5 Companies Boosting Dividend Payments

GuruFocus.com
11 min read
0
In this article:

There is little more reassuring about a company's ability to continue to pay a dividend than a dividend raise.

Of course, nothing is guaranteed in investing. There have been plenty of companies that raised dividends one quarter only to cut them the next. Thus, a dividend raise may not necessarily be a buy signal.

In my own personal portfolio, my goal is to acquire shares of companies with long track records of dividend growth. The stocks of companies that have experienced multiple recessions and still found a way to increase the dividend payout are particularly attractive to me, as this gives me some confidence that these companies will likely be able to continue to pay and raise dividends during the next recession.

Chubb Limited

Chubb is a provider of insurance and reinsurance services. The company is located in Switzerland, but U.S. investors can purchase shares listed on the New York Stock Exchange. Chubb operates in approximately 140 counties. The U.S. contributed the vast majority of revenues, with global reinsurance and life insurance accounting for the rest. As of May 22, Chubb has a market capitalization of nearly $53 billion. Shares of the company are down more than 20% over the last 12 months.

Chubb raised its dividend 4% for the upcoming July 10 payment. Investors will need to purchase the stock prior to June 18 to receive the dividend. This increase marks 27 consecutive years of dividend increases for the company, meaning that Chubb has managed to raise its dividend through several recessions, including the Great Recession. Many financials were forced to cut dividends during this period. Chubb has compounded its dividend by an annual rate of 8.7% over the last decade, though that growth has slowed to just 2.3% over the last five years. Shares yield 2.7% today, topping the 10-year average yield of 2.3%. The stock's current yield is also above the 2% average yield of the S&P 500.

Using the annualized dividend of $3.12 and predicted earnings-per-share of $9.64, the payout ratio is 32%. Though low, this is higher than the 10-year average payout ratio of 26%. I believe the company's dividend is well-supported by earnings.

Shares of Chubb traded at $117 as of Friday's close. Using predicted EPS, Chubb has a forward price-earnings ratio of 12.1. This is slightly above the 10-year average multiple of 11.6.

While Chubb is trading above its long-term valuation, the company's ability to raise dividends during the financial crisis is a positive sign. The payout ratio is also low and the yield is above average. Investors looking for exposure to the insurance industry might find Chubb interesting for these reasons.

Clorox Company

Clorox is a global leader of consumer and professional cleanliness products. The company has four distinct business segments: Cleaning, which offers laundry, home care and professional products; Lifestyle, which sells food products, water filtration systems and personal care; Household, which consist of charcoal, cat litter and plastic bags; and International, which sells products outside of the U.S. Clorox shares have gained nearly 32% over the last year through May 22, with most of that growth occurring since public awareness of the Covid-19 pandemic began in the U.S. The stock has a market capitalization of $25 billon.

Last week, the company raised its dividend 4.7% for the Aug. 14 payment date. Investors need to own shares by July 28 to receive the dividend. Clorox's dividend has compounded at a 6.5% clip over the last 10 years. Due to the surge in share price, the stock offers a yield of 2.2% today. This is below the decade's average yield of 3%. Clorox has now increased its annual payout for 43 consecutive years, showing that its dividend is recession-tested.

The annualized dividend of $4.44 is projected to account for 67% of predicted EPS for fiscal 2020. This is slightly above the long-term average payout ratio of 63%, but not to the point I would be concerned about a dividend cut.

Clorox closed the most recent trading session at $199. Using predicted EPS of $6.66 for the year, the stock has a price-earnings ratio of 30.2. The 10-year average price-earnings ratio is 22, meaning that the shares trade well above the historical average.

Clorox is trading with a valuation normally reserved for high growth tech stocks, not a consumer products company. To be sure, Clorox has benefited from increased demand for products in recent months, especially in the cleaning category. However, this isn't enough for me to consider the name at the current valuation.

Flower Foods Inc.

At more than 100 years old, Flower Foods is one of the oldest and largest packaged bakery foods companies in the U.S. Flower Foods has 46 bakers spread out over 18 states and products are sold to supermarkets, restaurants, convenience stores and vending companies. The company's product lineup includes Wonder Bread, Nature's Own and Home Pride. The stock is down less than 1% over the last 12 months as of May 22 but up more than 5% year-to-date. Flower Foods trades with a market capitalization of $4.8 billion.

Shareholders of record as of June 4 will be entitled to receive the company's most recent dividend increase of 5.3%. Flower Foods' dividend has increased at a rate of almost 8% annually for the last 10 years. The company now has 19 consecutive years of dividend growth. Shares yield a generous 3.5% as of Friday. This is 50 basis points above the stock's 10-year average yield of 3%.

While the yield is appealing, the payout ratio doesn't leave much room for error on the part of Flower Foods. The annualized dividend of $0.80 is projected to consume 78% of expected EPS of $1.06. For context, the average payout ratio since 2010 is 65%.

