Dividend Aristocrats In The Cyclical Sectors

Oct. 21, 2020 9:00 AM ETAFL, ALB, AMCR, APD, BEN, CB, CINF, ECL, ESS, FRT, GPC, LEG, LIN, LOW, MCD, NUE, O, MTB, PPG, SHW, SPGI, TGT, TROW, VFC30 Comments
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FerdiS
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Summary

  • The S&P 500 Dividend Aristocrats Index is a list of 65 S&P 500 companies with dividend increase streaks of 25 or more years.
  • Recently, I used DVK Quality Snapshots and tie-breaking metrics to rank all 65 Dividend Aristocrats.
  • I presented 21 Dividend Aristocrats from defensive sectors in one article and 20 Dividend Aristocrats from sensitive sectors in another article.
  • This article presents the remaining 24 Dividend Aristocrats, all from the cyclical sectors: Consumer Discretionary, Financials, Materials, and Real Estate.

This article is the third in a series that covers the Dividend Aristocrats, a list of S&P 500 companies that have increased their dividends for at least 25 consecutive years. Currently, there are 65 Dividend Aristocrats.

The first article covered Dividend Aristocrats in the Defensive Sectors (Consumer Staples, Health Care, and Utilities), while the second article covered Dividend Aristocrats in the Sensitive Sectors (Communication Services, Energy, Industrials, and Information Technology).

Stocks in the cyclical sectors are closely tied to the ups and downs of the economy. When the economy is thriving, companies in cyclical sectors do well because unemployment is low and wages are increasing. In downturns, though, companies in cyclical sectors tend to struggle, as consumers are less confident about the future.

This article presents Dividend Aristocrats in the cyclical sectors: Consumer Discretionary, Financials, Materials, and Real Estate. Cyclical sectors are closely tied to the ups and downs of the economy. When the economy is thriving, companies in cyclical sectors do well because unemployment is low and wages are increasing. In downturns, though, companies in cyclical sectors tend to struggle as consumers are less confident about the future.

Cyclical Sectors

The Global Industry Classification Standard (GICS) is a market-based taxonomy consisting of 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries. Sectors can be further grouped into super sectors based on how they tend to perform during different phases of the business cycle. These are defensive, sensitive, and cyclical super sectors. See my first article in this series for details.

The focus of this article is on Dividend Aristocrats in the cyclical sectors:

  • Consumer Discretionary - Auto, entertainment, media, lodging, retailers, restaurants
  • Financials - Asset management, banks, insurance, investment funds, loans
  • Materials - Building materials, chemicals, mining, paper products, raw materials
  • Real Estate - Commercial, industrial, residential real estate

In a business cycle approach to sector investing, the prevailing phase of the business cycle is considered to inform investment decisions. The United States recession that began in March with the coronavirus pandemic may already be over, though some economists are concerned that the economy might stall again and enter a “double-dip” recession.

If the economy recovers and we enter into the early part of the business cycle, cyclical stocks should perform quite well based on past performance:

Source: Fidelity Investments

So, it is appropriate to consider cyclical stocks and identify high-quality candidates, such as the Dividend Aristocrats.

Assessing Quality and Ranking Stocks

When assessing the quality of stocks, I like to use DVK Quality Snapshots. Developed by David Van Knapp, the system considers quality indicators and assigns 0-5 points to each quality indicator, for a maximum quality score of 25 points. See the table below for details.

DVK Quality Snapshots scoring system and the author's rating system

My rating system maps to different quality score ranges. Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9).

To rank stocks, I sort them by descending quality scores and apply tie-breaking metrics, including Simply Safe Dividends' Dividend Safety Scores and the S&P Credit Ratings.

Key Metrics and Fair Value Estimates

In each table below, I present key metrics, quality indicators, and fair value estimates. Data in the tables are sourced from Dividend Radar, Value Line, Morningstar, F.A.S.T. Graphs, and Simply Safe Dividends.

I estimate fair value by referencing fair value estimates and price targets from other sources. Typically, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values to arrive at my fair value estimate. The last column shows the discount or premium of the recent price to my fair value estimate.

