Dividend stocks are often the foundation for a great retirement portfolio. Dividend payments not only put money in your pocket, which can help hedge against any downward move in the stock market, but they're usually a sign of a financially sound company. Dividend payments also give investors the opportunity to reinvest into more shares of stock, thus boosting future dividend payments and compounding gains over time.
Yet not all income stocks are living up to their full potential. Utilizing the payout ratio, or the percentage of profits a company returns in the form of a dividend to its shareholders, we can get a good bead on whether or not a company has room to increase its dividend. Ideally, we like to see healthy payout ratios between 50% and 75%. Here are three income stocks with payout ratios currently below 50% that could potentially double their dividends.
Biotech stocks aren't often known for their dividend payments, but Amgen might as well be known as the dividend originator within the sector. Amgen began paying a dividend in 2011, and has raised its payout five separate times since its inception. What's more, Amgen hasn't been shy about enacting big dividend increases. In late October Amgen announced a 27% quarterly payout increase to $1 per share. By comparison, Amgen was paying just $0.28 per quarter back in 2011. That's phenomenal growth that shareholders surely appreciate.
However, even with $4 in annual dividends per share in 2016, Amgen could have the potential to double its dividend by as early as the end of the decade. Wall Street is projecting that Amgen could earn around $10 in EPS this year, and may approach $13 in EPS by 2018. Thus, a payout of $8 per year would only equate to a payout ratio of around 60%, which is both sustainable for the company and worthwhile for investors.
How will Amgen fund its dividend growth? It'll primarily rely on organic pipeline growth. Although Amgen is benefiting from its purchase of Onyx Pharmaceuticals for $10.4 billion and the recent label expansion of multiple myeloma drug Kyprolis into a second-line indication, the company has reported positive data on more than a half-dozen late-stage compounds. In fact, counting the Kyprolis expansion, Amgen has had six drugs approved (or had their labels expanded) by the Food and Drug Administration over the past year, including two cardiovascular products, which is a new therapeutic focus for the company.
We also shouldn't discount the role biosimilars could play. Amgen has nine biosimilar drugs in its pipeline, including ABP 501, which is a clinical equivalent to Humira, the best-selling drug in the world. This portfolio diversity should give Amgen all the growth it needs to continue raising its payout.
Electronic circuits may be a bit of a commoditized business that's somewhat reliant on the health of the U.S. and global economy, but that doesn't seem to be stopping Littelfuse, a manufacturer of various fuses and protectors for personal computing devices and the automotive and industrial sectors, from notching its dividend higher.
Littelfuse introduced a $0.15 per quarter dividend to shareholders in 2010, and has increased its payout five times since then. In its most recent quarter Littelfuse paid investors $0.29 per share, so its payout has nearly doubled in five years. The good news is that its payout could double again over the next five years if Wall Street's projections are correct. Doubling its annual payout would yield $2.32, and with the company expected to generate in excess of $5.50 in 2016, a payout ratio that's just over 40% seems very reasonable.
It also doesn't hurt that Littelfuse ended the third quarter with $340.6 million in cash and cash equivalents compared to $209 million in debt. This net cash buffer provides extra incentive to continue rewarding shareholders.
How does Littelfuse expect to maintain its growth? By focusing on strength in its electrical/industrial segment through custom orders, as well as taking advantage of a strong auto market, especially in the United States. U.S. auto sales have benefited from lower fuel prices, leading to the first ever three-month streak in which the annual run rate exceeded 18 million units according to Autodata. As long as investors can look past currency headwinds in foreign markets, the company is likely to see slow but steady automotive and industrial protector and fuse growth.
Allegiant Travel (NASDAQ:ALGT)
Another industry not often thought of as a dividend powerhouse, but which has recently packed on some payout punch, is airlines. Specifically, I'd focus on low-cost airline Allegiant. Although Allegiant has previously paid special dividends, just as it announced it'll be doing this year, it only recently began paying a regular quarterly dividend. In 2015, shareholders received $1.10 in cumulative (non-special) payouts. However, this payout could double, triple, or perhaps even quadruple with ease in the coming years.
Based on Wall Street's estimates, Allegiant is forecast to earn $12.61 in EPS this year, and nearly $17 per share by 2018. Even if it paid out a dividend that's quadruple what it is now, Allegiant would only have a payout ratio of around 25% based on its 2018 EPS projections. This would still leave Allegiant plenty of capital to expand its fleet, and could make income investors very happy.
What's Allegiant's secret? The company's low-cost structure and bare bones pricing strategy afford it a number of advantages over its peers. For starters, Allegiant tends to buy older planes, which cost less upfront. It's also a smaller airline company, giving it the added flexibility that the domestic majors don't have to drop unprofitable routes. But the big advantage stems from its carrot-dangling low ticket prices and add-on options, such as carry-on bag fees and checked bag fees. These ancillary fees are almost pure profit for Allegiant, and they're driving profits substantially higher. Lower fuel costs are helping too.
Allegiant is still rapidly growing and expanding, but I'm expecting income investors to soon profit from the company's ongoing success.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Littelfuse. 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.