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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| September 2017
The Wilanów Palace Museum via Wikipedia
Dividend Aristocrats are an elite group of S&P 500 companies that have raised their payouts for a minimum of 25 consecutive years. To make it on to this list, you must operate your business efficiently over almost three decades — a feat that’s not easy for any company.
Income investors love buying Dividend Aristocrats because these companies are committed to paying dividends through thick and thin. However, it’s harder to do this if you’re not growing your business sufficiently, either on the top line, the bottom line or both.
Take McDonald’s Corporation (MCD) for example. It has barely grown revenues — up 8.1% between 2007 and 2016 — yet its gross and operating margins are the highest they’ve been in the past decade. Yes, the stock is doing well, but dividend investors aren’t exactly getting McDonald’s full effort, with the most recent payout increase registering at less than 6%.
Today, I want to look at seven Dividend Aristocrats that are also growing at a reasonable pace. I’m also going to include members of the S&P High Yield Dividend Aristocrats Index — those S&P 1500 companies that have raised their dividend every year for at least 20.
Prices and data are from the original InvestorPlace story published on September 5, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 2.65%
It was looking to make a big acquisition for some time, but VF Corp finally pulled the trigger earlier this month when it announced it was buying Williamson-Dickie — the maker of the Dickies brand of workwear — for $820 million, doubling its annual workwear revenue, and more importantly, reigniting the growth engine.
As a result of the deal, VF has upped its revenue and earnings goals for 2021. It now expects to grow revenues 5% to 7% annually over the next five years to more than $15 billion. Dickies is projected to deliver more than $1 billion in revenue by 2021, making it VF Corp’s sixth billion-dollar brand.
On the earnings front, VFC expects to grow EPS on a compounded annual basis between 11% to 13% to more than $5 per share, with Dickies adding 25 cents per share to the bottom line.
“When we introduced our 2021 global business strategy earlier this year, reshaping our portfolio to accelerate growth was our highest priority,” said Steve Rendle, president and chief executive officer of VF. “The acquisition of Williamson-Dickie is another meaningful step that delivers on that commitment and further demonstrates our focus on being an active portfolio manager to drive transformative growth for VF and value creation for our shareholders.”
I expect to hear more big ideas from North Carolina in the next 12 to 24 months.
Dividend yield: 1.01%
Back in July 2012, I wrote a little piece about A. O. Smith Corp., a Wisconsin manufacturer that specializes in water heaters, including the tankless variety.
What attracted me to AOS stock was the fact the company was making significant strides in China, a country that can be a tough market to crack for non-Chinese companies, yet it had managed to capture 20% of the Chinese residential water heater market. The stock has more than quadrupled since July 19, 2012 — the date the article appeared on InvestorPlace.com — and I remain excited about its prospects.
A.O. Smith continues to grow revenues at more than 10% annually. China accounts for 33% of its overall revenue and has grown 22% annually over the past decade. North America represents the lion’s share at 65%.
In the U.S., AOS is the leader in the residential market with a 40% market share; it also sits atop the commercial gas market with 52% of the market. In China, it now has more than 25% market share — 10 percentage points higher than its closest competitor.
A.O. Smith introduced air purifiers in China a couple of years ago. Its latest quarterly report suggests it could develop a good secondary business in the Chinese market to complement its successful water heater business.
The S&P 500 added AOS to its ranks in late July, and more good things should follow, as the Chinese market is a one-two punch for future growth.
Dividend yield: 1.74%
About the only area of retail that’s not getting killed is the off-price segment, where TJX Companies Inc. and Ross Stores, Inc. (ROST) battle it out for the title of the best discount retailer.
If you looked at both stocks’ performance in 2017, you’d probably take a pass on both. As most retail experts suggest, that would be a big mistake.
TJX’s latest quarterly report included another solid performance, with same-store sales up 3%, and earnings per share (excluding currency) up 9.9% to 89 cents. It also returned $751 million to shareholders via dividends and share repurchases.
TJX expects fiscal 2018 earnings of at least $3.78, 7% higher than for the full-year in 2017. The rising minimum wage and wages, in general, are expected to reduce earnings for the year by 2%.
Don’t let the minimum wage story shake you out of this stock. TJX will figure out a way how to make the business as profitable as it has ever been, whether the minimum wage is $11, $13 or $15 per hour.
On Aug. 21, TJX opened its newest concept, HomeSense, in Framingham, Massachusetts. It’s focused more on larger furniture than is typically available at another TJX chain, HomeGoods, and the company expects to have a total of four open by the end of 2017.
I like TJX over ROST because it has greater geographic diversity. Plus, it doesn’t hurt that its Sierra Trading concept is also up and coming.
Dividend yield: 5.82%
While it sounds like a crazy recommendation on the surface, Tanger Factory Outlet Centers, Inc. is one of the better contrarian investments to come along in years.
“Retail sucks” goes the refrain, but the truth is the industry needed a shakeup. Now that everyone associated with it has to figure out how to make a go of it, real estate investment trusts (REITs) like SKT aren’t in the terrible position everyone thinks they are.
