Following my recent post on the relationship between higher payout ratio and higher future earnings growth, Pierre-Olivier of www.jourly.com asked me who I thought were the best US dividend plays in the US…and while I had some ideas based on stocks I have reviewed since creating Margin of Safety Investing, I thought I should try and answer the question based on the entire US stock universe, not just the stocks I have analyzed so far.
To do so, I first generated a list of US companies using Morningstar’s stock screener using the following criteria:
- Market capitalization > $100M
- Dividend yield > 2%, making sure we are looking at the highest dividend payers (current S&P dividend yield = 2.3%)
- Payout ratio of 60% or less: I usually want companies to have enough cash to keep growing and hence prefer company with manageable payout ratios
- I excluded financial services companies as I generally do not really know how to analyze/value them
- Using Morningstar’s rating as a first pass, I set my screen to only select companies with a “Financial health grade” of B or better
These criteria lead us to a list of c.180 stocks (much more than I was expecting), representing $4.6T of cumulative market cap!
You can find the list of companies and the key metrics that I will be using for the selection of the best US dividend payers in this Google Doc.
Now, in order to select the best stocks among those 182, I will use filters along the three risk categories I usually review:
1- Business risk
In order to evaluate business performance, I usually look into ROE and ROA over time as a starting point. Using ROE>12%and ROA>6% both on a Trailing Twelve Month and 5-year average, our list of potential best dividend payers comes down to 82 candidates.
In addition to good returns, I usually screen out companies experiencing very low growth or revenue declines. By filtering out companies having a 3-year revenue growth of 1% or less, our list of candidates drops to 53 stocks.
2- Balance sheet risk
I prefer companies with conservative balance sheets and usually look at current ratios, debt/equity and Debt/FCF. As current ratios level are often “industry dependant” I will only use Debt/Equity as a criteria here. Using Debt / Equity<1.0x, our universe is now down to 40 companies.
3- Valuation risk
Finally, using a price to earnings (trailing)< 18x and FCF / Market Cap > 5% leaves us with 18 companies.
|Name||Ticker|| % ROE|
| % ROA|
|Debt to Equity|| Price/|
|Analog Devices, Inc.||ADI||20.1||15.8||2.3||0.1||16.2|
|AstraZeneca PLC ADR||AZN||38.7||16.6||5.0||0.4||8.7|
|Bristol-Myers Squibb Company||BMY||37.7||15.7||4.9||0.4||9.7|
|Cal-Maine Foods, Inc.||CALM||28.3||14.3||3.1||0.3||10.3|
|ConAgra Foods, Inc.||CAG||16.2||6.5||3.7||0.7||13.7|
|Darden Restaurants, Inc.||DRI||24.5||8.7||2.3||0.8||16.6|
|Eli Lilly and Company||LLY||19.9||7.9||5.6||0.6||8.0|
|Flowers Foods, Inc.||FLO||15.9||9.2||3.1||0.2||17.2|
|Johnson & Johnson||JNJ||28.1||15.8||3.4||0.2||12.7|
|Merck & Co Inc||MRK||29.0||12.0||4.2||0.3||13.8|
|Novartis AG ADR||NVS||19.3||11.9||3.0||0.2||12.5|
|Procter & Gamble Company||PG||19.4||8.7||3.0||0.4||17.7|
|Telecommunications of Sao Paulo ADR||TSP||23.9||12.9||4.1||0.1||8.8|
|Tupperware Brands Corporation||TUP||28.4||7.3||2.1||0.6||13.4|
|United Breweries Company, Inc. ADR||CCU||19.7||9.4||2.1||0.5||15.1|
|Wal-Mart Stores, Inc.||WMT||20.7||8.3||2.2||0.7||12.9|
As you can see, a lot of companies are Drug manufacturers which I tend to avoid as a lot of them face major patent cliff and thus potential for large revenue drops. However amongst those 18 companies, I think one can find some of the best US-listed dividend payers, with strong returns, good dividends, conservative balance sheets are reasonable valuations!
It’s reassuring to me to see that I have already performed a stock reviews of a number of these stocks and put them in my watchlist.
Many happy returns