Parsing Dividend Trends

4/10/2017


The pace of dividend increases has been slowing since late 2014, a trend we've addressed before and one that some analysts have cited as a reason to avoid dividend-paying stocks. However, investors base their decisions on a single trend at their peril.

We aren't ready to predict that the sky is falling on dividend stocks, for at least three reasons:

1) While the number of stocks raising their dividends has declined in the last two-and-a-half years, it remains well above the long-run average.

2) For larger stocks, like those in the S&P 1500 Index, dividend growth is actually more common now than it was a year ago. Over the last 12 months, 80% of the index's dividend-payers increased the payout, up from 62% in the same period a year earlier.

3) Dividend growth has historically been a decent predictor of stock returns. In rolling 12-month periods since 1994, the top one-fifth of the S&P 1500 Index as measured by three-year dividend growth outperformed the average stock 58% of the time, with an average return 0.8% above the index average.

In rolling 12-month periods since the start of 2005, an average of 1,722 U.S.-traded stocks have raised their dividends. As the chart below illustrates, the number of hikes ebbs and flows, peaking at nearly 2,300 in late 2014 and falling below 700 in 2009.

Among S&P 1500 stocks, 922 have paid dividends for each of the last three years. Of those stocks, 774 raised their dividends in the 12 months ended March, up from 652 during the same period a year earlier. All but one sector saw the percentage of companies with dividend hikes rise over the last year. Dividend growth averaged 8% in both periods.

PAYOUTS RISE FOR S&P 1500 STOCKS
While the number of dividend increases is declining marketwide, larger firms are charting a different course. In 10 of the S&P 1500's 11 market sectors, the percentage of companies raising their dividend in the last year was higher than the percentage during the same period a year ago, a trend that suggests companies remain committed to raising their payouts.
---------- Last 12 Months ----------
------------- A Year Ago -------------
Sector
(No. Of Dividend Payers)
Number
Raising
Dividend
% Raising
Dividend
Average
Dividend
Change
(%)
Number
Raising
Dividend
% Raising
Dividend
Average
Dividend
Change
(%)
Cons. discretionary (136)
117
86
13
93
68
10
Consumer staples (50)
46
92
9
44
88
8
Energy (42)
14
33
(23)
13
31
0
Financials (176)
159
90
10
138
78
12
Health care (53)
48
91
8
39
74
9
Industrials (162)
133
82
11
109
67
7
Materials (69)
61
88
8
49
71
7
Real estate (88)
70
80
7
62
70
4
Technology (84)
70
83
6
50
60
7
Telecom services (8)
5
63
(2)
6
75
5
Utilities (54)
51
94
8
49
91
7
S&P 1500 (922)
774
84
8
652
71
8

Not surprisingly, the sector with the weakest dividend growth is energy, where just a third of companies boosted the payout over the last year. On average, energy-stock dividends fell 23%.

Does the rise in the percentage of S&P 1500 stocks hiking their dividends prove the marketwide slowdown is over? Not necessarily, though it does suggest we've seen the worst of it. The stabilization of the growth rate at 8% over the last two years is also cautiously optimistic news.


WE LIKE DIVIDEND GROWTH

Our Quadrix system taps into two dividend-growth metrics, three- and five-year growth, both of which contribute to the Quality category score.

While neither metric is a predictive powerhouse, both have worked, with top scorers in those statistics outperforming the average stock. However, the stats' individual power is less important than what they imply about a company.

In general, we like to see companies raise their dividends. Such action suggests management possesses both the will and the financial wherewithal to share the wealth with shareholders.

You'll find that most of the stocks we recommend that pay dividends have a history of growing those dividends.


Only time will tell whether recent dividend-growth data represent a blip rather than a change in trend. But either way, we're comfortable recommending stocks that consistently increase their payouts, such as the ones in the table below. Three of those stocks are reviewed in the following paragraphs:

After not paying a dividend in nearly 17 years, Apple ($144; AAPL) initiated a payout in 2012. Since then, the dividend has increased at an annualized rate of 11%. Last year, Apple distributed $12.3 billion in dividends, second-most among U.S. companies. Despite that massive payout, the dividend accounts for less than one-fifth of operating cash flow, leaving plenty of flexibility for future hikes. In the last 12 months, Apple generated more than $40 billion in free cash flow after capital spending and dividends, suggesting it could make the dividend as large as it desires.

