Updated on July 22nd, 2020 by Bob Ciura
DRIP stands for Dividend Reinvestment Plan. When an investor is enrolled in a DRIP, it means that incoming dividend payments are used to purchase more shares of the issuing company – automatically.
Many businesses offer DRIPs that require the investors to pay fees. Obviously, paying fees is a negative for investors. As a general rule, investors are better off avoiding DRIPs that charge fees.
Fortunately, many companies offer no-fee DRIPs. These allow investors to use their hard-earned dividends to build even larger positions in their favorite high-quality, dividend-paying companies – for free.
Dividend Aristocrats are the perfect complement to DRIPs. Dividend Aristocrats are elite companies that satisfy the following:
- Are in the S&P 500 Index
- Have 25+ consecutive years of dividend increases
- Meet certain minimum size & liquidity requirements
You can download an Excel spreadsheet with the full list of Dividend Aristocrats (with additional financial metrics such as price-to-earnings ratios and dividend yields) by clicking the link below:
Think about the powerful combination of DRIPs and Dividend Aristocrats…
You are reinvesting dividends into a company that pays higher dividends every year. This means that every year you get more shares – and each share is paying you more dividend income than the previous year.
This makes a powerful (and cost-effective) compounding machine.
This article takes a look at the top 15 Dividend Aristocrats that offer no-fee DRIPs, ranked in order of expected total returns from lowest to highest.
The updated list for 2020 includes our top 15 Dividend Aristocrats, ranked by expected returns according to the Sure Analysis Research Database, that offer no-fee DRIPs to shareholders. You can skip to analysis of any individual Dividend Aristocrat below:
- #15: S&P Global (SPGI)
- #14: Illinois Tool Works (ITW)
- #13: PPG Industries (PPG)
- #12: Nucor (NUE)
- #11: Cincinnati Financial (CINF)
- #10: A.O. Smith (AOS)
- #9: Johnson & Johnson (JNJ)
- #8: Emerson Electric (EMR)
- #7: 3M Company (MMM)
- #6: Chubb Limited (CB)
- #5: Aflac Incorporated (AFL)
- #4: Realty Income (O)
- #3: AbbVie Inc. (ABBV)
- #2: Federal Realty Investment Trust (FRT)
- #1: Exxon Mobil (XOM)
No-Fee DRIP Dividend Aristocrat #15: S&P Global (SPGI)
S&P Global traces its roots back to 1917, when McGraw Publishing Company and the Hill Publishing Company came together. The company was first named McGraw Hill Financial. In 1957, McGraw Hill introduced the S&P 500, the most widely-recognized index of all large-cap stocks.
S&P Global offers financial services, including credit ratings, benchmarks, analytics, and data, to the global capital and commodity markets. It generates about half of its operating income from its ratings segment, 30% from market and commodities intelligence and the balance from S&P Dow Jones Indices.
S&P Global has a highly profitable business model. It is the industry leader in credit ratings and stock market indexes, which provide it with high profit margins and growth opportunities. Its strong industry leadership position provided the company with strong revenue growth, particularly over the past several years.
Source: Investor Presentation
S&P Global has a very strong business model. The company has generated impressive growth rates over the past several years. Today, the S&P 500 is arguably the most widely-known stock market index in the world. The company generates more than $6 billion in annual revenue.
S&P Global reported first-quarter earnings on April 28th and results were very strong, beating top and bottom line expectations. Revenue was up 14% to $1.8 billion, as all four of its operating divisions posted gains once again. Adjusted operating margin soared 580bps to 53.1% of revenue as the company continues to post strong operating leverage gains thanks to additional revenue without commensurate costs.
Adjusted net income was up 27% to $665 million, and adjusted diluted earnings-per-share increased 29% to $2.73. The company noted productivity and cost saving gains in the first quarter, as well as reduced business travel driving margin gains. The company returned $1.3 billion to shareholders in Q1, $161 million of which was through dividends, and the balance of which was through the company’s robust share repurchase program.
S&P Global has significant catalysts for future growth. The global economy continues to expand, which fuels greater demand for financial analysis and debt ratings. This is all crucial information for investors. As a result, ratings revenue continues to rise at a steady pace, and took only a modest dip during the Great Recession.
However, the stock appears overvalued currently, with a 2020 P/E of 35 compared with our fair value P/E of 24. And with a current dividend yield of just 0.8%, total expected returns are just 1.6% annually through 2025.
No-Fee DRIP Dividend Aristocrat #14: Illinois Tool Works (ITW)
Illinois Tool Works has been in business for more than 100 years. Illinois Tool Works has been in business for more than 100 years. It started out all the way back in 1902, when a financier named Byron Smith placed an ad in the Economist. At the time, Smith was looking to invest in a “high class business (manufacturing preferred) in or near Chicago.” A group of inventors approached Smith with an idea to improve gear grinding, and Illinois Tool Works was born.
