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Are These Stocks Worth Buying Following a Dividend Increase?

·7 min read

Investor looking for income know that share prices can fluctuate over time, but companies that have a long history of dividend growth usually increase their payments to shareholders every year. In this article, I will discuss three stocks with at least 45 consecutive years of dividend growth that recently raised payments, and whether or not I think they look like a buy today.

PPG Industries

PPG Industries raised its dividend by 5.9% for the Sept. 11 payment. Investors will need to own the stock by Aug. 7 in order to receive the dividend. This latest increase is just below the stock's dividend compound annual growth rate, or CAGR, of 6.3% for the last decade. This raise gives PPG Industries its 49th consecutive annual dividend increase. There are less than 40 companies in the U.S. market that have as long or longer of a dividend growth streak.

The new annualized dividend of $2.16 gives shares of PPG Industries a yield of 1.9%, matching the stock's 10-year average yield. This also matches the average yield of the S&P 500. Wall Street analysts expect PPG Industries to produce earnings per share of $4.44 per this year, which gives the stock an expected dividend payout ratio of 49%. This is higher than the decade-long average payout ratio of 35%.

PPG Industries has compounded EPS at a rate of 8.4% over the last decade while sales have increased at an annual rate of just 1.2%. EPS has improved at a faster rate due to the retirement of more than 85 million shares since 2010, but net profit margins have improved 250 basis points to 8.2% over this period of time.

Using Friday's closing price of $112, the stock has a forward price-earnings ratio of 25.2. This compares unfavorably to the stock's 10-year average price-earnings ratio of 20.

As one of the larger companies in its sector, PPG Industries is truly a global leader in paints and coatings. The company's dividend growth streak is closing in on five decades, an especially impressive accomplishment given that it operates in a cyclical business.

That said, shares are expensive against their own history and the dividend yield doesn't offer more income than that of the market index. Investors looking to own the stock are likely better off waiting for a more favorable entry point.

Stanley Black & Decker

Stanley Black & Decker (NYSE:SWK) is a global provider of hand tools, power tools and related construction equipment. The company occupies the top position in the area of tools and storage and is the second largest manufacture of electronic security and engineered fastening products. Stanley Black & Decker has a market capitalization of $23.6 billion. The company generated more than $14 billion in sales last year.

Stanley Black & Decker increased its dividend by 1 cent, or 1.4%, for the Sept. 15 payment date. The stock will begin trading ex-dividend on Aug. 31. The company's dividend has compounded at a rate of 7.3% annually since 2010. Stanley Black & Decker now has 53 consecutive years of dividend growth, one of the longest dividend growth streaks in all the market place.

The company's annualized dividend now totals $2.80, which equates to a dividend yield of 1.8% using the most recent closing price. Shares have averaged a 2.1% yield for the last decade. Wall Street analysts predict that Stanley Black & Decker will earn $5.73 for 2020. This would give Stanley Black & Decker a payout ratio of 49%, which is above the 10-year average payout ratio of 35%.

Earnings have grown at a 7.8% clip over the last 10 years. While some of this growth can be attributed to a slight reduction in the share count, Stanley Black & Decker has seen revenue improve with a CAGR of 5.6% over this period of time. The company has improved its ability to turn sales into profits as the net profit margin reached 8.2% last year compared to just 5.7% in 2010.

Stanley Black & Decker closed the most recent trading session at $154, giving shares a forward price-earnings ratio of 26.7 times earnings. For context, shares have traded with a multiple of 16.3 over the last 10 years.

As with PPG Industries, Stanley Black & Decker's ability to grow its dividend while operating in a cyclical business should be of note to investors. Also, as with PPG Industries, the stock's valuation is quite steep and well-off its long-term average. Stanley Black & Decker remains on my watch list due to its dividend growth history, but I would need a much better valuation prior to purchasing.

Walgreens Boots Alliance

Walgreens Boots Alliance (NASDAQ:WBA) is a leading pharmacy retailer that has operations in both the U.S. and Europe. All totaled, Walgreens has more than 19,000 stores in 11 countries and has a distribution network that supplies 230,000 hospitals, pharmacies and doctors every year. The company is valued at nearly $36 billion and had sales of $137 billion in fiscal 2019 (the company's fiscal year ends Aug. 31).

Shareholders will receive a 2.2% dividend increase for the Sept. 11 payment. Investors wanting to receive the dividend will need to own the stock prior to the ex-dividend date of Aug. 18. Walgreens' dividend nearly tripled between 2010 and 2019. The dividend increased with a CAGR of just under 12% over this period of time. Walgreens' dividend growth streak now stands at 45 consecutive years.

Following the recent dividend increase, the annualized payment to shareholders is $1.87. The yield on shares of Walgreens is 4.6%, more than twice that of the S&P 500. As I've written previously, this is considerably higher than the stock's 10-year average yield of 2.2%. Wall Street expects EPS of $4.93 for the current fiscal year. Dividends would consume just 38% of this EPS total, slightly above the 10-year average payout ratio of 34%.

Walgreens' EPS has a CAGR of nearly 11% since 2010. A small decline in shares outstanding has contributed some of this growth, but a 7.3% annual increase in sales is the primary factor in the company's growth. Net profit margin hasn't improved much over the last 10 years, just 80 basis points to 4% between 2010 and 2019.

The stock closed Friday at around $41. Using EPS estimates for the year, the stock has a forward price-earnings ratio of 8.3. For context, the stock has a decade-long average price-earnings ratio of 15.9.

I continue to believe that shares of Walgreens are ridiculously cheap. Even a slight reversion to the average valuation would result in a considerably higher share price. At the same time, the stock's yield is very high and appears safe given the expected EPS payout ratio this year. Investors looking for value and income should consider buying Walgreens at the current price, in my opinion.

Final thoughts

Income investors always look forward to the next dividend increase, and PPG Industries, Stanley Black & Decker and Walgreens Boots Alliance all delivered an increase in recent weeks. Each company has more than four decades of dividend growth, something only a handful of companies in the entire market can match.

Stanley Black & Decker and Walgreens gave meager raises while PPG Industries' increase was closer to its 10-year average. On the other hand, only Walgreens trades below its long-term average valuation and offers a yield higher than that of the S&P 500.

For these reasons, Walgreens appears to be a buy today, while I would wait for a much cheaper valuation before purchasing either PPG Industries or Stanley Black & Decker.

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

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This article first appeared on GuruFocus.