Bargain Hunting: The 10 Worst Performing Dividend Achievers Of 2016

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Investors can build significant wealth over time by investing in dividend growth stocks. One place to look for dividend growth stocks is the Dividend Achievers list.

The Dividend Achievers are companies that have raised their dividends for at least 10 consecutive years, and exhibit certain minimum size and liquidity requirements.

You can see the entire list of all 273 Dividend Achievers here.

These stocks can help build income. Even better, buying beaten-down stocks at cheap valuations can be a profitable strategy, for investors looking for value in addition to income.

By doing so, investors could get their hands on a group of stocks that offer dividend growth plus potential share price appreciation, if their turnarounds are successful.

This article will discuss 10 of the worst-performing Dividend Achievers in 2016, and why they may be turnaround candidates for 2017.

Worst Performing Dividend Achievers Of 2016

10. Hormel Foods (HRL)

Hormel stock has declined 11% since the start of 2016, and there does not seem to be a fundamental justification for it.

Hormel is about as stable of a business as you’ll find in the stock market. The company was founded in 1891. Today, the company operates five main segments:

  • Refrigerated Foods (47% of sales)
  • Jennie-O Turkey (21% of sales)
  • Grocery Products (19% of sales)
  • Specialty Foods (8% of sales)
  • International & Other (5% of sales)

It is highly diversified. Hormel sells a number of different food items, across both refrigerated and packaged goods.

Source: Barclays Global Consumer Staples Conference, page 9

These businesses are performing well. For fiscal 2016, net sales increased 2.8%, while diluted earnings-per-share increased 29%.

The only conceivable reason for Hormel’s share price drop this year is that the stock could have been overvalued. Heading into 2016, Hormel stock sported a price-to-earnings ratio above the market average.

But this could be an opportunity, because the company continues to grow and generate strong earnings.

Moving forward, Hormel’s strategy is to first build profitability in its core brands. In addition, it plans to generate new growth from acquisitions and product innovation, through its Muscle Milk and Justin’s brands.

Dividend Achievers

Source: Barclays Global Consumer Staples Conference, page 21

Plus, the stock is now attractively priced. Hormel stock has a price-to-earnings ratio of 21, thanks to its share price decline throughout the year.

Hormel could now be a good value stock, and it has always been a great dividend growth stock. The company recently raised its dividend by 17%, from $0.58 per share to $0.68 per share.

This was the 51st consecutive year in which Hormel raised its dividend. Hormel is not just a Dividend Achiever, but a Dividend Aristocrat as well—an even more exclusive club of companies that have raised dividends for 25 years in a row.

You can see the entire list of Dividend Aristocrats here.

Hormel has paid 353 quarterly dividends without interruption.

9. Brown-Forman (BF-B)

Brown-Forman stock has declined 9% year-to-date. Like Hormel, this could be for valuation reasons. Brown-Forman shares had more than doubled in the past five years.

It could simply be taking a breather, but now Brown-Forman stock is back to being a good value play. Brown-Forman trades for a price-to-earnings ratio of 17.

The stock does not offer a high yield—its current yield is just 1.6%. But it makes up for this with rapid dividend growth.

The company raised its dividend by 7% in 2016, and has increased its dividend for 33 consecutive years. Going back further, Brown-Forman has paid dividends to shareholders for 71 years without interruption.

It has maintained its impressive dividend growth history because of its strong business model. Brown-Forman is a global manufacturer of alcoholic beverages.

Its core brand is Jack Daniels whiskey, which recently celebrated its 150th anniversary. Its other brands include Herradura and El Jimador tequila, and Finlandia vodka.

Over the first two quarters of its current fiscal year, Brown-Forman increased constant-currency sales and operating profit by 2% and 7%, respectively.

This performance was driven by the company’s smaller, high-growth brands, namely Woodford Reserve and Herradura.

For example, sales of Woodford Reserve increased 19% year-to-date. This brand has grown at a 20% annual rate for many years.

Dividend Achievers

Source: Investor Day presentation, page 31

In addition, sales of Herradura increased 16% over the first two quarters of the fiscal year. This is another brand that has grown at a double-digit rate in recent years.

Dividend Achievers

Source: Investor Day presentation, page 35

Brown-Forman’s core brands provide stability, and the company is investing aggressively in its growth brands. Combined, this should provide more than enough earnings growth to continue raising dividends.

8. V.F. Corporation (VFC)

V.F. Corporation (VFC) traces its beginnings all the way back to 1899. In the more than 100 years since, it has become a global apparel giant.

Today, it has 64,000 employees and its annual sales top $12 billion.

