It's a strange time to be a dividend investor. Amid coronavirus, many top companies have been forced to suspend their dividends. In fact, there aren't that many sectors in which one can say that dividends are safe, let alone candidates for growth!
But even though you have to look harder to find attractive dividend growth stocks, that doesn't mean they don't exist. You just have to avoid travel, oil, banks, apparel, mining, and a host of other sectors. No problem, right?
Yet even though the universe is limited, the following three stocks all pay decent dividends, should be resilient amid coronavirus, have solid growth prospects, and have low payout ratios. That means their dividends look quite secure today, with the potential to grow handsomely in the future.
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Lam Research
Semiconductor equipment manufacturer Lam Research (LRCX 2.65%) may not make it on the radar for the average investor, but its financial metrics could put it in the top tier of technology names. In fact, the company has earned more than 50% return on invested capital over each of the last three years -- enviable profitability no matter what industry!
That can be chalked up to the fact that the semiconductor equipment industry is fairly consolidated, with only a handful of companies able to produce this highly advanced technology. But since the industry is cyclical, it can be challenging at times. Still, this cyclicality has allowed the strongest companies to fortify their positions, giving them dominant market shares in critical parts of the semiconductor manufacturing process. Fortunately, Lam is one of those, producing critical etch and deposition equipment that allows semiconductor and memory companies to make smaller and smaller advanced chips.
Lam also doesn't just sell advanced machines but also provides services, spare parts, cleaning, consumables, and other services, whose revenues are tied to the amount of the installed base. That makes this segment much more stable than volatile annual equipment sales. Last quarter, services revenue amounted to 34% of revenues, adding a solid and profitable floor to Lam's earnings results. The services push has also brought down Lam's earnings volatility compared to past cycles and provided strong profitability even in the recent down-cycle in 2019.
Currently, Lam's 1.7% dividend yield only amounts to 32.8% of trailing earnings, and management projects earnings could grow strongly in the years ahead, as the need for more advanced chips is near-certain to grow. In fact, on its recent analyst day presentation, management projects EPS can grow from $14.51 in 2019 earnings to over $30 by 2023 or 2024. Since earnings could potentially double, that means Lam's dividend could too, all while maintaining a conservative payout ratio.
Kroger
America's largest pure-play grocer and second largest overall grocer is Korger (KR -0.75%), which houses a number of local grocery brands across the country such as Ralph's, Harris Teeter, Food 4 Less, and several others. In times of coronavirus, one industry that certainly won't be disrupted is groceries.
And while many have wondered how Kroger would adapt to a world of e-commerce and large tech giants getting into the grocery business, Kroger appears to be one of the winners left standing. The company has boosted its digital offerings under its long-term "Restock Kroger" program, cutting $1 billion in costs out of the business through last year. Kroger also bought a stake in automated warehouse and British online grocer Ocado (OCDO -2.54%) in 2018, giving it a stake in the upstart and also licensing the company's automated warehouse technology.
That's helped Kroger modernize, and results are beginning to pay dividends literally and figuratively. Last quarter, same-store sales accelerated to 2%, up from 1.8%, in the year ago quarter. Digital sales increased 22%, and adjusted operating profit surged 20.7%. Kroger also raised its dividend by 14% in 2019, its 13th straight year of increases. The stock now yields 2%, but its payout ratio is only 29%, leaving plenty of room for future dividend hikes. Kroger's solid results and scale advantages were even enough to lure one of Warren Buffett's investing lieutenants into buying a large amount of Kroger stock back in late 2019.
Coronavirus is affecting Kroger for sure, but it's actually leading to a sales surge and the need for the company to spend big on safety and hire new employees because it now has so much more business. Of all the coronavirus problems to have, this is probably a good one. In a recent business update, Kroger management also reaffirmed its previous strong guidance for the full year, reflecting both the headwinds and tailwinds from COVID-19.
In the end, Kroger is a recession-resistant stock that's made great strides in modernizing, with a history of strong dividend growth and a still-conservative payout ratio. And oh, by the way, Warren Buffett's protégé is invested. Sounds like a solid dividend growth stock to me.
Ping An
One company you may not know of is Ping An Insurance Group (PNGA.Y 1.34%), the largest financial company in China. Ping An has been around over 30 years and has grown into a highly profitable, technologically savvy financial conglomerate spanning life & health insurance, property and casualty insurance, banking, and technology software. That last segment is Ping An's secret sauce, as the company has long invested far more in technology solutions than its traditional rivals.
Those past technology investments have not only given Ping An best-in-class profitability for its core financial businesses, but have also spawned several technology start-ups that are making names for themselves independently, and in which Ping An retains ownership stakes.
It should also be known that most of Ping An's main business is insurance, with its banking businesses a relatively minor part of the company. That should make Ping An more resilient to an economic downturn than a straight-up bank. Last quarter, even amid amid the severe disruptions from coronavirus and quarantines in China, Ping An managed to grow operating income 5.3%, impressive for a quarter in which the country was in a recessionary lock-down.
Yet looking back over the long term, Ping An has had a remarkable track record of profitable growth, doubling its customer count in the past five years, all while making more and more revenue per customer via cross-selling, with consistent returns on equity in the 20%-plus range.
Along with that profitable growth, Ping An's dividend has increased as well; in fact, Ping An's dividend has nearly quadrupled in just the past four years. Yet Ping An only trades at a P/E ratio of 9.7, its dividend yields an ample 2.9%, and that dividend only encompasses 26% of its net income.
Ping An might be cheap because it's a financial and a Chinese stock, and there are of course risks associated with that, especially if the trade war escalates. Yet Ping An is an extremely high-quality business trading at a very cheap price, making it huge bargain for dividend growth investors that aren't afraid of investing overseas.
