- S&P 500 dividend aristocrats possess pretty safe dividends. All 65 of them have paid out higher disbursements for at least 25 straight years.
- We decided to put together our Buy list for the top six to purchase right now.
- Ben Graham once said, “The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition."
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In a recent Barron’s article, Lawrence C. Strauss explained:
“One would think that the S&P 500 dividend aristocrats possess pretty safe dividends, considering that all 65 of the companies have paid out higher disbursements for at least 25 years.”
From Strauss’ list of “aristocrats,” he selected six that he considered the overall safest:
- Johnson & Johnson (JNJ)
- Aflac (AFL)
- Hormel Foods (HRL)
- Procter & Gamble (PG)
- NextEra Energy (NEE)
- Medtronic (MDT)
Now, I’m a big fan of Strauss’ Income Investing column in general and his six-pack above in particular. Plus, they’re screened for dividend safety, with each one scoring 99 on Simply Safe Dividends’ list.
Then again, most all of the 65 aristocrats are safe. They have, after all, paid and increased their dividends for at least 25 years in a row now.
That’s why I wanted to take this analysis to another level. In today’s article, I’m providing readers with the best aristocrats to buy based on valuation.
Whenever the financial markets fail to fully incorporate fundamental values into securities prices, an investor’s margin of safety is high. As Benjamin Graham defined it, the margin of safety constitutes a
“favorable difference between price on the one hand and indicated or appraised value on the other.”
So I used the Dividend Kings toolkit to screen for the top six dividend aristocrats to buy today. That gives us:
(Source: Dividend Kings)
iREIT Expects VF Corp to Return 20% Annually
Founded in 1899, V.F. Corp (VFC) is one of the world's largest apparel, footwear, and accessories companies. Its diverse portfolio includes apparel, backpack, and luggage categories as well.
VFC’s largest brands are Vans, The North Face, Timberland, and Dickies.
In a recent article, I explained that it has strong liquidity. “S&P and Moody's estimate a less than 4% chance of going bankrupt in the next three decades.” In other words, “the fundamental risk of losing all your money buying VFC today is about (one) in 26.7.”
“VFC could soon be getting credit rating upgrades because its safe balance sheet is expected to get steadily safer over time. The company’s average borrowing costs are 1.95% and are expected to average 1.8% to 1.9% in the coming years.”
VFC's retained earnings are expected to be $1.7 billion in the coming years. That’s enough to pay down 29% of its debt or buy back 14% of stock, potentially up to 4% per year.
The way I see it, this company is one of the best fast-growing aristocrats you can buy today. And as shown below using analyst growth estimates, we’re modeling annual total returns of 20%.
(Source: FAST Graphs)
We Expect MMM to Return 16% Annually
3M (MMM) was incorporated in 1929. The company is a diversified technology business with a global presence in the following fields:
- Safety and industrial
- Transportation and electronics
3M is a leading manufacturer for many of the markets it serves. As my associate Dividend Sensei explains:
“If management de-leverages as expected, then 3M might end up an AA-rated company with just 0.55% long-term bankruptcy risk. The company's debt isn't actually expected to fall much. But rather its cash position and cash flows are expected to rise steadily in the coming years.”
3M's average borrowing costs are 2.54% today, and analysts expect it to remain about 2.6% over time. Plus, its historical profitability is in the top 20% of industrials. And in the past year, despite pandemic supply chain disruption, it's been in the top 7%.
This company’s modest 2% dividend growth is expected to last for about three more years. But after that, growth should return to match its earnings and cash flows.
Speaking of such, cash flows should grow at nearly 20% annually through 2024. Right now, in Dividend Sensei’s words again:
“3M is a potentially good buy and very close to the potential strong buy price...”
(Source: FAST Graphs)
We Expect ABBV to Return 25% Annually
AbbVie (ABBV) is a global, research-based biopharmaceutical company. It uses its expertise to develop and market advanced therapies that address some of the world’s most complex and serious diseases.
Dividend Sensei has something to say about this company too. AbbVie, you see, had an A- credit rating before it bought up Allergan in 2019 for $63 billion.
That required taking on a decent bit of debt – $40 billion, to be specific – something the credit agencies weren’t too thrilled with. But today, the drug company is noticeably reducing its leverage ratios, which should result in it reclaiming what it once lost.
“AbbVie's dividend is expected to grow at a modest 4% rate in the coming years. And its payout ratio remains well below the 60% payout ratio safety guideline for this industry.
“The $63 billion in post-dividend retained earnings through 2025 is enough to repay almost all of ABBV's debt or buyback as much as 32% of shares at current valuations.”
