Dividend aristocrats are companies that have been growing their dividends for 25 years or more.
Long-term dividend growth with this kind of history typically sells at a premium.
This is the November 2015 update with 3 aristocrats near their 52-week lows worth a closer look.
This is the November update for the article series which covers companies which are close to their 52-week low and have continued to increase their dividends for 25 years or more. Since the last update though the market has seen significantly more volatility and so the names near the bottom are somewhat familiar.
In August I covered Exxon (NYSE:XOM) and Chevron (NYSE:CVX). I would suggest checking out these 2 because I believe that the fundamental reasons and opportunities exist for those of you who do not yet own them.
Looking for the historically low priced dividend grower isn't an investment thesis by itself. In order to profit from such a strategy, you need to be right about two things. First, you need to be sure that the downward trend will end. Secondly, you need to be right about the timing of when the stock's slide will end. Alternatively, you may be investing in a company due to one-time events which are negatively impacting earnings on a short-term basis and which do not change your long-term investing thesis.
There are some things you can do if you decide to wade into the shallows of a 52-week low list. I have sourced the data from Wolfram Alpha for some historical context to get an idea of their historical averages. I believe picking a dividend grower, specifically a dividend aristocrat, may provide some security to someone willing to take on more risk and wait out a return to capital gains. Here are three companies I've looked at which may be worth an additional look if your stomach is strong and your horizon is long enough.
HCP, Inc
| 5 Year | August | Minimum | Average | Maximum |
|---|---|---|---|---|
| PRICE | $33.96 | $27.77 | $33.97 | $55.28 |
| YIELD | 6.65% | 3.71% | 5.02% | 6.65% |
Key take away points from the quarter would be that the company completed $365 million of asset sales, a new joint venture with Prime Property Funds for a new medical office building and the divestiture of $180 million of HCR ManorCare assets and land. From the debt perspective, the company is still above historical norms by about 3% which may indicate HCP will raise equity or continue to sell assets.
Most of the healthcare REIT sector may underperform the rest of the REIT sectors. With several REITs reliant on RIDEA structures for growth, senior housing supply and assisted living facility construction has been growing rapidly as of late. The increase in supply will put occupancy levels under pressure. Add in some short term pressures caused by increasing interest rates, and I may have more opportunities to add at lower levels.
Currently, I am long HCP with a cost basis of about $40.40 and it represents a tiny 0.85% of the "Late To The Game" retirement portfolio. While I expect short-term weakness, I think the underlying demographics and long-term dividend growth history of HCP may persuade me to average down and increase my position size in the stock.
Wal-Mart
Wal-Mart (NYSE:WMT) makes a return to the Dividend Aristocrat Near 52-Week Low list this month. Everyone knows about Wal-Mart and the issues facing the retailer. While store traffic and grocery trends remain strong, necessary investments in labor, pricing, and technology could put a lid on margins over the next few years. WMT's focus on strategic priorities, such as expanding digital relationships with customers, adding supply chain capabilities, and growing business in North America and China are likely to reduce growth potential. But the question I had to ask myself is why would WMT be a buy right now?
| 5-Year | Current | Minimum | Average | Maximum |
|---|---|---|---|---|
| Price | $58.78 | $48.41 | 68.54 | 90.47 |
| Dividend | 2.66% | 2.02% | 2.41% | 3.41% |
| P/E | 12.27 | 10.26 | 14.35 | 18.47 |
Well, like most retailers, they need sales. WMT's three year guidance includes plans to grow sales by more than $45 billion over the next 3 years. However, earnings are expected to decline by 6-12% in 2017 as the company will be entrenched in a heavy period of investment.
Other potential downsides would be the pressures by an increasingly competitive pharmacy market and decreased reimbursement pressures as well as tough same store sales comparisons in the U.S.
That said a $20 billion share repurchase program over the next two years, a higher than historical dividend and a healthy free cash flow generation could help support the stock price.
S&P has decreased WMT's fair value price to $62.80, with the current price representing a 9% discount to fair value. Morningstar is a bit more generous (albeit lower than previous) with a fair value of $75.00, giving a discount to fair value of 20%.
During the past 5 years, the average dividends per share growth rate was 12.90% per year. During the past 10 years, the average dividend growth rate was 14.60% per year. That said we could see lower than normal dividend growth in early 2016. Since 2013 the company has only been able to raise their dividend by $0.04 per year. A measly 2% or if we're lucky, 3% is all that I expect in 2016.
So we have reasonable valuation, potential for continued growth and reasonable, albeit slightly slowing DGR, but a rock-solid company with limited near term potential. For myself, I can't help but consider WMT for purchase. I suspect we are in the conception phase of a larger multi-year turnaround for WMT that will require reinvestment and further reorganization in order to turn things around.
My current cost basis is $65.30 and WMT represents a lowly 1% of my portfolio. I have a very long timeframe and the 40+ year history of dividend growth makes me quite happy. I may add further as I believe that the income and dividend growth has no reason to abate any time soon.
Archer Daniels Midland
Food exposure in an investment portfolio is a very important and positive point to follow given that the food sector has a lifespan that lasts as long as humans do. It does not matter where you go on earth, people need to eat.
The stock has declined significantly as the company posted a weak third quarter and provided soft guidance for Q4. That said there are some potential positives on the horizon for the company.
| 5 Year | August | Minimum | Average | Maximum |
|---|---|---|---|---|
| PRICE | $42.13 | $24.16 | $37.32 | $53.71 |
| YIELD | 2.66% | 1.62% | 2.10% | 2.86% |
| PE | 14.65 | 7.399 | 14.61 | 22.32 |
One of the issues is that ethanol margins remain depressed and the strong U.S. dollar continues to keep the U.S. uncompetitive with other markets with regards to ethanol. In addition, lower demand for vegetable oil and the demand for sweeteners and starches also declined year over year.
A potential positive for the company would be if they were able to complete the acquisition of GrainCorp. A new Prime Minister in Australia may be more open to foreign acquisitions and another attempt to complete their ownership would not be surprising. Currently ADM owns nearly 20% of GrainCorp.
As part of a long term global view, I believe the demand for quality food ingredients will continue to increase and the role of the agricultural business sector is key in connecting the harvest to the home and transforming farmers' crops into products that serve vital needs.
ADM has a 40-year history of dividend growth and a 3-year dividend growth rate of 15%. ADM shareholders can expect another dividend raise in 2016 and I suspect we'll see something around 10%, or a $0.03 increase to $0.31/quarter. If so, buying today provides you a nearly 3% yield and a good starting point on which to average into the stock.
S&P currently has the stock listed as a hold with a fair value calculation of $45.30, or slight discount to fair value of 5%.
For myself, I would like to see the stock trade a little lower. The strong management and history of dividend increases are nice, but the U.S. market is extremely challenging. Any large movement downside will prompt to reevaluate and potentially purchase a small handful of shares as I would like greater exposure to the food commodity sector.
Additional disclosure: If you've eaten a snack or consumed a manufactured beverage odds are you have consumed an ADM product. For that reason, I may be understandably biased to purchase the stock on that basis.
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