Finding Dividend Stars Among Consumer Cyclicals

YCharts

This is part of a YCharts series analyzing dividend-payers across all 10 sectors of the S&P 500. The initial article explained how to find dividend stars in ten sectors and following articles focused on dividend stars in consumer defensive stocks, among utility stocks, among financial stocks and among industrials.

The consumer cyclical sector of the S&P 500 got off to a strong 2013 start with an 11% gain in the first quarter. The largest component of the index -- it accounts for 82 of the 500 stocks -- has also managed to beat the index by a wide margin over the past one and three years, periods when discretionary consumer spending has been muted.

Not surprisingly strong price gains have pushed valuations higher; the sector’s 17.1 forward PE ratio is 20% higher than the index average. Still, there are some compelling dividend payers selling at decent valuations today. And potentially longer-term as well, S&P Capital IQ estimates the sector’s price-to-earnings growth rate (PEG ratio) is 1.1, using the projected growth rate over the next five years. That’s a lot lower than the 1.7 for Consumer Defensive. Only Technology, at 1.0 is a better relative value.

Using YChart Stock Screener we landed on nine companies that have a current dividend yield of at least 2%, annualized dividend growth over the past five years of at least 8% (the sector median) and a forward PE no higher than the 17.1 average for the sector.

Darden Restaurants (DRI) is the only one of the nine that is currently rated Attractive by YCharts proprietary analysis available to Pro subscribers. Darden’s generally superior performance and its tasty dividend have moved YCharts to write about the company in the past.

The parent company of casual dining chains including Olive Garden, Red Lobster and LongHorn Steakhouse has widely outperformed coming off the financial crisis, as seen in a stock chart.

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DRI Chart

That said, growth is becoming harder to come by. In Darden’s most recent full quarter (through February) it reported an 18% decline in earnings, as rising costs overwhelmed decent sales growth of 4.3% (2.3% for same store comps.) Still, that showing beat street estimates

For the full year, the company’s estimate for FY 2013 net earnings per share would come in 9% below last year’s level assuming it hits at the high end of management’s given range.

Despite the stock’s strong showing over the past five years, the PE ratio hasn’t budged much, after recovering from depressed levels during the heart of the financial crisis.

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DRI PE Ratio TTM Chart

During that stretch the dividend has more than doubled, and at a current 4.1% dividend yield it sure looks enticing to income investors. But as the chart below shows, Darden’s payout ratio has also doubled and is at a level now that suggests further strong dividend growth will be harder to deliver.

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DRI Dividend Chart

In terms of delivering consistent dividend growth, the two retailing extremes on our list, Wal-Mart (WMT) and Nordstrom’s (JWN) are the standouts. Wal-Mart has been delivering dividend growth forever, as YCharts reported in an earlier 10-part series, and continues to generate strong cash to cover the payout.

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WMT Dividend Chart

The story is much the same for Nordstrom’s. While other retailers cut dividends during the financial crisis as discretionary consumer spending went into hibernation, Nordstrom managed to hold steady on its dividend-and resumed dividend increases after a one-year break in 2009.

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JWN Dividend Chart

Nordstrom’s current payout ratio is a below-average 29% and Wal-Mart is close by at 31%; the other seven consumer cyclical stocks on our list have payout ratios above 50%.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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