Today, Illinois Tool Works generates annual revenue of nearly $15 billion. Illinois Tool Works is composed of seven segments: Automotive, Food Equipment, Test & Measurement, Welding, Polymers & Fluids, Construction Products and Specialty Products.
These segments have performed very well against its peers. 2019 was another year of steady earnings growth and strong free cash flow for Illinois Tool Works.
Source: Investor Presentation
This has allowed Illinois Tool Works to achieve “best of breed” status in its industry.
Illinois Tool Works’ portfolio is concentrated in product segments that each hold growth potential of 2%+ above the average in their respective markets. The overarching strategic growth plan for Illinois Tool Works is to continuously reshape its business model, when necessary. The company frequently utilizes bolt-on acquisitions to expand its reach.
At the same time, it has conducted more than 30 divestments in commoditized, low-growth product lines. Illinois Tool Works routinely trims businesses and adds new ones, to maintain a growth trajectory over time. Illinois Tool Works has a significant competitive advantage. It possesses a wide economic “moat”, which refers to its ability to keep competition at bay. It does this with a massive intellectual property portfolio. Illinois Tool Works holds over 17,000 granted and pending patents.
At the same time, Illinois Tool Works has a decentralized, entrepreneurial corporate culture. This also sets the company apart from the competition. Illinois Tool Works empowers its various businesses with significant flexibility, to customize their own approaches to serving customers in the best way possible.
One potential downside of Illinois Tool Works’ business model, is that it is vulnerable to recessions. As an industrial manufacturer, Illinois Tool Works is reliant on a healthy global economy for growth. As a result, 2020 is expected to be much more challenging, due to the coronavirus.
On May 5th, 2020 Illinois Tool Works reported Q1 2020 results for the period ending March 31st, 2020. For the quarter revenue came in at $3.23 billion, which was down -9.1% compared to Q1 2019, as organic revenue was down -6.6%. Net income equaled $566 million or $1.77 per share compared to $597 million or $1.81 per share in the prior year quarter.
Illinois Tool Works stock trades for a 2020 price-to-earnings ratio of 27.9, which is above our fair value P/E of 17. Therefore, we view the stock as overvalued. A declining P/E multiple to 17 would reduce annual returns by 9.4% per year. However, we expect positive returns consisting of 9% earnings-per-share growth and the 2.4% dividend yield, leading to total annual returns of 2% per year.
Overall, returns are estimated to be quite low over the next five years. That said, it should continue to reward shareholders with annual dividend increases for many years.
No-Fee DRIP Dividend Aristocrat #13: PPG Industries (PPG)
PPG Industries is the world’s largest paints and coatings company. Its only competitors of similar size are Sherwin-Williams and Dutch paint company Akzo Nobel. PPG Industries was founded in 1883 as a manufacturer and distributor of glass (its name stands for Pittsburgh Plate Glass) and today has approximately 3,500 technical employees located in more than 70 countries at 100 locations.
The company generates annual revenues in excess of $15 billion. It is a dominant player in the global paint and coatings industry.
Source: Investor Presentation
In the most recent quarter, the company earned $0.99 per share, which was almost 47% below that of the same quarter last year. Revenue declined 25% to $3 billion, down 22% when excluding currency exchange. As with the prior quarter, top and bottom-line results were negatively impacted by the ongoing COVID-19 pandemic. Total sales volumes decreased 24% year-over-year. Performance Coatings’ sales declined 15%. Net selling prices added 3% to results and acquisitions added 1%.
Volumes for Aerospace Coatings decreased 30% due to lower demand from commercial OEM and after-market activity. Do-it-yourself architectural coatings grew in all major regions, but professional channels were mixed and automotive refinish declined 35% in the second quarter. Industrial Coatings sales decreased 40% with volumes falling 38% due to demand decline related to COVID-19. Automotive OEMs were especially weak due to lower global automotive industry production.
The company ended the quarter with $2.3 billion in cash and equivalents and has an undrawn revolving credit facility of $2.2 billion. PPG Industries expects volumes to be down 8% to 15% in the third quarter, but it should hold up relatively well during the coronavirus crisis, thanks to its strong financial position.
PPG Industries’ key advantage is that it is one of the most well-known and respected companies in the paints and coatings space. The company is also one of just three similarly-sized companies in this industry, which limits PPG Industries’ competitors. This gives PPG Industries size and scale and the ability to increase prices.This has been reflected in the company’s ability to increase product prices in order to offset volume declines.
The stock trades with a price-to-earnings multiple above 24 based on our 2020 earnings-per-share estimate of $4.44. Negative returns from a declining P/E are expected to mostly offset 8% annual earnings growth and the 2.0% dividend yield, resulting in total annual returns of 2.5% per year.
