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Stock Screen: Stocks for Dividend Growth with Low Risk – January 12, 2011
In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project to continue providing investors with dividends that are likely to increase at above-average rates.
We began our search with stocks whose dividends have advanced at a compounded annual rate of at least 7% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 7% over the next three to five years. We also set a minimum estimated yield for the year ahead of 3.0%, which is 110 basis points (100 basis points equals one percentage point) higher than the current median for all dividend-paying stocks under our review.
We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better), two of Value Line’s many proprietary ranks. Companies whose shares earn high marks for these metrics generally will fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.
The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that have and are likely to advance at a rate exceeding the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Indeed, other industries, such as Aerospace/Defense had a strong showing. Not surprisingly, our list is dominated by large-cap industry leaders, several of which are Dow 30 components. Here are some highlights:
Novartis AG (NVS) is a major Swiss-based pharmaceutical and health care company. In 2009, Pharmaceuticals accounted for 64% of revenues, Generics brought in 17%, Consumer Health made up 13%, and Vaccines and Diagnostics were the remaining 6%. The company’s major therapeutic area is hypertension, and its leading products include Diovan, Lotrel, Gleevec, Zometa, Neoral, Femara, Sandostatin, Lamisil, and Zelnorm.
The company continues to expand its eye-care empire. It already has a proprietary eye-care division called CIBA Vision, and has been slowly accumulating the common stock of Alcon (ACL), one of the largest eye-care firms in the industry. Consumer demand for eye-care equipment and services is expected to increase over the next 10 years, as the western baby boomer generation ages. The eye-wear business is noncyclical, generates a stable revenue stream, and is relatively high margined. Novartis is currently in the process of buying the remaining 23% of Alcon shares outstanding. It already has a majority voting position, and on December 15, 2010, it entered into a definitive agreement to merge with Alcon.
Conservative income-oriented investors may want to examine this stock. Given the company's strong financial metrics, conservative leadership, and diversity (both business-wise and by geography), Value Line analyst Jeremy J. Butler thinks the issue is one of the more stable large-cap drug stocks, and that its ability to successfully navigate the industry's well-publicized drug patent cliff is better than average. All told, however, it is the above-average, growing, and well-covered dividend that is the most attractive investment component.
Raytheon Company (RTN) represents the December, 1997 merger of (old) Raytheon Co. and the defense electronics business of Hughes Electronics Corp. This corporation is a major global provider of ground-based air defense systems, air intercept missiles, airborne and ground-based radar systems, communication and other military systems, and is an important producer of electronics-based aerospace and defense products & systems.
A one-time charge and pension expenses likely weighed a bit on Raytheon’s 2010 earnings. However, Value Line analyst Morton L. Siegel believes that the company is poised to deliver record-high earnings per share in the new year, as its order stream remains strong and margin recovery is likely. Pensions expenses will probably be a lingering headwind and budgetary pressures on defense spending ought to be watched carefully. Nonetheless, Raytheon should continue to do well as a global supplier of military goods over the pull to 2013-2015. Raytheon stock offers a generous yield. The quarterly payments are well covered and have increased every year for the past five years, a trend that Mr. Siegel expects to continue.
CenturyLink, Inc. (CTL), formerly CenturyTel, is a rural-focused telecom carrier and the fourth-largest telephone company in the United States. It has about 2.2 million broadband customers and 7.0 million switched access lines in service in 33 states.
The company’s $13 billion-plus merger with Qwest Communications (Q) will likely be completed by mid-2011. Under terms of the tax-free, all-stock transaction, part of a consolidation movement among traditional landline providers, Qwest shareholders would receive 0.1664 CenturyLink share for each share of Qwest held. (This would result in CenturyLink and Qwest shareholders owning approximately 50.5% and 49.5% of the combined entity, respectively.)
Value Line analyst Justin Hellman thinks that the acquisition, coming on the heels of the company’s 2009 purchase of Embarq, will produce numerous scale advantages, which are needed to lower overhead costs and bring new products to market that will offset persistent access-line erosion. (Like most of its industry peers, CenturyLink has been steadily losing access lines, as customers switch to mobile phones or opt for new phone services from cable operators.) Indeed, the extra scale should help the company to expand broadband availability and deploy new video, data, and high-bandwidth services to consumers and businesses. It should also bring forth ample cost synergies, mostly by eliminating overlapping call centers and redundant back-office functions.
These quality telecom shares offer an attractive yield. Mr. Hellman believes that the current dividend payout looks pretty safe, in light of the strong cash flow here and the big synergy opportunities from the Embarq and upcoming Qwest transactions.
To see all 15 companies that our screen came up with, complete with Timeliness and Safety ranks, and Financial Strength ratings, subscribers can view the Selection & Opinion. As usual, we advise investors to carefully review both full-page and supplementary analyses in our Ratings & Reports before making commitments to any of the equities on the list of stocks produced by our screen.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.