Dividend Growth Slowing

11/21/2016


In the 12 months ended September, the S&P 500 Index paid out a record $392 billion in dividends. The index's payout has increased in each of the last 27 rolling four-quarter periods since March 2010, and we expect continued record payouts in the year ahead.

Unfortunately, those rosy numbers don't mean everything's OK in dividend land. The overall rise in dividends paid obscures some less-encouraging trends:

• Dividend growth has slowed in recent quarters. In the 12 months ended September, the index's per-share dividend rose 6%, one-third the growth rate from four years ago. Over the last 25 years, the index has averaged less than 6% dividend growth, and the recent growth rate looks like a reversion to the mean, not a downward blip.

• The index's payout ratio, or the percentage of operating earnings paid out in dividends, was 44% in the year ended September. We don't consider that payout ratio dangerously high, but it has risen steadily over the last five years and is now above the 25-year average of 37%. The payout ratio is more likely to fall than rise in coming quarters, capping future dividend growth, particularly if earnings growth remains muted.

• In the first ten months of 2016, 278 companies in the S&P 500 Index increased their payout, down 19% from the 344 dividend-raisers during the same period in 2015 and down 26% from 2014. Not since 2010 have so few companies raised their payout.

We don't expect a reduction in dividends for the index, or a broad-based suspension of dividend hikes. Over time, assuming no recessionary conditions, stock dividends tend to rise. But the double-digit gains seen over most of the last five years are probably gone. Expect some companies to stop raising their payouts and others to slow the pace of growth.

Of course, not all pockets of the market will behave the same way, as shown in the table to the right. Stocks in three sectors — consumer discretionary, financials, and industrials — averaged dividend growth of at least 7% over the last year. Technology, telecom, and utilities stocks grew their dividends less than 5%, and energy dividends actually declined.

DIVIDEND GROWTH, BY SECTOR
The numbers below reflect average growth of announced dividends for stocks currently in the S&P 500 Index. To avoid skewing the numbers with big growth from new dividend payers, we exclude companies without a 10-year history of paying dividends.
------ Average 12-Month Dividend Growth ------
Sector (Number Of Companies)
Last
12 Months
(%)
1 Year
Ago
(%)
3 Years
Ago
(%)
10-Year
Average
(%)
Consumer Discretionary (39)
7
16
18
12
Consumer Staples (28)
5
11
10
9
Energy (25)
(15)
12
15
10
Financials (51)
8
14
22
5
Health Care (24)
5
15
11
12
Industrials (51)
9
13
12
12
Materials (23)
5
8
13
8
Real Estate (23)
5
12
19
5
Technology (21)
1
8
16
12
Telecommunication Services (4)
2
2
(8)
0
Utilities (24)
4
4
3
4
S&P 500 Index (313)
4
12
14
9

For a list of stocks with both dividend growth and the flexibility to keep the payout rising, see the table below. Four of those stocks are reviewed in the following paragraphs.

The financial crisis was a dividend disaster, particularly with financial stocks such as J.P. Morgan Chase ($77; JPM), which cut its payout 87% in 2009. These days, J.P. Morgan must seek government approval before raising its dividend. But despite the regulatory strictures, the financial giant has managed to grow its payout aggressively over the last five years.

In the last 12 months, the financial giant paid dividends of $1.84 per share, its largest in history. That generous dividend equates to just one-third of trailing earnings, a payout ratio the company is likely to boost in coming years. J.P. Morgan Chase, yielding 2.5%, is a Long-Term Buy.


Kroger ($34; KR) has raised its payout every year since initiating the dividend in 2006. The dividend has risen at an annualized rate of 24% during that 10-year period, most recently a 14% hike in August. With less than one-fourth of operating earnings committed to the dividend — less than half the payout ratio of the average dividend-paying consumer-staples stock — Kroger has plenty of flexibility to keep the dividend growing at double-digit rates. The stock yields 1.4%.

Food-price deflation has eroded both Kroger's growth (the consensus projects profit declines in the October and January quarters) and its share price (down 19% so far this year). However, while the company expects deflation pressures to persist through early 2017, same-store sales rose 1.7% excluding fuel in the July quarter on a rise in both households served and total tonnage sold. Kroger, which will release October-quarter earnings on Dec. 1, is a Buy and a Long-Term Buy.


With less than 10% of earnings allocated to dividends, Southwest Airlines ($46; LUV) has one of the lowest payout ratios of any dividend-paying stock we recommend. But even with just a 9% payout ratio, Southwest yields 0.9%. Over the last three years, the quarterly per-share dividend has risen 150%. Southwest last raised its dividend in May, announcing a 33% hike. We expect continued double-digit dividend growth.

While the consensus projects sales growth of more than 4% next year, analysts expect roughly flat profits, hurt by higher labor costs (the pilots' and flight attendants' unions have approved new contracts in the last month) and an expected rise in fuel prices. In the first 10 months of the year, capacity rose 5.9% while traffic rose 6.3%. The company says capacity growth will slow going forward. Southwest is a Focus List Buy and a Long-Term Buy.