No-Fee DRIP Dividend Aristocrat #12: Nucor (NUE)
Nucor is a member of the Dividend Aristocrats Index due to its dividend history. It has increased its dividend for 46 consecutive years. Nucor is the largest publicly traded U.S.-based steel corporation based on its market capitalization of $13 billion. The steel industry is notoriously cyclical, which makes Nucor’s streak of 47 consecutive years of dividend increases more remarkable.
Source: Investor Presentation
Nucor struggled to emerge from the Great Recession of 2008-2009, as it has had to compete against international competitors flooding the market with low priced steel. The 25% tariff on imported steel was positive for Nucor, which has been reflected in the company’s recent earnings reports.
On 4/28/20, Nucor reported first-quarter 2020 earnings, reporting better than expected earnings and revenues. As an “essential business” it was able to maintain production operations throughout the quarter to meet customers’ ongoing needs. First-quarter revenues grew by 10% quarter-over-quarter to $5.62 billion and total shipments increased by 11% quarter-over-quarter to 7.19 million tons.
To cut costs during the tough Q2, the company is freezing spending on some capital projects currently in process and delaying projects that have not yet begun. As a result, planned 2020 spending is expected to come in at $1.5 billion instead of $2 billion as previously forecast. The company maintains sufficient liquidity to weather short term challenges with $1.39 billion in cash and short-term holdings as well as a fully available $1.5 billion revolving credit facility.
Nucor stock has a current yield of 4%. Investors should note that Nucor is an economically-sensitive company. A severe recession is likely to have a significantly negative impact on Nucor. That said, the company has survived multiple recessions while maintaining its annual dividend increases.
The global economic outlook remains highly uncertain due to the coronavirus, but we maintain positive—albeit modest—expectations for Nucor’s earnings-per-share growth. The combination of expected EPS growth, a declining valuation multiple and the 4% dividend yield result in total expected returns of 2% to 3% annually through 2025.
No-Fee DRIP Dividend Aristocrat #11: Cincinnati Financial (CINF)
Cincinnati Financial is an insurance company founded in 1950. It offers business, home, and auto insurance, as well as financial products, including life insurance, annuities, and property and casualty insurance.
As an insurance company, Cincinnati Financial makes money in two ways. It earns income from premiums on policies written, and also by investing its float, or the large sum of money consisting of the time value between the premium income and insurance claims.
Source: Investor Presentation
In the 2020 first quarter, the company saw a decrease in total revenues of (104.6)% compared to last year’s first quarter, from $2,159 million to $(99) million. The loss in revenue was because of the Investments losses of $(1,586) million compared to a gain of $796 million in 1Q19. However, $(1,649) million in unrealized gains and losses on equity securities still held.
Of course, this loss is the result of the market downturn caused by coronavirus. Earned premiums increased 9.2% year-over-year, and investment income rose 5.1%. First-quarter net written premiums grew because of price increases and premium growth initiatives. Non-GAAP also declined from $1.05 a share in the 2019 first quarter to $0.84, down 20%.
Quarter-end book value of $50.02 per share represented a 17% decline from book value per share at the beginning of 2020. Subsequent to its quarterly report, the company announced second quarter catastrophe losses would total approximately $231 million.
Cincinnati Financial has grown earnings by 10.7% per year over the past nine years but generated negative earnings growth of -0.3% over the past five years. Consensus analyst expectations are for relatively flat earnings over the next two years. Book value, a significant metric for insurance companies, has grown by 7.8% over the past nine years and 9.7% over the past five years.
Unlike many insurers, the company is not a significant buyer of its own shares for per-share growth. The company makes most of its net income from its investment gains and thus is highly dependent on bond interest rates and stock market performance.
Compared to many insurers, Cincinnati Financial is a somewhat aggressive investor and has a 39.3% allocation to equities. This gives the company better long-term portfolio growth, but a bit more volatility. Bond yields are at historic lows, which could put significant pressure on forward investment returns. We have a baseline forecast of 1.0% earnings and 1.0% book value growth over the next five years.
Cincinnati Financial has a strong dividend growth track record. Unlike many peers from the financial industry, it did not cut its dividend payout during the last financial crisis. In 2009, the dividend was not fully covered by earnings, but the company nevertheless continued to grow its payout, and dividends have been fully covered since 2012.
With its dividend record during the financial crisis, BBB+ investment-grade credit rating, and because Cincinnati Financial has 59 consecutive years of annual dividend increases, we believe that the risk of a dividend cut is low with this company.
Shares of CINF trade for a 2020 price-to-earnings ratio of 22.3, which is above our fair value estimate of 20. As a result, total returns will be fairly low. Expected five-year EPS growth of 1% and the 3.1% dividend yield result in total annual returns of 2.6% per year over the next five years.
