Published on March 4th, 2019 by Bob Ciura
At Sure Dividend, we frequently publish articles on the Dividend Aristocrats, a group of 57 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases.
The Dividend Aristocrats are among our favorite stocks in the entire market to buy and hold for the long run. The reason is simple—the Dividend Aristocrats have outperformed the broader market over the past several decades.
In the last 10 years, the Dividend Aristocrats Index has average annualized returns of 17.6% versus 15.9% for the S&P 500 Index.
Source: S&P Fact Sheet
The Dividend Aristocrats also had a lower standard deviation than the S&P 500, meaning the Dividend Aristocrats delivered stronger returns than the S&P 500 Index, with lower risk.
For a company to increase its dividend for 25 years in a row or longer, it must have a strong brand, leadership position in its industry, and durable competitive advantages. We believe these factors are the reasons why the Dividend Aristocrats have historically outperformed.
That said, not every Dividend Aristocrat is a buy today. We focus on undervalued Dividend Aristocrats that are poised to generate high returns for shareholders over the long-term.
This article analyzes the Top 10 Dividend Aristocrats today based on the highest expected total returns going forward.
#10: T. Rowe Price Group (TROW)
T. Rowe Price was founded in 1937 by Thomas Rowe Price, Jr. In the eight decades since, T. Rowe Price has grown into one of the largest financial services providers in the United States.
Today, the company manages nearly $1 trillion in assets. It provides mutual funds, advisory services, and separately managed accounts for individuals, institutional investors, retirement plans, and financial intermediaries.
Source: Investor Presentation
In late January (1/30/19) T. Rowe reported its fourth quarter and full-year 2018 earnings results. Revenue of $1.31 billion for the quarter rose 2.2% compared to the prior year’s period. Revenue grew despite a decline in T. Rowe’s assets under management, or AUM.
Market declines in combination with net outflows of $8.4 billion during the fourth quarter caused AUM to decline to $960 billion from more than $1 trillion at the beginning of the fourth quarter. Earnings-per-share of $1.54 increased 1% for the fourth quarter.
Competition for client assets is fierce within the investment management industry. As a result, asset managers must rely on their reputation to retain clients. This is where T. Rowe has a measurable competitive advantage.
According to the company, 83% of its funds outperformed the Morningstar median fund performance over the past 10 years. Furthermore, more than half of T. Rowe’s funds fall in the top quartile of their respective categories in the past decade.
Amazingly, T. Rowe remained profitable during The Great Recession. Earnings-per-share fell from $2.40 in 2007 to a temporary low of $1.65 in 2009 before recovering to a new high (at the time) of $2.53 in 2010.
T. Rowe stock currently trades for a dividend yield of 3.1%. We expect earnings-per-share growth of around 6% annually in the absence of a recession, from a mix of asset growth and share repurchases.
And, the stock is trading for only 14.3 times expected fiscal 2019 earnings-per-share of $6.95.
This gives T. Rowe expected total returns of around 9% annually. T. Rowe offers investors a nice mix of dividend yield and growth at a reasonable valuation.
#9: People’s United Financial (PBCT)
People’s United Financial is a regional bank with over 400 branches in the Northeastern United States. The company has $48 billion in total assets and a $7 billion market cap. People’s United Financial operates People’s United Bank, which was founded in 1842.
Today, People’s United Financial is a diversified financial services company. Its commercial segment provides commercial real estate lending, equipment financing, cash management, deposit gathering, and other services for businesses.
Its retail arm offers mortgages, home equity lending, and other consumer loans, along with consumer deposits and merchant services. People’s United also engages in life insurance, brokerage, wealth management, and financial advisory.
People’s United managed to increase its dividend each year during the Great Recession of 2007-2009, when so many large banks had to cut their dividends. This resilience is largely the result of its stable business.
Last year was another year of steady growth. In the fourth quarter, People’s United increased its earnings-per-share by 16% from the year-ago quarter, mostly due to the acquisition of First Connecticut and a boost from tax reform.
The acquisition helped grow loans and deposits by 9% year-over-year. For the full year, earnings-per-share increased 26%.
People’s United has a positive growth outlook going forward. Acquisitions are a primary catalyst, for example the recent acquisition of VAR Technology Finance, which focuses on serving the technological sector.