One metric I like is the Chowder Number (CDN), which models the likelihood that a stock will deliver annualized returns of at least 8%. I color-code the CDN to indicate that likelihood, with green being likely, yellow being less likely, and red being unlikely. I consider green CDNs favorable.

The second table in each group shows the Company name and the Sector of each stock.

Cyclical Dividend Aristocrats rated Exceptional

None.

Cyclical Dividend Aristocrats rated Excellent

Stocks in this table are high-quality Dividend Aristocrats in the cyclical sectors.

I own the highlighted stock, APD, in my DivGro portfolio.

Rank out of 65

Company (Ticker)

Sector

9

Ecolab Inc. (ECL)

Materials

10

Air Products and Chemicals, Inc. (APD)

Materials

I opened a relatively small position in APD in December 2018 at a cost basis of about $158 per share. The position has grown nicely into one equaling about 0.44% of the total value of my portfolio, for annualized returns of about 49%!

Unfortunately, APD is trading well above my fair value estimate of $251 per share. The stock's current yield of 1.82% is 24% below its historical 5-year average yield:

Source: Portfolio Insight (October 20)

To get an initial yield on cost (YoC) that equals the 5-year average yield, we can use the following formula to determine a target price:

target = price × yield / 5-year average yield

= $294.49 × 1.82% / 2.39%

= $224.26

This means APD would need to trade below $225 per share to get an initial yield on cost of 2.39%.

Although ECL is ranked just above APD, I'd much rather add to my APD position than open a new position in ECL. APD's yield and dividend growth rate metrics are superior, as is its CDN.

Of course, given their premium valuations, neither of these stocks is suitable for investment at this time, in my view.

Cyclical Dividend Aristocrats rated Fine

Stocks in the next table are high-quality Dividend Aristocrats in the cyclical sectors.

I own four of these stocks: CB, TROW, MCD, and LOW.

Rank out of 65

Company (Ticker)

Sector

17

Chubb Limited (CB)

Financials

22

T. Rowe Price Group, Inc. (TROW)

Financials

26

McDonald's Corporation (MCD)

Consumer Discretionary

29

PPG Industries, Inc. (PPG)

Materials

30

Lowe's Companies, Inc. (LOW)

Consumer Discretionary

33

Franklin Resources, Inc. (BEN)

Financials

36

The Sherwin-Williams Company (SHW)

Materials

CB and MCD are undersized positions in my portfolio (0.27% and 0.57% of portfolio value, respectively).

Unfortunately, MCD is overvalued... and except for a brief period when the market tanked in late February and early March, the company has been overvalued for a long time:

Source: Portfolio Insight (October 20)

MCD's 5-year average yield is 2.61%, so to get an initial yield on cost (YoC) that equals the 5-year average yield, MCD would need to trade at the following target price:

target = price × yield / 5-year average yield

= $227.45 × 2.27% / 2.61%

= $197.82

CB, on the other hand, is trading at a deep discount to fair value. While I don't like the fact that the company's CDN is only 6, I think its discount is too good to pass up. I'm considering rounding out my CB position to a full position. To do so, I would need to add 80 shares at the current price.

Here is a yield channel chart of CB, showing that the company indeed is trading in undervalued territory, about 1% below the blue undervalued price line of $120.15.

Source: Portfolio Insight (October 20)

Simply reverting to the mean at $142.60 (the middle of the channel price range) would imply an upside of about 20%. To, me that seems like a compelling counterargument to CB's low CDN.

Of the stocks I don't own, BEN looks interesting. I've written about BEN several times, as the stock continues to pop up on my screens. But I've hesitated so far, seeking some confirmation that the company's recent purchase of Legg Mason is bearing fruit. Bank of America securities analyst Michael Carrier upgraded BEN to a "Buy" citing merger synergies and the company's strong balance sheet and an elevated cash position.

It appears that BEN stock price is starting to show signs of life:

Source: Seeking Alpha (Author's overlay)

Perhaps it is finally time to consider an investment in BEN.

Cyclical Dividend Aristocrats rated Decent

Stocks in this table are lower-quality (though still Investment Grade) Dividend Aristocrats in the cyclical sectors.

