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All Contents © 2019The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| February 1, 2019
The Dividend Aristocrats fared better than many other stocks during 2018. This group of dividend royalty delivered a 3.3% decline for the year including income, less than the 4.4% drop for the Standard & Poor’s 500-stock index.
The Dividend Aristocrats, for the uninitiated, are a subset of the S&P 500 that have increased their annual dividends without interruption for at least 25 consecutive years. And these 50-plus superstar dividend stocks are noteworthy for several reasons:
However, sometimes even great stocks get knocked back a little. These 18 Dividend Aristocrats have posted double-digit price declines over the past year, with most of them still recovering from the fourth-quarter broad-market drubbing. The upside for any investors considering putting new money to work in these dividend stocks: Many are close to multiyear lows, and several yield more than 3%.
Market value: $40.7 billion
Dividend yield: 3.0%
52-week price decline: 10.0%
Emerson Electric (EMR, $65.33) is a diversified global manufacturer with operations in process management, industrial automation, climate technologies, tools, storage products and appliance solutions. This Fortune 500 company generated sales of $17.4 billion last year.
In fiscal 2018, Emerson Electric exceeded guidance by delivering 14% sales growth and 36% EPS gains while also closing $2.2 billion of acquisitions and returning $2.2 billion to investors through dividends and share repurchases.
Recent acquisitions include Aventics, a leader in smart pneumatics technologies for factory automation, and Advanced Engineering Valves, which manufactures specialized valves for the LNG industry. Emerson also plans to acquire General Electric’s (GE) Intelligent Platforms business, which delivers automation solutions across various end-markets. This transaction expands Emerson’s machine control solutions and footprint in the metals, life sciences, food and beverage and packaging markets.
Emerson targets 8.5% annual growth and expects sales to eclipse $21 billion by 2021. EPS gains targeted at 11.5% per year will be fueled by acquisitions, margin expansion and share repurchases.
The company has an impressive 62-year track record of dividend growth, though its recent velocity has left much to be desired. Payouts have grown by just 2.6% annually over the past five years.
Market value: $22.1 billion
Dividend yield: 1.4%
52-week price decline: 11.9%
Brown-Forman (BF.B, $46.53) is a leading worldwide manufacturer and distributor of premier whiskies under its Jack Daniel’s, Gentleman Jack, Old Forester and Woodford Reserve brands and premium tequila under its Herradura and El Jimador brands. The company has sales in 170 countries and generated revenues exceeding $3.2 billion last year.
Product extensions to the Jack Daniel’s brand have delivered steady growth and recently acquired premium bourbons and tequilas are generating double-digit sales gains. Sales of Old Forest and Woodford Reserve bourbons rose 24% in the first half of fiscal 2019, and sales of Herradura and El Jimador tequila improved 12%.
Brown-Forman’s principle geographic markets are the U.S., Europe and Latin America. The company’s strongest growth is from emerging markets, which are producing double-digit sales gains. Brown-Forman is guiding for 6% to 7% sales growth in fiscal 2019 and 11% to 18% EPS growth.
Dividends have increased 35 years in a row and at a 9.1% annual rate in the last five years. Brown-Forman hiked the dividend 5.1% and also paid a $1.00 special distribution in fiscal 2018. A low 39% payout provides a thick safety cushion for dividend growth going forward.
Market value: $217.1 billion
Dividend yield: 4.0%
52-week price decline: 12.0%
Integrated energy giant Chevron (CVX, $113.01) ranks 19th on the Fortune 500 list. Chevron produces oil and natural gas, has significant refinery operations and is also the world’s largest producer of geothermal energy.
Chevron has consistently lowered per barrel production costs since 2014 and has plans to grow annual production 4% to 7% per year through 2020. Development spending is budgeted at $18 billion to $20 billion per year over the next two years. Historically, 75% of the company’s investments have produced cash flow within two years.