ABBV has always been priced at 13x-14x earnings – even when growing as fast as a 24% compound annual growth rate ("CAGR"). This indicates that the market has always priced in its various impending patent cliffs.
Shares now trade at 9.4x, far below its historical 13.5x and far less than the conservative 11.1x Dividend Sensei’s fair value model estimates.
(Source: FAST Graphs)
We Expect Franklin Resources to Return 21% Annually
Franklin Resources (BEN) provides investment services for individual and institutional investors. At the end of June 2021, it had $1.552 trillion in managed assets, composed of:
- Fixed income (42%)
- Equity (35%)
- Multi-asset/balanced funds (10%)
- Alternatives (9%)
- Money market funds (4%)
BEN is also one of the more global firms of the U.S.-based asset managers. More than 35% of its assets under management are invested in global/international strategies. And just over 25% of managed assets sourced from clients domiciled outside the United States.
Dividend Sensei explains:
“BEN's assets declined by 6.4% CAGR from 2016 through 2020. But a series of potentially game-changing acquisitions, such as Legg Mason in 2020 and now O'Shaughnessy Asset Management has analysts very bullish on Ben's future outlook.”
“Because BEN is a turnaround story, it's considered a speculative blue-chip and has a 2.5% max risk cap recommendation. That's because BEN misses growth estimates half the time. And its historical margin-of-error adjusted growth consensus range is 3%-11% CAGR.”
He continues with, “if BEN's turnaround goes well, it could deliver nearly 17% CAGR returns over the next five years, about 5x what analysts expect from the S&P 500.”
(Source: FAST Graphs)
iREIT Expects Cardinal Health to Return 24% Annually
Cardinal Health (CAH) is a leading pharmaceutical wholesaler. It engages in the sourcing and distribution of branded, generic, and specialty pharmaceutical products to pharmacies – retail chains, independent stores, and mail-order services alike – hospital networks, and healthcare providers.
It, AmerisourceBergen (ABC), and McKesson (MCK) together compose well over 90% of the U.S. pharmaceutical wholesale industry. And CAH also supplies medical-surgical products and equipment to healthcare facilities in North America, Europe, and Asia.
I know I keep quoting Dividend Sensei, but that’s because he knows his dividend-paying stocks up and down – hence the reason why he’s part of the iREIT on Alpha team. And the way he sees it, if CAH is:
“… growing at 5% as analysts expect it to in the future, it’s worth about 13x earnings. Today, you can buy it for under 9x, pricing in virtually no growth.”
“Even modest growth when combined with deep-value blue-chips can deliver very impressive medium-term returns…
“For anyone comfortable with its risk profile and modest growth potential, CAH is one of the best high-yield aristocrats you can buy today.”
(Source: FAST Graphs)
We Expect Walgreens to Return 16% Annually
Walgreens Boots Alliance (WBA) is a global leader in retail and wholesale pharmacy. Through its retail locations, digital platforms, and health and beauty products, its sales were $139.5 billion in fiscal-year 2020.
WBA has made advances into walk-in clinics and the automation of its supply chain. And the same goes for its omnichannel and online rewards.
Looking at its balance sheet, leverage already is solid. Yet it’s expected to rapidly decline further due to a high (and growing) cash position – which should rise from $516 million today to almost $12 billion by fiscal 2025.
Historically, Walgreens’ profitability is in the top 30% of its peers. Returns on capital are expected to be about 22% above them, with 2% steady sales growth expected.
Dividends are expected to grow at a modest 3% for the next few years since the company should retain nearly $8 billion in free cash flow.
Analysts expect 5.1% long-term growth, in line with the pre-pandemic 4%-6% CAGR growth guidance from management.
Turning to Dividend Sensei again:
“Walgreens' turnaround efforts are going well, and analysts now have strong confidence that it will be able to grow about 5% over time. That might not sound all that impressive. But at just 10.1x forward earnings, Walgreens is priced for 0.8% CAGR growth.
“When the market so badly misprices a company's risk profile and future growth prospects, that's what creates the opportunity to earn Buffett-like returns from a blue-chip bargain hiding in plain sight.”
(Source: FAST Graphs)
I’m going to turn to another dividend-loving individual, this time the father of value investing, Benjamin Graham. He once said that,
“The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition.”
“One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company’s quality rating…
“Paying out a dividend does not guarantee great results. But it does improve the return of the typical stock by yanking at least some cash out of the manager’s hands before they can squander it or squirrel it away.”
And companies that allow money to be “yanked” away for 25 years or more?
That’s dedication to a solid concept I enjoy being part of.
Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn more
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BEN, JNJ, MMM, VFC, WBA either through stock ownership, options, or other derivatives. 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.
Since the original (marketplace) article was published, BEN shares are up ~12%.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.