No-Fee DRIP Dividend Aristocrat #10: A.O. Smith (AOS)
A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. Smith generates roughly ~69% of its sales in North America, with the remainder from the rest of the world. It has category-leading brands across its various geographic markets.
Source: Investor Presentation
A.O. Smith has raised its dividend for 26 years in a row, including a 9% increase in 2019. Its long history of dividend growth is the result of a leadership position in its industry and a high historical growth rate.
A.O.Smith reported its first-quarter earnings results on May 5. The company generated revenues of $640 million during the quarter, which represents a decline of 15% compared with the prior year’s quarter. A.O.Smith’s revenues were up slightly in North America, but sales in the rest of the world declined substantially. These declines in the international regions more than offset the positive performance in the U.S., due to the coronavirus.
Despite the recent challenges, we believe in the long-term future prospects of the company. A.O. Smith operates in a growing industry, with a particularly attractive long-term growth catalyst in the emerging markets. The trade war and the coronavirus have dented emerging market growth in recent quarters, but should not impact A.O. Smith’s long-term growth.
Source: Investor Presentation
The long-term growth potential in the emerging markets remains very favorable for water purification and heating products. The company is poised to keep growing for years in China thanks to the country’s huge population, its robust GDP growth, and a booming middle class. India will also be a major growth market, for the same reasons.
Growth is expected to slow down in 2020, due to the impact of trade conflicts and the coronavirus. Still, the company will likely remain profitable, which allows it to raise its dividend each year, even when economic conditions become challenging.
Over the long-term, we believe that A.O. Smith can grow its EPS by 6% per year. With a 1.9% dividend yield and annual dividend increases, A.O. Smith is an appealing stock for dividend growth investors. We believe the stock is overvalued right now, and we see the potential for 3% to 4% annual returns through 2025.
No-Fee DRIP Dividend Aristocrat #9: Johnson & Johnson (JNJ)
Johnson & Johnson is an obvious candidate for this list, as it maintains the longest streak of annual dividend increases of any healthcare stock. It is also the only healthcare company on the list of Dividend Kings, a group of just 30 stocks that have increased their dividends for at least 50 consecutive years. You can see the full list of Dividend Kings here.
Johnson & Johnson is a diversified health care company that sells a variety of pharmaceuticals, medical devices, and over-the-counter consumer medical products. The company was founded in 1886 and now employs more than 125,000 people worldwide. Johnson & Johnson currently trades for a market capitalization above $300 billion, making it one of the largest health care companies in the world.
Source: Investor presentation, page 21
Johnson & Johnson enjoys a product portfolio with a staggering 26 different brands with at least $1 billion in annual revenue. In addition, nearly half of the 26 produce at least $2 billion in revenue per year, a feat few companies can match. This size and scale gives Johnson & Johnson many advantages with branding, consumer loyalty, and the ability to reinvest cash flow to develop the next generation of billion-dollar brands.
On 7/16/2020, Johnson & Johnson reported second-quarter earnings results. Adjusted earnings-per-share of $1.67 topped estimates by $0.16, but declined 35% from the previous year. Revenue was lower by 11% to $18.3 billion, but came in $606 million ahead of estimates. Global pharmaceutical sales improved 3.9% in constant currency,to $10.8 billion. Oncology sales were higher by 3.5%. Consumer sales were down 3.6% in constant currency, to $3.3 billion.
As with the previous quarter, COVID-19 related lock-downs impacted results for several product categories. Skin Health and Beauty decreased 16.2%, Women’s Health declined 20.1% while Would Care was lower by 4% due to the pandemic. On the other hand, Oral Care was up 2.2% due to increased demand for Listerine mouthwash in the U.S.
Revenues of $4.3 billion for the Medical Devices segment were a year-over-year decline of 33.9%, or 32.7% in constant currency. COVID-19 has led to a postponement of many elective surgeries due to lack of hospital space.
The company offered revised guidance for 2020. Revenue is now expected in a range of $79.9 billion to $81.4 billion, up from $77.5 billion to $80.5 billion previously. Adjusted earnings-per-share was raised to $7.75-$7.95 from $7.50-$7.90 previously.
Going forward, Johnson & Johnson’s robust pharmaceutical pipeline should continue to fuel the company’s long-term growth. J&J had previously issued guidance that by 2021, it expects to file at least 10 new products, each with annual sales potential of $1 billion or more. It also sees the potential for 40 line extensions to existing products by then. Of these 40 extensions, 10 have potential for more than $500 million in annual revenue.
In addition to its massive R&D platform, J&J’s excellent balance sheet provides another competitive advantage. It is one of only two U.S. companies with a ‘AAA’ credit rating from Standard & Poor’s, along with Microsoft (MSFT).
