The Best DRIP Stocks: 15 No-Fee Dividend Aristocrats - Sure Dividend Sure Dividend

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The Best DRIP Stocks: 15 No-Fee Dividend Aristocrats

Updated on January 16th, 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:

You can download an Excel spreadsheet with the full list of Dividend Aristocrats (with additional financial metrics such as price-to-earnings ratios) 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 2019 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:


No-Fee DRIP Dividend Aristocrat #15: 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. Revenue is derived from five sources, with agencies across 44 states.

The company has nearly 1,800 agency relationships with a staggering 2,445 locations as of the end of Q3 2019. Many of them have meaningful market share as well as Cincinnati Financial has grown over the years.

Source: Investor Handout, page 11

The company has a profitable business model. Instead of focusing solely on high-margin products, Cincinnati Financial is willing to write lower-margin policies. It earns a high level of profit by issuing high volumes and taking market share.

In addition, 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, the large sum of premium income not paid out in claims.

Indeed, the company’s cash float is 37% invested in common stocks as a way to grow book value over time, with no single stock making up more than 5% of the investment portfolio. To that end, Cincinnati Financial’s book value is more beholden to stock market performance than some of its peers.

This favorable combination of premiums and investment gains has led to steady growth over many years, and there should be room for continued growth up ahead.

Cincinnati Financial has a positive growth outlook moving forward as growth should continue to come from new policies written. The company has a successful history of growing profits through new policies written, outperforming the industry benchmark, as seen below.

Source: Investor Handout, page 26

Price increases helped the company grow revenue from premiums in recent periods. Interest rates have been a headwind of late given the inversion of the yield curve, and the sharp move down in long-term rates. Like other insurers that rely upon investment income, Cincinnati Financial would prefer higher rates, all else equal.

However, as mentioned, the company has a relatively high concentration of common stocks in its investment portfolio, which have performed well while rates have moved down.

Cincinnati Financial’s strong performance has continued in 2019. The company’s third quarter results showed continued growth in earnings and book value over 2018. Total revenue was up 23% in the first nine months of the year to $5.8 billion thanks to robust gains in earned premiums and smaller gains in investment income, net of expenses.

Operating income increased 26% in the first three quarters of the year to $491 million, and adjusted earnings-per-share followed suit with a 26% gain to $2.98. Book value also gained 12% to $57.37 over the same period. In short, Cincinnati Financial continues to perform very well and shareholders are being rewarded.

Based on 2019 earnings-per-share forecasts, Cincinnati Financial stock trades for a price-to-earnings ratio of approximately 27.3. We see fair value at 19.6 times earnings, so shares are quite overvalued at this point. We see fair value at $75 per share today, which compares very unfavorably to the current share price of $105.

Cincinnati Financial is a dividend growth stock, but investors should wait for a better price before buying. We believe buyers at this price will generate negative total returns through 2025.

No-Fee DRIP Dividend Aristocrat #14: Nucor (NUE)

Nucor is the largest steel producer in North America after decades of growth. The company is headquartered in Charlotte, North Carolina and has a market capitalization of $17.5 billion. The company currently operates in three segments: Steel Mills (the largest segment by revenue), Steel Products, and Raw Materials.

Nucor manufactures a wide variety of material types, including sheet steel, steel bars, structural formations, steel plates, downstream products, and raw materials. The majority of the company’s production comes from a combination of sheet and bar steel, as has been the case for many years.

The company currently operates in three segments: Steel Mills (the largest segment by revenue), Steel Products, and Raw Materials.

Source: Investor presentation, page 3

Nucor manufactures a wide variety of material types, including sheet steel, steel bars, structural formations, steel plates, downstream products, and raw materials. The majority of the company’s production comes from a combination of sheet and bar steel, as has been the case for many years.

Nucor has been successful over the long-term because of the above principles. The company continues to focus on being a low cost producer, first and foremost. This allows it to maintain profitability during downturns, as well as to produce significant operating leverage during better times.

In addition, it has worked to expand its product offerings to new markets, and maintain and grow its market leadership in existing channels. Over time, these principles have served Nucor very well, which is why it is the largest North American producer today.

This has helped Nucor remain profitable and grow dividends through all economic cycles, while so many higher-cost commodity producers cannot stand the test of time.

We believe that Nucor is likely to deliver just 3% adjusted earnings-per-share growth from this point forward, although bottom line growth will be lumpy thanks to Nucor’s presence in the cyclical materials sector. Indeed, 2019 earnings should be around $5.31 per share, down from $7.42 last year.

However, for the long-term, Nucor’s markets have largely favorable outlooks. Nucor’s diversification in terms of end markets is a key driver for not only growth, but also offer some relative safety when downturns strike. This helps the company perform well compared to other steel makers during recessions.

Nucor is expected to report adjusted earnings-per-share of about $5.31 in fiscal 2019. This would represent a sizable decline from fiscal 2018 earnings of $7.42. That puts the company’s price-to-earnings ratio at 10.1, which is low relative to many sectors in the stock market, but for steel producers we are more cautious.

We see fair value at 6.5 times earnings, meaning Nucor is substantially overvalued today. Part of this is certainly because earnings have declined materially this year while the share price has held up relatively well. However, the stock is still quite expensive in our view. Contraction of the P/E multiple from 10.1 to 6.5 would reduce annual returns by 8.4%, if the process takes five years.

