Published December 22nd, 2016 by Bob Ciura
As 2016 draws to a close, it’s a good time for investors to start planning for 2017. One of the best places to look for dividend growth stocks is the Dividend Aristocrats list.
The Dividend Aristocrats are companies in the S&P 500 that have increased their dividends for at least 25 consecutive years.
You can see the entire list of all 50 Dividend Aristocrats here.
The following 10 stocks come from a wide range of industries. The stocks are ranked in order, using The 8 Rules of Dividend Investing.
Here are the 10 best Dividend Aristocrats for 2017 (and beyond).
#10 – W.W. Grainger (GWW)
W.W. Grainger distributes maintenance, repair, and operating products used in motors, safety products, lab supplies, outdoor equipment, janitorial supplies, and more. The company was founded in 1927 and currently generates $10 billion of annual revenue.
The company operates in five core businesses:
- S. Large (60% of sales)
- S. Medium (9% of sales)
- Single Channel (11% of sales)
- Canada (7% of sales)
- International (9% of sales)
It also has a Specialty Brands segment which accounts for the remaining sales, but W.W. Grainger does not report this segment separately.
Over the first nine months of 2016, W.W. Grainger’s sales increased 2.3% from the same period in 2015. However, earnings-per-share declined 4.5% in the same period, due to higher restructuring expenses.
The company is restructuring to improve performance in some of its major segments, most importantly its U.S. Large business. This is the largest segment for the company, by annual revenue.
Source: Credit Suisse Industrial Conference, page 10
Separately, W.W. Grainger is trying to turn its Canada business around. Sales in Canada dropped by 16% last quarter. This caused a $15 million operating loss in Canada last quarter, down from a $4 million operating profit in the same quarter last year.
Fortunately, the company has a plan to restore growth to the Canada business.
Source: Credit Suisse Industrial Conference, page 14
Despite the various challenges seen this year, W.W. Grainger remains a strong dividend growth stock. It has increased its dividend for 45 years. It can do this because of its high free cash flow.
Source: Credit Suisse Industrial Conference, page 17
W.W. Grainger stock has a 2% dividend yield, which is about on par with the S&P 500 Index average.
#9 – Medtronic (MDT)
Medtronic is a global medical devices giant. The company is organized into four main operating segments, which are:
- Cardiac and vascular (35% of sales)
- Restorative therapies (25% of sales)
- Minimally invasive therapies (34% of sales)
- Diabetes (6% of sales)
Medtronic is performing well to start the current fiscal year. Sales rose 1% through the first two fiscal quarters.
For the full year, management expects sales to rise in the mid-single digits. Much of this growth will be from acquisitions, in particular the Covidien takeover. This was the largest deal in Medtronic’s history.
Source: Morgan Stanley Global Healthcare Conference, page 14
Such a large acquisition provides significant room to cut costs.
Margin Expansion Image
Source: Morgan Stanley Global Healthcare Conference, page 7
Cost cuts will be a major driver of Medtronic’s future earnings growth, as will growth in new product categories.
One area in particular the company wants to expand on is diabetes. This is Medtronic’s smallest business segment by far, but it is aggressively pursuing growth in this category.
Today, Medtronic’s diabetes segment is about a $2 billion business. But by 2021, management expects sales to double to $4 billion.
Source: Jefferies Diabetes Summit presentation, page 3
It plans to achieve this growth by changing focus. Currently, Medtronic’s diabetes business is mostly in the U.S., and is focused on devices.
Going forward, Medtronic will adopt a global strategy, with a focus on outcome-based research and development.
Medtronic is an attractive dividend growth stock because it is highly profitable and has a healthy balance sheet. According to the company, it has raised its dividend by 15% each year over the past decade.
The company has raised its dividend for 39 years in a row. Medtronic currently has a 2.4% dividend yield.
#8 – Wal-Mart (WMT)
Wal-Mart earns a place on this list because of its amazing stability. It is the largest retailer in the world, with approximately $500 billion in annual sales.
It is an ideal stock selection for risk-averse investors. Wal-Mart stock offers very low volatility. It has a beta value of just 0.10, which means that the stock is expected to rise or fall just 0.10% for every 1% move in the S&P 500.
Wal-Mart’s relative safety can be observed particularly during recessions.
When economic times are tough, cash-strapped consumers typically scale back spending at super markets. This makes Wal-Mart the ideal recession stock.
More recently however, Wal-Mart’s growth has slowed. The company is extremely recession-resistant, but its defensive business model also means it can lag behind during times of economic growth.