During the first nine months of 2018, Chevron grew revenues 19% year-over-year and earnings per share improved 80% as a result of higher production and oil prices and share repurchases. Third-quarter production of 2.96 million barrels per day was the highest quarterly total in Chevron’s history and quarterly cash flow ($9.6 billion) also set a five-year record.
Chevron plans to invest $17.3 billion in upstream projects during 2019, which include currently producing Permian Basin and other shale assets. The company is also allocating $4.3 billion for a new project underway in Kazakhstan that may contain 25.5 billion barrels of oil.
Chevron has hiked dividends 31 years in a row, though its payments have only trickled higher at just more than 2% annually over the past five years.
Bank of America Merrill Lynch analyst Doug Leggate recently upgraded Chevron from “Neutral” to “Buy,” noting the company’s undervalued assets and favorable positioning for an oil-price recovery.
Market value: $18.1 billion
Dividend yield: 2.7%
52-week price decline: 12.6%
Nucor (NUE, $60.34) is a major steel products producer and recycler, operating 25 scrap-based steel mills representing annual production capacity of 27 million tons.
Nucor’s growth strategy focuses on lowering production cost, building dominant market shares and moving up the value chain. The company has achieved steady reductions in per ton conversion costs since 2015 and also built the leading North American market share in structural steel and the Nos. 2 and 3 positions in plate and sheet steel. Progression up the value chain will result from introducing new high-strength steels for automotive applications, novel products based on Quench and Self Tempering (QST) technology and hollow structural sections and electric conduit.
Nucor set records in revenues, profits and steel shipments last year, with sales topping the $25 billion mark. The company says 2019, from an earnings standpoint, will be “one of the best in Nucor’s history.”
Nucor has grown dividends 45 years in a row, although growth has averaged less than 2% per year over the past five years. Still, the company has returned more than $8.5 billion to shareholders through dividends and share repurchases since 2006.
Cowen analyst Tyler Kenyon initiated coverage of Nucor in January with an “Outperform” rating, noting that the company is well-positioned for EBITDA gains due to recent investments.
Market value: $55.1 billion
Dividend yield: 2.6%
52-week price decline: 13.3%
Colgate-Palmolive (CL, $63.95) is a household name in personal care products with iconic brands like Colgate toothpaste, Ajax cleaners, Hills pet foods and Palmolive and Irish Springs soap. The company holds a nearly 35% U.S. share and 42% worldwide share of the toothpaste market. Sales are split roughly 50/50 between developed and emerging markets.
Slowing category growth worldwide has flattened the company’s sales in recent years and depressed earnings. Colgate’s revenues grew less than 1% in 2018, and while EPS improved by 20%, operating profits actually declined slightly.
Colgate plans to revitalize top-line growth by increasing customer outreach and investments in digital media, launching new personal care products that address consumer mega-trends like natural and organic ingredients and investing in e-commerce.
Colgate has raised dividends 56 years in a row and at a 4.3% annual rate in the last five years. Free cash flow of $2.6 billion in 2018 was well more than enough to cover $1.6 billion in dividends paid.
In early 2019, Goldman Sachs analyst Jason English upgraded Colgate from “Neutral” to “Buy” based on expectations that organic sales are at an inflection point. Evercore ISI Group analyst Robert Ottenstein recently initiated coverage with an “Outperform” rating.
Courtesy Eve Mattress
Market value: $5.3 billion
Dividend yield: 3.7%
52-week price decline: 14.8%
Leggett & Platt (LEG, $40.59) is a leading American manufacturer of bedding, fabric and flooring, automotive seating and furniture. The company sells primarily to other manufacturers and generates nearly $4 billion in annual revenues.
Leggett focuses on total shareholder return, which it targets at 11% to 14% annually and will achieve through a combination of 6% to 9% annual sales growth, margin enhancements, dividends and stock repurchases.