V.F. Corporation has a balanced business model, led by its outdoor and action sports segment.

Dividend Achievers

Source: Q3 Earnings presentation, page 1

In 2016, the company has struggled in the Americas. Domestic revenue fell 4% last quarter.

Fortunately, its international growth is picking up the slack. Revenue in Europe, the Middle East and Africa rose 6% last quarter, while revenue in the Asia-Pacific region increased 4%.

Among V.F. Corporation’s core brands, Vans is doing the heavy lifting.

Dividend Achievers

Source: Q3 Earnings presentation, page 1

Lastly, V.F. Corporation is tightening its cost controls, in light of weakening growth. The company increased gross margin by 70 basis points last quarter, thanks to lower cost of goods sold.

Overall, this propelled 16% growth in earnings-per-share for the quarter, excluding the impact of currency.

For the full fiscal year, V.F. Corporation expects 2% revenue growth and 7% growth in earnings-per-share.

In addition to its international growth, the company is counting on expanding into new channels for growth.

Specifically, direct-to-consumer is an emerging channel for V.F. Corporation. This is thanks to the boom in e-commerce. Last quarter, V.F. Corporation grew direct-to-consumer sales by 6%.

The company’s growth has slowed this year, which explains why the stock is down 13% year-to-date. But now, the stock is much more attractive.

V.F. Corporation trades for a price-to-earnings ratio of 20, which is reasonable. And, the stock offers a solid 3.1% dividend yield.

The company has hiked its dividend for an impressive 44 consecutive years.

7. Abbott Labs (ABT)

Abbott Labs is a global health care giant. It has four main business segments:

  • Nutrition (33% of sales)
  • Diagnostics (23% of sales)
  • Established Pharmaceuticals (19% of sales)
  • Medical Devices (25% of sales)

Abbott’s most important business segment is nutrition. The company has a dominant position in adult nutrition, led by its Ensure brand. It also manufactures Glucerna, and the Similac child-nutrition brand.

Future growth in this category will be fueled by Abbott’s strong brands and new product releases.

Dividend Achievers

Source: 2015 Annual Report, page 21

Collectively, Abbott’s businesses are performing well throughout 2016. Organic sales, which excludes the impact of foreign exchange translations, increased 5% in the first three quarters of the year. Earnings-per-share increased 5%.

Abbott derives about 50% of its annual sales from developed markets like the U.S. and Europe, and the other 50% from emerging markets.

The company is seeing strong international growth this year. Over the first nine months of 2016, international revenue increased 5.9%, which exceeded the 3.5% growth in the U.S.

This strong international performance is reflected by the Established Pharmaceuticals business. This was one of Abbott’s strongest-performing businesses in 2015.

Dividend Achievers

Source: 2015 Annual Report, page 33

Growth in that segment has continued into this year. Constant-currency revenue increased by 9.8% in the Established Pharmaceuticals segment, over the first nine months of the year.

Abbott’s Established Pharmaceuticals business is entirely based in the international markets. Abbott spun off its U.S. pharmaceuticals business, which now trades independently as Abbvie (ABBV).

The company is seeing especially strong growth in key emerging markets, which are Russia, India, China, and Brazil. These countries are enjoying rapid economic growth, which is benefiting Abbott.

Sales in these four emerging markets rose 13.4% over the first three quarters of 2016, on a constant-currency basis.

Abbott recently raised its dividend by 2%, and the company has paid 371 consecutive dividends. Abbott has a 2.7% current dividend yield.

6. Monro Muffler Brake (MNRO)

Monro Muffler Brake is the most under-the-radar company to appear on this list. Many investors may not have ever heard of this company.

Monro Muffler Brake is an automotive services company. It provides scheduled maintenance, repairs, and sells tires.

Dividend Achievers

Source: October 2016 Investor Presentation, page 6

The company has a variety of retail brands, including Monro Muffler Brake and Service, Mr. Tire, Tread Quarters Discount Tires, Autotire, Tire Warehouse, Tire Barn, Ken Towery’s Tire and Auto Care, The Tire Choice and Car-X.

Monro Muffler Brake operates 1,097 company-owned stores across 26 U.S. states. And, it franchises 131 Car-X stores in 10 states.

The stock has a market capitalization of just $1.8 billion, meaning it is a small cap stock. Nevertheless, the company has a good dividend track record.

It has paid dividends for 11 years, and has increased its dividend in each of those 11 years.

Its impressive dividend history is due to the company’s strong business model. Automotive repairs are always necessary, even when the economy enters recession.

Moreover, the number of light vehicles on the road is increasing. Light vehicles tend to need more frequent servicing.