Based on expected EPS of $7.85 per share, JNJ shares trade for a reasonable P/E ratio of 19.2. This is above our fair value estimate which is roughly 16 times earnings. Still, the company raised its dividend by 6% along with first-quarter results, the 58th consecutive year of dividend increases. The stock has a forward yield of 2.7%. Overall, we expect total annual returns of 4.9% per year.
No-Fee DRIP Dividend Aristocrat #8: Emerson Electric (EMR)
Emerson Electric is an ideal candidate for a no-fee DRIP program, as the company has increased its dividend for over 60 years in a row. Emerson Electric was founded in Missouri in 1890. Today, Its global customer base affords it $18+ billion in annual revenue.
Emerson is organized into two major reporting segments called Automation Solutions and Commercial & Residential Solutions. Automation Solutions helps manufacturers minimize energy usage, waste, and other costs in their processes. The Commercial & Residential Solutions segment makes products that protect food quality and safety, as well as boost efficiency in the production process.
The company has endured a difficult few years due to a number of headwinds including the coronavirus crisis, and the steep decline in oil and gas prices. These factors weighed on Emerson to varying degrees. Many of Emerson’s customers are in the energy sector, which is why low oil and gas prices affect the company negatively. With oil prices remaining fairly low, Emerson remains exposed to these risks.
Emerson reported second-quarter earnings on April 21st, with revenue coming in below expectations, but profits outperforming consensus. Net sales declined -9% year-over-year as underlying sales fell -7%, excluding unfavorable currency of -2% and no impact from acquisitions and divestitures.
Source: Investor Presentation
The company cited very aggressive cost controls as helping expand its profit margins. Pretax margin and EBIT margin of 16.6% and 17.4% of revenue were up 180 bps and 160 bps, respectively, from the year-ago period. The company saw lower stock compensation expense and its restructuring actions as drivers of strong profitability despite much lower revenue. Earnings-per-share came in at $0.89 on an adjusted basis.
Emerson stock trades for a P/E ratio of 21.3 based on estimated EPS of $3.00. The P/E multiple is above our fair value estimate of 18. A declining P/E multiple to the fair value estimate could reduce annual returns. We also expect annual EPS growth of 5%, and Emerson stock has a 3.2% dividend yield. Overall, we expect total returns of 5.1% per year through 2025.
No-Fee DRIP Dividend Aristocrat #7: 3M Company (MMM)
3M is a diversified global industrial manufacturer. It manufactures ~60,000 products, which are sold in 200 countries around the world. 3M came to dominate the industrial manufacturing industry through a sharp focus on the most attractive market segments.
It has invested heavily across its core areas of focus to build a product portfolio that leads the pack. 3M is composed of four separate divisions. The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software, as well as personal protective gear and security products. The Healthcare segment supplies medical and surgical products, as well as drug delivery systems.
Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. The Consumer division sells office supplies, home improvement products, protective materials and stationary supplies.
3M is off to a challenged start to 2020, due to the coronavirus crisis which has negatively impacted the global economy. The company released first-quarter results on 4/28/2020. The company’s adjusted earnings-per-share declined 3.1% to $2.16, though this was $0.15 above consensus estimates. Revenue improved 2.7% to $8.1 billion, $220 million above estimates. In local currency, organic sales increased 0.3%. Net of divestitures, acquisitions added 4.2% to growth.
Source: Investor Presentation
Foreign currency reduced revenue results by 1.8%. The Americas experienced robust sales growth, up more than 10% year-over-year. Offsetting this growth was a 2.1% decline in Europe/Middle East/Africa and a 5.4% drop in Asia-Pacific. Organic growth in the Americas was 4.2%.
The Safety & Industrial segment was down 1% as strength in personal safety, roofing granules and industrial adhesives and takes was more than offset by electrical markets, automotive aftermarkets and abrasives. Transportation & Electronics declined 5%. This segment had weak results for commercial solutions, automotive and aerospace.
Sales for Health Care were up 21%, primarily due to acquisitions. Drug delivery, food safety, medical solutions and separation and purification performed well. Consumer sales improved 4.6% due to home improvement, home care and consumer health care.
Free cash flow improved 16% to $1.2 billion and the company has a strong liquidity position with an undrawn revolving credit facility of $4.25 billion.
In addition to its organic growth opportunities, 3M has a separate growth catalyst in the form of acquisitions. For example, 3M’s nearly $7 billion acquisition of Acelity will further expand its strong position in health care.
Acelity is a leading global manufacturer of advanced wound care and surgical products. It has a large and diverse product portfolio which provides it with high market share.
With a P/E of 18.9, 3M stock trades slightly above our fair value estimate of 16.5. Negative returns from a declining P/E ratio will be offset by 5% annual EPS growth and the 3.8% dividend yield. Overall, we expect annual returns of nearly 6% per year for 3M over the next five years.
