Typically, when investing in dividend stocks, one fail-safe method for picking up a stable income generator for your portfolio is to buy dividend aristocrats -- those companies that have more than 25 years of dividend increases under their belt. The prospects for all of these companies aren't the same, however, and just because a company has the dividend aristocrat label doesn't mean it's a great investment today.
So, we asked three of our contributors to highlight a company in the dividend aristocrat list that they think isn't the best buy today. Here's what they had to say.
Matt DiLallo: While GATX Corporation (NYSE: GMT) falls just short of the official definition of a dividend aristocrat, it has still paid an uninterrupted dividend for 96 years, which is quite an accomplishment. However, the fact of the matter is that GATX is susceptible to an economic slowdown, which, in times past, has led to the dividend being slashed. So, with income security really being the core of a dividend aristocrat, that leaves me with no choice but to pass on GATX.
The largest independent railcar lessor in North America tries to mitigate this risk by signing its rail car fleet to long-term contracts during the good times. That helps to keep operating cash flow rather stable, but what it can't help reduce is the volatility of the proceeds received as it continually turns over its portfolio of railcars, which is a key source of cash flow for the company. We see this in the chart below, when during the financial crisis, GATX's total cash inflows dropped by 43% from peak to trough.
Image source: GATX Corporation investor presentation.
What's worth noting is that while operating cash flow fell by 33%, portfolio proceeds plunged 72%. That left the company with less cash to reinvest into its portfolio at a time when capital was at a premium.
The good news is the fact that during the financial crisis, GATX's dividend stayed flat, which was a feat in and of itself given the dividend casualties during that period. Having said that, the company's actual dividend rate during the crisis of $0.28 per share was still lower than its prior peak rate in 2003, when GATX was paying $0.32 per share. It slashed that payout in 2004 all the way down to $0.20 per share, and it took the company a decade to return the payout to its former peak, which it finally topped last year.
A dividend aristocrat is supposed to be a core income holding that is expected to deliver income security in good times and in bad. GATX has proven in its history that it struggles to maintain its payout in bad times because its business is a bit more economically sensitive. So, while it has a long history of paying a dividend, it's just not good enough for me.
Jason Hall: This may sound crazy, but one dividend aristocrat I wouldn't buy is ExxonMobil (NYSE: XOM). Don't get me wrong -- it's a great company with one of the best management teams in the industry. But it's not a stock that I would buy -- at least right now. Hear me out.
Yes, ExxonMobil has all of the things above going for it, pays a decent 3.6% yield, and has plenty of cash flows to sustain and even potentially increase it in years ahead. It's the largest, most diversified public oil company in the world.
But if I'm buying a stock off the dividend aristocrats list, then I'm looking to get paid, and to get paid well for years to come, and I'm not convinced that ExxonMobil will substantially increase payouts anytime soon, beyond the roughly 6% increase from earlier this year. It probably could afford to do so, but one of the most conservative management teams in the business isn't going to, at least not before the current downturn stabilizes.
I'd be more inclined to buy shares of Chevron (NYSE: CVX) if I'm looking at dividend aristocrats. Yes, the company is paying a much higher percentage of earnings in dividends today, but its yield is 28% higher than ExxonMobil's, so ExxonMobil would have to increase payouts at a high rate to make for a better dividend investment.
And that hasn't happened, historically speaking:
XOM Dividend data by YCharts.
Tyler Crowe: I'm going to take the flip side of that argument, because personally, I think there are just too many things in the air for Chevron right now to make a long-term investment in the company.
The aspect of Chevron that would scare me off from buying is the fact that it is much more directly exposed to oil prices than ExxonMobil, or any other integrated oil and gas company. Whereas the others have a larger presence in oil refining and chemical manufacturing, Chevron is much more of a production oriented company. If we were to see a prolonged bout of low oil prices, it will likely have a greater impact on the company's bottom line.
With oil prices this low, the company has been forced to sell off several billions in assets and take on a good portion of debt to cover its capital spending and dividends. So far in 2015, the company's cash from operations has covered just a little more than half of its obligations -- not exactly an enviable position.
Image source: Chevron investor presentation.
While I'm not convinced that Chevron is in a dire situation in any way, it just seems that the chance of sustained low oil prices could compromise the company's ability to raise its dividend at the rate it has accomplished in recent years. Management doesn't expect to cover all of its capital obligations like new projects and dividends until 2017.
If we were to remain at low prices for that long and potentially longer, which isn't completely out of the question, then Chevron doesn't look to be the growing dividend payer compared to so many other companies on the dividend aristocrat list.