“The most recent RetailNext Store Performance Pulse indicated that while store traffic and sales remain in decline, these dips are less drastic than in the past. The 5.5% year-over-year traffic decline in July 2017 was retail’s lowest decline rate in 18 months, while the 5.7% year-over-year sales dip was the lowest in 14 months,” Glenn Taylor of online publisher Retail TouchPoints recently wrote. “And outside of three months during the past year, retailers’ in-store conversion rates — sales transactions as a percentage of traffic — have largely remained within a 0.1% to 0.5% range, in line with totals from April and May 2015.”
Retail rents are at their highest level since 2008, which means the stores that aren’t going bankrupt are willing to pay big bucks to keep their more profitable locations open. Many of those just happen to be in outlet malls owned by Tanger.
Tanger’s stock hasn’t traded this low since 2011, yet its overall occupancy rate in Q2 2017 was 96.1%, and its adjusted funds from operations (AFFO) was unchanged year-over-year at $59.4 million.
The sky might be falling, but from where I sit, Tanger is in the enviable position of owning outlet malls exclusively — the last place retailers tend to cut when looking to shrink their retail footprint.
Dividend yield: 0.99%
Last September, I included SEI Investments Company in a list of seven debt-free stocks I thought would survive the coming bear market. The bear market has yet to arrive, but I still believe SEIC stock makes a good investment.
The shares are up 23% since my Sept. 26, 2016, article, and trade within a couple percent from their all-time highs. But if you think SEI doesn’t have any more gas in the tank, you’re wrong.
On July 5, SEI announced that it had acquired Archway Technology Partners, LLC — a company whose technology helps family offices function properly. If you’re unfamiliar with family offices, they are what rich people use to stay rich.
All kidding aside, the global family office market is $7 trillion and growing, providing SEI with a tremendous opportunity to capture a critical piece of the wealth management industry.
“This announcement represents a modest shift in SEI’s long-held belief in purely organic growth. We believe there is value in growing through carefully considered strategic acquisitions that add to our expanding geographic footprint, market reach, platform functionality, and expertise,” said Alfred P. West, Jr., Chairman and CEO of SEI at the time of the deal.
SEIC currently manages or administers $779 billion in assets. The addition of Archway will undoubtedly accelerate its push to $1 trillion, but in a fraction of the time.
This acquisition is a case of one plus one equals three.
Dividend yield: 1.07%
Here’s an interesting fact: S&P Global Inc. is the index provider behind the S&P 500. SPGI is up more than 42% year-to-date, giving the stock the advantage over the S&P 500 in five of the past six years. The lone exception was 2016, when the index beat it by a mere 141 basis points. Over the past five years, SPGI has outperformed the index by an average of 12 percentage points annually.
There used to be a saying that you bought stock in the mutual fund company, not the mutual fund company’s products. The same theory applies to S&P Global. You can buy some of its products through exchange-traded funds (ETFs), but you’re better off just going with the real thing.
S&P Global is all about finding, analyzing and disseminating information to those in need of an edge when it comes to decision making. Big data is the future; SPGI is all over it.
In the latest quarter, SPGI’s indices business generated $184 million in revenue, 20.3% higher than a year earlier. While that’s just 12% of its overall revenue in the quarter, its operating income grew 19.0% YOY to $119 million — a healthy 64.7% operating margin.
Let’s just say the indices business punches above its weight.
S&P Global’s three operating segments — which also include its ratings business, the company’s biggest by revenue and operating profits; and its global intelligence segment, featuring S&P Capital IQ, a great resource for investors of all stripes — deliver the goods.
You might not like SPGI’s low yield, but who cares when you’re getting double-digit total returns?
Dividend yield: 3.4%
You can’t have a selection of seven Dividend Aristocrats and not recommend at least one pharmaceutical company.
AbbVie Inc is in a weird situation in that while it’s considered a Dividend Aristocrat, it has only been a publicly traded company for four years. However, it was spun off from former parent Abbott Laboratories (ABT) in 2013, which has paid a dividend for 25 consecutive years … so ABBV gets a pass.
ABBV trades at just 11.5 times its forward earnings as a result of losing its exclusivity in the U.S. on Humira, its anti-inflammatory drug, which accounts for 63% of the company’s overall 2016 revenues.
At present, biosimilar drugs such as Amjevita — which is owned by Amgen, Inc. (AMGN) and expected to hit the market in 2019 or 2020 — are suppressing AbbVie’s stock price. If legal challenges by several of its competitors are successful, Humira could see a challenge to its dominance sooner rather than later.
To replace the loss of growth expected from Humira’s patent expiry, AbbVie has bet heavily on several oncology drugs, including paying $21 billion in 2015 to acquire Pharmacyclics, the company behind successful Imbruvica. The problem is AbbVie shares profits in the U.S. with Johnson & Johnson (JNJ), which owns the rights to the drug internationally.
As a result of this acquisition and others, AbbVie has $33.8 billion in long-term debt, a reasonable 28.7% of its market cap. However, should ABBV not be able to replace the loss of revenue and profits from Humira fully, its annual free cash flow — currently about 20% of that debt — would shrink considerably, making its balance sheet a potentially bigger problem than it currently is.
But I don’t see it getting that far. I still think AbbVie’s management will figure out how to keep the company’s top and bottom lines growing.
This article is from Will Ashworth of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
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