As 2016 draws to a close, it’s a good time for investors to start planning for 2017. One of the best places to look for dividend growth stocks is the Dividend Aristocrats list.
The Dividend Aristocrats are companies in the S&P 500 that have increased their dividends for at least 25 consecutive years.
The following 10 stocks come from a wide range of industries. The stocks are ranked in order, using The 8 Rules of Dividend Investing.
Here are the 10 best Dividend Aristocrats for 2017 (and beyond).
#10 – W.W. Grainger (GWW)
W.W. Grainger distributes maintenance, repair, and operating products used in motors, safety products, lab supplies, outdoor equipment, janitorial supplies, and more. The company was founded in 1927 and currently generates $10 billion of annual revenue.
The company operates in five core businesses:
- S. Large (60% of sales)
- S. Medium (9% of sales)
- Single Channel (11% of sales)
- Canada (7% of sales)
- International (9% of sales)
It also has a Specialty Brands segment which accounts for the remaining sales, but W.W. Grainger does not report this segment separately.
Over the first nine months of 2016, W.W. Grainger’s sales increased 2.3% from the same period in 2015. However, earnings-per-share declined 4.5% in the same period, due to higher restructuring expenses.
The company is restructuring to improve performance in some of its major segments, most importantly its U.S. Large business. This is the largest segment for the company, by annual revenue.
Source: Credit Suisse Industrial Conference, page 10
Separately, W.W. Grainger is trying to turn its Canada business around. Sales in Canada dropped by 16% last quarter. This caused a $15 million operating loss in Canada last quarter, down from a $4 million operating profit in the same quarter last year.
Fortunately, the company has a plan to restore growth to the Canada business.
Source: Credit Suisse Industrial Conference, page 14
Despite the various challenges seen this year, W.W. Grainger remains a strong dividend growth stock. It has increased its dividend for 45 years. It can do this because of its high free cash flow.
Source: Credit Suisse Industrial Conference, page 17
W.W. Grainger stock has a 2% dividend yield, which is about on par with the S&P 500 Index average.
#9 – Medtronic (MDT)
Medtronic is a global medical devices giant. The company is organized into four main operating segments, which are:
- Cardiac and vascular (35% of sales)
- Restorative therapies (25% of sales)
- Minimally invasive therapies (34% of sales)
- Diabetes (6% of sales)
Medtronic is performing well to start the current fiscal year. Sales rose 1% through the first two fiscal quarters.
For the full year, management expects sales to rise in the mid-single digits. Much of this growth will be from acquisitions, in particular the Covidien takeover. This was the largest deal in Medtronic’s history.
Source: Morgan Stanley Global Healthcare Conference, page 14
Such a large acquisition provides significant room to cut costs.
Margin Expansion Image
Source: Morgan Stanley Global Healthcare Conference, page 7
Cost cuts will be a major driver of Medtronic’s future earnings growth, as will growth in new product categories.
One area in particular the company wants to expand on is diabetes. This is Medtronic’s smallest business segment by far, but it is aggressively pursuing growth in this category.
Today, Medtronic’s diabetes segment is about a $2 billion business. But by 2021, management expects sales to double to $4 billion.
Source: Jefferies Diabetes Summit presentation, page 3
It plans to achieve this growth by changing focus. Currently, Medtronic’s diabetes business is mostly in the U.S., and is focused on devices.
Going forward, Medtronic will adopt a global strategy, with a focus on outcome-based research and development.
Medtronic is an attractive dividend growth stock because it is highly profitable and has a healthy balance sheet. According to the company, it has raised its dividend by 15% each year over the past decade.
The company has raised its dividend for 39 years in a row. Medtronic currently has a 2.4% dividend yield.
#8 – Wal-Mart (WMT)
Wal-Mart earns a place on this list because of its amazing stability. It is the largest retailer in the world, with approximately $500 billion in annual sales.
It is an ideal stock selection for risk-averse investors. Wal-Mart stock offers very low volatility. It has a beta value of just 0.10, which means that the stock is expected to rise or fall just 0.10% for every 1% move in the S&P 500.
Wal-Mart’s relative safety can be observed particularly during recessions.
When economic times are tough, cash-strapped consumers typically scale back spending at super markets. This makes Wal-Mart the ideal recession stock.
More recently however, Wal-Mart’s growth has slowed. The company is extremely recession-resistant, but its defensive business model also means it can lag behind during times of economic growth.
For example, this fiscal year Wal-Mart expects to generate adjusted earnings-per-share of approximately $4.27, at the midpoint of guidance. This would represent a 7% year over year decline.
One reason for this is that Wal-Mart is spending more to renovate its U.S. stores and increase employee wages, with the goal of improving its domestic performance. In recent years, Wal-Mart’s brand image deteriorated in the U.S.
This investment will negatively impact earnings this year, but the progress is already noticeable. U.S. comparable sales have increased for six consecutive quarters.
Plus, international growth is a positive catalyst for the company. Net sales for Wal-Mart International rose 2.5% last quarter, excluding the effects of currency.
Source: Investment Community Meeting, page 6
Thanks to strong overseas growth and improved performance in the U.S., Wal-Mart’s net sales growth is accelerating.
Source: Investment Community Meeting, page 4
Wal-Mart is so financially strong that it can invest billions in the business, and still generate plenty of earnings to grow its dividend.
Wal-Mart has raised its dividend each year for the past 43 years.
#7 – Becton, Dickinson, & Company (BDX)
Becton, Dickinson, & Company manufactures medical supplies. It has been in business for more than a century.
The company operates in two segments, which are BD Medical and BD Life Sciences. Becton, Dickinson, & Company has a wide range of products and solutions across these categories.
Source: Analyst Day presentation, page 8
The company’s most compelling growth catalyst is its $12 billion acquisition of CareFusion. The deal was a home-run across the board.
Source: Analyst Day presentation, page 7
CareFusion accelerates Becton, Dickinson, & Company’s medication management business. The acquisition was a major reason why Becton, Dickinson, & Company’s medical operating segment revenue soared 34% in fiscal 2016.
This was far better performance than Life Sciences, which posted flat revenue for the fiscal year.
Plus, since they are such complementary companies, there is a huge cost savings opportunity from the acquisition. By 2018, management expects to generate $325-$350 million of annualized