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Top 5 Dividend Aristocrats with the Lowest P/E Ratio


 Published 5/19/14

The dividend aristocrats list includes many of the greatest companies of the last several decades. Occasionally, these businesses will go on sale and present buying opportunities for patient investors. The 5 businesses with the lowest P/E ratios in the Dividend Aristocrat index are:

Top 5 pe ratio
 

This article will briefly discuss the current events, growth drivers, and shareholder friendliness of each of these 5 businesses. Each company will also be ranked based on several quantitative measures to give an unbiased view of each company.

Exxon Overview

Exxon is the world’s largest integrated oil & gas business. It is the second largest corporation in the world, behind only Apple (AAPL). Exxon’s growth is driven by worldwide increasing demand for energy. As the leading energy company, Exxon has positioned itself to meet and profit from the world’s increasing appetite for energy.

Source: Exxon 2014 Analyst Presentation

Exxon is an incredibly shareholder friendly corporation. The business has returned over 50% of operating cash flow to shareholders over the last 4 years.

 

Shareholders of Exxon can expect a CAGR of around 9.5% going forward from growth (~4%), dividends (2.75%), and share repurchases (2.75%).

Chevron Overview

Chevron is the world’s 13th largest corporation, and 3rd largest integrated oil & gas business behind only Royal Dutch Shell (RDS.A) and Exxon. Similar to Exxon, Chevron’s growth is being fueled by increasing worldwide demand for energy. The world is demanding more energy as more people worldwide move out of poverty and into the middle class. As demand is increasing for energy, known oil supplies are decreasing. The gap in supply and demand will benefit Chevron (and Exxon).

 

Source: Chevron 2014 Analyst Presentation

Chevron has rewarded shareholders through 26 years of consecutive dividend increases. The business has also repurchased $40 billion worth of shares over the last decade. Shareholders can expect a CAGR of 8.5% from dividends (3.5%), share repurchases (2%), and growth (3%).

AT&T Overview

AT&T is a the second largest domestic telecommunications provider (just behind Verizon). The bulk of the businesse’s revenue come from the US. AT&T now generates over 50% of revenue from wireless.

 

AT&T has been able to keep pace with the quickly changing telecommunications industry. The company’s future growth will increasingly come from consumer demand for data usage in smart phones and tablets. As the industry evolves, AT&T must change with it and adapt to changing technology.

AT&T has been purchasing shares at a rapid clip over the last 2 years. The company purchased $25 billion worth of shares in 2012 and 2013. Shareholders of AT&T can expect a CAGR of 10% to 11.5% going forward from growth (2.5% to 4%), share repurchase (2.5%), and dividends (5%).

AFLAC Overview

AFLAC is the world’s leading seller of cancer insurance. AFLAC sells life, health, and cancer insurance policies in the US and Japan. About 75% of AFLAC’s revenue is generated in Japan. The company’s Japanese revenue concentration makes it susceptible to fluctuations in the dollar/yen conversion rate.

AFLAC’s has managed to grow revenue over the last decade by opening new distribution channels for insurance in Japan. The company sells in banks and post offices throughout Japan, as well as through traditional channels. AFLAC’s future growth will come from greater need for health coverage for Japan’s aging population. AFLAC also has room to expand market share in the competitive US insurance industry.

<p”>Shareholders of AFLAC can expect a CAGR of 6.5% to 11.5% from growth (2% to 7%), dividends (2.5%), and share repurchases (2%). AFLAC’s management has been strategic with their share repurchases. The company attempts to allocate capital to share repurchases when they believe the business to be undervalued.

 

Source: Raymond James Investor Conference

Chubb Group Overview

Chubb group is a global insurance corporation that sells commercial, personal, and special insurance through a network of independent agents. About 75% of the company’s revenue comes from the US, with 25% coming overseas.

Chubb’s future growth will come from the incremental expansion of the company’s insurance business in profitable niche markets. Chubb is also focused on increasing profitability through using predictive analytics to improve underwriting and prevent fraud.

Shareholders of Chubb Group can expect a CAGR of 10% going forward from growth (3%), share repurchases (5%), and dividends (2%). The business has a long history of rewarding shareholders, with 32 years of consecutive dividend increases.

Comparison to Other Stocks with 25+ Years of Increasing Dividends

 

Consecutive Years of Dividend Increases

All 5 of these businesses have a long history of dividend increases.

Date Founded
 

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.The long histories of these businesses show that they operate in slow changing industries, or have found a way to innovate alongside a faster changing industry.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

AT&T has an exceptionally high dividend yield compared to other businesses with 25+ consecutive years of dividend increases.

Yield
 

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Every company except AT&T has a payout ratio below 50%. Chubb, AFLAC, and Exxon all have especially low payout ratios which gives them the opportunity to grow dividends faster than earnings for several years.

Payout Ratio
 

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

AFLAC has grown revenue per share faster than any of the other low cost businesses on the list. Chubb and Exxon have had very solid growth as well over the last decade.

Growth Rate
 

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

AT&T has the lowest volatility out of these 5 businesses. I believe this reflects the stability of the company’s subscription based revenue.

AFLAC has had exceptionally high volatility over the last decade. This is most likely due to the company’s exposure to Japan’s currency and economy, coupled with the cyclical nature of the insurance industry.

Volatility
 

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

All of these companies are in the top quartile of businesses based on the 5 buy rules from the 8 Rules of Dividend Investing. Exxon and Chubb Group tie for the highest ranking.

AT&T and Chevron’s lower growth rates over the last decade keep them from ranking higher. AFLAC ranks highly as well, but its high volatility keeps it from matching Exxon and Chubb Group. Any of these 5 businesses make excellent long-term investments for dividend investors.


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