More Companies Raise Dividends
Positive dividend activity is still below levels seen in 2007 and 2008. But the number of dividend hikes and initiations through Sept. 7 is up 74% from the same time last year.
The wave of dividend cuts and suspensions is also subsiding, with just three occurring so far this year for S&P 500 companies, the lowest in at least seven years and well below the 71 seen at the same time in 2009.
Pockets of weakness linger, particularly in financial stocks. Once known for rich dividends, the S&P 500 financial sector boasted a yield of 4.4% at the end of August 2008. Today, the yield languishes at just 1.2%. Dividend growth has been conservative for financials — when there’s been any growth at all. Through Aug. 31, just 27% of dividend-paying financial stocks had raised their distribution this year, lower than any sector besides telecom services. In the financial sector, the median dividend increase was less than 7%, versus 9% for the entire S&P 500 Index.
In contrast, consumer-discretionary stocks are posting some of the strongest dividend trends. More than half of the sector’s dividend-payers have raised their payout this year, with a median hike of 22%, the largest increase of any sector.
Recent dividend momentum coincides with a spike in one key measure of financial stability and growth potential: free cash flow (operating cash flow minus dividends and capital spending).
Steady free cash flow gives a company flexibility to boost its dividend, repurchase stock, pay down debt, reinvest in its business, or pursue acquisitions. In the past four quarters, free cash flow for nonfinancial, nonutility companies in the S&P 500 Index surged 57% from year-earlier levels. Consumer-discretionary companies reported 72% higher free cash flow.
At the Forecasts, our ideal dividend stock offers a healthy yield, produces steady cash-flow growth, and consistently raises its dividend without overreaching to fund the distribution. The table below lists eight of our best dividend stocks, all of which meet the following criteria:
• Yields of 1.8% or higher.
• Double-digit annualized dividend growth in the past three years.
• Payout ratios below 50%, meaning the indicated year-ahead dividend represents no more than 50% of trailing 12-month earnings.
• Free-cash-flow growth over the past three years.
• Positive free cash flow in at least 10 of the past 12 quarters.
Three of those dividend leaders are reviewed in the following paragraphs.
Every year from 1989 through 2009, Aflac ($50; AFL) raised its quarterly dividend at least 10%. The insurer departed from that trend in August when, in announcing its 28th consecutive annual dividend hike, it increased the distribution just 7%. That decision is understandable given the lingering financial instability in Europe. Aflac yields 2.4% and pays out just 23% of trailing earnings in dividends, leaving plenty of flexibility for future growth.
Aflac sells supplemental health and life insurance in the U.S. and Japan. Its $76.7 billion investment portfolio features $3.47 billion in corporate and sovereign bonds from Portugal, Ireland, Italy, Greece, and Spain (the troubled economies known as PIIGS). The chance that losses might force Aflac to recapitalize itself by issuing more equity — diluting its stock — seems less and less likely.
The August dividend hike — along with the revival of a share-repurchase program — suggests Aflac is confident its balance sheet can soak up losses in its investment portfolio. Net cash was $1.64 billion on June 30, up 129% from a year earlier. Free cash flow totaled $5.8 billion for the year ended June. Aflac is a Focus List Buy and a Long-Term Buy.
CSX ($53; CSX) is being added to the Focus List. The railroad’s quarterly dividend has climbed at an annualized rate of 28% over the past three years, while the share count has declined at a 6% clip. Both trends are supported by free cash flow, up in 10 of the last 12 quarters.
CSX is highly leveraged to the economic recovery. Coal, chemicals, and automobiles rattle along its tracks to manufacturers, power plants, and seaports in the eastern half of the U.S. CSX expects U.S. industrial production to grow more than 3% in the second half of the year.
Demand for coal could slow overseas, but utility stockpiles in the U.S. are down from high levels earlier in the year, and record high temperatures are boosting demand for electricity. In addition, U.S. vehicle production should get a boost from a new Kia plant in Georgia. Wall Street sees revenue advancing 16% and 13% in the September and December quarters, with per-share profits jumping 38% and 29%, respectively. CSX, yielding 1.8%, is a Focus List Buy and a Long-Term Buy.
Rogers Communications ($36; RCI) pays a quarterly dividend of C$0.32, up from C$0.04 in early 2007. The current dividend equates to an indicated yield of about 3.5% in U.S. dollars. Free cash flow rose at an annual clip of 38% over the last three years, supporting that aggressive dividend growth. Rogers’ free cash flow is also fairly consistent, positive in 16 of the last 18 quarters. The payout represents 44% of trailing earnings, leaving room for more dividend increases in the future.
Rogers, a Canadian media conglomerate, earns an Overall Quadrix score of 98, bolstered by scores of 99 for Quality, 82 for Value, and 77 for Momentum. Shares have risen 16% this year despite a 2% decline for the S&P 500 Index. The rally, like Rogers’ sharp dividend growth, might not yet be finished. Shares trade at 13 times trailing earnings, well below the three-year average P/E of 20. Rogers is a Focus List Buy and a Long-Term Buy.