Dividend Analysis: 5 Consumer Staples Vs. 5 Utilities

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Includes: AEP, D, DUK, ED, KHC, KMB, MDLZ, PEP, PG, SO
by: Skafan

The purpose of this article is to compare the dividends on five consumer staples stocks with five utilities to illustrate my belief that consumer staples currently have a superior dividend profile. In other words, I believe consumer staples represent a better dividend value than utilities in the current market environment. I am a dividend investor and my goal is to maximize dividend income and long-term capital gains. This requires balancing the need for current dividend income with the need for long-term growth in the business and the dividend payment.

The five consumer staples selected for this analysis are Kimberly Clark (NYSE:KMB), Kraft Foods (KFT), Proctor & Gamble (NYSE:PG), Pepsico (NASDAQ:PEP) and Heinz (HNZ). The five utility stocks selected are Dominion Resources (NYSE:D), Southern Co (NYSE:SO), Con Ed (NYSE:ED), Duke Energy (NYSE:DUK) and American Electric Power (NYSE:AEP). These utility stocks were selected from the Dow Jones Utility Index so they represent some of the largest publicly traded utilities in the country. It should be noted that the average market capitalization of the utility stocks is approximately $25 billion whereas the consumer staple stocks had an average market capitalization of $93 billion or nearly quadruple. The combined market capitalization of the utility stocks was $131 billion whereas the consumer staple stocks was $401 billion.

My analytical exercise compared the average current dividend yield, dividend pay-out ratio (based on data from latest annual report), earnings growth (past 5 years), forecasted earnings growth (next 5 years) and 4-year dividend growth rate. The data are listed below and then I analyze the results.

Table explanation

Dividend yield - per yahoo finance at close of trading on 4/19/12

Diluted EPS & dividends per share - most recent annual report (year-ends are all 2011, but not the same dates. Most are 12/31, but there are a few fiscal years)

Ratio - pay-out ratio - Dividend / EPS

EPS Growth - future 5 years - Obtained from yahoo finance on the analyst estimate screen

EPS Growth - past 5 years - Obtained from yahoo finance on the analyst estimate screen

Average - Represents the average data point for the 5 stocks listed.

CONSUMER STAPLES

Div Yield Diluted EPS Div Ratio Growth - future 5 yrs Growth - past 5 yrs
Kimberly-Clark 3.9% 3.99 2.80 70% 6.78% 3.95%
Kraft 3.0% 1.99 1.16 58% 9.33% 4.22%
P&G 3.4% 3.93 1.97 50% 8.67% 4.33%
Pepsico 3.1% 4.03 2.03 50% 6.35% 8.17%
Heinz 3.6% 3.06 1.8 59% 8.33% 5.82%
AVERAGE 3.4% 58% 7.89% 5.30%

UTILITIES

Yield 4/19 EPS Div Ratio Growth - future 5 yrs Growth - past 5 yrs
Dominion Resources 4.1% 2.45 1.97 80% 4.60% 6.14%
Southern Co 4.2% 2.55 1.8725 73% 5.74% 4.66%
Con Ed 4.2% 3.57 2.4 67% 3.47% 1.8%
Duke Energy 4.8% 1.28 0.99 77% 3.67% 0.79%
American Electric Power 4.9% 4.02 1.85 46% 3.75% 1.08%
AVERAGE 4.4% 69% 4.25% 2.89%

Dividend CAGR 4 yr - 2007 to 2011 (Fiscal year)

CONSUMER STAPLES 4-yr CAGR
Kimberly Clark 7.3%
Kraft 2.8%
P&G 11.4%
Pepsico 9.2%
Heinz 6.5%
AVERAGE 7.4%
UTILITIES
Dominion Resources 7.8%
Southern Co 4.1%
Con Ed 0.9%
Duke Energy 3.6%
American Electric Power 4.0%
AVERAGE 4.1%

CAGR represents compounded annual growth rate. This was calculated from the Company's most recent annual report or 10-K filing based on 5-year historical dividend per share data.

ANALYSIS

This exercise illustrates to me that the consumer staple stocks currently have a better dividend profile than the utilities. While the utilities have a 1% higher dividend yield at 4.4%, the payout ratio is higher, which suggests a reduced ability to increase the dividend in the future without increasing earnings. The data illustrates tepid earnings growth in the past and muted expectations for the future. The historical earnings growth rate for utilities lagged the staples by 2.4% and the future expectation is 3.6% lower. This variance in growth is also evident in the dividend growth rates. The consumer staples increased their dividends an average of 7.4% during the past 4 years while the utilities only increased their dividends at a 4.1% rate. The utilities also have much less flexibility to increase the pay-out ratio given their already elevated pay-out of 69% versus 58% for the staples.

Given the data above, I believe the consumer staples have a better overall dividend profile than the utilities. I don't think a 1% higher average dividend yield compensates investors enough for the reduced earnings and dividend growth prospects. Utility stocks appear overvalued to me from a dividend perspective similar to the way bonds appear overvalued. Why would I lend the U.S. government money for 10 years with negative real yields (after expected inflation rates)? Why would I purchase utility stocks with a 4.4% average dividend when I can sacrifice 1% of income for a basket of consumer staple stocks with a much stronger dividend growth profile? I also believe that the utilities are much more exposed to a future increase in interest rates, which could trigger a sell-off in these stocks. This is because the utilities appear much more like bonds than the staples, so I think people who chased dividend yield in utilities may have a change of heart when interest rates eventually increase.

I am not suggesting that I purchase stocks purely based on dividend profiles, but the current value disparity between staples and utilities is a good starting point for my security analysis.

Disclosure: I am long KFT, PEP, PG, HNZ, KMB.

Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.