The 3 Worst Performing Dividend Aristocrats This Year by Ben Reynolds

The Dividend Aristocrats Index is comprised of 50 businesses with 25+ years of consecutive dividend increases.  You can see all 50 Dividend Aristocrats here.

Over the last decade, the performance of the Dividend Aristocrats Index has been excellent.

Dividend Aristocrats, Cardinal Health, T. Rowe Price Group

Source:  S&P Fact Sheet

But that doesn’t mean all Dividend Aristocrats perform well all the time…

This article takes a look at the 3 worst performing Dividend Aristocrats this year.  These are great businesses that the market has discounted since the beginning of the year.  Buying high quality businesses trading at fair or better prices is an excellent way to generate long-term wealth.

The worst performing Dividend Aristocrats this year are:

  1. Cardinal Health (CAH), down 8%
  2. Walgreens Boots Alliance (WBA), down 3%
  3. Rowe Price Group (TROW), down 2%

As you can see, none of these stocks have seen massive losses.  That’s because the S&P 500 (SPY) is up 8.0% so far this year.  A rising tide lifts all boats.  The 4 businesses above have not taken part in market gains this year.

The 3 worst performing Dividend Aristocrats are analyzed in detail below.

Cardinal Health

Cardinal Health stock has not performed well this year… But the underlying business does not know that.  The company grew adjusted earnings 17% in fiscal 2016.

Earnings have surged forward while the company’s stock price has declined.  This is great news for investors who are looking to get more earnings ‘bang’ for their investing ‘buck’.

Cardinal Health is currently trading for a forward price-to-earnings ratio of 13.1.  The company has paid increasing dividends for 32 consecutive years, and offers investors a dividend yield of 2.2%.  Better yet, the company has compounded adjusted earnings-per-share at 11.8% a year over the last 5 years.

The company’s combination of a long dividend history, cheap valuation, and solid growth make Cardinal Health a favorite of The 8 Rules of Dividend Investing.

The company’s future looks as bright as recent results.  Cardinal Health is one of the largest businesses in the pharmaceutical and medical supply industry.  The company has a $26 billion market cap – only competitor McKesson (MCK) with its $43 billion market cap is larger.

The pharmaceutical supply industry is categorized by massive economies of scale and very low margins.  Cardinal Health’s net profit margin is extremely slim at 1.2%.

Jeff Bezos is famous for saying “your margin is my opportunity”.  There is not much opportunity in the pharmaceutical supply industry due to razor thin margins.  Cardinal Health’s economies of scale in a low margin business create a strong competitive advantage that prevents new companies from entering the market.

Cardinal Health shareholders will likely see far better results over the long run than what they’ve seen so far this year.  The company will benefit from the continued ‘graying of America’ – as baby boomers age and require more health care.  Cardinal Health’s competitive advantage will protect it from competition as it benefits from industry growth.

Walgreens Boots Alliance

Like Cardinal Health, Walgreens is currently ranked as a Top 10 Dividend Aristocrat using The 8 Rules of Dividend Investing.   The company ranks well because it has:

  • A reasonable adjusted price-to-earnings ratio of 18.6
  • 40 consecutive years of dividend increases
  • Low 34% payout ratio (using adjusted earnings)
  • Double-digit expected total returns

Walgreens is a good example of a high quality businesses with solid growth prospects trading at a reasonable price.

The company was founded in 1901 and has grown to reach a market cap of $88 billion.  The company’s largest direct competitor is CVS Health (CVS), which has a $104 billion market cap.

Walgreens currently operates 8,173 stores in the United States and Puerto Rico.  The company plans to acquire Rite Aid (RAD).  The acquisition would boost Walgreens’ store count by as much as 4,500, depending on how many Rite Aid stores Walgreens takes over, and how many it divests.

Walgreens has realized earnings-per-share growth of 9% a year over the last decade.  The company set itself up for future growth by acquiring Boots Alliance at the beginning of 2015.  The move gives Walgreens significant exposure in Europe.  Exploiting synergies from this acquisition have led to excellent resent results.

The company is expecting adjusted earnings-per-share of $4.50 in fiscal 2016, up 16% from adjusted earnings-per-share of $3.88 in fiscal 2015.  The image below shows Walgreens business performance through the first 3 quarters of fiscal 2016.

Dividend Aristocrats, Cardinal Health, T. Rowe Price Group

Source:  Walgreens 3rd Quarter Investor Presentation

The company’s long-term prospects remain bright.  Walgreens future growth will be propelled by the same trends benefiting Cardinal Health.  Walgreens’ convenient locations and prescription filling services will only be more in demand as the United States population ages.

T. Rowe Price Group

  1. Rowe Price Group is one of the larger publicly traded asset managers. The company was founded in 1937 and today has a market cap of over $17 billion.
  2. Rowe Price Group has a total of $776.6 billion in assets under management. The company has paid increasing dividends for 30 consecutive years.

As an investment provider, the core reason to invest in T. Rowe Price Group funds is to get better performance than peer averages.  90% of the company’s funds have outperformed peer averages on a 10 year basis.

Despite strong historical performance, T. Rowe Price Group saw its mutual fund assets under management declined 3% in the company’s most recent quarter, and revenues declined 2%.

As an asset manager, T. Rowe’s assets under management, revenue, and profit are largely tied to the performance of equity markets.  When equity markets decline, so does the company’s assets under management.  Similarly, when markets are rising, T. Rowe benefits.

This effect can be seen in the company’s performance through the Great Recession.  In 2007 earnings-per-share were at $2.40.  In 2008, earnings-per-share fell to $1.82.  In 2009, they fell further, to $1.65 per share.  The company’s share price plummeted as well, from a high of $70 down to $20.

  1. Rowe operates a cyclical business model. The company’s profits are tied to market performance – though the company remains profitable throughout market cycles. T. Rowe has a low payout ratio of around 44% of adjusted income.  The company’s lower payout ratio allows T. Rowe to increase dividends even when earnings decline during recessions.

If the market enters into another serious decline, T. Rowe stock will likely follow suite – with more severe losses than the overall market.  When its price is depressed, T. Rowe stock makes an excellent long-term investment.