 4% to 6%.

Walgreens Boots Alliance (WBA)

Prediction: 10.2–14.8% increase to $1.94-$2.02

Actual: 4.0% increase to $1.83

Forward yield: 3.32%

With 2018 EPS growth of 18%, I had really expected a nice double-digit increase from Walgreens. Unfortunately, I was way too optimistic. This is the company’s 43rd year of dividend growth.

Predictions For August's 11 Announcements Of Dividend Increases

Here are my predictions for the 11 dividend increases I expect in August:

Badger Meter (BMI)

Badger Meter develops flow measurement and control systems for utilities and commercial businesses. Last year’s dividend boost was a nice 15% to an annual rate of 60 cents, building on the 11% growth average over the last decade. With last year’s adjusted EPS growth of 30% and first quarter EPS up another 40%, things are setting up for another good year. On top of the EPS growth, Badger Meter has hardly any debt. I’ll hedge my bet a little, but I still expect a double-digit boost from Badger Meter in its 28th year of dividend growth.

Prediction: 10.0–16.7% increase to $0.66-$0.70

Predicted Forward Yield: 1.24–1.31%

Community Bank System (CBU)

Like Badger Meter above, the bank holding company has grown dividends for 27 years. And like Badger Meter, Community Bank has little debt to weigh it down. The company sports a historical dividend growth rate around 5%; EPS growth last year was 7%, but slowed to less than 3% in the first quarter of 2019. Despite last year’s 12% boost, it looks like Community Bank System’s 28th year of dividend growth will be around the company’s historical average.

Prediction: 3.9–5.3% increase to $1.58-$1.60

Predicted Forward Yield: 2.41–2.44%

Carlisle Companies (CSL)

Carlisle Companies, which engineers and manufactures a variety of products in multiple niche fields, has grown dividends for 42 years. The company grew EPS by 10% year-over-year, matching Carlisle’s average dividend growth over the last decade. On top of that, Carlisle also saw EPS growth of 45% from continuing operations in the first quarter of 2019. Given the company’s modest debt level and payout ratio of 30%, I expect Carlisle’s 43rd year of dividend growth to be around last year’s 8% boost.

Prediction: 7.5–10.0% increase to $1.72-$1.76

Predicted Forward Yield: 1.21–1.24%

Dover Corporation (DOV)

At 64 years, engineering company Dover Corporation has one of the longest dividend growth records among publicly traded companies. This year’s increase is shaping up to be a good one. The company is guiding full year adjusted EPS growth to 16–18%, and so far, the company is on track to make its numbers. Over the first half of the year, adjusted EPS is up 27% to $2.80. The only possible headwind is a decent level of debt, but the company should be able to cover that and still reward its investors with a nice boost. I’m looking for an increase in the high single digits, in line with the decade-long average of 8%.

Prediction: 6.3–8.3% increase to $2.04-$2.08

Predicted Forward Yield: 2.08–2.12%

Federal Realty Investment Trust (FRT)

Retail-based REIT Federal Realty focuses on properties located in large coastal markets, like Washington D.C., Boston, Los Angeles and San Francisco. Last year’s FFO (funds from operations – an earnings metric that accounts for the tax benefits for REITs) growth was 8.5%, but the company is guiding this year’s FFO growth to 1–4%. Despite the drop in FFO growth, I expect Federal Realty to base its dividend increase on last year’s growth, so I’m looking for the company’s 52 year of dividend growth to be in the high single digits.

Prediction: 6.9–8.3% increase to $4.36-$4.42

Predicted Forward Yield: 3.33–3.38%

International Flavors & Fragrances (IFF)

International Flavors & Fragrances, a chemical company specializing in food additives and fragrances, has grown dividends for 16 years. The company has a good growth rate, compounding its payout by more than 11% over the last decade. I expect the growth rate to continue; the company is guiding adjusted EPS growth to between 13 and 16% for fiscal 2019. Longer term, the company just announced a plan for currency neutral EPS growth of at least 10% annually through 2021. Given the modest payout ratio of 50% and the projected growth, I’m expecting the company’s 17th year of dividend growth to be close to the 10-year average.

Prediction: 9.6–11.0% increase to $3.20-$3.24

Predicted Forward Yield: 2.19–2.21%

Illinois Tool Works (ITW)

The diversified manufacturer has compounded its payout by nearly 12% over the last decade. In fact, the company blew away expectations last year with a 28% boost to an annualized $4.00. Even better, Illinois Tool has grown its dividend by double digits over each of the last 5 years, and increasing the dividend growth each year. But with the company guiding fiscal 2019 EPS growth to the mid-single digits, I’m expecting a much smaller dividend boost this year. Despite a modest payout ratio of about 50%, the company sports a decent-sized debt-to-equity ratio of 240%. I’ll give Illinois Tool some benefit of the doubt, and predict that the company will announce a dividend increase in the low double-digits for its 44th annual dividend increase.