The current yield is 3%, which is roughly in-line with its historical dividend yields. Despite the solid dividend yield, we see total annual returns of negative 2.4% per year over the next five years. Thus, we think investors should wait for a better price before buying Nucor.

No-Fee DRIP Dividend Aristocrat #13: 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 and a current market capitalization of $47 billion.

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 a strong U.S. dollar, slowing economic growth rates in China, and the steep decline in oil and gas prices. All of these factors weighed on Emerson to varying degrees, and more recently, oil and gas prices have been a larger issue.

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.

As a result, Emerson’s revenue results have been very weak in recent years, as fiscal 2019’s total revenue was only ~4% higher than in fiscal 2014, implying essentially no annual top line growth for five years. Part of this is due to nearly constant divestitures as Emerson remade itself, but it has added companies to its portfolio as well during that time. Its performance has still been weak in recent years.

In response, Emerson has undertaken a significant restructuring of its business model.

First, it slashed costs to boost profits. This has helped boost Emerson’s earnings-per-share significantly in the past couple of years, with 2018 earnings-per-share growing 36% over the prior year, and fiscal 2019 improving a further 7% over 2018’s strong results. Cost reductions, combined with organic sales growth, acquisitions, and share repurchases, are expected to fuel at least 10% annual earnings growth through 2021.

Emerson produced a 5.5% gain on the top line in fiscal 2019 on top of a similar gain in the prior year, as Emerson finally saw some revenue growth on a meaningful scale. However, fiscal 2020 promises to be another weak year on the top line as the company expects essentially flat sales against fiscal 2019.

Source: Investor presentation, page 19

Global fixed investment growth continues to slow, and Emerson is quite cautious on the near-term outlook. We can see that gross fixed investment, which is what Emerson needs from its customers to buy its services, has been slowing gradually since 2011.

When China is removed from the equation, gross fixed investment is expected to contract very soon, possibly next year. Even with China, it is below 2% for 2020, so Emerson will almost certainly struggle with the top line as its customers pull back on investment spending. To this end, we expect Emerson to produce flat revenue in fiscal 2020, although we also expect 3% annual EPS growth through 2025.

Emerson stock trades for a P/E ratio of 21.3, above our fair value estimate of 17. This could reduce annual returns by 4.4% per year through 2025. Emerson has positive expected returns just above 1% per year over the next five years, but this is not high enough to justify a buy recommendation from Sure Dividend.

No-Fee DRIP Dividend Aristocrat #12: Hormel Foods (HRL)

Hormel’s history dates all the way back to 1891. The company has continued to grow in the 100+ years since, and now generates more than $9 billion in annual revenue. Today, it has a diverse portfolio of food brands. Some of its major brands include Skippy, Jennie-O, Spam, Hormel, and Dinty Moore.

In recent years, it has added more natural products to compliment its core portfolio, such as Justin’s and Applegate.

Source: Investor Presentation

Hormel recently concluded its fiscal fourth quarter and full fiscal year. For the fiscal year, net sales fell 1%, while organic sales (which excludes the impact of foreign currency translation) increased 1%. Diluted earnings-per-share of $1.80 declined 3% from the previous year. For the upcoming year, the company expects net sales in a range of flat to up 8%. Earnings-per-share are expected to decline 2% at the midpoint of guidance, due to continued pressure on margins.

Despite the recent issues, Hormel’s long-term growth potential remains intact. In November 2019, the company announced an 11% dividend increase, representing the 54th consecutive year of dividend growth. Hormel has an extremely impressive history of generating consistent growth from year to year.

We expect Hormel to generate earnings growth of 4% per year over the next five years, driven by sales growth. In addition, the stock has a 2% dividend yield. But the stock also appears to be overvalued. Hormel stock trades for a P/E ratio of 25.9, compared with our fair value estimate of 18. The decline of the P/E ratio could effectively wipe out ~4% EPS growth and the 2% dividend yield, leaving total returns close to zero.

No-Fee DRIP Dividend Aristocrat #11: Abbott Laboratories (ABT)

Abbott Laboratories is a diversified healthcare corporation with a market capitalization of $150 billion. The company was founded in 1888. Today, the company operates four main segments:

The company’s Nutrition Products segment is characterized by market leadership. It is the #1 pediatric nutrition provider in the United States and some other geographies. Moreover, the segment’s performance has improved considerably in recent years as operating margin has improved in each and every year since 2011.

The Branded Generic Pharmaceuticals segment is focused on emerging markets. The company’s Diagnostics segment is geographically more diverse than the Branded Generic Pharmaceuticals segment. Abbott Laboratories’ last segment is the Medical Devices unit. This segment was significantly bolstered in recent times by the St. Jude Medical acquisition.

On October 16th, Abbott Laboratories reported third-quarter results. For the quarter the company generated $8.1 billion in sales (65% of which was outside of the U.S.) representing a 5.5% increase on a reported basis or a 7.6% increase on an organic basis compared to Q3 2018. The Medical Devices segment (making up 38% of all sales) once again led the growth, with an 8.9% reported sales increase and a 10.6% organic sales increase for the quarter.