No-Fee DRIP Dividend Aristocrat #6: Chubb Limited (CB)
Chubb Ltd is a global provider of insurance and reinsurance services headquartered in Zurich, Switzerland. The company provides insurance services including property & casualty insurance, accident & health insurance, life insurance, and reinsurance. The current version of Chubb was created in 2016, when Ace Limited acquired the ‘old’ Chubb and adopted its name.
Source: Investor Presentation
In the 2020 first quarter, earned premiums totaled $7.8billion during the first quarter of fiscal 2020, which was 9% year-over-year growth. Net written premiums were up 9% year-over-year, and up 10% in constant currencies. Net investment income of $860 million was a slight increase from $850 million in the year-ago quarter. Chubb generated earnings-per-share of $2.68, up 7% year-over-year.
Profits benefited from higher premiums, and from higher investment income. Chubb also benefited from a slightly lower combined ratio, which dropped to 89.1%for the property & casualty segment. Chubb’s book value was down due to some mark-to-market losses during the quarter.
Chubb has compounded its book value per share at more than 7% per year since 2009. Looking ahead, we believe that a 5% growth rate in per-share book value is feasible for Chubb. The company is also fairly recession-resistant. Chubb remained highly profitable during the last financial crisis, unlike many other financial companies. This allowed the company to continue raising its dividend each year during the Great Recession.We expect total returns of 7% to 8% per year over the next five years, due to 6% expected earnings-per-share growth, the 2.3% dividend yield and a modest boost from an expanding valuation multiple.
No-Fee DRIP Dividend Aristocrat #5: Aflac Inc. (AFL)
Aflac was formed in 1955, when three brothers — John, Paul, and Bill Amos — came up with the idea to sell insurance products that paid cash if a policyholder got sick or injured. In the mid-20th century, workplace injuries were common, with no insurance product at the time to cover this risk.
Today, Aflac has a wide range of product offerings, some of which include accident, short-term disability, critical illness, hospital indemnity, dental, vision, and life insurance.
The company specializes in supplemental insurance, which pays out to policy holders if they are sick or injured, and cannot work. Aflac operates in the U.S. and Japan, with Japan accounting for approximately 70% of the company’s revenue. Because of this, investors are exposed to currency risk.
Aflac’s strategy is to increase premium growth through new customers, as well as increase sales to existing customers. It is also investing to expand its distribution channels, including its digital footprint, in the U.S. and Japan.
In the 2020 first quarter the company reported $5.16 billion in revenue, an -8.8% decline compared to Q1 2019. Net earnings equaled $566 million or $0.78 per share compared to $928 million or $1.23 per share in the year-ago quarter. However, this quarter included sizable investment losses whereas last year’s quarter included investment gains. On an adjusted basis, earnings-per-share equaled $1.21 compared to $1.12 previously.
The company has laid out a specific growth plan for 2020. Aflac has laid out clear growth avenues in its respective markets. In Japan, Aflac wants to defend its strong core position, while further expanding and evolving to customer needs.
Source: Investor Presentation
To this point, Aflac Japan is expanding its offerings of “third-sector” products. These include non-traditional products such as cancer insurance, as well as medical and income support. Aflac has enjoyed strong demand in Japan for third-sector products, due to the country’s aging population, and declining birthrate.
Meanwhile, in the U.S., Aflac believes it has a long way to go to penetrate the market. While the brand name is well-known, only a small fraction of the U.S. working population has access to Aflac and an even smaller fraction actually purchases Aflac – under 5% of the working population.
Source: Investor Presentation
In general terms, Aflac has two sources of income: income from premiums and income from investments. Taking the items collectively, in addition to an active share repurchase program, reasonable expectations would be for 4% annual earnings-per-share growth over the next five years.
During the last decade shares of Aflac traded at an average P/E ratio of about 10 times earnings. Based on 2020 expected earnings-per-share of $4.00, shares are presently trading hands at 9.2 times earnings. As such, this could imply a small valuation tailwind over the next five years, should shares revert to their historical average.
On the other hand, the 4% expected EPS growth rate and 3.1% current dividend yield (which ought to grow over the years) should aid in shareholder returns. Total returns could therefore reach 8.8% per year through 2025.
No-Fee DRIP Dividend Aristocrat #4: Realty Income (O)
Realty Income is a retail-focused REIT that owns more than 6,500 properties. Realty Income owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This means that the properties are viable for many different tenants, including government services, healthcare services, and entertainment.
Realty Income is a highly attractive dividend stock not just because of its long history of dividend increases, but also because it is a monthly dividend stock. Realty Income has declared 600+ consecutive monthly dividend payments without interruption, and has increased its dividend 107 times since its initial public offering in 1994.
