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.