Abbott enjoyed broad-based growth across its four businesses last quarter:

Source: Earnings Infographic

Adjusted earnings-per-share came in at $0.84, which was in-line with previous Q3 guidance of $0.83 to $0.85, representing a 12.0% year-over-year improvement. Abbott Laboratories also updated its guidance for fiscal 2019. The company has narrowed its expectation for adjusted earnings-per-share to come in between $3.23 and $3.25 (from $3.21 to $3.27 last quarter and $3.15 to $3.25 two quarters ago) representing a growth rate of 12.5% at the midpoint of guidance.

The company’s high-quality product portfolio and the acquisition of St. Jude should fuel strong growth for the next several years. Abbott Laboratories has two major growth prospects that will help its business to become increasingly more profitable over the years to come.

The first is the aging population, both domestically and within the United States. In 2017, the percent of the global population that exceeded age 65 was 8.7%. This proportion is expected to reach 16.7% in 2050. The second broad tailwind that will benefit Abbott Laboratories is the company’s focus on the emerging markets. This is particularly true for its Branded Generic Pharmaceuticals segment.

With its strong position in growth markets such as diagnostics – Abbott Laboratories is the market leader in point-of-care diagnostics – and cardiovascular medical devices, Abbott Laboratories should be able to generate attractive long term growth rates for both earnings-per-share and dividends. We have tempered our expectations slightly, but still anticipate 6% annual growth over the intermediate-term.

With a P/E ratio of 26.3, Abbott shares appear to be overvalued. Even with expected annual EPS growth of 6% and a 1.7%, right now may not be the best time to purchase shares of this high-quality business. Total returns are expected to fall in the low-single digits each year, due to the negative impact of overvaluation.

No-Fee DRIP Dividend Aristocrat #10: Ecolab (ECL)

Ecolab was created in 1923, when its founder Merritt J. Osborn invented a new cleaning product called “Absorbit”. This product cleaned carpets without the need for businesses to shut down operations to conduct carpet cleaning. Osborn created a company revolving around the product, called Economics Laboratory, or Ecolab. Today, Ecolab is the industry leader and generates annual sales of roughly $15 billion.

Ecolab has paid dividends to shareholders for 83 years. It has increased its dividend for 28 consecutive years, including a 2.2% increase on December 4th, 2019.

Ecolab operates three major business segments: Global Industrial, Global Institutional, and Global Energy, each of roughly equal size. The business is diversified in terms of operating segments, and also geography. Approximately 42% of the company’s sales took place outside North America in 2018.

Source: Investor Presentation

The Global Industrial group provides water treatment, cleaning, and sanitation. Customers in this segment are primarily large firms in the food and beverage, manufacturing, chemical, and mining industries. The Global Institutional business provides specialized cleaning and sanitation services, such as on-premise laundry, housekeeping, and food safety. Customers are primarily in the foodservice, hospitality, lodging, healthcare, and retail industries.

Lastly, the Global Energy segment includes the Nalco brand. Nalco provides chemical and water treatment services to the petroleum and petrochemical industries, specifically to oilfield services and refineries. Ecolab is planning to spin off its upstream energy business in mid-2020.

Ecolab has many positive growth catalysts. One of the company’s most important growth catalysts is acquisitions. In 2016, Ecolab acquired UltraClenz, a developer of electronic hand hygiene systems and dispensers. It also acquired Anios, a European healthcare and hygiene business.

These deals helped Ecolab expand its scale, particularly in the international markets. In 2017, Ecolab announced the acquisition of Georgia Pacific’s paper chemicals business. The purchase will help boost Ecolab’s growing paper business, which helps paper manufactures improve their efficiency, product quality, and profitability.

Ecolab has proven successful at integrating other acquisitions, so we remain positive on the company’s ability to do so in the future.

Acquisitions such as these, along with organic investment, have fueled steady earnings growth for decades.

Source: Investor Presentation

Ecolab generates high growth rates. Through the first three quarters of 2019, Ecolab has seen adjusted earnings-per-share increase 12.1%. Revenue was up 1.7% to $11.1 billion over this same time period.

Ecolab has been able to accomplish this growth even in the face of higher raw material and transportation costs as well as a higher tax rate through sizable product price hikes. However, Ecolab’s management lowered its guidance for adjusted earnings-per-share to $5.80-$5.90 from $5.80-$6.00. Still, the midpoint would represent an 11.4% increase from the previous year.

Earnings-per-share are expected to grow by 9% per year over the next five years. However, the stock trades significantly above our fair value estimate, with a P/E ratio of 32x compared with a fair value estimate of 20x. As a result, Ecolab is significantly overvalued. Total returns are estimated to be in the low single-digits each year over the next five years, due largely to the impact of overvaluation.

No-Fee DRIP Dividend Aristocrat #9: Sherwin-Williams (SHW)

Sherwin-Williams is the world’s second-largest manufacturer of paints and coatings. The company distributes its products through wholesalers as well as retail stores. Sherwin-Williams was founded in 1866, and has grown to a market capitalization of $53 billion on annual sales of $18 billion.

The company distributes its products through wholesalers as well as retail stores that bear the Sherwin-Williams name. Its only competitor of comparable size is fellow Dividend Aristocrat PPG Industries (PPG).

