Dividend Kings: August Dividend Growth Analysis

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Includes: ABM, AWR, CBSH, CINF, CL, CTWS, CWT, DOV, EMR, FMCB, FRT, FUL, GPC, HRL, JNJ, KO, LANC, LOW, MMM, MO, NDSN, NWN, PG, PH, SCL, SJW, SWK, TGT, TR
by: Dividend Power
Summary

A dividend growth analysis is presented based on dividend yield, earnings and dividend growth, dividend safety, and valuation.

Hormel Foods Corp., Parker-Hannifin Corp., Target Corp., Nordson Corp., and Commerce Bancshares are the top five Dividend Kings in the ranking model.

Altria Group is newest Dividend King and is included in the analyses for the first time. Small investors may be interested in Altria due to its 7.7% regular dividend yield.

Target Corp. has trended lower in my rankings due to an increasing stock price.

Overview

In this article I analyze the 29 Dividend Kings. Note that the number has increased by one since Altria Group, Inc. (MO) recently raised the quarterly dividend allowing the company to enter this exclusive club. The Dividend Kings represent successful companies that have survived through several recessions, major world, events, financial uncertainty, and many market conditions. All the time, these companies have grown their dividend year-in and year-out. This consistency and the ability to return cash to shareholders makes the Dividend Kings of interest to many small investors. A reasonable strategy for Dividend Growth Investors is to start with the Dividend Kings and perform further analyses. In addition, I also present an analysis of Altria since it is a newcomer to the Dividend Kings. Altria may be of interest for those seeking income due to its high dividend yield of 7.7%. Another stock that may interest small investors is Genuine Parts Company (GPC) that has trended up in my rankings. 3M Company (MMM) also performs well and is worthy of further research. Hormel Foods Corp. (HRL) continues to be the top ranked stock in my model but is currently overvalued. One interesting development is that Target Corp. (TGT) has trended lower in my rankings due to the recent surge in stock price.

Background

In these analyses I use nine criteria that permit rapid quantitative screening based on the dividend, earnings growth, dividend growth, dividend safety, and valuation. The nine criteria used in quantitative screening are:

  • History of increasing dividends
  • Dividend yield
  • 5 Years EPS growth rate
  • 5 years dividend growth rate
  • 10 years dividend growth rate
  • Payout ratio
  • Long-term debt-to-equity ratio (D/E)
  • 5-year Beta
  • P/E Ratio (NYSE:TTM)

The goal here is to identify stocks for further research. There are often qualitative factors for each stock that must be researched before making an investment decision. For instance, I also evaluate P/E ratio relative to past 10-years and dividend-to-FCF ratio. Other qualitative factors can also include management history, recent M&A activity, and effect of tariffs on revenue.

Dividend Kings Source: Seeking Alpha

Top 5 Dividend Kings In Each Criteria

The table below lists the 29 Dividend Kings in order of number of years of paying a growing dividend. These stocks come from a wide range of industries but there are quite a few industrial, consumer staples, and water utility stocks in the table. The green highlighted rectangles in each column list the five stocks that rank the best in that criteria. The red highlighted rectangles indicate negative growth rates. The yellow highlighted rectangles indicate that the data was not available or applicable. For example, Colgate-Palmolive Co. (CL) has negative equity, so the D/E ratio is undefined.

List of Dividend Kings

Dividend Kings Analyses By Criteria

Source: Data from dripinvesting.org as of August 30, 2019

The Dividend King that stand out based on this analysis is Hormel. The company ranks well in five of the of the nine criteria due to high earnings and dividend growth rates, low D/E ratio, and low beta. A second stock that stands out is Parker-Hannifin Corp. (PH), which also ranks highly in five of the nine criteria due to earnings and dividend growth rates, number of consecutive years increasing the dividend, and low valuation. Commerce Bancshares (CBSH) ranks highly in four criteria including earnings growth rate, low payout ratio, low D/E ratio, and low valuation. Newcomer, Altria ranks highly in two criteria based on its substantial dividend yield and low valuation. Notably, Target ranked highly in three criteria last month but does so only in 10-year dividend growth this month. Target’s stock price has been increasing and thus the yield is dropping and the valuation is increasing. The company recently reported stellar quarterly results and the stock price surged close to 20% in response making this stock less compelling at the moment.

Graphical Analysis of Yield Versus Other Criteria

In the following sets of graphs, I plot the dividend yield versus the other criteria. The individual data points are labeled according to their yields and can be cross-referenced with the table above. Stocks that I highlight in this discussion are labeled in the graphs.