Dividend Achievers

Source: October 2016 Investor Presentation, page 13

This all makes for a sound fundamental backdrop for the company, and its earnings have grown at a high rate for many years.

Dividend Achievers

Source: October 2016 Investor Presentation, page 14

In addition, Monro Muffler Brake strategically acquires companies to grow. It has conducted 40 acquisitions in the past 15 years, which have added $800 million in annual revenue.

And, since consumers are holding onto their cars longer, Monro Muffler Brake is seeing strong growth. For example, in the fiscal year ended March 31, sales and earnings-per-share rose 5.5% and 6.4%, respectively.

The company is off to a good start to fiscal 2017 as well. Over the first two quarters, sales increased 2.1% from the same period in fiscal 2016.

Monro Muffler Brake stock has a 1.6% dividend yield.

5. Cardinal Health (CAH)

Cardinal Health is a major healthcare supply distributor. The stock has lost 20% of its value since the beginning of 2016.

Investor sentiment became more pessimistic this year, likely because the company is in a difficult transition period. After losing Walgreens Boots Alliance (WBA), a major customer, Cardinal Health’s revenue fell in 2013 and 2014.

Fortunately, it secured new customers and has returned to revenue growth. In fiscal 2016, revenue increased 19% to $121.5 billion, which set a company record.

However, Cardinal Health has a new set of problems that emerged in 2016. Specifically, deflationary pressure on drug prices, due primarily to generic competition.

The company has done well to secure new customer relationships. But since 90% of Cardinal Health’s business comes from its pharmaceutical segment, eroding profit margins from falling drug prices have had a distinct impact on earnings.

Dividend Achievers

Source: Q1 Earnings presentation, page 5

This caused total company earnings-per-share to decline 17% last quarter.

Cardinal Health management expects full-year pharmaceutical segment revenue to increase in the high single digits. But pressure from generic drugs is expected to reduce pharmaceutical segment profits by the high single digits.

The company expects to make up for this by growing profits in its medical and specialty businesses.

Dividend Achievers

Source: Q1 Earnings presentation, page 12

Cardinal Health believes this can lift overall company growth. Long-term adjusted earnings-per-share are projected to rise 10%-15% as a result.

This would be more than enough growth to continue raising the dividend. Cardinal Health stock has a 2.5% dividend yield, and the company has increased its dividend payout for the past 31 years.  Cardinal Health’s combination of double-digit growth, an above-average dividend yield, and low forward price-to-earnings ratio of 12 make it a favorite of The 8 Rules of Dividend Investing.

4. Nike (NKE)

Nike is the global leader in athletic apparel. This year has been a rough one for the stock, which has lost 19% of its value year-to-date.

This could be another valuation story. Nike stock had risen significantly over the past few years, and became one of the market’s growth stock darlings.

Nike generated strong earnings growth over the past five years.

Dividend Achievers

Source: Nike Annual Report

But as growth started to slow, particularly in the emerging markets, the stock experienced compression of the valuation multiple.

The good news is that this could be a buying opportunity. Nike stock is more reasonably valued now, with a price-to-earnings ratio of 23. It is cheaper than the S&P 500, which has a price-to-earnings ratio of 26.

While Nike’s growth is slowing, the company is still putting up strong results. Over the first six months of the current fiscal year, revenue and earnings-per-share rose 7% and 10%, respectively.

Moreover, Nike generates very high returns on capital.

Dividend Achievers

Source: Nike Annual Report

Nike enjoys a very strong brand name. According to Forbes, Nike is ranked as the number 18 most valuable brand in the world. Its brand alone is worth $27.5 billion.

This provides the company with a high brand image and pricing power over the consumer.

As a result, it still has plenty of growth left in the tank.

Nike has raised its dividend for 15 years in a row. And, it is a high dividend growth stock. Its 2016 hike was an impressive 13%.

This helps make up for its relatively low dividend yield, of 1.4%. The company maintains a modest payout ratio of 32%, which leaves plenty of room for double-digit annual dividend increases.

3. CVS Health Corporation (CVS)

CVS is an integrated pharmacy health care service provider. It operates in two main segments:

  • Pharmacy Services (60% of sales)
  • Retail/LTC Segment (40% of sales)

In all, CVS services more than 9,600 retail pharmacies, more than 1,100 walk-in medical clinics, and its pharmacy benefits management business has nearly 80 million plan members.

There does not seem to be a fundamental reason for CVS Health’s share price decline, other than the broad concerns over drug pricing.

The company grew revenue by 17% through the first three quarters of 2016. Various one-time expenses such as acquisition costs reduced earnings-per-share growth to just 1% in the same period.