People’s United will also grow its customer base through acquisitions. People’s United Financial acquired BSB Bancorp last year, which gave it an even stronger foothold in the Northeast region.
Aside from acquisitions, higher interest rates will help People’s United grow its future earnings. Rising interest rates help banks increase profits from loans. People’s United expanded its net interest margin by 5% last year, to 3.12%.
We expect People’s United to generate earnings-per-share of $1.45 for 2018. Based on this, the stock trades for a price-to-earnings ratio of 12.2. Our fair value estimate is a price-to-earnings ratio of 13.0, which means the stock is modestly undervalued.
Expansion of the valuation multiple could boost annual returns by 1.3% through 2024. Combining valuation changes with 5.0% expected annual earnings growth and the 4.0% dividend yield, we expect total returns slightly above 10% per year for People’s United stock over the next five years.
#8: PPG Industries (PPG)
PPG Industries was founded in 1883 and in the years since has grown into one of the largest paints and coatings companies in the world.
PPG Industries has a long history of growth, and paying reliable dividends to shareholders. PPG has paid a quarterly dividend since 1899, and it has raised its dividend for 46 consecutive years.
PPG’s strong growth over so many decades is largely the result of its aggressive acquisition strategy. In late 2018, the company announced acquisitions including SEM, Whitford and Hemmelrath. Since 2008, PPG has generated 5% annual sales growth on average from acquisitions.
Source: Investor Presentation
That said, PPG is also an economically-sensitive company. The paint and coatings industry is not very recession-resistant because it depends on a healthy housing and construction market. For that reason, PPG’s earnings-per-share declined 35% in 2008 and 37% in 2009.
Fortunately, PPG bounced back quickly as the global economy recovered. Earnings-per-share more than doubled in 2010, and continued to grow in the years since.
PPG’s current dividend yield of 1.7% is below the S&P 500 Index average, making it one of the lower-yielding Dividend Aristocrats. However, with an expected dividend payout ratio of 30% for 2019, there is plenty of room to grow the dividend at a high rate.
PPG is expected to have earnings-per-share of $6.42 for 2019. The stock trades for 17.2 times 2019 projected earnings. With a fair value estimate of 19x earnings, the stock appears to be undervalued. A rising valuation multiple could boost shareholder returns by 2% per year.
We see PPG producing low-double-digit total returns in the years to come, consisting of the current 1.7% dividend yield, ~7% earnings growth and a ~2% tailwind from a rising valuation.
#7: Chevron (CVX)
Chevron is the second-largest U.S. oil company, behind only fellow Dividend Aristocrat Exxon Mobil (XOM). The two oil supermajors are also the only energy sector stocks on the list of Dividend Aristocrats.
The energy sector is notoriously volatile. Rapid fluctuations in oil prices create a “boom-or-bust” environment for many oil companies. That makes Chevron’s streak of 32 years of consecutive increases even more impressive.
With that said, Chevron’s earnings are far from steady. The company actually posted a net loss in 2016 amid plummeting oil prices. The company’s ability to remain a Dividend Aristocrat even in a cyclical industry is a testament to Chevron’s strong business.
In early February (2/1/19) Chevron reported strong fourth-quarter earnings. Revenue of $40 billion increased 11% from the same quarter a year ago. Revenue growth was due to higher oil and gas prices, as well as a huge boost in production.
Chevron realized record annual net oil-equivalent production of 2.93 million barrels per day, 7% higher than a year ago. Earnings-per-share increased 19% for the quarter. For the full year, Chevron grew earnings-per-share by 60%.
The upstream segment was the biggest contributor to Chevron’s earnings growth, with 63% segment earnings growth in 2018. This allowed Chevron to increase its dividend by 6%.
Chevron should have little trouble continuing to grow earnings over the next several years. The company will do this primarily through production growth.
Source: Investor Presentation
Chevron expects to grow its oil and gas output by 4%-7% this year, and by 2%-3% per year for the next five years.
Given the magnified effect of production growth and the corresponding impact to Chevron’s earnings-per-share, we believe the company is likely to achieve total earnings-per-share growth in the 5%-6% range annually.
Chevron is expected to generate earnings-per-share of $8.17 in fiscal 2019. The stock is currently trading for 14.8 times expected fiscal 2019 earnings. We believe Chevron is trading around fair value at current prices.
