How much is $8 billion? It's larger than the gross domestic product of dozens of nations. It's enough to circle the earth more than 30 times if you laid $1 bills end to end. And it's less than the amount that several companies pay out each year in dividends.
Three well-known companies that return more than $8 billion in dividends to shareholders each year are Anheuser-Busch InBev (BUD +0.46%), Johnson & Johnson (JNJ 0.15%), and Verizon Communications (VZ 0.49%). But how strong are these dividend stocks looking to the future?
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Anheuser-Busch InBev
In 2016, Anheuser-Busch InBev shelled out more than $8.4 billion in dividend payments. Over the past 12 months, the beverage maker has returned nearly $9 billion to shareholders as dividends. Investors should like the company's dividend yield of over 3.5%.
There's a fly in the beer, though. AB InBev is paying out more in dividends than it's generating in free cash flow. The situation can't continue indefinitely. The company must either boost earnings and cash flow or it will have to cut its dividend. But which will it be?
AB InBev gave some reasons to think earnings could grow when the company announced its third-quarter results. The company's management projected revenue acceleration, as its global brands remained strong. AB InBev's earnings should also improve as the company captures more of the synergies resulting from its merger in 2016 with SABMiller. At this point, it appears likely that AB InBev should be able to continue paying out dividends at current levels into the future.
Johnson & Johnson
Healthcare giant Johnson & Johnson paid out more than $8.6 billion in dividends in 2016. Thanks to a dividend increase announced in May 2017, J&J's dividend payments last year were even higher, with the company returning nearly $8.9 billion to shareholders as dividends. Its dividend yield now stands at 2.33%
Are there any reasons for investors to be concerned about future dividend payments? Not really. J&J uses less than half of its free cash flow to fund the dividend program. The company has increased its dividend for 55 consecutive years, so keeping the streak going is a major priority.
Johnson & Johnson appears to be on track for its best year ever in 2018 in terms of revenue and earnings. Although sales are slipping for top-selling autoimmune-disease drug Remicade in the face of biosimilar competition, J&J's acquisition of Actelion last year is boosting overall revenue. I expect the drugmaker to easily pay out more than $9 billion in dividends this year.
Verizon Communications
Verizon has been the biggest dividend spender of the three, paying out nearly $9.3 billion in dividends during 2016 and $9.4 billion over the past 12 months. The telecommunications company's yield of 4.55% is also by far the highest of the group.
From one perspective, Verizon's dividend appears to be quite healthy, since the company's payout ratio is a reasonable 59%. On the other hand, the telecom giant spent more on dividends in 2017 than it generated in free cash flow. As discussed with AB InBev, that's a situation that must change at some point.
I wouldn't look for tremendous improvement from Verizon in 2018. The company appears likely to invest more in adjacent markets and 5G networks to keep up with its major rivals. At the same time, Verizon will probably sell off some non-core assets to lower its massive debt load of more than $115 billion. Still, I don't think Verizon's dividend will be in any jeopardy in the near future.
Best pick
As important as dividends are, investors should focus most on the total return potential when evaluating stocks. In 2017 and over the past five years, the clear leader in total return was Johnson & Johnson. But can J&J continue its winning ways? I think so.
Johnson & Johnson is a global leader in consumer healthcare, medical devices, and pharmaceuticals. Aging demographics should drive long-term demand in all three areas. The company's strong cash flow allows it to stay at the top or near the top in all of its markets by investing in research and development and by making strategic acquisitions. In terms of overall quality and future potential, my view is that J&J is the best pick of these three high-paying dividend stocks.