But these costs are non-recurring in nature. Adjusted earnings-per-share are expected to increase 11.75%-13% in 2016.

Thanks to its strong business model, CVS generates a lot of cash flow.

Dividend Achievers

Source: 2016 Analyst Day presentation, page 7

Such high levels of free cash flow allow the company to invest in growth opportunities such as acquisitions, as well as return cash to shareholders.

Dividend Achievers

Source: 2016 Analyst Day presentation, page 11

CVS expects to return $7-$8 billion to investors each year in total cash returns.

Going forward, the company plans to boost margins further by cutting costs. CVS expects to deliver approximately $700-$750 million in annual cost savings by 2021.

Cumulatively, savings are projected to reach nearly $3 billion over the next five years.

This should help the company continue growing its dividend at a high rate. CVS has already announced a 18% dividend increase for 2017.

CVS is an attractive stock based on valuation and income. The stock has a price-to-earnings ratio of 16, and has a 2.5% dividend yield.

2. AmerisourceBergen (ABC)

Like Cardinal Health, AmerisourceBergen is a healthcare distributor. It has a massive network.

Dividend Achievers

Source: Citi Global Healthcare Conference, page 4

In all, it provides distribution service to more than 50,000 healthcare facilities.

AmerisourceBergen is an industry giant—it generates more than $145 billion of revenue each year.

The stock has lost approximately 25% of its value so far in 2016, for many of the same reasons as Cardinal Health. Namely, deflationary pressure on drug prices.

But the company’s fundamentals remain sound. In fiscal 2016, revenue and gross profit increased 8% and 21%, respectively.

Much of this growth is driven by a favorable industry fundamentals. The U.S. healthcare industry is experiencing strong growth, due to two primary factors: the aging population and expanded insurance coverage.

Dividend Achievers

Source: Citi Global Healthcare Conference, page

Moreover, the company is growing through acquisition, including its $2.5 billion takeover of MWI Veterinary Supply in 2015.

These structural tailwinds are resulting in significant cash flow generation for the company. In fiscal 2016, Amerisource Bergen generated $2.7 billion of free cash flow.

With so much free cash flow, the company can afford to raise its dividend each year, and also buy back stock. The company recently announced a new $1 billion regular share repurchase program.

In addition, Amerisource Bergen has a solid balance sheet. It ended last quarter with $2.7 billion in cash and short-term marketable securities, compared with $3.5 billion of long-term debt.

The share price decline has created an attractive buying opportunity. AmerisourceBergen stock trades for a price-to-earnings ratio of just 12.

The stock also has a 1.9% dividend yield, and the company recently raised its dividend by 7%.

1. Perrigo (PRGO)

Taking the top spot on this list is Perrigo, a stock that has lost 43% of its value year-to-date.  The company has a forward price-to-earnings ratio of just 11.

Perrigo develops and manufactures over-the-counter consumer goods and pharmaceutical products worldwide.

The company operates through the following segments:

  • Consumer Healthcare (49% of sales)
  • Branded Consumer Healthcare (23% of sales)
  • Prescription Pharmaceuticals (21% of sales)
  • Specialty Sciences (7% of sales)

Perrigo has a huge brand portfolio, most of which is consumer-facing.

Dividend Achievers

Source: Raymond James 37th Annual Institutional Investors Conference, page 6

Falling drug prices, particularly in generics, have had a devastating effect on the company.

This year has been butal for Perrigo. It has had to incur massive charges against earnings, due to impairments to goodwill. These write-downs caused the company to lose $1.2 billion last quarter alone, which completely reversed a $113 million profit in the same quarter last year.

A lot of the asset impairments have to do with Perrigo’s $3.7 billion acquisition of Omega Pharma in 2014.

Going forward, Perrigo is hoping that its lineup of new product releases can return the company to higher growth.

Dividend Achievers

Source: Raymond James 37th Annual Institutional Investors Conference, page 10

There may be reason for optimism, as the company generates high amounts of cash flow. And, excluding its impairments, Perrigo is highly profitable. Adjusted earnings-per-share are projected to increase 25%-29% in 2016, to $9.50-$9.80 per share.

Perrigo stock has a 0.70% dividend yield. This is far below the 2% average dividend yield in the S&P 500 Index. As a result, it is not a compelling stock pick for income investors – but it does make an interesting pick for contrarian investors looking to capitalize on market overreaction.

Perrigo’s turnaround strategy could indeed materialize, but the share price will likely not recover until its asset impairments are behind it.

One could argue that the company should consider raising its dividend to a more competitive level. This would at least compensate investors who have had the patience to hold on during the company’s various challenges.

Article by Bob Ciura

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