Source: Investor Presentation, page 6

Sherwin-Williams became significantly larger since the acquisition of Valspar. The Valspar merger was transformative for Sherwin-Williams. Post-merger, Sherwin-Williams is now divided into three segments: Americas, Consumer Brands, and Performance Coatings. Sherwin-Williams is a much more diversified company than it was prior to the Valspar purchase. Management believes it can deliver strong earnings-per-share growth, with less volatility and variability in earnings.

Sherwin-Williams reported Q3 earnings on 10/22/2019 and results were strong again. Revenue was up 2.9% to $4.87 billion. Higher paint sales volume in North America, as well as pricing increases, were partially offset by certain international markets and an unfavorable currency movement. Adjusted earnings came in at $6.65, up 17% from $5.68 as each segment produced higher profits against the year-ago period.

Guidance is for low-single-digit revenue gains in Q4, producing a full-year total of 2% to 4%, while earnings-per-share is now expected to be $21.10 for the year. That would represent a 14% increase from last year’s earnings.

Looking ahead, Sherwin-Williams stands to benefit from broad-based demand for its products, especially in the international markets. Demand for Sherwin-Williams’ products is expected to grow most rapidly in the Asia-Pacific region. In addition, the company has scale unlike any of its competitors in Latin America and North America. There is still plenty of growth potential in its more mature markets, but the Valspar acquisition helped to expedite expansion into Asia-Pacific, where the company is relatively small.

These factors should combine to accelerate the company’s revenue growth in the near-term. Sherwin-Williams expects sales growth of 4%-6% per year through the end of fiscal 2020.

Source: Investor Presentation, page 3

Revenues are just one component of Sherwin-Williams’ future growth in profitability. The Valspar acquisition has presented some meaningful opportunities to reduce expenses by eliminating duplicate roles, integrating supply chains, and combining workforces.

Sherwin-Williams is expecting ~$400 million in annual cost synergies by 2020. Indeed, this chart shows how adjusted SG&A costs have declined significantly already as a percentage of revenue due to synergies with Valspar, which improves margins.

Source: Investor Presentation, page 5

Sherwin-Williams has plenty of opportunities to grow its sales and earnings for the foreseeable future. The company also has a very strong track record of earnings growth, a broad and deep portfolio of popular brands with high margins, and a positive sales growth outlook. In addition, merger synergies have begun to accrue, but aren’t yet complete.

In total, we see 7% annual earnings-per-share growth in the coming years, with about half of that accruing from a higher top line, and the balance from a combination of margin expansion and share repurchases.

The stock trades with a price-to-earnings multiple of 27.3 based on our 2019 earnings-per-share estimate of $21.10, compared with our fair value estimate of 20. That implies a ~6% negative headwind to total returns in the coming years as the stock is significantly overvalued.

We expect 7% long-term annual earnings growth for Sherwin-Williams, and the stock also has a secure dividend, which yields 0.8% right now. However, this results in annual expected returns of just ~2% over the next five years as the headwind from the valuation essentially offsets projected earnings growth and dividends.

No-Fee DRIP Dividend Aristocrat #8: Illinois Tool Works (ITW)

Illinois Tool Works has been in business for more than 100 years. Today, Illinois Tool Works has a market capitalization of $57 billion, and 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.

Source: Investor Presentation

Illinois Tool Works reported third quarter results on October 25th. For the third quarter, the company generated revenue of $3.48 billion, which was 3.7% less than the company’s revenues during the previous year’s quarter. This revenue decline was expected by the analyst community, though actual results were $70 million lower than consensus estimates. Currency exchange negatively impacted results by 1.8% and organic revenue was lower by 1.7%.

Despite the revenue decline, the company increased earnings-per-share 6% to $2.04, which was $0.09 above estimates. This was possible due to a combination of higher operating earnings (due to margin growth outpacing Illinois Tool Works’ revenue decline), a lower tax rate, and the positive impact that the company’s share repurchases had on its per-share performance.

Except for Polymers & Fluids, which had organic growth of 1%, each division within Illinois Tool Works saw declines versus the same quarter a year ago. Illinois Tool Works also reaffirmed guidance for the year.

Source: Investor Presentations

Illinois Tool Works guides for revenues of $14 billion to $14.2 billion, a 4.7% decrease from the previous year. On the other hand, earnings-per-share in a range of $7.55 to $7.85 during fiscal 2019, represents a projected increase of 1.3% from 2018 at the midpoint of guidance. The company expects $1.5 billion in share repurchases during the year, which will also help boost earnings-per-share growth. Overall, we expect 6% annual EPS growth over the next five years, comprised mainly of revenue growth and share buybacks.

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.

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. For example, earnings-per-share declined 9% in 2008 and 37% in 2009, during the Great Recession.

However, the company remained profitable during the Great Recession. This allowed it to continue increasing its dividend each year during the recession, even when earnings declined. And, thanks to its strong business model, the company recovered quickly. Earnings-per-share soared 57% in 2010. By 2011, earnings-per-share surpassed 2007 levels.

Illinois Tool Works has a 2.4% dividend yield and a highly secure payout, with a 56% payout ratio expected for 2019. We also expect the company to generate 6% annual returns to shareholders. But the stock is overvalued, at a P/E ratio of 23. Our fair value estimate is a P/E ratio of 17.