Based off of the most recent closing price of $23 and expected earnings, Flower Foods has a forward price-earnings ratio of 21.7. This is nearly in-line with the price-earnings ratio of 21.5 that the stock has averaged over the last 10 years.

Flower Foods has managed to raise its dividend for nearly two decades because it offers products that consumers need even under difficult economic conditions. While the payout ratio is elevated, the dividend yield is above average and the valuation doesn't appear stretched. Investors looking for income from a consumer staple might find Flower Foods interesting, though future dividend growth will depend on earnings growth.

Medtronic plc

Medtronic is the largest manufacturer of implantable biomedical devices in the world. The company sells its products in more than 120 countries. Medtronic has four reportable business segments: Cardiac & Vascular Group, Restorative Therapies Group, Minimally Invasive Therapies Group and Diabetes Group. Medtronic's stock has increased under 2% over the last year through May 22, but lost 16.5% since the start of the year. Medtronic's market capitalization is almost $127 billion.

Medtronic announced last Thursday that the company was raising its dividend 7.4% for the July 17 payment. The ex-dividend date is June 25. Since 2010, the company's dividend has grown at an annual rate of 9.3%. Medtronic's dividend growth streak now stretches back 43 years. The stock's yield is 2.5%, topping Medtronic's 10-year average yield of 2.2%.

The new annualized dividend is $2.32, and the analyst community predicts the company will earn $5.14 per share this year. This gives Medtronic a payout ratio of 45%. This payout ratio makes the dividend look safe, but compares negatively to the 10-year average payout ratio of 31%. Though higher than average, the payout ratio is nowhere near danger territory, so future dividend growth is likely.

Medtronic closed at $95 on Friday, which gives the stock a price-earnings ratio of 18.5. The stock has had an average price-earnings ratio of 13.3 since 2010. Shares are expensive compared to this average.

Medtronic operates in a sector of the economy that is considered to be a safe haven during a recession. Consumers might put off certain purchases under difficult economic conditions, say a new home or car, but will likely continue to seek medical care. The stock's yield is above average, but shares trade at a steep premium to the historical average. Therefore, I would wait for a pullback before adding Medtronic to my portfolio.

Northhop Grumman

With a market capitalization of more than $54 billion, Northrop Grumman is one of the largest aerospace and defense contractors in the world. The company is composed of four business units: Aerospace Systems, which provides products for man and unmanned aircraft; Space Systems, which produces missile defense, space systems, hypersonics and space systems; Mission Systems, which provides radars, sensors and systems for use in surveillance and targeting; and Defense Systems, which offers solutions for information technology, sustainment and modernization and tactical weapons. Shares of Northrop Grumman are up 4.4% over the last 12 months as of May 22, but down 5.3% since the start of 2020.

Northrop Grumman raised its dividend 9.8% for the June 17 payment. Investors looking to capture the increase need to own the stock prior to May 29. The company has compounded its dividend by 10.9% since 2010, so the most recent raise is within striking distance of the annual growth rate. The latest raise gives the company 17 years of dividend growth. Share of Northrop Grumman have a dividend yield of 1.8%, below the long-term average yield of 2.3%.

Based on the increase, the annualized dividend is now $5.80. Analysts predict that the aerospace and defense company will produce $22.57 in EPS for 2020, which equates to a payout ratio of 26%. This is below the 29% average payout ratio that Northrop Grumman averaged from 2010 through 2019.

Northrop Grumman traded at $326 on May 22. Using EPS estimates, the stock has a forward price-earnings ratio of 14.4. The stock has a 10-year average price-earnings ratio of 13.9.

Northrop Grumman is one of the largest companies in the aerospace and defense sector, an area of the economy that I have been very bullish on for some time. The stock's yield is the lowest on this list, but the payout ratio means that the dividend is likely safe even in the event of a prolonged recession. Shares have held up decently compared to the market since the start of the year and the valuation isn't too far off the historical norm. Investors looking for a stock in this sector could find Northrop Grumman attractive.

Final thoughts

A raised dividend likely means that the dividend is safe. Though there are expectations to this trend, I believe Chubb, Clorox, Flower Foods, Medtronic and Northrop Grumman all offer a safe dividend at the moment. Flower Foods' payout ratio is elevated, but there remains room for growth even at a lower level. All of these companies have sufficient histories of dividend growth to provide evidence that they can withstand a downturn in the economy.

Of the names discussed in this article, I find that Chubb, Flower Foods and Northrop Grumman all have a valuation that isn't overly expensive compared to each company's respective history. These stocks might be of interest to investors. I consider Clorox and Medtronic to be expensive, especially the former, which I think has gotten too far ahead of itself in response to the pandemic.

Author disclosure: the author is not long any stocks listed in this article.

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.


Advertisement

Recommended Stories