It looks like the dividend-stock juggernaut may be starting to slow down, as yields on income vehicles begin to edge up again. After staying abnormally low for the last few years, the yield on the 10-year Treasury bond has increased by 80 basis points since April to its current rate of 2.57%. Income investors are starting to exit the lower-yielding stocks in favor of "safe" investment grade bonds, so look for some slowing in the sector.
However, research has shown that dividend-paying companies tend to outperform in both bull and bear markets, so there may not be a rush for the doors; however, it is likely that dividend investors will become a bit more choosy about their selections, especially among the lower-yielding companies.
If you've read any of my articles, you know that I am a huge dividend fan. I've been writing about dividend-paying companies for over a year, I've designed a ratings system to help me select the best companies, and I've built my Perfect Dividend Portfolio (PDP), featuring ten stocks that I believe will perform better than other dividend portfolios.
I look for a combination of excellent dividend-raising history, high current yield, and superior potential for earnings growth. Earnings are important, and I take into account the projected five-year earnings growth rate as well as the current P/E and the past twelve months' share price increase.
In this article I will examine three retail companies, Walmart (NYSE: WMT ) , Target (NYSE: TGT ) and Walgreens (NYSE: WAG ) and establish their qualifications in terms of a dividend growth portfolio.
Bad to employees, but good to investors
Walmart is currently trading at $73 per share and yields 2.6%. The company has raised its dividend every year for 39 years; its 5-year Dividend Growth Rate (DGR) is an impressive 14.6%, and its payout ratio is a conservative 33%, which leaves plenty of cash for further investments in the company as well as returning some to shareholders.
In addition to its dividend, Walmart has been rewarding its shareholders over the past ten years through an aggressive share repurchase program. The number of common shares outstanding has decreased from 4.5 billion in 2002 to just 3.3 billion today.
The company announced its 2Q earnings before the bell on August 15, and the results were mixed. The company met the 2Q EPS estimate of $1.24 per share, but the worst news was that forward guidance for the rest of the year was lowered significantly. Expectations now are for growth in the 2 to 3% range, half of what had been forecast prior to this earnings release.
I like Walmart's Dividend Growth Rate, which sees the dividend doubling every 5 years, as well as its 37-year history of raising dividends and its low payout ratio. The 5-year projected earnings growth rate of 9% is right in line with the earnings growth projections of the S&P 500 in general. However, at 2.4%, I find that Walmart does not quite yield enough to make it into my portfolio. I'd like to see Walmart increase its dividend to about 3%, and pay out a bit more of its earnings.
Dividend doubling every three years
Target is currently trading at $63 and yields 2.7%; the company has been raising dividends consistently for 46 years, and has a 5-year DGR of 25.2%. Its 5-year projected earnings growth rate is 10.8%, and its P/E is 16.6, and its payout ratio is 32%.
Target's last dividend increase was in June, when the company announced a 19% increase for its 183rd consecutive distribution. The 5-year DGR of 25% means the dividend has doubled roughly every 3 years.
Target announced its 2Q earnings on Aug. 20, and reported EPS up 6% versus the same quarter last year. The management team stated that they project the remainder of the year to fall into the low end of previous guidance, based on expectations of continued soft retail sales from consumers.
Target also continues to repurchase its own shares, with a total of 21.9 million shares, or $1.5 billion year-to-date. This is approximately triple the total value of dividends distributed, and adds significantly to the shareholder value.
If the company reaches its stated goal of $8 per share by 2017, that means the earnings will have roughly doubled within 4 years, which seems reasonable given a combination of share repurchases, sales and square footage growth, and the opening of new stores in Canada. The company is also working to overcome the impact of online retailers such as Amazon, Walmart.com, Best Buy and ToysRUs, by offering price matching.
Again, Target's yield is low for my taste, and I'd like to see the company pay out a bit more of its earnings. However, I do like Target very much as a dividend-growth company. If I did not already have a full 10-stock portfolio, I would definitely consider adding Target. In the meantime, I will keep a close eye on it in case I exit one of my existing positions.
Walgreens is on a Roll
Walgreens is currently trading at $48 and also yields 2.6%; the company has been raising dividends consistently for 38 years, and has a 5-year Dividend Growth Rate of 22.9%. Its 5-year projected earnings growth rate is 13%, its P/E is 21.5, and its payout ratio is 48%.
Walgreens last raised its dividend earlier in August, with a 14.5% increase. The 5-year DGR of 23% means the dividend has doubled roughly every 3 years. While the historical DGR is of course no guarantee of future dividend increases, it indicates the company's commitment to returning value to shareholders via cash distributions. With a 5-year projected earnings growth rate of 13%, well above the average growth rate of the S&P 500, and a reasonable payout ratio, Walgreens seems well-positioned to continue its aggressive dividend policy.
And the company's stock has been on a tear recently, up 36% year-to-date, despite missing earnings and revenue estimates when it released its numbers in late June. The stock dropped approximately 10% immediately after the earnings release, but quickly rebounded. Investors seem to have focused on the negligible sales increases from a year ago, while ignoring the improved margins that resulted in a 16% increase in net profits.
Walgreens is a reliable dividend company, and I consider it a terrific addition to a dividend-growth portfolio. Although the yield is low for my taste, with the kind of DGR it has been demonstrating the yield might well grow toward the 3% range within another couple of years.
Fund manager David Berman from Durbin Capital told CNBC that the market should be expecting "horrible" earnings reports from retailers this quarter: "In a few weeks, we're going to have a lot of retailers reporting. We actually think it's going to be a lot worse than people think. We thought things would bounce back, but they don't seem to have."
The next quarter or two look like they might still be a little rough in terms of consumer spending; but remember, these particular retailers sell a lot of necessary items. Consumers still have to buy toothpaste and toilet paper, even if they don't want to spend money on more expensive, discretionary items.