Realty Income is not immune from the coronavirus crisis, as many retail outlets have been closed in recent weeks. However, Realty Income continues to show why it is a best-in-class retail REIT. Its top four industries sell essential goods, including convenience stores, drug stores, dollar stores, and grocery stores. This has helped the company’s rent collection results.
Source: Investor Presentation
In the 2020 first quarter, adjusted FFO-per-share increased 7.3% to $0.88, as total revenue increased 17% year-over-year. Realty Income collected 83.5% of expected contractual rent in May, and 85.7% of contractual rent due in June.
The company will see a negative impact from coronavirus in 2020, but it has taken aggressive action to shore up its financial position to weather the storm. Realty Income raised $754 million in the first quarter through the sale of stock.
Total liquidity available as of July 1, 2020 was approximately $2.7 billion, consisting mostly of $2.4 billion of remaining borrowing capacity available on the revolving credit facility. Therefore, we expect the company to make it through the coronavirus with its dividend intact.
Realty Income stock trades for a P/FFO ratio of 16.4, below our fair value P/FFO multiple of 18. An expanding valuation multiple could add to shareholder returns in the years ahead. In addition, expected FFO-per-share growth of 4.0% and the current dividend yield of 4.9% lead to total expected returns of 10.0% per year over the next five years.
No-Fee DRIP Dividend Aristocrat #3: AbbVie Inc. (ABBV)
AbbVie is a pharmaceutical company focused on Immunology, Oncology, and Virology. AbbVie was spun off by Abbott Laboratories in 2013 and now trades with a market capitalization of $172 billion. Its most important product is Humira, which by itself represents ~60% of annual revenue.
Humira is a multi-purpose pharmaceutical product, and is the top-selling drug in the world. Humira is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. It will lose patent protection in the U.S. in 2023.
AbbVie reported first-quarter earnings results on May 1st. Revenue of $8.6 billion increased 10% year-over-year, while adjusted earnings-per-share increased 13% to $2.42 for the quarter. Global Humira net revenues of $4.7 billion increased 6.4% operationally, and remained AbbVie’s most important product. AbbVie’s oncology portfolio led the company’s growth last quarter. Global hematologic oncology sales increased 32% to $1.549 billion.
AbbVie’s major risk is loss of exclusivity for Humira. Fortunately, the company’s massive research and development platform is a competitive advantage.
Source: Investor Presentation
Adjusted research and development expense totaled $5 billion in 2019, and the investment is already paying off. AbbVie has received 14 major approvals since 2013, with 10 of those coming in the core categories of Immunology and Oncology. AbbVie has multiple growth opportunities to replace Humira.
AbbVie was not a standalone company during the last financial crisis, so there is no recession track record, but since sick people require treatment whether the economy is strong or not, it is highly likely that AbbVie would continue to perform well during a recession. AbbVie’s earnings are likely to decline somewhat in a recession, but the dividend should remain secure. AbbVie has a projected dividend payout ratio of 49% for 2020.
Despite the challenge posed by loss of exclusivity on Humira, we believe AbbVie has long-term growth potential. First, it has invested heavily in building its pipeline of new products. For example, AbbVie has seen strong growth from Imbruvica, which saw a 21% increase in sales last quarter. AbbVie also completed the $63 billion acquisition of Allergan (AGN).
Allergan’s flagship product is Botox, which diversifies AbbVie’s portfolio with exposure to global aesthetics. The combined company will have annual revenues of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted earnings-per-share over the first year, with peak accretion of greater than 20%.
Based on expected 2020 earnings-per-share of $9.66, AbbVie trades for a price-to-earnings ratio of 10.1. Our fair value estimate for AbbVie is a price-to-earnings ratio (P/E) of 10.0. We view AbbVie as slightly undervalued. In addition, we expect annual earnings growth of 5.5%, while the stock has a 4.8% dividend yield. We expect total annual returns slightly above 10% per year over the next five years.
No-Fee DRIP Dividend Aristocrat #2: Federal Realty Investment Trust (FRT)
Federal Realty is a shopping center REIT similar to Brixmor Property Group. However, it concentrates in high-income, densely-populated coastal markets in the US, allowing it to charge more per square foot than its competition. Federal Realty generates approximately $950 million in annual revenue.
Its biggest claims to fame are its A-rated balance sheet (making it one of the most conservative investments in the REIT sector) and 52 straight years of growing its dividend (the longest streak among REITs) at a highly impressive CAGR of 7%.
Federal Realty is on the exclusive list of Dividend Kings.
As a retail REIT, Federal Realty has been negatively impacted by the coronavirus crisis:
Source: Investor Presentation
The company reported first-quarter financial results on May 7th. Revenue of $232 million declined fractionally, while adjusted FFO-per-share of $1.50 declined 3.9% from the same quarter last year.