Prediction: 10.0–13.0% increase to $4.40-$4.52

Predicted Forward Yield: 2.83–2.90%

MGE Energy (MGEE)

Wisconsin-based MGE Energy distributes electricity and natural gas to more than 300,000 customers in and around Madison, Wisconsin. EPS fell in 2018 by 14%, but have rebounded in the first quarter of 2019, growing by 19% to 69 cents a share. Like many utilities, MGE has a very modest dividend growth rate as earnings are driven by rate increases allowed by the local governments and customer growth. Given its modest payout ratio of 55% and the first quarter EPS growth, I’m expecting the company to announce a payout boost along the lines of last year’s 4.6% increase. This will be the company’s 43rd year of dividend growth.

Prediction: 3.7–5.2% increase to $1.40-$1.42

Predicted Forward Yield: 1.89–1.91%

Nordson Corporation (NDSN)

Nordson Corporation develops and manufactures systems for dispensing adhesives and coatings, along with test and inspection products. The company has grown dividends for 55 years and has compounded them at more than 13% over the last decade. While the company grew its adjusted EPS at 11% last year, it’s looking at a year-over-year drop of 12% in the first half of the fiscal year. With a payout ratio of less than 25%, there’s plenty of coverage for the current dividend and for a decent boost. I’ll hedge my bets and give a prediction that we’ll see Nordson’s 56th year of dividend growth be in the mid-single digits.

Prediction: 4.3–8.6% increase to $1.46-$1.52

Predicted Forward Yield: 1.03–1.07%

The Scotts Miracle-Gro Company (SMG)

Lawn and garden care company Scotts Miracle-Gro recently divested itself of its 30% stake in TruGreen, with an eye towards reducing its debt by around $130 million, or 7% of total debt. The company has grown dividends for a decade and compounded them by 7% over the last 5 years. Scotts is guiding 2019 adjusted EPS growth to between 13 and 18%. Given the company’s indebtedness and its recent focus on reducing that debt, I expect a decent amount of the earnings growth to go to repaying debt. I’m looking for the company’s 11th year of dividend growth to be in the mid single-digit range, in line with its dividend growth rate.

Prediction: 4.5–6.4% increase to $2.30-$2.34

Predicted Forward Yield: 2.22–2.26%

Aqua America (WTR)

Water utility Aqua America continues to grow through acquisitions of smaller utilities throughout the country, adding three water and wastewater utilities in the first quarter of 2019. This adds to the six water/wastewater utilities acquired in 2018, along with the announcement of the acquisition of Pennsylvania-based utility People’s Natural Gas. The good news is that these acquisitions have powered EPS growth. The bad news is that they’ve also powered growth in the company’s debt. Despite this, Aqua has a very consistent record of dividend increases, with 5 and 10-year compounded averages of 7.6%. The company is guiding adjusted EPS growth to between 3 and 7%, but with the costs of the People’s acquisition still unknown and a current payout ratio of 60%, I expect Aqua America’s 28th year of dividend growth will be muted.

Prediction: 5.0–7.0% increase to $0.9198-$0.9373

Predicted Forward Yield: 2.22–2.26%

Summary

I mentioned above that many of my predictions were optimistic. Of the eight announcements, I overestimated five of them – especially some of the larger ones, like Fastenal, Stanley, Black & Decker, and Walgreens. Smaller than expected increases seem to be a trend over the last several months, and influenced my predictions for next month. While I still expect decent increases from Badger Meter and Illinois Tool Works, I adjusted my expectations across the board. It’s not clear to me why there’s a trend of smaller dividend growth than EPS growth would support. Am I just being over-optimistic, or are companies seeing something in their businesses and adjusting accordingly? Let me know what you think in the comments below.

I’ll also point out that I would normally provide a prediction for Harris Corporation this month since they usually announce their annual increase in August. However, the company closed on its merger with L3 Technologies (which also had an established dividend growth record) at the end of June. The dividend policy of the newly-merged company isn’t clear yet, but hopefully we’ll see another increase from the defense company soon.

If you enjoyed this article and would like to find out how my predictions turn out at the end of August, please follow me by clicking the "Follow" button next to my name at the top of the article. Thanks!

Disclosure: I am/we are long WBA. 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.

Additional disclosure: I may take a position in any of the stocks mentioned in this article in the near future.