In the first graph I compare dividend yield versus 5-year EPS growth rate. Ideally, a stock should be in the top right corner of the graph, but no Dividend Kings really have high yield combined with high EPS growth rates. The stock with the highest dividend yield and the highest EPS growth rate is Altria. However, 3M and Genuine Parts also do well from this perspective. Notably there are six stocks with negative 5-year EPS growth rates including Coca-Cola Company (KO), Cincinnati Financial (CINF), Dover Corp. (DOV), Connecticut Water Service (CTWS), Procter & Gamble Co. (PG), and ABM Industries, Inc. (ABM). Small investors should keep an eye companies that have negative EPS growth as this eventually puts the dividend at risk. One stock to highlight is Tootsie Roll Industries (TR), which has an undesirable combination of the lowest yield and dividend growth rate. In addition, Tootsie Roll keeps its cash dividend relatively constant and issues an annual 3% stock dividend. So, the dividend growth is from adjusting for the split rather than actual increases in the cash payment. But still, investors can sell the stock dividend and receive about a 4% yield.

Dividend King Yield versus 5-Year EPS Growth Rate

Source: Dividend Power

In the second and third graphs I compare dividend yield versus 5-year dividend growth rate and also versus 10-year dividend growth rate. The two companies with the highest dividend growth rates over 5-years are Hormel and Lowe’s Companies (LOW), and over 10-years are Lowe’s and Target. Hormel is an interesting company to track since it has high dividend growth rate over both time periods. Hormel has demonstrated the ability to increase EPS and the dividend over time due to organic growth and bolt-on acquisitions. 3M stands out due to its high yield and relatively high dividend growth rate over 5-years and 10-years. 3M should be looked at in greater detail from this perspective. Genuine Parts Company’s yield has increased, and the dividend growth rates are reasonable but not great. The company has trended up in my model rankings due to a lower stock price and rising dividend. This stock should be researched further and I have recently written about the stock in detail. Altria stands out as an outlier due to its high yield and roughly 10% dividend growth rate over the past 5-years and 10-years. From this perspective, Altria is unique since no other companies have been able to sustain such a high dividend yield simultaneously with relatively high dividend growth rates. This points to Altria’s pricing power in the face of declining cigarette sales.

Dividend Yield versus 5-Year Dividend Growth Rate

Source: Dividend Power

Dividend King Yield versus Dividend 10-Year Growth Rate

Source: Dividend Power

In the fourth graph I compare dividend yield versus D/E ratio as a measure of safety. Ideally, a stock should be in the top left corner of the graph. Stocks with too much long-term debt may not raise the dividend significantly. In the worst case, the dividend may be frozen or cut due to high interest payments or principal payments. Several stocks including Hormel have little to no long-term debt. 3M, Genuine Parts, and Emerson Electric (EMR) have yields over 3% and D/E ratios less than 2.0. On the other hand, Lowe’s stands out as having a high D/E ratio of over 5.0. Coca-Cola also has a fairly high D/E ratio. Of interest is that Altria’s D/E ratio of 2.02 is just over my threshold of 2.0, which negatively affects the company’s ranking in my model.

Dividend King Yield versus DE Ratio

Source: Dividend Power

In the fifth graph I compare dividend yield versus dividend payout ratio as another measure of dividend safety. Ideally for this graph a stock should be in the top left corner. A high yield with a low payout ratio is a reasonably safe dividend. Genuine Parts, 3M and Emerson have yields greater than 3% but also have payout ratios less than 65%. Two stocks with high payout ratios are Coca-Cola and Procter & Gamble Co. (PG). There is a roughly linear trend since as the payout ratio increases, the yield increases, although the correlation is not strong. But still stocks should not deviate too much from this line. From this context, Altria is a clearly an outlier. But saying that, Altria has been able to maintain a high dividend yield combined with a high payout ratio for many years. Essentially, Altria generates cash in excessive of its need to run the business and invest in future growth. The company has returned this excess cash to shareholders through dividends.

Dividend King Yield versus Payout Ratio

Source: Dividend Power

In the last graph I compare dividend yield versus P/E ratio (TTM) as a measure of valuation. In this graph, a stock would ideally be located toward the top left corner. I would like to buy stocks with good yields but low valuations and hold forever. From this perspective, 3M and Genuine Parts perform well. Again, Altria stands out as an outlier with very high dividend yield combined with relatively low valuation. After screening, one could compare a stock’s current valuation relative to the historical P/E multiple. I want to buy low and hold forever. Three stocks stand out for being located in the lower right part of the graph meaning that they have an undesirable combination of low yield and high valuation. These are Tootsie Roll, American States Water (AWR), and Procter & Gamble. Tootsie Roll has low float and is controlled by one shareholder. American States Water has elevated valuation due to consolidation in the water utility industry. Procter & Gamble’s stock price continues to increase due to good performance and is up almost 50% in the past 12 months thereby increasing valuation.