The company collected 53% of April rent, and reported that about 47% of its commercial tenants were open and operating based on annualized base rent. Occupancy stood at 93.6% at the end of the first quarter. More recently, rent collection trends improved slightly, to 54% in May.
Federal Realty believes that its portfolio of flexible retail-based properties located in strategically selected major markets that are transit-oriented, first ring suburban locations will continue to thrive for the foreseeable future. This is because these markets’ superior income and population characteristics, significant barriers to entry, and strong demand characteristics will drive strong long-term rent growth.
Furthermore, by keeping the portfolio at a manageable size and restrained to a limited number of core markets, management can give each asset the necessary focus to drive out-performance. In response to the coronavirus-related shutdowns, the company is boosting its liquidity to help it get through the coronavirus crisis. Federal Realty drew $990 million of its $1 billion revolving credit facility in March.
Federal Realty stock has a 5.6% dividend yield, and 6.9% expected annual FFO growth. In addition to a positive tailwind from an expanding P/FFO multiple, we expect nearly 14% annualized returns over the next five years.
No-Fee DRIP Dividend Aristocrat #1: Exxon Mobil (XOM)
Exxon Mobil is an integrated super-major, with operations across the oil and gas industry. In 2019, the oil major generated over 80% of its earnings from its upstream segment, with the remainder from its downstream (mostly refining) segment and its chemicals segment.
On May 1st, Exxon Mobil reported first-quarter financial results. Revenue of $56.2 billion declined 12% year-over-year, while adjusted earnings-per-share of $0.53 declined 4% from the same quarter last year. Production edged up 2% over last year’s quarter, as a 7% increase in liquids offset a -5% decrease in gas. Exxon’s full-year results will be greatly affected by the coronavirus crisis, which has caused a collapse in oil demand as well as prices.
Exxon will cut its capital expenses 30% this year in order to protect its dividend and will slow the development of its promising growth projects in the Permian and Guyana due to the depressed oil price. Due to the pandemic, we now expect Exxon to lose -$0.40 per share this year.
That said, we remain positive regarding Exxon’s long-term growth prospects. Global demand for oil and gas continues to rise, which provides a strong fundamental tailwind for the company’s long-term future. According to a recent company presentation, new supply of 550 billion barrels of oil and 2,100 trillion cubic feet of natural gas are required through 2040 to meet projected global demand. In preparation, the oil major has greatly increased its capital expenses in order to grow its production from 4.0 to 5.0 million barrels per day by 2025.
The Permian Basin will be a major growth driver, as the oil giant has about 10 billion barrels of oil equivalent in the area and expects to reach production of more than 1.0 million barrels per day in the area by 2024. Guyana, one of the most exciting growth projects in the energy sector, will be another major growth driver.
Source: Investor Presentation
In 2019, Exxon Mobil made 6 major deep-water discoveries in Guyana and Cyprus. In Guyana, Exxon Mobil has started Liza Phase I ahead of schedule. Guyana’s total recoverable resources are estimated at over 8 billion oil equivalent barrels.
Like Chevron, Exxon Mobil’s growth potential is challenged by the recent decline in commodity prices, as well as the prospect of a global recession due to the coronavirus. We view the coronavirus as a short-term issue which should abate in a matter of months. The company announced it will reduce capital expenditures by $10 billion to preserve cash in this difficult environment.
Exxon Mobil’s earnings are volatile, due to the cyclical nature of the oil and gas industry. For 2020, we expect the company to report a loss, but we recognize that the actual results could vary drastically from this estimate due to the ongoing coronavirus crisis. In order to calculate future returns, we have used mid-cycle (5-year average) earnings-per-share of $3.26 as a base.
Using this estimate, the stock trades for a P/E ratio of 13.8. Our fair value estimate is a P/E of 13, as investor sentiment has eroded while the company turns itself around. Expansion of the P/E multiple could reduce annual returns slightly over the next five years.
Because of Exxon Mobil’s depressed earnings, we expect a snap-back with 9% annual expected earnings-per-share growth over the next five years. Including the 8.2% dividend yield, we expect total annual returns of 14.2% per year over the next five years. Exxon Mobil is a riskier Dividend Aristocrat due to its volatile industry. But a recovery in oil and gas prices could mean strong returns for investors willing to buy at these depressed prices.
Final Thoughts and Additional Resources
Enrolling in DRIPs can be a great way to compound your portfolio income over time. That being said, I prefer to selectively reinvest my dividends into my current best investment idea. This ensures that DRIPs don’t automatically purchase stocks that I view as overvalued.
Additional resources are listed below for investors interested in further research for DRIP plans.
For dividend growth investors interested in DRIPs, the 15 companies mentioned in this article are a great place to start. Each business is very shareholder friendly, as evidenced by their long dividend histories and their willingness to offer investors no-fee DRIP plans.