Dividend Growth Slowing But Still Solid

1/11/2016


Large stocks' dividend growth has apparently peaked. But we still expect a pleasant ride down from that mountain.

In the first 11 months of 2015, components of the S&P 500 Index delivered 318 dividend increases while seven initiated payouts, versus 16 dividend cuts or omissions. Not bad, considering positive dividend actions outnumbered negative dividend actions by a ratio of more than 20-to-1. But in each of the last two years we saw ratios of at least 32-to-1.

S&P 500 DIVIDEND ACTION
First 11
Months Of . . .
Increases
And New
Dividends
Cuts And
Omissions
Ratio Of
Postive To
Negative
2015
325
16
20-to-1
2014
383
8
48-to-1
2013
381
12
32-to-1
2012
348
12
29-to-1
2011
342
5
68-to-1
2010
256
5
51-to-1
2009
157
78
2-to-1
2008
241
62
4-to-1
2007
298
12
25-to-1
2006
305
10
31-to-1
2005
316
11
29-to-1
2004
282
5
56-to-1
Source: Standard & Poor's.

The index's total dividends jumped 17% in 2012, then 11% in 2013 and 12% in 2014 as companies made up for lost time in the wake of massive cuts in 2009 and 2010. Growth decelerated to 9% in 2015, still well above the index's annualized growth of 6.4% over the last 25 years.

In coming quarters, dividend growth will likely slow — even if earnings growth picks up, as analysts expect. The index's payout ratio of 41% remains reasonable, and most companies currently boosting their payouts should continue doing so. Payout ratio represents the indicated year-ahead dividend as a percentage of trailing earnings.

We like stocks with consistent dividend growth. Check out the table below, which presents 18 stocks that have delivered growth of at least 10% in dividends and at least 6% in operating cash flow over the last year, and annually over the last three years. Four are reviewed below:

Kroger ($42; KR) has raised its dividend every year since initiating the payout in 2006, most recently a 13.5% hike in June. The grocery-store chain yields 1.0%. Cash from operations rose 13% over the last year and 21% annualized over the last three years. Factor in a payout ratio of just 21%, and Kroger looks like a good bet for continued dividend growth.

In each of the last seven quarters, Kroger grew per-share profits at least 14%, helped by widening operating profit margins and stock buybacks. Over the last two years, the company invested more than $2 billion in its own shares, reducing the share count 6%. Rising analyst profit estimates now project per-share growth of 4% in the January quarter and 9% in the year ending January 2017. Kroger is a Buy and a Long-Term Buy.


Lear ($113; LEA) suspended its dividend in 2006 and didn't pay one again for four years. But since emerging from bankruptcy in 2009, Lear has made up for lost time. In 2011, Lear initiated a quarterly payout of $0.125 per share; over the next four years that payment doubled, equating to an annualized growth rate of 19%.

In each of the last four years, Lear boosted the dividend in February. Operating cash flow jumped 50% and free cash flow doubled in the 12 months ended September. With the payout using just 10% of earnings and 12% of free cash flow, Lear has room for continued hikes, and one seems likely to come next month. Lear, yielding 0.9%, is a Focus List Buy and a Long-Term Buy.


Nvidia ($32; NVDA) paid its first dividend in late 2012 and has since raised the payout three times, including twice last year. The semiconductor maker yields 1.5%, above the industry average and in line with the average for dividend-payers.

Over the last 12 months, Nvidia grew sales 5%, per-share profits 12%, and operating cash flow 28%. The consensus projects gains of 6% in sales and 27% in per-share profits in the fiscal year ending January 2017; over the last 60 days, the consensus has risen 16%. While the stock is a bit expensive at 23.5 times the 2017 profit estimate of $1.34 per share, demand for such new electronics as ultra-high-definition televisions and virtual-reality devices should help the graphics-chip maker meet or exceed expectations. Nvidia is a Long-Term Buy.


Robert Half International ($45; RHI) has raised its dividend in 10 consecutive years, growing the payout at an annualized rate of 11% over that period. The staffing firm has been a picture of consistency, always increasing the dividend in the first quarter of the year and delivering growth between 7% and 13% in each of the last eight years. With a payout ratio of 31% and operating cash flow declining just once in the last 16 quarters, the company should be able to keep the dividend rising.

The consensus projects sales growth of 9% and per-share-profit growth of 15% for Robert Half in 2016. Steady payroll growth in the U.S. and signs of improvement in Europe offer reasons for optimism about the year ahead. Robert Half, with a yield of 1.8% that dwarfs the industry median of 1.3%, is a Buy and a Long-Term Buy.

DIVIDEND-GROWTH PLAYS
All 18 of the stocks below grew their dividends at least 10% and operating cash flow at least 6% annually over the past one and three years. To calculate payout ratio, we divided the indicated divided by earnings from the last 12 months. All stocks are rated A (above average), with those on our buy lists in bold.
----------- Dividend Increases -----------
Change In
--- Operating Cash Flow ---
-- Annualized --
Years
With Hike.
Last
Decade
-- Annualized --
Company (Price; Ticker)
Div.
($)
Yield
(%)
Payout
Ratio
(%)
Most
Recent
(%)
3
Years
(%)
10
Years
(%)
12
Months
(%)
3
Years
(%)
10
Years
(%)
Quadrix
Overall
Score
Amgen ($157; AMGN)
4.00
2.6
40
27
41
NM
5
19
12
7
79
Boeing ($139; BA)
4.36
3.1
52
20
35
16
8
115
21
7
95
Comcast ($55; CMCSa)
1.00
1.8
31
11
15
NM
9
25
6
13
79
CVS Health ($96; CVS)
1.70
1.8
35
21
38
28
10
32
13
23
75
Disney ($100; DIS)
1.42
1.4
28
24
24
19
8
12
11
10
79
Foot Locker ($65; FL)
1.00
1.5
24
12
41
21
5
7
12
7
92
Ford Motor ($13; F)
0.60
4.6
43
20
44
4
4
28
21
(5)
93
Kroger ($42; KR)
0.42
1.0
21
14
22
NM
10
13
21
7
89
Lear ($113; LEA)
1.00
0.9
10
25
21
7
5
50
24
10
100
Lincoln Nat'l ($47; LNC)
1.00
2.1
16
25
46
(4)
8
110
42
10
91
McKesson ($193; MCK)
1.12
0.6
9
17
12
17
8
69
28
3
82
Nvidia ($32; NVDA)
0.46
1.5
29
18
15
NM
4
28
12
13
75
Phillips 66 ($78; PSX)
2.24
2.9
28
12
41
NM
3
43
6
NM
97
Robert Half ($45; RHI)
0.80
1.8
31
11
10
11
10
13
12
4
83
Shire ($195; SHPG) e
0.70
0.4
6
13
29
15
10
81
43
26
73
Starbucks ($58; SBUX)
0.80
1.4
50
25
24
NM
7
517
29
15
70
UnitedHealth ($115; UNH)
2.00
1.7
32
33
33
52
7
29
20
6
82
Valero Energy ($71; VLO)
2.00
2.8
22
25
42
26
9
6
8
2
100
Note: Quadrix Scores are percentile ranks, with 100 the best.     NM Not meaningful.     e Dividend and yield estimated.

 


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