Dividend Kings Yield versus TTM PE Ratio

Source: Dividend Power

Ranking Model

In this section I present a scaled ranking model using the aforesaid nine criteria and weight each one according to their importance to me. The model tends to reward stocks with better dividend growth characteristics. But saying that, stocks with low dividend safety or high valuation multiples tend to rank low.

The model also accounts for a stock’s criteria rising above or falling below a critical value. If a criterion is above or below the critical value, then that criterion would be zero. For example, I want stocks that have a payout ratio below 100% but sometimes the payout ratio goes above 100% due to a drop in EPS resulting from economic headwinds or company specific short-term issues. The model assigns a zero for that specific criteria for these stocks. It is not a sell signal, but the stock will rank low and thus it may not be suitable for adding to the position at that time. Similar logic applies to other criteria.

The top five stocks in the ranking model in order are Hormel, Parker-Hannifin, Target, Nordson, and Commerce Bancshares. Note that 3M dropped out of the top five this month and was replaced by Commerce Bancshares. But note that 3M still ranks highly at number six. Again, the lowest ranked stock using my ranking methodology is Coca-Cola due to the negative 5-year EPS growth rate, relatively low dividend growth rates, high payout ratio, and high D/E ratio.

This month I provide a summary of Commerce Bancshares since it entered the top 5 in my Dividend King rankings. I also provide a summary of Altria since it is a newly minted Dividend King.

Commerce Bancshares, Inc. (CBSH) – Commerce Bancshares is a regional bank that operates roughly 340 locations in Missouri, Kansas, Illinois, Oklahoma, and Colorado. The bank provides diversified financial services including personal and business banking, wealth management, financial planning. Through subsidiaries Commerce Bancshares also offers mortgage banking, credit related insurance, venture capital and real estate activities. Commerce Bancshares focuses on local lending and is seemingly very conservatively run. The company has raised the quarterly dividend for 51 straight years. The forward annual dividend is $1.04 giving a yield of 1.8%. The dividend is well covered with a payout ratio of 28.3% based on expected EPS (FWD) of $3.67 giving the bank room for further increases. The company has consistently returned cash to shareholders through dividends and share buybacks. This is due to long-term ability to grow deposits and thus interest income, and the ability to grow fee income from AUM and cards. Commerce Bancshares performs well in my ranking due to its relatively high 5-year EPS growth rate, low payout ratio, low beta, and reasonable valuation, On the other hand the dividend yield is low, and the dividend growth rate is low. Another consideration is that the bank may be affected by declining farm exports and slowing manufacturing.

Altria Group Inc. (MO) – Altria manufactures and sells cigarettes, smokeless products, and wine in the U.S. The company’s brands include Marlboro, Copenhagen, Skoal, Black and Mild, IQOS, and Chateau Ste. Michell (wine) and several others. Altria also has several large strategic investments including a ~10.2% stake in AB InBeV, the global beer company; a 35% stake in JUUL, the U.S. e-vapor leader; and a 45% stake Cronos Group, a cannabis company. Altria has raised the dividend for 50 consecutive years with the recent increase in the quarterly dividend. The current yield is about 7.7%, which is far above the broader market average and the average of the Dividend Kings. Altria has demonstrated the ability to grow EPS and the dividend at about a 10% rate over time due to its market dominance. In addition, the stock has low volatility and the valuation is currently low. Some concerns are that the payout ratio is just under 100% and the D/E ratio is slightly over 2.0. Altria is facing long-term decline in number of consumers due to health concerns of cigarettes and other tobacco products leading to high taxes and restrictions in marketing. But still, Altria has been able to raise prices due its market dominance and thus revenue. Altria is currently in the news as it may merge with PhilipMorris International undoing the past split.

Final Thoughts On The Dividend Kings

Although Hormel continues to top the ranking I am not adding to shares at the moment. The stock is trading at an elevated valuation relative to historical averages. I have recently presented a detailed analysis of Hormel. However, at the right price I would not hesitate to add to my Hormel shares. I like 3M but my position is full at the moment. My cost basis is a bit higher than the current stock price. But with a yield over 3.5% one is paid to wait. Once global manufacturing starts to recover 3M should perform decently. Genuine Parts is trending up in my rankings and if the price drops sufficiently the company should enter the top 5. Target is not as compelling an investment as last month when the yield was over 3% and the P/E TTM ratio was under 14.0. In general, many retailers are reporting solid earnings results and their stock prices are surging. Of all the Dividend Kings, Altria is probably the one most small investors seeking income and dividend growth should research further. The yield is well above the broader market average and the Dividend King average. I do not own Altria but will spend some time researching the stock.

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Disclosure: I am/we are long HRL, KO, CL, MMM. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.