I published my first article for the new year on the Dividend Kings in January 2020 with an article entitled “Dividend Kings Analysis: Most Are Overvalued.” I skipped February’s article on the Dividend Kings and instead wrote about the Dividend Champions in an article entitled "Dividend Champions Analysis: Canadian National Railways Is The Newest Champion.” What a difference one month makes? The market was trending down in February and of course that has only accelerated in the first half of March. The mean PE [TTM] ratio of the Dividend Kings came down to ~24.4 from ~29.9 in early January. The median PE [TTM] ratio came down to ~22.6 from ~26.8 in early January. This is a large drop. But obviously the recent market action and volatility in the past week resulting from the continued coronavirus scare compounded by the oil price war and travel restrictions tells us that further drops in valuation may occur.
In this article I analyze the 29 Dividend Kings, an exclusive group of stocks that have increased their dividend for 50+ consecutive years. The top five stocks in the ranking model have changed due to change in valuations and a slowdown in earnings and dividend growth rates. The top five stocks in the ranking model in order are Hormel Foods Corp (HRL) [DP Score = 9.26], Commerce Bancshares (CBSH) [DP Score = 9.12], Nordson Corp (NDSN) [DP Score = 9.08], Parker-Hannifin Corp (PH) [DP Score = 9.08], and Stanley Black & Decker (SWK) [DP Score = 9.04]. Notably, Stepan Company (SCL) dropped out of the top 5 as did Target Corp (TGT). 3M Company, which was in the top 5 for many months dropped out in January and continues its downward trend. It is now ranked 20th due to too low earnings growth rate, high payout ratio, and high relative valuation.
In these analyses I use nine criteria that permits rapid quantitative screening based on the dividend, earnings growth, dividend growth, dividend safety, and valuation. The nine criteria used in quantitative screening are:
The goal here is to identify stocks for further research not make buy or sell decisions. 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 5-years or 10-years and dividend-to-free cash flow ratio. Other qualitative factors can also include management history, recent M&A activity, and effect of tariffs and trade wars on revenue.
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
Source: Data from dripinvesting.org as of February 28, 2020, Seeking Alpha, and Morningstar
The two Dividend King that stand out here are now Hormel and Commerce Bancshares which both lead in four categories. Hormel is a consumer staples company that focuses on proteins. The company ranks well in four of the of the nine criteria due to high dividend growth rates, low D/E ratio, and low beta. But on the other hand, the stock has a high relative valuation and low dividend yield. But at the right price, Hormel is generally a sound investment. Hormel remains one of my favorite Dividend Kings. The company recently raised the quarterly dividend 10.7% for the 54thconsecutive year.
Commerce Bancshares (CBSH) ranks highly in four criteria of the nine criteria including earnings growth rate, low payout ratio, low D/E ratio, and low valuation. I have not yet analyzed Commerce Bancshares as an individual stock but will probably do so in the future. The firm is a bank holding company that operates in three segments: Consumer, Commercial, and Wealth. Although the stock ranks highly, it is likely that 2020 will be a tough year as interest rate cuts will negatively impact profitability.
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. In the first graph I compare dividend yield versus 5-year EPS growth rate. The stock with the highest dividend yield combined with the highest EPS growth rate is still Altria Group (MO). A yield over 8% is decent for Altria for those that are interested. Unlike two months ago when only three stocks had yields over 3%, we now have six stocks with yields over 3%. This list includes 3M, Genuine Parts Co. (GPC), Emerson Electric (EMR), Federal Realty Trust (FRT), and Coca-Cola (KO). This number is trending up and will likely continue to do so in the near future. In fact as of this writing both Emerson Electric and Genuine Parts Company are yielding over 4%.
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 the past 5-years are Hormel and Lowe’s Companies (LOW), and over the past 10-years are Lowe’s and Hormel. Hormel remains one of my favorites in the consumer staples sector. The company recently announced the acquisition of Sadler’s Smokehouse. I feel that the recent downturn is a good buying opportunity, particularly when the stock drops below $40. The stock is still the highest ranked stock in my model. Lowe’s was arguably overvalued but perhaps not anymore. One should take a harder look at it since the stock is down over 30% in the past month as of this writing.
Source: Dividend Power
Source: Dividend Power
In the fourth graph I compare dividend yield versus D/E ratio as a measure of safety. 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. In general, D/E ratios of 2.0 or greater is considered to be too high. Most of the Dividend Kings are conservatively managed. Hence, their D/E ratios are relatively low. However, Altria, Sysco Corp (SYY), Lowe’s, Coca-Cola, and 3M all have D/E ratios greater than 2.0. Generally, this means that growth, dividends, or share repurchases are being financed with debt. One should take a deeper look at the risks of companies with high D/E ratios.