The acquisition last year of Precision Hydraulic Cylinders gives Leggett & Platt a new growth platform in the $5 billion market for hydraulic cylinders used in construction, material handling and transportation applications. More recently, the company announced it will acquire Elite Comfort Solutions for $1.25 billion. This transaction will extend the company’s footprint in specialty foam and hybrid boxed bed markets and provides new technologies that can be leveraged across other businesses.
Leggett has increased dividends 48 years in a row, held its payout ratio between 50% and 60%, and grown its distribution 4.8% annually over the past half-decade.
Market value: $7.2 billion
Dividend yield: 1.8%
52-week price decline: 15.2%
Pentair (PNR, $41.19) is a world leader in residential and commercial water treatment. Its technologies deliver clean safe water, reduce water consumption and facilitate water recovery and reuse. Pentair operates in 34 countries from 130 locations worldwide.
The company recently topped fourth-quarter earnings and revenue estimates, and is guiding for 4% to 5% sales growth and 6%-11% profit growth in 2019. Growth will come from investments in digital marketing, introducing new “Smart” technologies and products, expanding in Asia and making bolt-on acquisitions. Speaking of M&A …
Pentair recently announced it would acquire Pelican Water Systems, a provider of water filtration and purification systems to residential customers in North America. This transaction gives Pentair new products and more options to offer its residential water treatment customers. PNR also recently announced it will buy Aquion, which markets premium water treatment equipment worldwide. With this deal, Pentair can offer turnkey water conditioning solutions through Aquion’s network of affiliated dealers. Both acquisitions are expected to close early this year.
This Dividend Aristocrat has delivered 43 consecutive years of dividend growth, and its hikes have averaged 10.2% annually over the past five years. A modest 34% payout ratio leaves ample room for future dividend improvements.
Stifel Nicholas analyst Nathan Jones recently upgraded his Pentair rating to “Buy” from “Hold.” He expects both pricing and productivity to improve in 2019 and sees strong potential for incremental margin gains.
Market value: $305.3 billion
Dividend yield: 4.5%
52-week price decline: 17.9%
Energy powerhouse Exxon Mobil (XOM, $72.29) is benefiting from production gains and improved pricing that lifted cash flow to a four-year high of $12.6 billion during the third quarter.
Cash flow rose 44% during the first nine months of 2018 to $30.6 billion, which more than covered $28.3 billion of dividends and capital expenditures. EPS increased 30% year-over-year on 23% revenue growth.
Production gains are coming from continued expansion of the company’s profitable Permian Basin operations, new production from the company’s vast Kaombo field in Angola, offshore discoveries in Guyana and expansion of Exxon’s Brazilian drilling properties portfolio. Downstream operations are improved by six refining investments in higher-margin products and integrating Permian Basin-sourced feedstocks into its refinery operations.
In its chemicals business, Exxon is investing in 13 new facilities that will increase Asian and North American capacity by 40% over the next six years. Seven of these new plants are already operating, and the company recently announced plans to build a new chemical complex in China.
Exxon has paid dividends without interruption for 137 years, grown dividends for 36 consecutive years, and increased payments 5.4% annually in the last five years. Also, its current yield of 4.5% is well above the four-year average of 3.6%.
Market value: $213.8 billion
Dividend yield: 7.0%
52-week price decline: 21.2%
Telecom giant AT&T (T, $29.37) serves more than 150 million wireless customers and is adding new subscribers at a rapid rate thanks to the proliferation of tablets and other new devices. During the final quarter of 2018, AT&T added 134,000 new postpaid accounts.
The rollout of 5G services, which AT&T has running in 12 cities and plans to extend to 20 cities this year, should fuel continued growth in wireless operations.
AT&T also is expanding its Latin American business, adding more than 907,000 customers last quarter and increasing its customer base in Mexico to 17.3 million subscribers.
AT&T paid $85 billion to acquire the media assets of Time Warner (Turner Broadcasting, HBO and Warner television/film studios) in 2018. This year, the company plans to leverage these new assets by launching a Time Warner branded streaming service that will deliver premium entertainment content to subscribers.