With a 4.0% dividend yield and expected growth in the 5.0% to 6.0% range, investors in Chevron should expect total returns of 9.0% to 10.0% moving forward.
#6: Target (TGT)
Target is a giant in the discount retail industry, behind only Wal-Mart (WMT) and Costco (COST) in the United States.
What stands out about Target is its 47-year streak of consecutive dividend increases. This is the longest active streak among retailers.
The other major benefit of discount retailers is that their business models are highly resistant to recessions. Target’s earnings-per-share fell 14% in 2008 but earnings hit a new high by 2010.
While Target remains profitable during recessions, it also generates growth in strong economies. The company reported a same-store sales increase of 5.1% during the third quarter.
Earnings-per-share of $1.09 missed estimates by $0.02, but this total represented 20% growth from the third quarter of 2017.
Target expects full-year earnings growth of 16% for 2018. We expect earnings-per-share growth from target of around 6% annually moving forward.
Share repurchases will be a big part of growth moving forward. Target has reduced its share count by an average of 3.6% annually over the last decade. Sales growth from both physical and online channels make up the remainder of our growth estimate for Target.
It has launched several growth initiatives. First, Target is investing to modernize over 600 stores, nearly one-third of its total U.S. stores.
Target is also investing in e-commerce. Last quarter, Target grew its digital sales by almost 50%, an acceleration from previous quarters. Digital sales boosted comparable store sales by 1.9% in its most recent quarter.
Another major growth catalyst for Target is its small stores. These are stores with much less square footage, in places that cannot provide the necessary space to build a large store.
Target stock currently has a dividend yield of 3.5% and a price-to-earnings ratio of just 13.5. Target stock is modestly undervalued and offers investors total returns of at least 10% annually, due to valuation multiple expansion, earnings growth, and dividends.
#5: Cardinal Health (CAH)
Cardinal Health is one of the ‘big 3’ pharmaceutical distributors, along with Mckesson (MCK) and AmerisourceBergen (ABC). Cardinal Health has increased its dividend payments for 33 consecutive years.
In early February (2/7/19) Cardinal Health released financial results for the fiscal 2019 second quarter. Cardinal Health reported quarterly revenue of $37.7 billion, a 7% increase compared to the same quarter last year.
Adjusted earnings-per-share totaled $1.29, down 15% from the same quarter a year ago. Both operating segments (pharmaceutical and medical) posted 14% declines in operating profit for the quarter.
Source: Investor Presentation
However, Cardinal Health raised its adjusted earnings-per-share guidance for fiscal 2019, to $4.97 to $5.17 (from $4.90 to $5.15 previously).
The pharmaceutical distribution industry is challenged right now, but we still view Cardinal Health positively. Our bullish view is based on the company’s entrenched position in the industry. Cardinal Health serves over 24,000 pharmacies and more than 85% of hospitals in the United States.
Another benefit of Cardinal Health’s business model is that it is exceptionally resistant to recessions. Pharmaceutical and medical product distribution enjoys steady demand from year to year. People will always need to take their medications, even when the economy enters a downturn.
Pressure to lower pharmaceutical prices and the resulting margin erosion and intense competition are largely to blame for Cardinal’s tepid performance, but the company’s long-term future remains bright. Cardinal Health provides an essential service in an industry that is likely to grow over time.
We expect the company to compound its earnings-per-share at around 5.0% annually after 2019. In addition, Cardinal Health is an undervalued dividend stock.
Cardinal Health stock trades for a price-to-earnings ratio of 10.1, based on expected earnings-per-share of $5.07 for fiscal 2019. Our fair value estimate for the stock is a price-to-earnings ratio of 14.0, meaning the stock is significantly undervalued. Valuation changes could add 6.7% per year to shareholder returns.
In addition, we expect Cardinal Health to grow earnings-per-share by 5.0% per year. Adding in the 3.6% dividend yield and potential returns from an expanding valuation multiple, Cardinal Health’s total expected returns could exceed 13% per year for Cardinal Health stock over the next five years.
#4: Caterpillar (CAT)
Caterpillar is a leader in the global heavy machinery industry. It manufactures heavy equipment used mainly in the construction and mining industries. Caterpillar generates annual revenue of $58 billion. The company has increased its dividend for 25 consecutive years, making it a recent addition to the Dividend Aristocrats.
