The last article I wrote introduced the brand new Dividend Aristocrats Best Value Rankings page. It’s a quick resource for evaluating the most undervalued Aristocrats to be considered for further research.
Today’s post takes a closer look at the current Top 5 Dividend Aristocrats using the tool. And I’m super excited about who’s here to help out.
Please welcome Mr. Aristocrats himself, Ben Reynolds from Sure Dividend. Ben is one of my favorite dividend bloggers and a MUST READ for income investors. He’s a full-time writer focusing entirely on dividend paying stocks.
Regulars that check out my Blogfeed have surely seen a number of his posts. Ben is a prolific stock analyst, consistently churning out high quality content, including his annual detailed review of every Dividend Aristocrat.
In addition, his subscribers get a top-notch monthly newsletter highlighting the Top 10 Dividend Stocks. Sure Dividend uses The 8 Rules of Dividend Investing to systematically rank high quality businesses for long-term investors. I had a chance to view his March 2016 newsletter (where he expands into the 182 stocks with 25 or more years of dividend payments without a reduction), and I was really impressed.
For dividend investors that want a second pair of eyes to supplement their own research, Sure Dividend provides the goods.
With that, here is Ben’s take on the RBD current Top 5 undervalued Aristocrats. After reading his insight, be sure to click over to SureDividend.com for more.
The rankings system should not be the final step in your investment decision tree. Rather, it is a good place to start.
This article takes a look at the Top 5 Dividend Aristocrats using the Retire Before Dad Best Value Ranking system.
#5 Abbott Laboratories
Abbott Laboratories (ABT) was founded in 1888. The company has grown tremendously since that time. Today, Abbott Laboratories has a market cap of ~$60 billion.
Abbott Laboratories has a long dividend history. The company has been paying dividends since 1924. It has also paid increasing dividends (excluding the effects of spin-offs) for 44 consecutive years.
Most companies talk about being ‘global’. Abbott Laboratories is a truly global business.
- 69% of sales are generated outside the United States
- ~50% of sales are generated in emerging markets
The company operates in 4 segments. Each segment is listed below:
- Medical Devices
- Established Pharmaceuticals
The company owns several well-known nutritional brands including Similac, Pedialyte, and Ensure.
Abbott Laboratories recently announced it will acquire Alere (ALR) for $5.8 billion. Abbott is acquiring Alere at a P/E ratio of 29. The acquisition will bolster Abbott’s diagnostic equipment division and make the company the global leader in point of care testing.
Abbott Laboratories full fiscal 2015 results showed adjusted earnings-per-share of $2.15 for the full year, growth of 8.6% versus the previous year. The company is expecting adjusted EPS of $2.10 to $2.20 in fiscal 2016. Excluding issues in Venezuela from the company’s currency and negative currency effects from the strong United States dollar, Abbott Laboratories is projecting 10% Adjusted EPS growth.
The company’s growth is being driven by favorable economic tailwinds. The middle class of emerging market populations is growing. This results in greater demand for health care in these regions. At the same time, governments are spending greater amounts on health care, and the global population is aging. These 3 macro-economic factors will drive long-term growth for Abbott Laboratories.
Archer-Daniels-Midland (ADM) is a Dividend Aristocrat thanks to its 41 consecutive years of dividend increases. The company is one of the largest agricultural businesses in the world. Archer-Daniels-Midland originates:
- 30% of the global soy bean supply
- 15% of the global corn supply
- 15% of the global wheat supply
The company has struggled lately – which makes now an excellent time to buy into shares of Archer-Daniels-Midland.
Archer-Daniels-Midland’s business is cyclical and is currently in a downturn. The company’s dividend is very safe despite the downturn. Management announced a ~7% dividend increase in its latest quarterly report. This brings the company’s quarterly dividend to $0.30/share for a payout ratio of ~50%. Struggling businesses don’t hike their dividends by 7% unless long-term growth prospects remain bright.
This is the case with Archer-Daniels-Midland.
Archer-Daniels-Midland has compounded its earnings-per-share at 13.6% a year from 1999 through 2015.
Investors should expect total returns of 10% to 13% a year going forward from:
- The stock’s 3.2% dividend yield and
- Expected earnings-per-share growth of 7% to 10% a year
The long-term growth driver for ADM is increased food consumption from growing global populations. ADM’s management is shedding low margin businesses and acquiring higher margin businesses. Recent acquisitions include: WILD Flavors (flavorings and additives) and Harvest Innovations (Non-GMO, organic, and gluten-free ingredients).
Archer-Daniels-Midland currently trades for a low price-to-earnings ratio of just 12.8. The company appears undervalued at current prices given its above-average total return potential.
