Next Year’s 4 New Dividend Aristocrats: One Is Priced To Buy Now
The Dividend Aristocrats Index is comprised of 50 stocks that have increased their dividend payments for 25+ consecutive year.
The Dividend Aristocrats Index is very exclusive. To be a member a stock must have the aforementioned dividend history and be a member of the S&P 500.
Only ~10% of S&P 500 stocks are Dividend Aristocrats. The image below shows the number of years of dividend payments for S&P 500 stocks.
Note: 0 is no dividend payments, 1 is 1 year of dividend payments, and 2 is 1 year of increases, 3 is 2 years of increases, and so on.
Being a Dividend Aristocrat matters. The Dividend Aristocrats Index has outperformed the S&P 500 e over the last decade.
Source: S&P Dividend Aristocrats
Based on my research one business will be added to the Dividend Aristocrats List in 2016. Three more will be added in 2017 (assuming they continue to increase dividends).
This article examines the 4 stocks that will become Dividend Aristocrats in the next 2 years
Dividend Aristocrats – General Dynamics
General Dynamics (GD) is an aerospace and defense company founded in 1952. The company has grown to reach a $42 billion market cap.
General Dynamics is the 4th largest aerospace and defense business in the United States based on its market cap. The company’s 3 larger competitors are shown below:
- The Boeing Company (BA) has a $78 billion market cap
- United Technologies (UTX) has a $74 billion market cap
- Lockheed Martin (LMT) has a $66 billion market cap
General Dynamics has increased its dividend payments for 24 consecutive years.
The company’s 25th consecutive dividend increase will occur in April of 2016 (if the company does increase its dividend has planned – which is extremely likely).
The 2016 dividend increase will make General Dynamics eligible to be a Dividend Aristocrat.
General Dynamics operates in 4 segments:
- Marine Systems
- Combat Systems
- Information Systems & Technologies (IS&T)
The company’s aerospace segment is its largest based on operating income in fiscal 2015.
One large customer accounts for over 60% of General Dynamics sales – the United States government. Having one customer responsible for the majority of your business is usually a risky strategy. In General Dynamics case the risk is subdued because that customer is not going anywhere. The United States government is the largest entity in the world.
General Dynamics has grown its earnings-per-share at 8.9% a year over the last decade. The company has accomplished this growth by:
- Reducing its share count by ~3% a year
- Increasing net margins by ~3% a year
- Growing revenue by ~3% a year
I expect General Dynamics to continue growing its earnings-per-share at around 9% a year going forward. This growth combined with the company’s current 2% dividend yield gives investors an expected total return of around 11% per year going forward.
The company’s future growth will be driven by government contracts. General Dynamics relationship and standing with the United States government combined with its manufacturing and research and development capabilities form its competitive advantage.
General Dynamics is currently trading for a price-to-earnings multiple of around 15. The company has historically maintained a low price-to-earnings ratio – which has allowed it to buy shares back at reasonable prices.
General Dynamics ranks well using The 8 Rules of Dividend Investing, despite having a below average dividend yield.
The company’s scores over 4 key metrics are listed below. The 8 Rules of Dividend Investing rank ~180 businesses with 25+ years of dividend payments without a reduction on metrics that matter.
- Dividend yield of 2.0% ranks in the top 77%
- Expected 9.0% growth rate ranks in the top 24%
- Price-to-earnings ratio of 14.8 ranks in the top 23%
- 10 year stock price standard deviation of 24.7% ranks in the top 33%
Linear Technologies (LLTC) is a relatively young company in comparison to other Dividend Aristocrat contenders. The company was founded in 1981 and designs, manufactures, and markets integrated circuits.
The company has increased its dividend payments for 24 consecutive years.
Linear Technologies will be eligible for inclusion in the Dividend Aristocrats Index when the company increases its dividend payments in February of 2017. The company has historically increased its dividend every February.
Linear Technologies has a pristine balance sheet. The company has no debt and $1.3 billion in cash. This level of cash is significant as the company’s market cap is $10.3 billion.
While Linear Technologies is flush with cash it has not seen solid growth. The company has compounded earnings-per-share at 5% a year over the last decade. Earnings-per-share of $2.12 in fiscal 2015 are still well below highs of $2.50 reached in 2011.
The company’s products are purchased by customers in the telecommunications, industrial, personal computing, and automobile industries. The global growth slowdown and low oil prices have impacted the company’s customers which have in turn impacted earnings at Linear Technologies.
What’s troubling about the company’s 5% earnings-per-share growth rate over the last decade is that 2.6 percentage points per year of it came from share repurchases. Without share repurchases the company is only growing earnings at under 3 percentage points a year.