In the fifth graph I compare dividend yield versus dividend payout ratio as another measure of dividend safety. A stock with a high yield with a low payout ratio is a reasonably safe dividend. Ideally, a stock should be in top left corner of the graph. When I last wrote about the Dividend Kings there were no stocks on the Dividend King list with a yield over 3% and simultaneously a payout ratio under 65%. At the moment, Emerson Electric (EMR) qualifies as one as of this writing. Note that the stock price has dropped further, and the valuation has gone down and the yield has gone up over 4% the past couple of days. Investors may want to research Emerson Electric further.
In the last graph I compare dividend yield versus trailing P/E ratio 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. After screening, one could compare a stock’s current valuation relative to the historical P/E multiple. The valuation of the Dividend Kings has dropped and made few a bargain. But note in some cases, earnings estimates have also dropped so one must take that into account. The beating stocks received this past week have lower valuations further. In my opinion Emerson Electric and Genuine Parts Company (GPC) are worth researching further. Notably, even after the past two weeks the consumer staples stocks are still seemingly overvalued.
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. Companies with good scores tend to have Dividend Power scores of 9.0 or greater indicating that they are performing well in all nine criteria.
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 Foods Corp (HRL) [DP Score = 9.26], Commerce Bancshares (CBSH) [DP Score = 9.12], Nordson Corp (NDSN) [DP Score = 9.08], Parker-Hannifin Corp (PH) [DP Score = 9.08], and Stanley Black & Decker (SWK) [DP Score = 9.04]. Stanley Black & Decker is new to the list.
The lowest ranked stock using my ranking methodology is Procter & Gamble [DP Score = 5.93] due to the negative 5-year EPS growth rate, high payout ratio, and high valuation. I exclude Farmers & Merchants Bancorp (OTCQX:FMCB) due to the low volumes and low market capitalization.
This month I discuss Stanley, Black & Decker since it is new to the Top 5.
Stanley, Black & Decker, which traces its founding to 1843, is the well-known manufacturer of hand and power tools. The company also installs and operates security services. It also sells industrial fasteners. The company operates in three business segments: Tools and Storage, Security, and Industrial. Some of the more well-known brands include Stanley, Black & Decker, DeWalt, Craftsman, Bostitch, and others. The current market capitalization is ~$16B.
The stock has been hammered during the recent downturn and is down almost 40% in the past month alone. This has pushed the valuation down to 11.7 and the yield up to 2.64% as of this writing. The yield is still not great, but it is higher than it has been the past few years. But the stock is a Dividend King having raised the dividend for 52 consecutive years. The payout ratio is roughly 43.5%, which is solid value and well below my threshold of 65%. Note that a low payout ratio is desired here since the bottom line is very sensitive to industrial and construction activity.
Free cash flow also covers the dividend. In 2019, operating cash flow was $1,506M and capital expenditures were $425M giving free cash flow of $1,081M. The dividend required $402M giving a dividend-to-FCF ratio of 37.2%. This is an excellent value and well below my criterion of 65%.
Debt does not pose a risk to the dividend as the company has a net cash position. At end of 2019, cash and equivalents total $298M offset short-term debt of $3.1M and long-term debt of $3,217M. Overall, I view the dividend as very safe. Interest coverage is OK at about 6X. The leverage ratio is only about 1.6X.
With that said, this stock is not for the faint of heart. The trailing 5-year beta is ~1.4. But still, it was trading over $170 less than a month ago and hit a 52-week low of $99.62 this past week. Interested dividend growth investors may want to further research this company.
My graphical and ranking model analysis indicates that the Dividend Kings valuation has dropped and continues to drop. For a few months at the end of 2018 and early 2019 there were really no Dividend Kings to consider. But what a difference one month makes. Earlier concerns about tariffs and trade wars are pretty much secondary considerations at the moment. The coronavirus induced sell off indiscriminately pummeled stocks worldwide. This has now been compounded by the oil price war between Russia and Saudi Arabia. The selloff accelerated even further with the travel announcement of travel restrictions to Europe. All three major indices in the US are in bear market territory thereby ending the 11-year bull market.
The Fear & Greed Index is pegged at ‘Extreme Fear’. This was a huge swing from just one month ago. Volatility measured by the VIX remains elevated at about 75 compared to the long-term average of about 19 or so. We are likely to have more down days and volatility. One never knows what will exactly happen for ‘Black Swan’ events like this. It usually takes some time for the dust to settle. But with that said, there are some Dividend Kings that are interesting now and worth researching further.
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Disclosure: I am/we are long CL, KO, MMM, HRL. 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.