Overall, we expect total returns in the low single-digits for the stock over the next five years. That said, it should continue to reward shareholders with steady growth, and annual dividend increases for many years.

No-Fee DRIP Dividend Aristocrat #7: Aflac (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 premium income. 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.

Aflac continues to perform well. Last quarter, Aflac generated $5.54 billion in revenue and $1.16 in adjusted earnings-per-share, representing a 12.6% year-over-year improvement. For the first three quarters of 2019 the company has generated $16.7 billion in revenue, a 0.4% increase, and $2.6 billion in earnings ($3.41 per share) compared to $2.4 billion ($3.15 per share) in the first three quarters of 2018.

In addition, Aflac has guided investors to anticipate $4.35 to $4.45 in adjusted earnings-per-share for 2019, compared to the $4.17 posted in 2018. At the midpoint, the company is likely to grow adjusted EPS by 5.5% from 2018.

The company has laid out a specific growth plan for 2020.

Source: Investor Presentation

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.

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.

Source: Aflac 2019 Financial Analysis Briefing

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.

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 6% annual earnings-per-share growth over the next five years, in-line with the company’s guidance for 4.3% to 6.7% growth for 2019.

During the last decade shares of Aflac traded at an average P/E ratio of about 10 times earnings. Based on 2019 expected earnings-per-share of $4.40, at the midpoint of guidance, shares are presently trading hands at 11.9 times earnings. As such, this could imply a moderate valuation headwind (~3.4%) over the next five years, should shares revert to their historical average.

On the other hand, the 6% expected EPS growth rate and 2.1% current dividend yield (which ought to grow over the years) should aid in shareholder returns. Still, combined this would only imply ~5% annual returns over the next five years. That said, Aflac should have little trouble continuing to increase its dividend each year.

No-Fee DRIP Dividend Aristocrat #6: 3M Company (MMM)

3M Company has a very impressive track record. It has paid dividends for over 100 years, and it has raised its dividend for 61 years in a row. This makes 3M a Dividend King, an even smaller group of companies with 50+ consecutive years of dividend increases. There are fewer than 30 Dividend Kings, including 3M. In addition, 3M stock has an attractive yield of 3.4% right now.

3M sells more than 60,000 products that are used every day in homes, hospitals, office buildings and schools around the world. It has more than 90,000 employees and serves customers in more than 200 countries. As of the second quarter of 2019, 3M is now 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.

Lastly, 3M’s Consumer division sells office supplies, home improvement products, protective materials and stationary supplies. 3M trades with a market capitalization of $96 billion, and generates $33 billion in annual sales.

3M reported earnings results for the third quarter on 10/24/2019. Adjusted earnings-per-share for the quarter came to $2.58, which topped estimates by $0.08 and matched results from Q3 2018. Revenues declined 2.0% to $8 billion, but this was $210 million below estimates. Organic growth slowed by 0.9% and currency translation reduced results by 1.3%. U.S. sales were higher by just 0.8% while Asia-Pacific dropped 5% and Europe/Middle East/Africa was lower by 4.1%.

Source: Investor Presentation

Organic sales for the Safety & Industrial segment were down 3.3% as gains made in roofing granules were more than offset by weaker results for multiple product categories, including personal safety, abrasives and automotive. Operating margins did improve 3.7% due to a gain from the company’s gas and flame detection divesture in Q3 2019. Transportation & Electronics were down 3.4%. Advanced materials, transportation safety and commercial solutions improved during the quarter while automotive & aerospace and electronics were lower.

On the other hand, Health Care and Consumer segments both showed growth during the quarter. Organic sales improved 2% for Health Care due to several product categories, including health information systems, food safety and medical solutions. Operating margins were down 2.2% due to acquisitions and inventory reductions. Consumer sales were up 2.6% as home improvement and consumer health care was enough to offset weaker stationery and office sales.

3M cut its adjusted earnings-per-share guidance for the year and now expects to earn $8.99 to $9.09 per share in 2019, down from $9.25 to $9.75 per share previously. Local currency organic growth is now expected to be down 1% to 1.5% compared to previous guidance of down 1% to up 2% growth.

We still expect long-term growth for 3M, due to its tremendous competitive advantages. Specifically, 3M’s innovation is one of the company’s greatest competitive advantages. The company targets R&D spending equivalent to 6% of sales ($1.8 billion in 2018) in order to create new products to meet consumer demand.

This spending has proven to be very beneficial to the company as 30% of sales during the last fiscal year were from products that didn’t exist five years ago. 3M’s commitment to developing innovative products has led to a portfolio of more than 100,000 patents.

Overall, we see the potential for high single-digit annualized returns for 3M, comprised of 5% annual EPS growth and the 3.2% dividend yield, partially offset by a low-single digit P/E multiple reduction.

No-Fee DRIP Dividend Aristocrat #5: Johnson & Johnson (JNJ)

Johnson & Johnson is a global healthcare giant. It has a market capitalization of $385 billion, and generates annual revenue of more than $81 billion. J&J operates in more than 60 countries, with more than 250 subsidiary companies.