Apple seems to have worked through the much-publicized slump in iPhone demand. Sales in the December quarter, coupled with Apple's guidance, suggest iPhone revenue is becoming more dependable and less cyclical. Expectations for the company are fairly modest, with analysts projecting sales growth of 6% and per-share-profit growth of 8% for fiscal 2017 ending September. Analysts expect higher growth in fiscal 2018, when Apple is expected to launch a new iteration of the iPhone. Apple, yielding 1.6%, is a Buy and a Long-Term Buy.


After many years of paying an annual dividend, Disney ($113; DIS) switched to a semiannual payment in 2015. The odd payment schedule hasn't impinged on growth; over the last six years, the payout increased more than fourfold. Even after that growth, Disney yields a modest 1.4% and pays out only about a quarter of its earnings. WE expect the dividend growth to continue in coming years.

Analysts project gains of 2% in revenue and 4% in per-share profits for the year ending September, well below the growth seen in recent years. We can blame much of that weakness on difficult comparisons for the filmed entertainment unit. Three 2016 releases — Zootopia, Finding Dory, and The Jungle Book — combined for about $3 billion at the box office.

Because movie revenues are both lumpy and upredictable, Disney's results may vary from year to year. However, Disney is seeing solid demand at its media-networks and parks units, which helps explain why analysts expect some growth this year even after a huge 2016. And if a few of this year's movies hit it big, we could see plenty of upside to expectations. Disney is a Long-Term Buy.


FedEx's ($196; FDX) expected dividend over the next year accounts for only 14% of projected per-share profits. The stock yields 0.8%, a dividend that, on its own, won't inspire income investors to buy in. However, don't let the yield fool you; FedEx is serious about its dividend. The payout has risen at an annualized rate of 23% over the last 10 years. FedEx boosted its payout in 13 of the last 14 years, most recently a 60% hike last June.

Aggressive investment in the delivery network has positioned FedEx for strong growth going forward. We remain optimistic about FedEx's potential despite somewhat disappointing results in the February quarter. Demand remains solid, with package volumes rising for both U.S. and international shipments. Package yields are also on the rise. Analysts expect per-share profits to rise 17% in the May quarter and 14% for fiscal 2018 ending May. FedEx is a Focus List Buy and a Long-Term Buy.

DIVIDEND-GROWTH LEADERS
Each of the A-rated stocks below has grown its dividend at an annaulized rate of at least 10% over the last three, five, and 10 years, if it has paid a dividend that long. Stocks on our buy lists are presented in bold.
Annualized
---- Dividend Growth ----
Quadrix Scores
Company (Price; Ticker)
Per-Share
Dividend
($)
Yield
(%)
3
Years
(%)
5
Years
(%)
10
Years
(%)
Payout
Ratio
(%)
Quality
Overall
Sector
Industry
Alaska Air Group
($90; ALK)
1.20
1.3
77
NA
NA
16
95
89
Industrials
Airlines
AmerisourceBergen
($87; ABC)
1.46
1.7
17
25
36
25
90
88
Health care
Distributors
Amgen ($162; AMGN)
4.60
2.8
29
48
NA
39
95
92
Health care
Biotechnology
Anthem ($165; ANTM)
2.60
1.6
20
21
NA
23
72
90
Health care
Managed care
Apple ($144; AAPL)
2.28
1.6
10
NA
NA
27
89
78
Technology
Tech hardware
Citizens Financial
($34; CFG)
0.56
1.6
114
NA
NA
29
69
98
Financials
Regional banks
Comcast ($37; CMCSa)
0.63
1.7
13
20
NA
36
87
85
Cons.
discret.
Cable & Satellite
Corning ($27; GLW)
0.62
2.3
11
19
NA
37
79
87
Technology
Components
CVS Health ($77; CVS)
2.00
2.6
24
28
27
34
85
91
Cons.
staples
Drug Retail
Disney ($113; DIS)
1.56
1.4
22
29
18
28
91
75
Cons.
discret.
Movies &
entertain.
EQT Midstream Part.
($77; EQM)
3.40
4.4
25
NA
NA
62
96
91
Energy
Oil & gas
storage
FedEx ($196; FDX)
1.60
0.8
35
23
23
14
76
82
Industrials
Air freight
Home Depot ($147; HD)
3.56
2.4
21
22
15
50
96
77
Cons.
discret.
Home
Improvement
Lear ($133; LEA)
2.00
1.5
21
19
25
14
95
99
Cons.
discret.
Auto parts
Lowe's ($82; LOW)
1.40
1.7
23
20
23
30
95
97
Cons.
discret.
Home
improvement
Southwest Airlines
($53; LUV)
0.40
0.7
52
81
35
11
98
92
Industrials
Airlines
UnitedHealth Group
($165; UNH)
2.50
1.5
31
31
55
26
87
82
Health
care
Managed care
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.

 


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