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Stock Screen: Stocks for Dividend Growth with Low Risk - November 7, 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 2.7%, which is 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 healthcare, 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:
Johnson & Johnson
Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report) is engaged in the research & development, manufacture, and sale of a broad range of products in the healthcare field. It operates three business segments: Consumer (baby care, skin care, oral care, wound care, etc.), Pharmaceuticals (anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, etc.), and Medical Devices & Diagnostics (electrophysiology, circulatory disease management, orthopedic joint reconstruction,
Earnings growth has been less-than-spectacular of late, with weakness stateside limiting contributions from overseas. Although analyst Erik Antonson believes that some of the issues will be worked out, he sees some of the problems, such as product recalls and facility restructurings keeping earnings growth in the mid-single-digit range in the fourth quarter of this year and throughout 2012.
However, Antonson still sees value here and thinks JNJ is a good buy-and-hold candidate based primarily on its favorable risk profile and steady history of dividend growth. JNJ is the world’s largest healthcare company and has its hands in almost every niche conceivable. Its market position, size, and cash-laden balance sheet give it the wherewithal to remain at the forefront in terms of research and development and product innovation, and augur well for future dividend growth.
The Coca-Cola Company
Coca-Cola (KO - Free Coca-Cola Stock Report) is the world’s largest beverage company. It markets over 500 nonalcoholic beverage brands through a network of company-owned and independent bottlers/distributors, wholesalers, and retailers. Leading company/licensed brands include Coca-Cola, Diet Coke, Sprite, Fanta, Fresca, Dasani, Glaceau Vitaminwater, Powerade, and Minute Maid.
Similar to JNJ, Coca-Cola has been experiencing weakness domestically. Still, the company’s products continue to gain considerable traction outside the U.S., a trend analyst Nils C. Van Liew sees continuing, specifically in recent strongholds India and China. A more streamlined supply chain has Van Liew more bullish than management, who is looking for high-single-digit earnings growth in the December period. Indeed, he sees double-digit earnings growth in the fourth quarter carrying over into next year and thereafter.
KO gets solid marks for Financial Strength and Safety. It has delivered steady dividend growth for as far back as the eye can see, and that is not likely changing anytime soon. Income-oriented investors ought to like that roughly half of profits are being returned to shareholders via dividends.
McDonald’s (MCD - Free McDonald's Stock Report) operated, franchised, or licensed 32,943 fast-food restaurants in the United States, Canada, and overseas, under the McDonald’s banner (as of 6/30/11). About 81% are operated by franchisees or affiliates, with the remainder under the control of the company. Foreign operations contributed 66% of system wide sales and 54% of consolidated operating profits in 2010. The company sold a stake in Pret A Manger in 2008, and spun off Chipotle Mexican Grill (CMG) in 2006 and Boston Market in 2007.
Known predominantly around the globe as a hamburger chain, McDonald’s is now basking in the success of its other menu items. During the third quarter, McNugget volumes were up nearly 10% year over year, thanks largely to four new dipping sauces. New chicken sandwiches in the United States have been selling well, and the breakfast menu (25% of global sales) in China has also proven successful. New frozen smoothies have driven solid same-store sales growth for the McCafe drink line and contributed to the 12% earnings advance in the third quarter. Management’s ability to roll out new offerings and tempt the taste buds of consumers has analyst Mathew Spencer, CFA optimistic that earnings growth will fall near double-digit territory in the holiday period and next year. Although price increases may be needed to offset some higher commodity costs, management has shown the ability to do so recently in China.
Steady dividend hikes have become commonplace at McDonald’s in recent years. Spencer sees nothing changing anytime soon, and expects strong cash flow generation will continue to be used to reward shareholders. The stock scores our highest marks for Safety, Financial Strength, and Price Stability, which ought to add appeal for the risk averse.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.