AT&T expects generated $22.4 billion in free cash flow last year, which will be used to reduce debt and pay about $15 billion in annual dividends. In addition, the company expects to realize $2.5 billion of cost synergies from the Time Warner acquisition over the next three years.
AT&T has grown its payout 34 years in a row, though that growth has slowed to a 2.1% annual pace over the past five years. Still, at a whopping 7% annually, AT&T is by far the highest-yielding Aristocrat.
Market value: $115.8 billion
52-week price decline: 22.2%
Global conglomerate 3M (MMM, $199.27) generates $32 billion in annual sales, operates in 70 countries and ranks 97th on the Fortune 500 list. The company is known for innovative products such as Scotch tape, Post-It notes and Scotch Brite scrub pads. 3M makes adhesives, abrasives, laminates, window films, personal protection equipment and many other products for the industrial, consumer, health-care and worker safety markets.
3M is restructuring its portfolio to improve profits, however, and recently divested its communication markets businesses. In addition, 3M plans to grow through new products like its 3M surgical skin prep solution for reducing hospital infections. A partnership with ON Semiconductor (ON) is developing safety products for self-driving vehicles, and the company has teamed up with Eckhart for robot-based tape application system for automotive and industrial markets.
On the M&A front, 3M is paying $1.0 billion for M*Modal, a leading health-care provider of cloud-based AI systems that will help 3M tap the electronic health records (EHR) market.
3M targets annual 3% to 5% organic sales gains and 8% to 11% EPS growth over the next five years. Guidance for this year looks for $10.45 to $10.90 in EPS.
3M recorded its 60th consecutive year of dividend growth in 2018 and hiked payments by 16% last year. Five-year dividend growth has averaged 16.5% per year, and the payout ratio ranges around 50%. Rising material costs and foreign exchange headwinds caused 3M to trim to 2018 guidance, and the company recently scaled back its 2019 outlook as well. However, stark declines in the stock have driven 3M’s yield to 2.7%, at the high end of the company’s historic range.
Market value: $45.0 billion
52-week price decline: 23.3%
Illinois Tool Works (ITW, $135.61) is a Fortune 200 diversified industrial manufacturer. The company’s business lines, which include automotive OEM, food equipment, test & measurement/electronics, construction and polymers, generated $14.3 billion of sales last year.
ITW, which reports earnings Feb. 1, was expected 3% to 4% revenue growth and 15% EPS gains for full-year 2018 on the back of solid North American demand for its products, margin expansion and $2 billion of share repurchases. Through the first nine months of 2018, free cash flow grew 23% year-over-year to $1.72 billion. That was able to fuel the company’s most recent dividend hike – a 28% bump to the quarterly dole.
Over the next five years, ITW plans to produce annual growth of 3% to 5% in organic sales and 8% to 10% in EPS.
Illinois Tool Works is a longtime Dividend Aristocrat that has posted 55 consecutive years of dividend growth, including a 19.0% average annual clip over the past five years.
Market value: $21.5 billion
Dividend yield: 3.1%
52-week price decline: 24.1%
Shares of asset management firms were hit hard by the stock market meltdown, affecting even superior fund managers like T. Rowe Price (TROW, $89.24). The company manages $962 billion of assets and has clients in 48 countries.
T. Rowe Price is a top-tier fund manager. More than 47% of its U.S. mutual funds outperformed the Morningstar median over the prior one-year period, 70% have outperformed over the three-year period and 81% have exceeded peers over the past five years. Moreover, 45% of its funds have earned top Morningstar ratings over the past half-decade.
The fourth quarter was unsurprisingly difficult on T. Rowe Price, which produced $1.54 in per-share profits and $1.31 billion during the quarter, with both figures falling below the consensus estimate.