In all, it manufactures and sells health care products through three main segments:

It has a diversified business model, with strong brands across its three core operating segments.

Source: Investor Presentation

Johnson & Johnson is a leading manufacturer of healthcare products, but not all the recent news related to J&J has been positive. On December 14th, 2018 Reuters released research stating that the company knew its baby powder could be contaminated with asbestos. After examining documents, the report stated that the company discussed ways to address the issue between 1971 and the early 2000s.

J&J has strongly denied this report, but the company has more than 12,000 product liability lawsuits related to its baby powder. On December 19th, a Missouri circuit court judge dismissed a motion by the company to reverse its $4.7 billion jury award to plaintiffs claiming that its talc products caused their ovarian cancer. An appeal by J&J is underway.

On October 15th, 2019, the Missouri appeals court overturned a $110 verdict in favor of Virginia woman who says she developed ovarian cancer after using the company’s baby powder products. The court overturned this verdict on the grounds that out-of-state plaintiffs are limited on their ability to sue within the state of Missouri.

Another issue impacting J&J and other pharmaceutical companies is the impact of opioids. Many U.S. states are looking into the role that pharmaceutical companies played in this widespread opioid epidemic. In August, a judge in Oklahoma found J&J liable for helping fuel the state’s opioid crisis. J&N has been ordered to pay $572 million, though this award was later reduced to $465 million.

Despite the various legal risks facing the company, we believe these are short-term challenges. In our view, Johnson & Johnson’s core business remains intact, and the company retains multiple catalysts for long-term growth. The pharmaceutical segment is its strongest area of growth. This segment has recently generated much higher growth rates than medical devices or consumer products.

J&J had adjusted earnings-per-share of $2.12 in the third quarter of 2019, which represented 3.4% growth from the previous year. Revenue increased 1.9% to $20.7 billion. The pharmaceutical segment led the way, growing revenue 6.4% for the quarter. Consumer products grew by 3.3% while revenue for medical devices declined 2%.

International pharmaceutical sales, on an operational basis, increased 10% last quarter to lead the company.

Source: Investor Presentation

Within the pharmaceutical segment, two of the company’s best-performing areas continue to be oncology and immunology. Oncology sales rose by nearly 9% in constant currency, while the immunology segment grew by more than 10% in the third quarter.

In oncology, Darzalek, which treats multiple myeloma, had revenue growth of 54% on top of 63% growth in the third quarter of 2018. Imbruvica, which treats certain types of lymphoma, grew revenues by 31%% as the drug continues to see higher market share across multiple indications. J&J shares royalties with Imbruvica with fellow Dividend Aristocrat AbbVie.

Stelara, which treats immune-mediated inflammatory diseases and is J&J’s top grossing product, had worldwide revenue growth of 30% during the quarter. Revenues for Simponia / Simpona Aria, which treats rheumatoid arthritis, increased 9.6%. J&J’s pharmaceutical pipeline is a positive growth catalyst for the long-term, as the company has a robust pipeline of new products.

Source: Investor Presentation

By 2021, J&J 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.

Johnson & Johnson’s most important competitive advantage is innovation, which has fueled its amazing growth over the past 130 years. Its strong cash flow allows it to spend heavily on research and development. R&D is critical for a health care company, because it provides product innovation. J&J spent $11 billion on R&D in 2018 alone. J&J’s aggressive R&D investments have resulted in product innovation and a robust pharmaceutical pipeline, which will help produce growth for years to come.

And, J&J’s excellent balance sheet provides a competitive advantage. It is one of only two U.S. companies with a ‘AAA’ credit rating from Standard & Poor’s, along with Microsoft (MSFT). We view the dividend as highly secure, and the stock has an attractive current yield of 2.6%.

Combined with annual EPS growth of 6% and a small negative return from a declining valuation multiple, total returns could reach 8%+ for J&J at the current share price.

No-Fee DRIP Dividend Aristocrat #4: 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 ~64% of its sales in North America, 34% in China and the remaining 2% in 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 recent 9% increase. Its long history of dividend growth is the result of a leadership position in its industry and a high historical growth rate.

The company reported its third-quarter earnings results in late October. The company generated revenues of $728 million during the third quarter, which represents a decline of 3.4% compared to the prior year’s quarter, missing the consensus estimate by $24 million. A.O. Smith’s revenues were up in North America during the quarter, but at the same time, sales in the rest of the world declined substantially, including in China. This more than offset the positive performance in the company’s home market, where volumes and margins improved.

A.O. Smith generated earnings-per-share of $0.53 during the third quarter, which represents a decline on a quarter-to-quarter basis, and which was less than the profits A.O. Smith has generated during the previous year’s quarter. This came as no surprise, and was the continuation of a negative trend that started a couple of quarters ago. A.O. Smith guides for earnings-per-share of $2.25 to $2.28 for the current fiscal year.

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 has dented emerging market sales this year, but should not impact A.O. Smith’s long-term growth.

Source: Investor Presentation

Sales in China have grown 19% per year on average during the last decade. 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. In fact, China and India collectively represent 94% of revenue for the company’s Rest of World operating segment.

Growth is expected to slow down in 2019, due to the impact of trade conflicts. Still, the company will remain highly profitable, which allows it to raise its dividend each year, even when conditions become challenging. Stock buybacks will greatly help A.O. Smith reach its target EPS growth this year. On June 3, the company increased its buyback by 50%, adding 3 million shares to its repurchase authorization.