For example, this fiscal year Wal-Mart expects to generate adjusted earnings-per-share of approximately $4.27, at the midpoint of guidance. This would represent a 7% year over year decline.
One reason for this is that Wal-Mart is spending more to renovate its U.S. stores and increase employee wages, with the goal of improving its domestic performance. In recent years, Wal-Mart’s brand image deteriorated in the U.S.
This investment will negatively impact earnings this year, but the progress is already noticeable. U.S. comparable sales have increased for six consecutive quarters.
Plus, international growth is a positive catalyst for the company. Net sales for Wal-Mart International rose 2.5% last quarter, excluding the effects of currency.
Source: Investment Community Meeting, page 6
Thanks to strong overseas growth and improved performance in the U.S., Wal-Mart’s net sales growth is accelerating.
Source: Investment Community Meeting, page 4
Wal-Mart is so financially strong that it can invest billions in the business, and still generate plenty of earnings to grow its dividend.
Wal-Mart has raised its dividend each year for the past 43 years.
#7 – Becton, Dickinson, & Company (BDX)
Becton, Dickinson, & Company manufactures medical supplies. It has been in business for more than a century.
The company operates in two segments, which are BD Medical and BD Life Sciences. Becton, Dickinson, & Company has a wide range of products and solutions across these categories.
Source: Analyst Day presentation, page 8
The company’s most compelling growth catalyst is its $12 billion acquisition of CareFusion. The deal was a home-run across the board.
Source: Analyst Day presentation, page 7
CareFusion accelerates Becton, Dickinson, & Company’s medication management business. The acquisition was a major reason why Becton, Dickinson, & Company’s medical operating segment revenue soared 34% in fiscal 2016.
This was far better performance than Life Sciences, which posted flat revenue for the fiscal year.
Plus, since they are such complementary companies, there is a huge cost savings opportunity from the acquisition. By 2018, management expects to generate $325-$350 million of annualized cost synergies.
As a result, the acquisition boosted earnings-per-share by 22% in fiscal 2016.
Another growth catalyst for Becton, Dickinson, & Company is international markets. Specifically, emerging markets are a key driver of future growth.
In fiscal 2016, constant-currency revenue grew 5.3% in the emerging markets, led by 10% growth in China. This exceeded the developed markets, which grew 4.1%.
Overall, the company’s adjusted earnings-per-share increased 29% on a currency-neutral basis. Going forward, earnings-per-share are expected to grow another 12%-13%.
This will be more than enough earnings growth to continue raising the dividend.
Becton, Dickinson, & Company has a below-average dividend yield of 1.8%, but it makes up for this with high dividend growth rates.
The company has increased its dividend for 45 consecutive years, including a 10.6% raise on Nov. 21.
#6 – Hormel (HRL)
It should not come as a surprise to see Hormel make this list. Food companies are common on the Dividend Aristocrats list, because they have very stable business models.
Hormel has paid 354 consecutive quarterly dividends without interruption, going all the way back to 1928.
Hormel has a diversified portfolio, which includes Spam and other canned foods, Skippy peanut butter, as well as Jennie-O and a number of refrigerated products.
As a global food giant, Hormel enjoys pricing power and a lean cost structure. This leads to high returns on invested capital that typically are near the top of its industry.
Source: Barclays Global Consumer Staples Conference, page 7
One might instinctively assume that a huge food company like Hormel does not have many growth prospects, since it is so stable.
But this would be a mistake. Hormel has surprisingly good growth prospects. One is in natural and organic foods. Hormel acquired Applegate Farms last year for $775 million. Applegate Farms produces natural and organic meats.
In addition, Hormel is investing in its prepared refrigerated snacks business. This is an emerging focus area for the company. It has observed a trend in which consumers are eating more protein-based snacks.
Source: Barclays Global Consumer Staples Conference, page 15
Meats-as-a-snack are an attractive growth category for the company.
In all, Hormel has a multi-faceted growth strategy. It involves continued stability of its core brands, along with product innovation and acquisitions to expand into higher-growth product lines.
Source: Barclays Global Consumer Staples Conference, page 21
This is the formula that has provided Hormel with high growth rates. Hormel grew earnings-per-share by 24% in fiscal 2016.
A big reason why Hormel is the highest-ranked food company on this list is because it is a high-growth Dividend Aristocrat. Thanks to its strong earnings growth, the company routinely raises its dividend by double-digits, such as its 17% dividend increase on Nov. 21.
Hormel has raised its dividend for 51 years in a row. This makes the company a Dividend Kings – a select group of 18 stocks with 50+ years of consecutive dividend increases. You can see the full list of Dividend Kings here.
