To Gauge Dividends, Look At Payout Ratio

8/13/2012


Dividends are becoming more popular.

Among S&P 1500 Index stocks, 62% pay a dividend, up from 58% on average over the last five and 10 years. Looking at the broader market, S&P says during the first seven months of this year, 1,064 U.S.-traded stocks raised their dividends. That's up 20% from the year-earlier period and the highest since 2007.

That dividend activity begs the question — can companies keep it up? One useful guide is payout ratio, the percentage of earnings paid out in dividends. The average S&P 1500 stock has a payout ratio of 23%, in line with the norm since 1994. That payout ratio suggests that while companies' pent-up desire to raise dividends after the recession has been mostly satisfied, they still have the flexibility for more hikes.

We also looked at individual sectors to assess dividend fatigue and found no glaring weak points. In most market sectors, average payout ratios are roughly in line with long-run averages. Technology and utility stocks average payout ratios above historical norms, but the percentage of companies paying dividends has also risen, so the higher payout ratios make sense.

SECTOR ANALYSIS
While the average S&P 1500 Index stock has averaged a similar payout over the last five and 10 years, sector averages show slightly more variation. The rise in the tech and utility sectors' payout ratio over time reflects an increasing number of companies paying dividends. Averages include nonpayers.
Average Dividend
------ Payout Ratio ------
% Of Stocks
---- Paying Dividends ----
Average Yield,
---- All Index Stocks ----
Sector
Current
(%)
Last
5 Yrs.
(%)
Last
10 Yrs.
(%)
Current
(%)
5-Yr.
Avg.
(%)
10-Yr.
Avg.
(%)
Current
(%)
5-Yr.
Avg.
(%)
10-Yr.
Avg.
(%)
Cons. Discretionary
18
18
18
54
50
54
1.3
1.1
1.0
Consumer Staples
33
30
30
76
75
76
2.2
1.9
1.8
Energy
13
12
13
52
55
53
0.9
0.8
0.7
Financials
36
40
37
88
86
89
2.7
3.0
2.7
Health Care
9
10
10
34
28
30
0.6
0.5
0.4
Industrials
22
22
22
75
71
68
1.5
1.4
1.2
Materials
27
28
30
84
83
82
1.7
1.8
1.7
Tech
11
10
9
32
25
22
0.7
0.5
0.3
Telecom
32
40
36
56
59
59
3.6
3.7
2.8
Utilities
63
58
58
97
95
92
3.7
4.0
3.8
S&P 1500
23
23
23
62
58
58
1.6
1.5
1.3
Note: Averages exclude payout ratios below 0% or above 150% and yields above 15%.

Marketwide, modest payout ratios are a good indicator of future dividend growth. Since 1988, the S&P 500 Index's per-share dividends have tended to grow more quickly after periods when the payout ratio was low. Dividend growth probably won't keep up the torrid pace seen over the last four quarters, when the S&P 500's trailing 12-month dividend has averaged year-over-year growth of 15%. However, history suggests there is still plenty of room for solid increases.

OK, so the market can support higher dividends. But which individual companies are most likely to boost their payouts? Check out the table below. We screened for stocks with characteristics that suggest they will raise dividends in the future:

• A history of dividend increases.
• Payout ratios no higher than historical norms.
• Sufficient profit growth to support higher dividends.

The table below lists 10 A-rated stocks that meet those criteria, two of which are reviewed below.

Drought conditions in the U.S. grab headlines, but the news isn't all bad for fertilizer maker CF Industries ($206; CF). Yes, farmers with ravaged crops could cut back on their spending this autumn. But with the heat scorching corn and soybean crops, grain prices have jumped, a development that could spur many farmers to boost fertilizer purchases in an effort to enrich yields. According to Citi Research, fertilizer demand rose after droughts in 1983 and 1988.

In the June quarter, CF earned $8.71 per share excluding special items, up 27% despite a 4% decline in sales. While sales and profits fell short of consensus estimates, shares rose on the news, probably because CF said strong demand and low supplies should support higher fertilizer prices into 2013. CF expects strong plantings over the next year, particularly in the U.S., Latin America, and India.

Earlier this month, CF agreed to pay nearly C$1 billion for the 34% of an Alberta fertilizer plant it did not already own. The deal gives CF a stronger position in Western Canada, a key market where CF has had less exposure than its rivals. CF is a Focus List Buy and a Long-Term Buy.


Oracle ($32; ORCL) can be forgiven for keeping its head in the cloud. So far this year, the software giant has made seven acquisitions to build its presence in cloud computing. The cloud allows computer users to store and manage data on remote internet servers rather than their own hardware. This trend looks to have staying power; the computing approach could lower users' costs and slow growth in demand for bandwidth. Several technology researchers expect cloud computing to grow into a $100 billion-plus market.

While Oracle has until now had trouble finding a foothold in the cloud, the company has historically adapted well to changes in the enterprise-software market. In many cases, Oracle has dealt with change via acquisitions — witness the purchase of hardware-maker Sun Microsystems in 2010, middleware software developer BEA Systems in 2008, and sales-automation concern Siebel Systems in 2006. All of those mergers solidified Oracle's hold on a key portion of an end market while at the same time opening doors in new markets. The consensus projects per-share-profit growth of 8% in the fiscal year ending May 2013 — a conservative target — and annual growth of 13% over the next five years. Oracle is a Long-Term Buy.

PROBABLE DIVIDEND GROWERS
Below we list 10 A-rated stocks likely to raise their dividends in the future. All have trailing payout ratios below their five- and 10-year averages (or below 30% if they don't have a five-year dividend history). All also have sufficient profit growth to support a higher dividend. Stocks recommended for purchase are in bold.
-- Payout Ratio --
Annualized
-- Div. Growth --
Annualized Profit Growth
Company (Price; Ticker)
Div.
($)
Yield
(%)
Trailing
(%)
5-Yr.
Avg.
(%)
Last Div.
Increase
(%)
3
Years
(%)
5
Years
(%)
Last 12
Months
(%)
Last 3
Years
(%)
Last 5
Years
(%)
Sector
Aflac ($46; AFL)
1.32
2.9
20
29
10
6
11
44
30
10
Financials
Agilent Technologies
($40; A)
0.40
1.0
13
NA
Initial
NA
NA
30
40
14
Health Care
Apple ($621; AAPL)
10.60
1.7
25
NA
Initial
NA
NA
68
78
23
Technology
Boeing ($74; BA)
1.76
2.4
33
34
5
2
5
22
11
10
Industrials
CF Industries
($206; CF)
1.60
0.8
6
NA
300
59
82
86
34
16
Materials
McKesson ($88; MCK)
0.80
0.9
12
13
11
19
35
19
14
14
Health Care
National Oilwell
($77; NOV)
0.48
0.6
9
NA
9
NA
NA
33
4
18
Energy
News Corp.
($24; NWSa)
0.17
0.7
12
12
13
12
7
25
16
19
Cons. Discret.
Oracle ($32; ORCL)
0.24
0.8
10
NA
20
17
NA
14
21
13
Technology
Qualcomm
($61; QCOM)
1.00
1.6
28
30
16
6
14
17
28
15
Technology
NA Not available because stocks lack the dividend history.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com