Over the long-term, we believe that A.O. Smith can grow its EPS by 9% per year. With a 2.1% dividend yield and high dividend increases, A.O. Smith is an appealing stock for dividend growth investors. We believe the stock is slightly overvalued right now, but we still see the potential for ~9% annual returns through 2025.

No-Fee DRIP Dividend Aristocrat #3: Exxon Mobil (XOM)

Exxon Mobil is one of the largest energy companies in the world, with a market capitalization of nearly $300 billion. It is one of only two energy stocks on the list of Dividend Aristocrats, along with Chevron (CVX).

The company operates three large business segments. The Upstream segment includes oil and gas exploration and production. Downstream activities include refining and marketing. Manufactured chemicals include olefins, aromatics, polyethylene, and polypropylene plastics.

Source: Investor presentation, page 16

Above we can see the massive global scale on which Exxon operates, with its vast portfolio of diverse assets. The company has stated it expects increased divestment activity in the near future, raising cash to invest in more profitable projects.

Management believes it can raise $15 billion by the end of 2021, money which it will use to acquire or improve projects with better return profiles. Investing in higher-quality projects will allow Exxon Mobil to grow profits, even in an environment of stagnant oil and gas prices.

The climate for oil and gas majors remains challenged because oil prices are still down by nearly half from the peak levels of 2014. Fortunately, Exxon Mobil is an integrated company that was built – in part – to insulate itself against price declines. Its upstream and downstream businesses complement each other well and help shield it from swings in the prices of commodities. When oil and gas prices decline, upstream profits do fall. But downstream profits tend to benefit from sharp fluctuations in oil prices.

This helps Exxon Mobil’s profits hold up relatively well compared with other oil and gas majors. Earnings-per-share have declined significantly in the first three quarters of this year as the company has struggled with pricing in its upstream business in particular.

Source: Investor Presentation, page 20

Against last year’s Q3, results were weak across the board, as seen above. On the whole, Exxon’s Q3 was predictably weak against last year’s very strong results, and we see $2.70 in earnings-per-share for this year. Indeed, through the first three quarters of the year, earnings-per-share have declined from $3.47 to $2.03.

Despite relative weakness in earnings, ExxonMobil has more than enough cash on hand, plus what it generates, to continue paying the dividend, which has cost about $11 billion over the first three quarters of the year.

Source: Investor presentation, page 9

Exxon Mobil has a massive project pipeline, consisting of more than 100 new projects. In addition to the Permian Basin, Exxon Mobil has significant international projects located in Guyana, Brazil, and Angola, among others. Production is set to rise in the coming years as its legacy projects contribute more and as some of its larger growth projects come online.

Thanks to these factors, we expect a low-single-digit tailwind to production volumes in the coming years. Exxon believes it has tremendous leverage to oil prices in the coming years thanks to the way it has built its portfolio in recent years. By 2025, Exxon thinks it would earn perhaps $20 billion at $40/bbl. At $80/bbl, earnings would more than double as operating leverage would take over. In total, we expect Exxon to produce 17% annual earnings-per-share growth for the next five years off of what is a very low base for 2019.

Exxon Mobil enjoys several competitive advantages, primarily its tremendous scale, which provides the ability to cut costs when times are tough. It also has the financial strength to invest heavily in new growth opportunities. Another competitive advantage is Exxon Mobil’s industry-leading balance sheet. It has a credit rating of AA+, which helps it keep a low cost of capital.

Exxon Mobil’s integrated business model allows the company to remain profitable, even during recessions and periods of low commodity prices. Continuing to generate steady profits allowed Exxon Mobil to keep raising its dividend each year.

Source: Investor presentation, page 81

Exxon has greatly outperformed its peers in terms of dividend growth in the past ten years, and certainly in the past couple of years. Exxon’s streak of 37 consecutive years of dividend increases puts it in rare company in the S&P 500, but elite company when its industry is considered.

Plus, Exxon Mobil has a high current yield of 5%. Exxon Mobil has been – and in all likelihood, will continue to be – a top-tier dividend payer for a long time to come. In all, we see the potential for 10%+ annual returns for Exxon Mobil over the next five years, thanks largely to its high dividend yield.

No-Fee DRIP Dividend Aristocrat #2: Federal Realty Investment Trust (FRT)

Federal Realty is a Real Estate Investment Trust, or REIT. Its business model is to own and rent out real estate properties. It uses a significant portion of its rental income, as well as external financing, to acquire new properties. This helps create a “snow-ball” effect of rising income over time.

Federal Realty primarily owns shopping centers. However, it also operates in redevelopment of multi-purpose properties including retail, apartments, and condominiums. The portfolio is highly diversified in terms of tenant base. No individual industry represents more than 9% of the portfolio, and no single tenant accounts for more than 3%.

Source: Investor Presentation, page 6

Federal Realty’s retail portfolio is second to none in the industry in terms of average base rent, and consists of 104 properties. Approximately 94% of Federal Realty’s properties were leased, as of the most recent quarter, which is consistent with recent results.

