I shared with you the 2018 Dividend Kings List the other day. To be considered a dividend king, a company must have rewarded shareholders with an annual dividend increase for at least 50 years in a row. This is such a difficult task, that only 26 companies in the US have managed to achieve this regal status in the dividend investing world.
I received a few questions from readers, asking me which one I thought were worthy of further research. In order to answer this question, I went through my basic screen:
1) P/E ratio below 20
2) Dividend Payout Ratio below 60%
3) Having more than a nominal dividend growth
4) Rising earnings per share over the past decade
5) Since those companies have each raised dividends for 50 years in a row, they already meet my ten year minimum requirement for annual dividend increases
After applying those criterion over the list of dividend kings for 2018, I came up with the following companies for further research:
Company Name | Symbol | 10-yr Dividend Growth | Dividend Yield | Forward EPS | Forward P/E | Dividend Per Share | Dividend Payout Ratio | Price |
ABM Industries Inc. | ABM | 4.14% | 1.82% | 1.97 | 19.54 | $ 0.68 | 35% | $38.50 |
Farmers & Merchants Bancorp | FMCB | 4.69% | 1.97% | 37.44 | 18.03 | $ 13.30 | 36% | $675.00 |
Genuine Parts Co. | GPC | 6.92% | 2.94% | 4.58 | 20.31 | $ 2.68 | 59% | $93.01 |
Johnson & Johnson | JNJ | 8.03% | 2.37% | 7.28 | 19.48 | $ 3.28 | 45% | $141.78 |
Lowe's Companies | LOW | 22.92% | 1.92% | 4.51 | 19.70 | $ 1.46 | 32% | $88.86 |
Parker-Hannifin Corp. | PH | 14.45% | 1.36% | 9.56 | 20.72 | $ 2.61 | 27% | $198.07 |
Stepan Company | SCL | 6.91% | 1.13% | 4.34 | 18.47 | $ 0.82 | 19% | $80.18 |
Target Corp. | TGT | 18.09% | 3.96% | 4.54 | 14.11 | $ 2.42 | 53% | $64.06 |
Source: Yahoo Finance as of December 19. 2017
In todays article, I outlined the process I use to screen any large group of dividend companies. This process narrows down the list of companies for further research.
This group of companies is not an automatic buy. Rather, this is a list of companies for further research. Every reader has to decide for themselves whether these companies make sense to them, before committing any of their hard earned money (or not).
The next step in the process involves going through each company individually, and determining whether I like the trends in fundamentals such as earnings or revenues over a period of time ( for example – the past decade). I have found that focusing on the numbers has definitely given me an edge over the past decade.
This step also involves performing a qualitative analysis, in order to understand the business, and try to determine for myself if the good times will continue. This is a subjective evaluation, because I have found that “quality” lies in the eyes of the beholder. Two different investors will reach starkly different conclusions about the same investment, even if they have access to the same information.
Please allow me to explain my thinking by going over some of the information for dividend king Johnson & Johnson. Investors looking for a safe and dependable earnings, can look no further than Johnson & Johnson, which has rewarded them with a raise for 55 years in a row. The company is still growing despite its massive size and long history.
The company has managed to grow its earnings per share from $3.63 in 2007 to $5.93 in 2016. The company is expected to earn $7.28/share in 2017. It managed to accomplish this by growing revenues from $61.10 billion in 2007 to 71.90 billion by 2016.
Johnson & Johnson also has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. This makes the company somewhat immune from economic cycles. The fact that the company has exposure to other healthcare segments besides pharmaceuticals makes it a much safer play on the healthcare sector than pure pharma companies. I like the fact that there is diversity in the revenue generating behind each of the large segments. The three segments include Pharmaceutical with 45% of sales, Medical Devices & diagnostics with 35% of sales and the Consumer segment with approximately 20% of sales.
In addition, the company has strong competitive advantages due to its scale, leadership role in various diverse healthcare segments, breadth of product offerings in its global distributions channels, continued investment in R&D, high switching costs to users of its medical devices, as well as its stable financial position.
Future profits growth could come from new product offerings, which are the result of continued investment in research and development, and through strategic acquisitions.
I subscribe to the theory that a body in motion continues in motion until something changes. I believe that Johnson & Johnson can reasonably be expected to grow earnings per share by 5% - 6%/year, which could also result in annual dividend growth roughly equaling those same percentages.
Right now the stock is selling below $145/share, so it’s selling below 20 times forward earnings. I find it attractively valued below $145/share. The entry yield is roughly 2.40% today. A conservative long-term investor can expect earnings and dividends to double roughly every twelve years on average. For someone just starting out, or for an experienced investor JNJ is a good beginner position to research and potentially dollar cost average into.
Obviously, if you can snag Johnson & Johnson when Mr Market does not like the shares, you will be able to get more current dividend income for your investment dollars. If you want better margin of safety, using a P/E below 20 times last years earnings results in an entry price below $119/share and an entry yield of 2.80%
Relevant Articles:
-How to value dividend stocks
-Why do I use a P/E below 20 for valuation purposes?
-My Entry Criteria for Dividend Stocks
-Rising Earnings – The Source of Future Dividend Growth
-2018 Dividend Kings List