#3 Dover Corporation
Dover Corporation (DOV) is a large diversified global manufacturer. The company currently has a market cap over $10 billion. Dover has increased its dividend payments for an amazing 60 consecutive years – one of the longest active streaks of any business. The company’s long dividend streak makes it one of only 17 Dividend Kings.
Dover’s excellent dividend history shows clear evidence of a strong competitive advantage. The company’s competitive advantage comes from its focus on innovation and continuous improvement.
Dover’s innovations are protected through its man patents. The company has managed to consistently raise its margins over the last decade. Net profit margin has grown from 7.5% to 13.8% over the last decade.
Dover’s increasing margins show the company’s competitive advantages are strengthening as it acquires more bolt-on businesses and further enhances its technology and brand portfolio. The company benefits from greater scale.
Greater scale benefits are seen by combining multiple smaller manufacturing facilities into larger facilities. The company has focused on consolidating manufacturing facilities recently.
Dover’s management’s goal is to allocate around 50% of capital to capital expenditures and acquisitions, and 50% to dividends and share repurchases. This strategy has worked well for the company; Dover has grown its earnings-per-share at 7.5% a year over the last decade.
I expect a total returns of 7.5% to 11.5% for shareholders of Dover from the following sources:
- Dividend yield of 2.5%
- Revenue growth of 3% to 5%
- Share repurchases of 1% to 2%
- Margin improvements of 1% to 2%
Dover is currently trading for a price-to-earnings multiple of 17.6. The company appears to be trading around fair value at current prices.
#2 T. Rowe Price Group
T. Rowe Price Group (TROW) is one of the largest asset managers in the world. The company was founded in 1937 and now manages over $700 billion in assets.
The company has paid increasing dividends for 30 consecutive years. T. Rowe Price Group’s long dividend streak shows that investors have continued to choose the company’s investment products over the last 3 decades.
The company’s funds tend to outperform their peers. The percentage of the company’s mutual funds that have outperformed over various time frames is shown below:
- 1 Year: 71%
- 5 Year: 77%
- 10 Year: 88%
Investing in asset managers is similar to investing with leverage. Asset managers tend to do well during bull markets. That’s because assets under managements naturally rise as a result of rising equity values. This creates greater asset management fees. In addition, investors tend to flock to equities as bull markets progress for fear of ‘missing out’. The reverse is true as well. During bear markets, asset management companies tend to perform poorly as assets under management fall from both declining equity values and clients pulling out funds.
T. Rowe Price Group has handled these industry difficulties well. The company has managed to compound earnings-per-share at around 10% a year over the last decade.
Going forward I expect earnings-per-share growth of 7% to 9% a year from T. Rowe Price Group. The company’s growth will likely slow somewhat due to headwinds in the asset management industry. Namely, the growing market share of ultra-low cost ETFs which put pressure on asset management margins.
These pressures are clearly already priced into T. Rowe Price Group stock. The company appears to be undervalued at its current price-to-earnings ratio of 15.7.
Aflac (AFL) is the global leader in supplemental cancer insurance. Despite the many ‘Aflac Duck’ ads United States viewers have no doubt been exposed to, the company generates far more of its premiums in Japan.
Japan accounts for about 75% of Aflac’s premiums, with the other 25% coming from the United States. The insurance industry is an excellent industry in which to invest. That’s because some insurers have very favorable economics.
Aflac is one of the highest quality insurers around.
The company’s combined ratio is often under 90%. The combined ratio measures the profitability of an insurance company’s operations before investment gains/losses. The combined ratio is calculated as the sum of expenses and claims paid divided by premium revenue earned. A combined ratio under 100% means the company’s insurance business is profitable before investment gains.
When this is the case, the insurance company is getting paid to invest its insurance float. That’s like taking out a negative interest rate loan for your investments. Aflac’s high margins make it a compelling investment in the insurance industry.
On top of its high margins, Aflac stock is also cheap at current prices. The company is currently trading for a price-to-earnings ratio of just 10.8. Aflac stock has a dividend yield of 2.6% and a payout ratio of just 26.8%. In addition, the company has a very shareholder friendly management. Aflac has raised its dividend payments for 33 consecutive years.
The company’s combination of a long dividend history, a low price-to-earnings ratio, presence in a slow changing industry, and above-average dividend yield make it a compelling investment choice for dividend growth investors looking for exposure to the insurance industry.
RBD Note: Thanks again to Ben Reynolds for his take on the Top 5 Dividend Aristocrats. Please click the button below to check out his site.
Disclosure: The author is long ABT, ADM, AFL
Disclosure: RBD is long ABT, ADM, AFL, TROW, DOV