Still, the company has produced 32 straight years of dividend growth and increases over five years averaging 13.0% per year. Its 3%-plus yield is attractive, and a payout ratio of 37% leaves plenty of room to expand the dividend in the future.
Market value: $50.8 billion
Dividend yield: 2.2%
52-week price decline: 24.2%
General Dynamics (GD, $170.91) is a leading aerospace and defense contractor with operations in commercial aircraft, combat vehicles, weapons systems, IT services and shipbuilding. The company produces Gulfstream jets, Abrams tanks, Stryker ground vehicles, and Columbia- and Virginia-class submarines.
Revenues exceeded $36 billion in 2018, growing 16.9% year-over-year and driving a similar improvement to profits, which hit $1.62 per share. Some revenue growth reflects the $9.6 billion acquisition of CSRA, a leading government IT contractor. The acquisition makes GD the leading provider of IT solutions to government entities and will be accretive to 2019 EPS and free cash flow.
The company ended 2018 with an order backlog of $67.9 billion, up 7.4% from 2017. Significant new awards included $3.9 billion from the U.S. Navy for the construction of four guided-missile destroyers and a $3.9 billion contract with the Army for computing and communications equipment.
While revenue and earnings growth has been erratic, dividend growth has been consistent 21 years in a row, including a 10.7% annual rate for the past five years. A modest 21% payout provides GD with the flexibility to maintain and grow dividends during every business cycle.
Courtesy Stanley Black & Decker
Market value: $18.7 billion
Dividend yield: 2.1%
52-week price decline: 26.1%
Stanley Black & Decker (SWK, $124.48) is a world leader in tools and fasteners and holds the No. 1 or No. 2 market share with well-known brands like Craftsman, Flexvolt, Lenox and Irwin. The company’s revenues exceeded $13 billion last year.
During 2018, Stanley closed $1.4 billion of acquisitions that provide a platform for future growth. The company expanded its presence in the lawn and garden segment by acquiring a stake in MTD, a global manufacturer of outdoor power equipment. In addition, SWK broadened its product line by purchasing IES, a manufacturer of attachment tools for off-highway applications. And an acquisition of Nelson Fastener Systems expands the company’s portfolio of engineered fasteners and further diversifies its end markets.
SBD typically deploys 50% of free cash flow for acquisitions and 50% for dividends and share repurchases. The company’s annual performance goals include 10% to 12% sales growth, 10% to 12% EPS gains and free cash flow greater than net income.
Despite tariff headwinds, Stanley expects to produce 6% organic sales growth and 9% EPS gains this year. A new cost reduction plan should help boost future earnings by trimming $250 million from expenses.
Stanley Black & Decker has increased dividends 51 years in a row and at a 5.7% annual rate over the past five years. The payout ratio is safe at 60%, leaving room for modest increases going forward.
Market value: $8.1 billion
52-week price decline: 28.5%
A.O. Smith (AOS, $47.52) is one of the world’s leading makers of water heating equipment, boilers and water treatment and purification products. The company has sales in 60 countries and operations in North America, Mexico, Europe, China and Turkey. The company generates roughly a third of its revenue outside the country.
A.O. Smith announced record sales of $3.2 billion and record profits of $444.2 million in 2018. Prior to that, the company had grown annual sales and EPS at 10% and 25%, respectively, over the previous eight years. This growth reflects the company’s industry-leading U.S. market share and sales through major retailers such as Home Depot (HD), Lowe’s (LOW), Ace Hardware and True Value.
Sales in China have grown 21% per year for the last decade, exceed $1 billion and position A.O. Smith with the premium water heater brand in China, with distribution through 9,000 retail outlets. The company’s performance in 2018 was driven by strong water heater sales in China, the launch of A.O. Smith-branded water treatment products in 1,700 U.S. Lowe’s stores, and share repurchases.
A.O. Smith also rewarded investors with two dividend increases in 2018, each greater than 20%. The payout has improved for 32 years in a row, and at an average 8.0% annual rate over the past five years. Big dividend gains are possible going forward, too, given a light 35% payout ratio.
