Dividend Aristocrats have proven to be some of the best-returning stocks you can buy. These are companies that have increased their dividend payouts every year for 25 years or longer, demonstrating a record of stability and earnings growth that typically leads to solid returns for investors.
However, the past isn't always prologue, and some Dividend Aristocrats are in a weaker position today than their records would indicate. Below, three of the Motley Fool's top consumer goods specialists share some Dividend Aristocrats to avoid: Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT), and Sysco (NYSE:SYY).
Jeremy Bowman (Procter & Gamble): It's hard to question the success of Procter & Gamble during its history, as the company has been in business nearly 200 years, and counts 23 billion-dollar brands in its portfolio. However, the household-products maker's current position isn't as strong as its legacy would imply.
Revenue growth has stalled as the Tide-maker has saturated the market in developed countries, and is struggling to grow in developing ones. Internet brands such as Dollar Shave Club are eating away market share from high-margin segments such as Gillette razors. Results from Procter & Gamble's grooming segment tumbled last quarter.
A stronger dollar has squeezed profit abroad, where the majority of Procter & Gamble's sales come from. On top of that, its current strategy of selling off minor brands and its incoming leadership are both unproven.
As a result, P&G's stock has severely underperformed the S&P 500 during the last five years, increasing by 27% compared to 87% for the broad market indicator, and now trades at a 52-week low. On a free-cash-flow basis, its payout ratio is now 67%, indicating there's little room for increased dividends without earnings growth, especially because the company has been aggressively buying back shares.
P&G's most recent dividend hike in April was just 3%, and I'd expect the next one to be minimal, as well. Though it still pays a healthy 3.3% dividend yield, income investors can find better growth elsewhere.
Dan Caplinger (Wal-Mart): Dividend investors like big, safe companies, and at first glance, retail giant Wal-Mart seems like a natural choice. The company has a 42-year track record of consistent dividend increases, and long-term returns for the stock have been impressive, as well.
The problem for dividend investors, though, is that Wal-Mart has been in decline for a number of years. Company-wide comparable-store sales performance has been tepid, at best, with growth of just 0.4% in the year ending Jan. 30, and an outright decline in fiscal 2014. This came on the heels of a slump that lasted from 2010 to 2011. Wal-Mart has had trouble finding a lasting recovery strategy that addresses its key vulnerabilities.
Income investors can see the impact of Wal-Mart's tepid performance on its dividend policy. For years, annual dividend increases of 10% to 20% were par for the course at Wal-Mart, reflecting the growth that the retailer had enjoyed. Yet since 2013, the company has made two increases of just $0.01 per share, working out to boosts of just 2%. That trend suggests that even company management isn't convinced that Wal-Mart can return to its past growth trajectory.
Wal-Mart is worthy of praise for its status as a Dividend Aristocrat, and it has gotten through tough economic conditions before. The challenges it faces now, though, are difficult enough that dividend investors should think twice before counting on Wal-Mart for their income needs.
Bob Ciura: (Sysco) Not all Dividend Aristocrats are created equal, and I believe Sysco's future will not be as rewarding as its past. The company is a Dividend Aristocrat; it has paid a cash dividend since its incorporation as a public company in 1970, and has increased its dividend 46 times during that period.
However, its growth has evaporated. Sysco's 2014 profit clocked in at $1.58 per diluted share; in 2009, Sysco's earnings were $1.77 per share.
Part of this is due to the intense competition in the food-distribution industry. Sysco stated in its last 10-K filing that there are more than 15,000 companies engaged in the distribution of food and non-food products to the food-service industry in the United States. Another reason for Sysco's slowing growth is that consumers in the U.S. are widely embracing organics, and steadily moving away from pre-packaged foods.
As its profit declines, Sysco's dividend growth is screeching to a halt. The company has passed along dividend bumps of just $0.01 per share for several years now, which simply looks like an attempt to keep its streak going. There are many other Dividend Aristocrats that offer 3% yields and much better growth prospects, which is why I'd steer clear of Sysco.
Bob Ciura has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.