#5 – V.F. Corporation (VFC)
V.F. Corp is a global apparel giant. It has a long list of popular clothing brands.
Source: 2015 Annual Report, page 8
It has a strong track record of sales and earnings growth over the past five years, which has financed its impressive dividend growth in that time.
Source: 2015 Annual Report, page 6
However, the company has seen a growth slowdown in 2016.
For example, sales declined 1% last quarter. Management attributed this to weak performance in the Americas, which is troubling as that is V.F. Corp’s largest market.
Fortunately, there are still growth opportunities. One is growth in international markets. Approximately 36% of V.F. Corp’s 2015 sales came from outside the U.S.
This percentage is likely to expand going forward, as international markets are growing at a high rate. Last quarter, international revenue rose 6% in constant currency.
In addition, e-commerce is an emerging catalyst for V.F. Corp. The boom in online shopping does not appear to be slowing down anytime soon. V.F. Corp is aggressively investing in e-commerce to capitalize on the trend.
E-commerce is the company’s fastest growing direct-to-consumer channel, and represented approximately 16% of its direct-to-consumer business in 2015.
This year, direct-to-consumer revenue increased 6% last quarter. And, the company expects direct-to-consumer sales growth in the high-single digit range. It is expected to be the highest-growth operating segment this year.
Lastly, V.F. Corp can increase earnings-per-share because of cost cuts. Last quarter, the company expanded its gross margin by 0.70%, thanks to more favorable pricing, sales mix, and lower cost of goods sold.
These benefits resulted in 13% growth in earnings-per-share last quarter. For the full year, V.F. Corp projects 7% currency-neutral earnings growth for the full year.
V.F. Corp is a stable dividend stock and a high dividend growth stock, all in one. It has raised its dividend for 44 years in a row, including a 14% raise in 2016.
#4 – Abbott Labs (ABT)
Health care stocks are natural picks for a list of best Dividend Aristocrats. They are highly profitable, and have stable, defensive business models.
After all, people often cannot choose whether to take medication. For this reason, health care companies can remain profitable, even during recessions. Many of them pass along a portion of earnings each year in dividends.
Abbott Labs fits the mold.
Abbott has a large, diversified health care business. It generates more than $20 billion of annual revenue. It operates in four core segments, each of which are significant to the company:
Source: 2015 Annual Report, page 11
Abbott is also diversified geographically—half of its 2015 sales came from developed markets, and the other half were derived from under-developed markets.
Sales, excluding foreign exchange, rose 5.2% over the first nine months of 2016. Sales rose in all four segments. Earnings-per-share rose 9.3% in the same period, showing the benefit of Abbott’s diversified business.
Going forward, Abbott’s biggest growth catalyst is acquisition. The company made a huge deal earlier this year, when it acquired St. Jude Medical for a whopping $25 billion.
St. Jude fits in seamlessly with Abbott’s core operations. It expands Abbott’s position in medical devices, and there are significant cost-cutting opportunities.
Source: St. Jude Acquisition presentation, page 6
One thing investors should consider is that, because of Abbott’s huge acquisition, there may be less room for dividend growth.
For example, while Abbott recently raised its dividend, it was just a 2% hike.
That being said, Abbott stock does offer consistency. It has made 372 consecutive quarterly dividends, going all the way back to 1924. And, Abbott has raised its dividend for 45 years in a row.
After the dividend increase, Abbott has a forward dividend yield of 2.8%.
#3 – Johnson & Johnson (JNJ)
Johnson & Johnson is a legend among Dividend Aristocrats. J&J was incorporated all the way back in 1887. Today, it has a presence in more than 60 countries, with more than 126,000 employees.
In the 20-year period from 1995-2015, J&J grew sales and adjusted earnings-per-share each year by 8% and 10%, respectively.
With its steady growth, it has increased its dividend for 54 consecutive years. The company has generated such strong long-term returns because of its effective business strategy.
Source: Consumer and Medical Devices Business Review, page 14
J&J has a diversified business that encompasses the entire health care spectrum. Its operating segments are as follows:
- Consumer (18% of sales)
- Pharmaceutical (47% of sales)
- Medical Devices (35% of sales)
J&J has dozens of well-known brands. It has 24 brands and properties that each collect $1 billion or more in annual sales.
The company’s impressive growth over the past decades is due largely to its research and development. Successful R&D spending is one of the most important competitive advantages for health care companies.
Source: Consumer and Medical Devices Business Review, page 22
The billions of dollars J&J spends on R&D each year are paying off. In 2015, currency-neutral revenue increased 5.3%, and adjusted earnings, increased 5.8%.