I own only two of these stocks, AFL and O.

Rank out of 65

Company (Ticker)

Sector

41

Linde plc (LIN)

Materials

42

Aflac Incorporated (AFL)

Financials

43

Target Corporation (TGT)

Consumer Discretionary

45

Albemarle Corporation (ALB)

Materials

46

S&P Global Inc. (SPGI)

Financials

47

Nucor Corporation (NUE)

Materials

51

V.F. Corporation (VFC)

Consumer Discretionary

52

Federal Realty Investment Trust (FRT)

Real Estate

58

Essex Property Trust, Inc. (ESS)

Real Estate

59

Realty Income Corporation (O)

Real Estate

61

Amcor plc (AMCR)

Materials

62

Leggett & Platt, Incorporated (LEG)

Consumer Discretionary

Like CB, AFL is available at a deep discount to my fair value estimate. Insurance stocks have not yet recovered, and AFL trades well above its 5-year average yield:

Source: Portfolio Insight (October 20)

At 0.34% of portfolio value, my AFL position is undersized, so I'd be happy to add more shares. To round out my AFL position, I would need to add 238 shares at the current price.

My position in O is 0.53% of portfolio value, just more than half of a full-size position. As a monthly dividend payer, I like O and I'm thinking about rounding out my position. To do so, I would need to add about 111 shares at the current share price of $59.10.

It would be great to pick up shares closer to the bottom of Portfolio Insight's FV Price Range, but around $59 is still well In the Margin of Safety.

Source: Portfolio Insight (October 20)

Of the stocks I don't own, only ESS looks interesting to me. ESS offers a very attractive yield of 4.16% and a strong 5-year DGR of 7.8%, as well as a Very Safe dividend according to Simply Safe Dividends. Furthermore, the stock is discounted by 14%:

Source: Portfolio Insight (October 20)

I'll be taking a closer look at ESS, but the stock presents a compelling opportunity for dividend growth investors.

Cyclical Dividend Aristocrats rated Poor

Stocks in the last table are lower-quality Dividend Aristocrats in the cyclical sectors, stocks I don't consider to be investment grade.

Rank out of 65

Company (Ticker)

Sector

63

People's United Financial, Inc. (PBCT)

Financials

64

Cincinnati Financial Corporation (CINF)

Financials

65

Genuine Parts Company (GPC)

Consumer Discretionary

I don't own any of these stocks and I'm not interested in buying any of them.

Concluding Remarks

Dividend Aristocrats are stocks of companies with strong and durable competitive advantages. I ranked the Dividend Aristocrats using DVK Quality Snapshots and tie-breaking metrics.

Previous articles covered Dividend Aristocrats in the defensive and sensitive sectors.

This article covered 24 Dividend Aristocrats in the cyclical sectors of Consumer Discretionary, Financials, Materials, and Real Estate. An upcoming article will wrap up the series with observations about portfolio management and diversification. I will also provide a spreadsheet containing key metrics and fair value estimates of all 65 Dividend Aristocrats.

I highlighted several Dividend Aristocrats in cyclical sectors trading at favorable valuations. In my view, these stocks are suitable for further research and possible investment. These include CB, BEN, AFL, O, and ESS.

As always, I encourage readers to do their own due diligence before investing.

Thanks for reading, and happy investing!

This article was written by

FerdiS profile picture
26.31K Followers
FerdiS invests in dividend growth stocks and writes options to boost dividend income. He manages DivGro, a portfolio of mainly dividend growth stocks created in January 2013. With investment and trading experience spanning nearly 20 years, FerdiS enjoys writing articles about dividend growth investing, options trading, stock selection, portfolio management, and passive income generation. His DivGro blog hosts more than 1,000 posts and a live, public spreadsheet with full details of his DivGro portfolio, allowing readers to follow along in his investment journey. FerdiS is collaborating with the founders of Portfolio Insight, an online platform for portfolio management and investment analysis. Together, we maintain and publish Dividend Radar, a free spreadsheet of dividend growth stocks, on a weekly basis.

Disclosure: I am/we are long AFL, APD, CB, LOW, MCD, O, TROW. 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.

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