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Stock Screen: Stocks for Dividend Growth with Low Risk - September 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 will 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 100 basis points (100 basis points equals one percentage point) higher than the current median for all dividend-paying stocks under Value Line 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 food processing, had a strong showing. Not surprisingly, our list is dominated by large-cap industry leaders. Here are some highlights:
General Mills (GIS) has the first or second largest share of United States’ retail markets in 11 food categories. The six largest, in descending order of size, are ready-to-eat cereals (Cheerios, Fiber One); yogurt and ice cream (Yoplait, Haagen-Dans); frozen vegetables (Green Giant); Mexican products (Old El Paso); grain snacks (Nature Valley); soup (Progresso). International sales accounted for 19% of fiscal 2011’s (ended May 29th) $14.9 billion total, while 12% was derived from domestic bakeries and food service customers.
Rising food demand in emerging markets is contributing to management’s expectations for 10%-11% supply chain inflation and 100 basis points of gross margin contraction in fiscal 2012 (ends August 2012). To help offset this, GM uses “Holistic Margin Management,” which includes creative ways of reducing packaging materials and product weight, largely unbeknownst to most consumers. Its goal is to have 40 percent of global product volume to be sold in improved packaging by 2015, along with other localized sourcing, energy, and transportation optimization progress. Recently enacted price hikes should also help relieve food inflation pressure in the coming year.
Although earnings may moderate, we expect the ratio of annual dividend payments to net profits, which ranged between 41% and 44% between fiscal 2007 and 2011, to approximate 47% for a while. Consequently, our projections indicate hikes of 8%-10% in annual dividend payments through mid-decade. The dividend paid in August was raised 8.9%, sequentially. At the recent price and with an annualized dividend of $1.22, the 3.3% yield is above average. Other pluses are the stock’s high marks for Price Stability and Earnings Predictability, and the likelihood of solid risk-adjusted capital appreciation potential ahead.
Sempra Energy (SRE) is a holding company for San Diego Gas & Electric Co. and Southern California Gas Co. Sempra purchases most of its power, while its nuclear and gas-producing operations account for the balance. Sempra’s other subsidiaries include gas pipelines and storage, power generation, and liquefied natural gas. Also, it recently purchased stakes in electric utilities in Peru and Chile for a total of $875 million.
Although this year’s earnings will likely approximate the levels in 2006 and 2007, the annual dividend has increased from $1.20 in 2006 to the current annualized rate of $1.92. Moreover, given pending rate increases and expected profit contributions from the aforementioned investments in South America, as well as from numerous planned projects in the U.S., we look for mid-single-digit percentage earnings and dividend increases in each of the coming 3 to 5 years.
Sempra stock offers very good dividend growth potential to mid-decade. The company is targeting a 45%-50% payout ratio (versus an average of 30.4% in the previous five years), following a sizable dividend hike earlier this year. The current yield of 3.8% is slightly below the utility average, but 3- to 5-year total return potential is above average for the industry.
Raytheon (RTN), is a technology leader specializing in defense, homeland security, and other government markets throughout the world. The company provides state-of-the art electronics, and mission systems integration in the areas of sensing, command control, communications and intelligence systems, recording $25.2 billion in sales during 2010
Despite an estimated earnings gain of almost 5% this year, Raytheon stock is selling at the low end of its 12-month trading range. The company’s aggressive efforts to expand in foreign markets, along with an increasing need by governments for sophisticated security surveillance systems, buttress its prospects for decent annual earnings gains for the foreseeable future. At the recent depressed price, the dividend yield is somewhat over 4% per annum. Moreover, the P/E ratio is near its lowest level since 2000, due partly to U.S. budgetary concerns, and even modest improvement would meaningfully boost the stock’s total return potential in the coming years.
The stock market has been unusually volatile since July, and much of the major moves have been to the downside. The equities discussed above offer relative stability and excellent long-term track records of earnings and dividend increases. 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.