Business conditions have remained favorable this year.
Sales, excluding foreign exchange, rose 4.5% through the first nine months of 2016. The best-performing geographic segment for the company this year is the U.S., where sales rose 7.1%.
Among its operating segments, J&J’s pharmaceutical business has performed the best, with sales up 9.1% over the first nine months.
J&J’s consumer business has lagged its other operating segments this year. Consumer sales rose 0.4% in the first nine months.
But the consumer business offers stability, with strong brands like Band-Aids and Listerine, among others. And, this segment stands to benefit from growth in e-commerce, which is a surprising catalyst for J&J.
Source: Consumer and Medical Devices Business Review, page 42
Going forward, continued growth across the business will easily allow J&J to continue raising its dividend each year.
#2 – Cardinal Health (CAH)
Cardinal Health claims the number two spot on this list because it has a dominant position in its niche, which is distribution of health care supplies. It operates in two segments, pharmaceutical and medical.
The pharmaceutical business consists of more than 25,000 U.S. pharmacies.
Source: Credit Suisse Healthcare Conference, page 7
The pharmaceuticals business is seeing profound changes. Cardinal Health has successfully added customers, but it is struggling with falling prices.
This has led to a mixed bag of results. For example, last quarter pharmaceutical revenue increased 14%, but segment profit fell 19%. Margins are falling, as the company faces pricing pressure from generic drugs.
The good news is that Cardinal Health is focused on improving profitability in the pharmaceutical business.
In the meantime, the medical segment is performing exceptionally well.
Source: Credit Suisse Healthcare Conference, page 8
Last quarter, medical segment revenue and profit increased 12% and 26%, respectively.
Conditions are more difficult than usual, due to a combination of weak drug pricing and the loss of a key pharmaceutical customer. But Cardinal Health has a proven long-term track record of delivering results.
Over the past five years, diluted earnings-per-share from continuing operations rose 13.4% per year. In turn, the company raised its dividend by 14.7% compounded annually in this period.
Cardinal Health stock trades for a price-to-earnings ratio of 17. It is significantly cheaper than the S&P 500 Index, which has a price-to-earnings ratio of 26.
And, the stock has an above-average dividend yield of 2.5%.
Cardinal Health is an attractive stock for dividends, growth, and value. A stock that exhibits all three qualities is a truly rare find, which is why Cardinal Health ranks so highly on this list.
#1 – AbbVie (ABBV)
Taking the top spot on the Best Dividend Aristocrats for 2017 list is Abbvie.
Abbvie was spun-off from Abbott Labs in 2013. It focuses entirely on four core therapeutic areas, which are immunology, oncology, virology, and neuroscience.
Source: R&D Day Presentation, page 6
As a pharmaceutical pure-play, Abbvie faces a higher level of risk. Drug companies are under intense regulatory and public scrutiny over drug pricing.
Moreover, drug companies are already exposed to the risk of losing patent protection on key drugs.
But as the old saying goes, high risk often results in high reward. Abbvie is a very tempting stock for investors willing to take a little more risk than comes with diversified health care giants such as J&J.
For example, Abbvie has a 4.2% current dividend yield. Abbvie’s dividend yield towers above its peer group, most of which have a dividend yield in the 2%-3% range.
And, Abbvie offers excellent dividend growth. The company recently hiked its payout by 12.3%.
Abbvie stock trades for an attractive price-to-earnings ratio of 16. One reason the stock is so cheap could be that investors are afraid of future patent expirations.
Its most important drug, Humira, is set to lose patent protection at the end of 2016. Humira alone generates approximately 60% of Abbvie’s annual sales.
This is a big risk for investors, because Humira is a blockbuster. Revenue from Humira, excluding currency, rose 16.2% over the first three quarters of 2016.
The risk involving Humira explains why Abbvie stock is cheap and sports such a high dividend yield. But the good news is that Abbvie is a huge company, with a $100 billion market cap.
This provides it with sufficient financial resources to invest heavily in R&D. Abbvie management is confident that Humira will still be a leading drug even after it loses patent protection, and that new drugs will more than offset any revenue losses.
Source: R&D Day Presentation, page 10
Developing new products will be critical to Abbvie overcoming patent expiration on Humira. So far, so good: Abbvie expects adjusted earnings-per-share to increase 12% in 2016.
While Abbvie is an above-average risk among health care stocks, the potential rewards are even greater. Investors appear to be overly pessimistic about the company’s future prospects.
With its high dividend yield, high dividend growth, and undervalued stock price, Abbvie is the Best Dividend Aristocrat for 2017.