Market value: $14.8 billion
Dividend yield: 3.9%
52-week price decline: 35.2%
Health-care giant Cardinal Health (CAH, $48.76) supplies pharmaceuticals and health-care products to hospitals and other health organizations across the U.S. The company ranks 14th on the Fortune 500 list and sells to nearly 85% of American hospitals.
Cardinal’s revenues improved 5% in 2018 to $137 billion, but net earnings fell as a result of a $1.4 billion impairment charge primarily due to its Cordis medical-device business.
The company plans to boost profits by trimming $300 million from costs over the next two years, improving the performance of Cordis and forging partnerships to expand product offerings. During the first quarter of fiscal 2019, EPS were up 18% on 8% revenue growth.
Dividends have increased 32 years in a row and at a 10% annual rate in the last five years. Payout is conservative at 38%.
Market value: $118.9 billion
Dividend yield: 5.4%
52-week price decline: 35.4%
AbbVie (ABBV, $79.06) is a global pharmaceutical powerhouse that was formed in 2013 when Abbott Laboratories (ABT) spun off its drug development operations. The company generated $32.8 billion in revenues in 2018.
AbbVie’s principal asset is Humira, an immuno-therapy drug that currently represents roughly 65% of sales. Thus, the company has made launching new products that reduce its reliance on Humira and fuel incremental sales a high priority.
New oncology products Imbruvica and Venclexta represent a $4 billion franchise today that is expected to grow to $9 billion by 2025. Immunology agents upadacitinib and risankizumab are projected to add $10 billion to 2025 revenues, and billions more will come from Elagolix (endometriosis), Mavyret (Hepatitis C) and other new products. These new pipeline drugs and others should reach $35 billion in annual sales by 2025.
The company increased its dividend 11.5% in December, and AbbVie has returned more than $5 billion in share repurchases since its spinoff. But in addition to dividend growth, share-price declines have driven the stock’s yield to well north of 5%.
However, a rough year of disappointing corporate results have soured Wall Street’s analysts on this health-care play. ABBV now has just as many “Hold” calls as “Buy” calls after a clinical-trial failure of new cancer drug Rova-T sparked a $4 billion writedown and caused Bank of America to downgrade the stock.
Courtesy Franklin Resources
Market value: $15.0 billion
Dividend yield: 3.6%
52-week price decline: 35.5%
Franklin Resources (BEN, $29.09) is a global investment firm that operates as Franklin Templeton Investments. The firm manages $717.1 billion of assets and operates in more than 30 countries. Franklin generated $6.3 billion of revenues in fiscal 2018 from investment management, sales and distribution and shareholder servicing fees.
Growth in 2019 will come from building its LibertyShare suite of exchange-traded funds, launching a new private-equity joint venture with an Asian asset specialist and acquiring alternative credit asset manager Benefit Street Partners.
Benefit Street Partners has $26 billion of assets under management and capabilities in private credit that complement Franklin’s existing alternatives and fixed income platforms. The deal also leverages the company’s footprint in alternative credit markets forecast to double in size to $1.4 trillion over the next five years.
In the final quarter of its fiscal 2018, Franklin suffered $1 billion of outflows from its 5-star-rated Franklin Income Fund, which were only partially offset by inflows of $500 million to its Franklin Convertible Securities Fund. In the first quarter of the current fiscal year, BEN reported profits that were 10 cents per share shy of analyst expectations.
Analysts have weak 2019 expectations for the asset management sector, which caused Citigroup analyst William Katz to recently downgrade the stock to “Sell.” JPMorgan analyst Ken Worthington reduced his rating to “Underweight” because of Franklin’s international exposure; roughly 50% of the firm’s assets are held outside the U.S.
All that said, Franklin Resources has produced 39 straight years of dividend growth and five-year dividend gains averaging 16.7% per year.