Sure Dividend

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 an 8.3% increase in October 2020. 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 third-quarter earnings results on October 29th. The company generated revenues of $760 million during the quarter, which represents an increase of 4.4% compared to the prior year’s quarter. Revenues were up 6% in North America, but at the same time, sales in the rest of the world were flat year over year, which is why company-wide sales grew by only 4%.

A.O.Smith generated earnings-per-share of $0.66 during the third quarter, which was up 25% from $0.53 per share on a year over year basis. This can mostly be explained by revenue growth in the U.S., which allowed for some operating leverage and a meaningful increase in profitability.

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. 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.

Over the long-term, we believe that A.O. Smith can grow its EPS by 6% per year. With a 1.8% dividend yield and annual dividend increases, A.O. Smith is an appealing stock for dividend growth investors. However, we believe the stock is overvalued right now, and we see the potential for just 1.6% annual returns through 2026.

No-Fee DRIP Dividend Aristocrat #10: 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 fourth quarter and full-year earnings on November 3rd, 2020 with results coming in better than expectations on the top and bottom lines.

Source: Investor Presentation

For the fourth quarter, total revenue came to $4.56 billion, down -8.2% on a year-over-year basis. The company’s Automation Solutions segment saw a decline of -11% year-over-year, while Commercial and Residential Solutions revenue declined -3%.

However, free cash flow was $1.02 billion in Q4, up 2% year-over-year, and grew 6% for the full year to $2.55 billion. Adjusted earnings-per-share was $1.80, beating expectations thanks to cost containment and restructuring actions.

Emerson stock trades for a P/E ratio of 23.8 based on estimated EPS of $3.50 for fiscal 2021. 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 2.4% dividend yield. Overall, we expect total returns of 2.0% per year through 2026.

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 expected earnings-per-share of $4.75, shares are presently trading hands at 9.9 times earnings. As such, this could imply a very small valuation tailwind over the next five years. In addition, expected EPS growth of 3% plus the current dividend yield of 2.8%, lead to total expected returns of nearly 6% per year.

No-Fee DRIP Dividend Aristocrat #5: Hormel Foods (HRL)

Hormel Foods was founded back in 1891 in Minnesota. Since that time, the company has grown into a juggernaut in the food products industry with nearly $10 billion in annual revenue. Hormel has kept with its core competency as a processor of meat products for well over a hundred years, but has also grown into other business lines through acquisitions. Hormel has a large portfolio of category-leading brands. Just a few of its top brands include include Skippy, SPAM, Applegate, Justin’s, and more than 30 others.

These strong brands have fueled steady growth in operating income and dividends for the past several years.

Source: 2020 Annual Report

Hormel reported fourth quarter and full-year earnings on November 24th, 2020 with results coming in weaker than expected on both the top and bottom lines. Total revenue was down -3% in the quarter to $2.4 billion compared to the year-ago period. Organic volume fell -3% and organic sales dropped -4%, with the additional decline from pricing and mix, in addition to weak volume.

Hormel’s main competitive advantage is its 35 products that are either #1 or #2 in their category. Hormel has brands that are proven, and that leadership position is difficult for competitors to supplant. In addition, Hormel has a global network of distributors that few food companies can rival. Hormel’s earnings-per-share actually grew during the Great Recession, a testament to the stock’s defensive nature.

Hormel stock appears overvalued, trading for 25 times this year’s EPS estimate. We expect 6% annual EPS growth, while the stock has a 2.2% dividend yield. Overall, we expect annual returns of 5.7% per year through 2026.

No-Fee DRIP Dividend Aristocrat #4: 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 announced third quarter earnings results on 10/27/2020. Revenue increased 5.1% to $8.4 billion, topping estimates by $20 million. Adjusted earnings-per-share of $2.43 declined 5.8% from the previous year, but was $0.16 better than expected.

Source: Investor Presentation

Organic local-currency growth was 0.9%. North America returned to growth, with organic sales higher by 3.4%. This was offset by a 0.3% decline in the EMEA region and a 2.6% decreased in the Asia Pacific region.

We are reaffirming our expected growth rate of 5%. 3M has increased its dividend for the past 62 years, which shows that the company can thrive in a wide variety of economic environments.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. 3M is overvalued right row, with a P/E ratio of 20.2 which is above our fair value P/E of 19. Negative returns from a declining P/E ratio will be offset by 5% annual EPS growth and the 3.5% dividend yield. Overall, we expect annual returns of 7.0% per year for 3M over the next five years.

No-Fee DRIP Dividend Aristocrat #3: AbbVie Inc. (ABBV)

AbbVie is a pharmaceutical company spun off by Abbott Laboratories (ABT) in 2013. Its most important product is Humira. Humira is a multi-purpose pharmaceutical product and was the top-selling drug in the world in 2019. 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 has a diversified product line with many leading brands.

Source: Investor Presentation

AbbVie reported its third-quarter results on October 30th. Revenue of $12.9 billion increased 52% year-over-year. Revenue was boosted by the Allergan acquisition, as well as growth from new products. AbbVie earned $2.83 per share during the third quarter, up 21% from the previous year’s quarter. The company raised full-year guidance along with third-quarter results. AbbVie now expects 2020 adjusted earnings-per-share in a range of $10.47 to $10.49, which would make for another year of growth. AbbVie also raised its dividend by 10% in late October.

AbbVie’s major risk is loss of exclusivity for Humira. Fortunately, the company’s massive research and development platform is a competitive advantage. 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 50% 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 9% increase in sales last quarter.

AbbVie also completed the $63 billion acquisition of Allergan. 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 $10.48, AbbVie trades for a price-to-earnings ratio of 10.7, slightly above our fair value estimate of 10.5. A declining P/E multiple will slightly reduce shareholder returns over the next five years. In addition, we expect annual earnings growth of 3.0%, while the stock has a 4.7% dividend yield. We expect total annual returns of 7.4% per year over the next five years.

No-Fee DRIP Dividend Aristocrat #2: 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 over 100 times since its initial public offering in 1994.

Realty Income is not immune from the coronavirus crisis, as many retail outlets closed for an extended period. 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.

The company’s long history of dividend payments and increases is due to its high-quality business model and diversified property portfolio.

In the 2020 third quarter, AFFO per share fell 2.4% to $0.81 year-over-year. Realty Income collected 93.1% of contractual rent in the third quarter, an improvement from the previous quarter. Therefore, investors have some reason for hope that the worst is past for Realty Income.

Source: Investor Presentation

Realty Income stock trades for a P/FFO ratio of 16.6, 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 4.8% lead to total expected returns above 9% per year 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.

In late October, Exxon reported (10/30/20) financial results for the third quarter of fiscal 2020. Production rose1%sequentially, refinery utilization improved from 70% to 76% and chemical margins improved. As a result, Exxon narrowed its adjusted loss per share from-$0.70to -$0.18.Exxon has cut its capital expenses 27% this year in order to protect its dividend and will slow the development of its promising growth projects in the Permian and Guyana.
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

Guyana’s total recoverable resources are estimated at over 8 billion oil equivalent barrels.

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 15.2. Our fair value estimate is a P/E of 13, as investor sentiment has eroded while the company turns itself around. A declining valuation multiple could reduce annual returns going forward. However, because of Exxon Mobil’s depressed earnings, we expect a snap-back with 8% annual expected earnings-per-share growth over the next five years.

Including the 7.0% dividend yield, we expect total annual returns of 10.3% 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.

• List of no-fee DRIPs

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.