Its properties are geographically focused on the East and West coasts, and the trust now has properties in Miami and Chicago. Its major markets are Washington, D.C., New York, Philadelphia, Boston, San Francisco, and Los Angeles. The trust’s investment strategy is to pursue densely-populated, affluent communities, with high demand for commercial and residential real estate. This strategy has fueled strong growth over the past several years.

Federal Realty’s growth comes from new properties, and rental increases. Since 2009, Federal Realty increased FFO by just over 5% per year, on average, which is more in line with our expected growth rate for the trust.

Source: Investor Presentation, page 5

FFO is expected to come in at $6.38 per share in 2019, or ~2% higher than 2018. Federal Realty’s occupancy rate has dipped slightly but it has managed to offset that with development and pricing increases, as it has for many years.

Recent leasing activity is being completed at higher average rents than properties in the existing portfolio, which is a good sign that future rental income will grow. Indeed, Federal Realty has been doing this for decades, so we have no reason to expect it will change.

In the most recent quarter, Federal Realty had an overall lease rate of 94.2% against a comparable lease rate of 94.9% in the year-ago period. However, comparable property operating income rose 2.1%, signifying the tailwind of higher rent rates achieved through escalations.

The trust signed 103 leases for 491,414 square feet of rental space in Q3 with average cash basis rollover growth of 7%. In essence, this means that Federal Realty is continuing its long tradition of improving rental income and operating income through constantly recycling its portfolio at higher lease rates. New properties, therefore, should keep the “snowball effect” intact for the foreseeable future.

The trust expects FFO-per-share in a range of $6.30 to $6.46 for 2019. Our estimate is for $6.38 and would represent modest growth over 2018.

Federal Realty’s competitive advantage is its high-quality property portfolio. Federal Realty has done this by focusing on affluent areas of the country, where demand exceeds supply. This is also how it can continue to boost its cash basis rollover growth over time; it owns properties in the most desirable areas and tenants are willing to pay more to gain access to the best consumers.

Federal Realty benefits from the ability to raise rents over time. Another competitive advantage for Federal Realty is a strong balance sheet. The trust’s senior unsecured debt holds a credit rating of A- from Standard & Poor’s, which is solidly investment-grade, and is a high rating for a REIT. Indeed, there are only five REITs with a “A” rating, with Federal Realty being one of them.

Federal Realty has a high-quality property portfolio with growth potential, a strong balance sheet, and an attractive dividend yield of 3.3%. Combined with 5.5% annual FFO-per-share growth and a small boost from a rising valuation multiple, total returns could exceed 10% per year.

No-Fee DRIP Dividend Aristocrat #1: AbbVie (ABBV)

Taking the top spot on the list of no-fee DRIP Dividend Aristocrats is AbbVie. This is because AbbVie has the most attractive mix of expected earnings growth, a low stock valuation, and a high dividend yield above 5%.

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 ~$128 billion. Its most important product is Humira, which by itself represents ~60% of annual revenue. But AbbVie has also built a large portfolio of next-generation products that will lead the company’s future growth when Humira loses patent U.S. exclusivity.

AbbVie reported its third-quarter earnings results on November 1st. Revenue of $8.5 billion increased 3.5% operationally. Revenue was positively impacted by strong growth from Imbruvica, grossing sales of $1.3 billion, up 29% from the previous year’s quarter. However, Humira’s total global revenue declined by 3.2% year over year. Domestic sales growth of 10% for Humira was more than offset by a 32% decline in the international markets, due to biosimilar competition. That said, on an adjusted basis, AbbVie grew earnings-per-share by 8.9% year-over-year.

Along with its quarterly results, the company raised its full-year guidance. AbbVie now expects 2019 adjusted EPS in a range of $8.90 to $8.92, up from $8.82 to $8.92. The new guidance range represents full-year adjusted EPS growth of 12.6%, at the midpoint. In addition, AbbVie raised its quarterly dividend by 10%.

AbbVie’s major risk is loss of exclusivity for Humira, which has already transpired in Europe and will occur in the U.S. in 2023. Fortunately, AbbVie has multiple organic growth opportunities to replace Humira declines. AbbVie also recently announced the $63 billion acquisition of Botox-maker Allergan (AGN), which diversifies AbbVie’s product offerings.

The combined company will have annual revenues of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted EPS over the first full year following the close of the transaction, with peak accretion of greater than 20%.

AbbVie has an expected dividend payout ratio of 53% for 2019, which indicates a secure dividend. AbbVie will be more leveraged following the transaction, as a portion of the cash component of the offer will be funded with new debt. Fortunately, the company is committed to a Baa2/BBB or better credit rating. AbbVie also issued a new debt reduction target of $15 billion to $18 billion by 2021.

Based on expected 2019 earnings-per-share of ~$8.91, AbbVie stock trades for a price-to-earnings ratio of 10.0. Our fair value estimate for AbbVie is a price-to-earnings ratio of 10.5. Still, an expanding P/E multiple could boost shareholder returns by approximately 1% per year over the next 5 years.

In addition, we expect annual earnings growth of 9.5% through 2024. Lastly, the stock has a current dividend yield of 5.3%. In total, we expect annual returns of 15.8% per year over the next five years, making AbbVie our highest-ranked Dividend Aristocrat.

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.

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