After an industry downturn from 2014-2016, characterized by falling commodity and precious metals prices, Caterpillar enjoyed a resurgence last year.
For the fourth quarter, revenue increased 11% to $14.3 billion. Construction product sales rose 8%, while resource segment revenue increased 21%. In 2018, revenue increased 20% while adjusted earnings-per-share soared 63%.
Source: Earnings Slides
Caterpillar’s competitive advantage is its global presence, which provides it with economic scale. However, Caterpillar is certainly not immune from recessions as slowdowns in the global economy are generally accompanied by lower commodity prices and slowing construction spending.
Caterpillar’s earnings-per-share declined 75% in 2009. Fortunately, it was only a brief decline, as earnings nearly tripled in 2010.
The macro-economic environment is positive for Caterpillar’s future growth. Commodity prices remain favorable, and construction continues to expand in the U.S., China and other key markets around the globe.
We expect Caterpillar to earn $12.25 per share in 2019. Based on this, the stock has a price-to-earnings ratio of 11.3. This is significantly below average. In the past 10 years, the stock held an average price-to-earnings ratio of 16.7.
Our fair value estimate is a price-to-earnings ratio of 15.5. Expansion to this level would boost annual returns by 8.1% per year over the next five years. In addition, shareholder returns will be driven by earnings growth and dividends.
The company is expected to generate 6.2% earnings growth through 2024, while the stock has a current dividend yield of 2.5%. Overall, we expect total annual returns in excess of 16% per year over the next five years.
#3: AT&T (T)
AT&T has increased its dividend for 35 years in a row. It is a major U.S. telecom, with Verizon (VZ) as the other industry giant.
In addition to AT&T’s long history of dividend increases, the stock is highly attractive for income investors due to its very high dividend yield of 6.8%.
AT&T stock has a 6.8% dividend yield, making it the highest yielding Dividend Aristocrat. And, the dividend is well covered by earnings. AT&T expects to pay out less than 60% of its fiscal 2019 profits as dividends.
AT&T has a positive long-term growth outlook. Its major strategic decision in recent years was the massive $81 billion acquisition of content giant Time Warner (TWX), owner of multiple media brands including TNT, TBS, CNN, and HBO.
Source: Acquisition Presentation
Time Warner also has a movie studio, and sports rights across the NFL, NBA, MLB, and NCAA. Time Warner will be a huge boost to AT&T’s future growth.
Not only will AT&T be a major force in content, which will help the company hedge against rising content costs, it will also open up a huge opportunity for AT&T as an advertising platform.
AT&T is moving quickly to maximize the advertising potential from all its content. AT&T recently announced it will acquire AppNexus for approximately $1.6 billion. It will also acquire Otter Media, which has a large online subscription video service.
Moreover, AT&T appears significantly undervalued now. The stock is trading for just 8.3 times its expected 2019 earnings-per-share of $3.60. For comparison, the company has traded with an average price-to-earnings ratio of 12.7 over the last decade.
AT&T stock is cheap due to its higher debt load after acquiring DirecTV and Time Warner. But the company’s management has a workable plan in place to reduce leverage. The company expects to have a reasonable debt-to-EBITDA ratio of 2.5 by the end of fiscal 2019.
Fair value for AT&T is estimated to be a price-to-earnings ratio of 12.0, which means expansion of the P/E ratio could boost annual returns by 7.7% per year.
In addition to AT&T’s expected earnings growth of 2% per year, along with the 6.8% current dividend yield, total returns for the stock could reach 16%-17% per year.
The combination of a reasonable payout ratio, undervalued stock, long dividend history, and high yield make AT&T a compelling choice for income investors.
#2: Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance (hereafter Walgreens) was founded in 1901 and has increased its dividend for 43 consecutive years. Walgreens is a ‘corner store’ retailer and pharmacy that has grown to reach a market cap of $67 billion.
If there were one word to describe investor sentiment when it comes to retailers, it would be ‘fear’. Fears of Amazon making a big push into the healthcare industry have persisted for years.
And Amazon’s $1 billion acquisition of PillPack last year have only exacerbated fears that the e-commerce giant has set its sights on healthcare.