Linear Technologies difficulties stem from the competitive semiconductor industry. Linear Technologies is big enough to compete, but must contend with far larger corporations in the semiconductor industry. As the industry becomes increasingly more commoditized Linear Technologies will likely be hard pressed to grow faster than its current 5% rate.
The company’s pristine balance sheet does give the company room to make an acquisition that could propel growth. Whether this occurs or not is yet to be seen.
On the positive side, Linear Technologies does have a solid 3% dividend yield. This yield combined with the company’s 5% expected earnings-per-share growth rate gives investors expected total returns of around 8% a year.
Linear Technologies is currently trading for a price-to-earnings ratio of 21. The company appears somewhat overvalued at current prices given its mediocre growth prospects.
Praxair (PX) was originally founded as Linde Air Products Company in 1907. The company became Union Carbide and Carbon Company after merging with 4 other companies. The company was spun-off from Union Carbide in 1992. In 1999 Dow Chemical (DOW) purchased Union Carbide.
Praxair has increased its dividend payments for 23 consecutive years.
The company will hit its 24th consecutive dividend increase in March of this year. The company will be eligible to be a Dividend Aristocrat by March of 2017.
Praxair will join Air Products & Chemicals (APD) as industrial gas Dividend Aristocrats. The industrial gas market in the United States (and internationally) is dominated by a few large players. In the United States the market is controlled by 4 corporations:
- Air Products & Chemicals
- Airgas (ARG)
- Air Liquide (AIQUY)
The gas business is highly consolidated because it has strong competitive advantages for incumbent businesses. Large projects require technical know-how and high up-front costs which make competing difficult for a start-up business.
Additionally, gas suppliers have well established gas distribution networks. Once a customer is supplied by a gas company, it is unlikely they switch. Even if a customer wanted to switch, there are very few competitors in any one geographical region that can compete on price in the same distribution network.
As a result, the well-established gas companies (like Praxair) maintain their customers and grow business year after year.
Praxair has grown its earnings-per-share at 7.6% a year over the last decade. The company is expected to continue growing earnings-per-share at around 7.5% a year going forward.
This growth combined with the company’s current dividend yield of 2.9% gives investors double-digit expected total returns going forward.
Praxair is currently trading for an adjusted price-to-earnings ratio of around 18. The company’s price-to-earnings ratio has averaged close to 20 over the past 5 years. Praxair is likely trading at the lower end of fair value at current prices.
Praxair has a strong competitive advantage in the highly consolidated industrial gases industry. The company is trading at a reasonable valuation and offers slightly above average total return prospects going forward. Praxair makes a good holding for investors looking for low risk dividend growth.
Roper Technologies (ROP) was founded over 200 years ago, in 1808. The company is a diversified manufacturer that serves niche markets including: information systems, medical, water, energy, and transportation.
Roper Technologies has realized excellent returns for shareholders since going public.
Source: Roper Barclay’s Conference Presentation, slide 4
Roper has increased its dividend payments for 24 consecutive years. The company has historically raised its dividend payments every January. Roper will be eligible to be a Dividend Aristocrat when the company’s raises its dividend payments in January of 2017.
Roper operates in 4 segments:
- RF Technology
- Industrial Technology
The image below breaks down the company’s performance by segment.
Source: Roper Barclay’s Conference Presentation, slide 8
The company’s management has done an excellent job of growing both revenue and margins. Roper has compounded its earnings-per-share at 13.4% a year over the last decade. Revenue has more than doubled in the last decade, and net profit margin has nearly doubled as well. It is rare for a business to realize significant revenue growth and sizeable margin improvements.
While historical growth has been nothing short of excellent at Roper, current results are not as robust.
The company’s earnings-per-share grew 4% in fiscal 2015. Roper is expecting 5% earnings-per-share growth in fiscal 2016.
The company is seeing a growth slowdown due to the sluggish global economy, strong United States dollar, and low oil prices. Despite negative macro headwinds Roper is still growing. The company is fueling growth by acquiring high margin niche manufacturers. It then uses the cash flows from these businesses to make further acquisitions. This is how Roper has realized such rapid growth over the last ~20 years.
Roper has more in common with a growth stock than with a traditional dividend stock. The company has a low dividend yield of just 0.7%. This is a deal breaker for investors seeking current income.
Additionally, the company has a high price-to-earnings ratio of 25.6. Rapid growth is already ‘baked in’ to the company’s price. Investors looking to start a position in this quickly growing business should wait until its share price declines significantly. The company would be a bargain at a price-to-earnings ratio under 20.
The businesses above all have long dividend histories. Having a long dividend history makes a difference. Businesses with longer dividend histories are less likely to cut their dividend payments.
You can see 170+ businesses with 25+ years of dividend payments without a reduction ranked using The 8 Rules of Dividend Investing in the Sure Dividend Newsletter.