Shares of Zions Bancorp ($37; ZION) have jumped 16% since the presidential election, as the tide rose for most bank stocks. Despite that rally, Zions remains reasonably valued. The stock trades at 20 times projected 2017 earnings, slightly above the industry average, a premium more than warranted by Zions' improving efficiency, conservative balance sheet, and solid loan growth (6% over the last year). The shares offer a 23% discount to the median regional bank in the S&P 1500 Index as measured by price/sales and price/book ratios.

Zions yields 0.9%, less than half of the industry median. However, the current yield is more than double the stock's five-year average, the dividend has risen at an annualized rate of 45% over the last five years, and the payout ratio is still under 17%. Zions looks like a good bet for continued strong dividend growth in coming years. Zions is a Focus List Buy and a Long-Term Buy.


Beware high payout ratios

While everyone appreciates yield, a juicy dividend can sometimes turn out to be too much of a good thing. The last thing you want to do is purchase a stock because of its dividend yield, just to have that stock reduce the payout. Such developments not only cut investors' income, but also tend to cause the share price to decline.

One way to assess the safety of a dividend is the payout ratio, or the percentage of earnings paid out in dividends. The higher the payout ratio, the less flexibility the company has to invest in the business or deal with downturns, and thus the greater risk of a dividend cut if times get tough.

We typically avoid stocks with payout ratios above 70%, and take a hard look at stocks with payout ratios above 50%. The table below lists several Forecasts stocks with solid yields and dividend growth, as well as reasonable payout ratios.

STOCKS WITH DIVIDEND-GROWTH POTENTIAL
All 19 of the A-rated stocks below yield at least 1% and have grown their dividend at a double-digit rate over the last four quarters, and on average over the last 40 rolling four-quarter periods, if they've paid dividends that long. We also required manageable, sustainable dividend payout ratios under 60%, which suggest the ability to continue raising the payout. Stocks on our buy lists are presented in bold.
Indicated
Per-Share
Dividend
($)
12-Month Dividend Growth
-------- Payout Ratio --------
Company (Price; Ticker)
Yield
(%)
Last 4
Qtrs.
(%)
1 Yr.
Ago
(%)
3 Yrs.
Ago
(%)
10-Year
Average
(%)
Trailing
(%)
10-Year
Average
(%)
Sector
Average
(%)
Quadrix
Overall
Score
Sector
AmerisourceBergen
($79; ABC)
1.36
1.7
17
23
62
43
24
22
26
82
Health care
Amgen ($147; AMGN)
4.00
2.7
27
30
30
NA
35
28
26
90
Health care
Cisco Systems ($32; CSCO)
1.04
3.3
17
11
121
NA
44
33
41
85
Technology
Comcast ($67; CMCSa)
1.10
1.6
11
13
30
NA
32
26
37
64
Cons.
discretionary
CVS Health ($75; CVS)
1.70
2.3
24
25
35
26
30
19
49
85
Consumer
staples
Disney ($99; DIS)
1.42
1.4
19
34
25
20
25
20
37
79
Cons.
discretionary
EQT Midstream Partners
($74; EQM)
3.26
4.4
22
25
29
NA
59
53
49
98
Energy
Foot Locker ($70; FL)
1.10
1.6
12
12
10
12
24
32
37
94
Cons.
discretionary
Home Depot ($125; HD)
2.76
2.2
21
23
21
20
46
43
37
78
Cons.
discretionary
J.P. Morgan Chase
($77; JPM)
1.92
2.5
10
6
16
28
33
26
31
85
Financials
Kroger ($34; KR)
0.48
1.4
17
12
26
14
22
19
49
75
Consumer
staples
Lear ($126; LEA)
1.20
1.0
21
23
19
NA
9
9
37
99
Cons.
discretionary
Lincoln National ($61; LNC)
1.00
1.9
25
27
52
37
19
15
31
96
Financials
Lowe's ($67; LOW)
1.40
2.1
23
26
14
26
39
28
37
80
Cons.
discretionary
Magna International
($40; MGA) e
1.00
2.5
14
16
15
NA
19
18
37
97
Cons.
discretionary
Southwest Airlines
($46; LUV)
0.40
0.9
30
35
245
48
10
7
39
87
Industrials
Time Warner ($89; TWX)
1.61
1.8
14
10
11
10
30
31
37
87
Cons.
discretionary
UnitedHealth Group
($152; UNH)
2.50
1.7
29
34
31
NA
34
13
26
81
Health care
Zions Bancorp ($37; ZION)
0.32
0.9
30
25
150
15
17
18
31
96
Financials
Notes: For the purposes of this table, the payout ratio reflects the trailing 12-month dividend as a percentage of trailing 12-month earnings.    Quadrix scores are percentile ranks, with 100 the best.     NA Not available.     e Dividend and yield estimated.

 


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