However, Walgreens continues to post impressive results. In fiscal 2018, Walgreens reported 11% sales growth and 18% adjusted earnings-per-share growth. In the fiscal 2019 first quarter, sales increased 10% to $33.8 billion while adjusted EPS grew 14%.
Walgreens’ double-digit earnings growth was fueled in large part by its pharmacy business.
Source: Earnings Slides
Going forward, Walgreens’ growth will be fueled by its excellent pharmacy operations. Last quarter, Walgreens reported 18% growth in pharmacy sales, while prescriptions were up 11%.
Walgreens expects fiscal 2019 to be another strong year. The company has issued guidance which calls for 7%-12% adjusted EPS growth this year, or 9.5% growth at the midpoint.
We believe Walgreens will be successful over the long term, because of its considerable competitive advantages. Specifically, Walgreens has a massive distribution network, including nearly 400 distribution centers that supply 230,000 healthcare facilities.
Walgreens recently acquired over 1,900 Rite Aid (RAD) stores for $4.4 billion. The Rite Aid deal will help accelerate Walgreens’ growth.
Share repurchases will also boost earnings growth. Last year Walgreens announced a new $10 billion share repurchase authorization. Overall, Walgreens is expected to grow annual earnings by roughly 8%.
In addition, Walgreens stock appears to be undervalued. With expected EPS of $6.50 for fiscal 2019, Walgreens stock trades for a P/E ratio of 9.9.
Our fair value estimate for Walgreens stock is a P/E ratio of 15. If the stock valuation were to expand to 15 over the next five years, it would boost annual shareholder returns by approximately 8.7% per year.
Lastly, Walgreens has a 2.7% dividend yield. The combination of 8% annual earnings growth, 8.7% annual returns from valuation expansion, and a 2.7% dividend yield results in total expected returns of 19.4% per year through 2024.
#1: AbbVie (ABBV)
The top Dividend Aristocrat to buy today is pharmaceutical giant AbbVie, which became a publicly traded company when it was spun-off from fellow Dividend Aristocrat Abbott Laboratories (ABT) in 2013. AbbVie has increased its dividend each year since the spin-off.
AbbVie’s growth (to date) is largely because of its flagship product Humira, the top-selling pharmaceutical product in the world.
Source: Investor Presentation
In late January (1/25/19) AbbVie reported its fourth-quarter and full-year earnings results. Revenue of $8.3 billion for the fourth quarter increased 7%, due primarily to 42% growth for Imbruvica.
Humira remained the world’s best-selling drug, and AbbVie’s most important drug by far, but its growth rate slowed down to just 0.5%.
AbbVie earned $1.90 per share during the fourth quarter, which was 28% more than the company’s earnings-per-share during the fourth quarter of the previous year. For 2018, AbbVie generated earnings-per-share of $7.91, up 41% from 2017.
In 2019, AbbVie management expects adjusted earnings-per-share in a range of $8.65 to $8.75.
Unfortunately for AbbVie, Humira is slowly losing its patent protection. Humira sales have begun to decline in Europe after losing patent protection.
AbbVie management has acknowledged that discounting in Europe has been higher than what the company originally anticipated, up to 80% depending on the country. AbbVie will face biosimilar competition to Humira in the U.S. starting in 2023.
To prepare for increasing competition to Humira, AbbVie has accelerated research and development spending. AbbVie spent $10.4 billion on R&D in 2018, more than double the level from the previous year.
AbbVie’s huge R&D investments have paid off, as the company now has a robust pipeline. Its two most promising growth segments going forward will be hematologic oncology, and next-generation immunology.
AbbVie expects non-Humira product sales to exceed $16 billion by 2020, and $35 billion by 2025. We expect strong earnings-per-share growth of 9.5% annually over the next several years.
In addition to its growth prospects, AbbVie offers investors a 5.4% dividend yield. And the dividend will only be around 50% of AbbVie’s expected 2019 earnings-per-share, making it safe and well covered.
Based on expected earnings for 2019, AbbVie shares are trading for a price-to-earnings ratio of 9.2 times. This is an exceptionally low price to pay for a company with the strong growth history of AbbVie. Valuation expansion to a fair value of 13 could boost annual returns by 7.2% per year through 2024.
Adding in the 5.4% dividend yield and 9.5% expected annual earnings growth, results in total expected returns of 22% per year over the next five years.