A.O. Smith (AOS)The manufacturer of water heating equipment has improved its dividend output every year dating back to 1993, earning it Class E Dividend Dynamo status. Last year A.O. Smith announced a 7.7% increase to its payout on July 23, marking the fifth consecutive year the company has given its shareholders a raise in July.
Though its forward payout ratio is pretty conservative, that seems to be a trend A.O. Smith has purposely curated in recent years rather than an aberration it will sharply correct. The company has returned just 24% of its earnings to shareholders over the last five years, including 22.3% and 22.6% in 2009 and 2010, respectively. That’s a sharp decline from the 42% the company returned during the prior five years.
Important Stats: 23% forward payout ratio, 18-year dividend growth streak, last eight increases have averaged 5.6% and ranged between 2.6% (2009) and 7.7% (2010).
Forecast: An increase of 5-9%. It’s my belief that A.O. Smith is content with a payout ratio in the low-to-mid 20% range, as it’s had plenty of time to reverse the steady decline. Instead, the company hasn’t delivered a double-digit dividend hike since 1996.
Carbo Ceramics (CRR)The world’s largest supplier of ceramic proppant gave shareholders an 11% raise on July 15, 2003, and has increased its payout in mid-July every year since, boosting its payout by an average of 16.4% during the streak. In all, the company has improved its dividend output each calendar year going back to 2001, quadrupling its payout and climbing onto the list of Class E Dividend Dynamos in the process.
Carbo’s dividend has obviously been moving in the right direction, but it hasn’t kept pace with the company’s recent success, which has made its dividend policy look conservative. Carbo gave shareholders a 6% raise in July 2010 only to watch its stock double over the next 12 months, and bumped its payout another 11% in July 2010… only to watch its stock double again since then. That rapid rise in share price has pushed Carbo’s yield from 1.87% (the day it announced its 2009 dividend hike) all the way down to 0.51% in a little less than two years — despite two payout bumps during that span.
Similarly, the company’s earnings growth has consistently pushed analysts to upgrade their forecasts, leaving Carbo with a forward payout ratio that barely reaches double-digits. That’s absurdly low for a company that returned more than 20% of its earnings to shareholders from 2001 through 2010.
Important Stats: 11.7% forward payout ratio, 10-year dividend growth streak, last eight increases have averaged 16.4% and ranged between 5.9% (2009) and 25% (2005).
Forecast: An increase of 50-75%. Carbo can certainly afford a monster dividend hike here, and I think it gives its biggest yet. Even matching its previous record of 25% would be a disappointment, as the stock would barely yield 0.60% and the company would still be distributing less than 15% of its future earnings. A 75% dividend hike would push the company’s forward payout ratio just above 20%, in line with its historical average.
Darden Restaurants (DRI)The operator of full-service restaurants including Red Lobster and Olive Garden has delivered a double-digit second-half raise to its shareholders each of the last six calendar years. Since switching to a quarterly payout in 2007, the company has announced its annual increase within its fourth quarter earnings release, which will follow the closing bell on June 30 this year. (So in all likelihood, this “July” dividend hike will come one day early.)
Darden has certainly put a much larger emphasis on its dividend over the last five years, returning 29% of its earnings to shareholders (compared to just 5% during the prior five years), including an all-time high of 35% in 2010. The company nearly tripled its earnings per share during the last decade, so it took some serious dividend growth to pull that off. Like, 2300% dividend growth: Darden barely distributed a measly nickel per share to investors in 2001, and now pays an annual rate of $1.28 per share.
Important Stats: 33.6% forward payout ratio, six year dividend growth streak, last five dividend hikes have averaged 27% and ranged between 11% (2008) and 57% (2007).
Forecast: An increase of 10-20%. I think Darden’s dividend is about to start growing at a pace more comparable to its earnings. The company will definitely keep its double-digit streak alive, but anything above this range would be pretty aggressive, pushing its forward payout ratio well above 40%. McDonald’s (MCD) can get away with its 44% forward payout ratio because it has less growth to fund, has the scale to expand more efficiently, and can raise prices without denting its teflon brand equity. Darden probably wants to be somewhere between the golden arches and Yum! Brands (YUM), which currently returns just 31% of future earnings to its shareholders.
Landstar System (LSTR)The provider of freight transportation services and supply chain solutions initiated its quarterly dividend in July 2005 and has raised its payout every 12 months since. Each of the company’s five dividend hikes have been announced within its second quarter earnings release, which is scheduled for July 21 this year.
Landstar has raised its quarterly dividend by a half-penny each of the last two years and has never increased its payout by more than 25%, but could very easily break away from those trends if its earnings live up to expectations. Analysts currently expect the company to earn $2.20 per share this year — which would be its largest EPS figure since initiating its dividend — and to grow that figure to $2.60 per share in 2012. Those forecasts have pushed Landstar’s forward payout ratio down into the single-digits, giving it plenty of room to distribute more cash to shareholders.
Important Stats: 7.7% forward payout ratio, five year dividend growth streak, five dividend hikes have averaged 15.1% and ranged between 6.7% (2008) and 25% (2007).
Forecast: An increase of 25% to 100%. Even giving investors an extra penny per share each quarter (which would require a 20% dividend hike) would be a disappointment, as it wouldn’t even push the company’s forward payout ratio out of the single-digits. Maybe I’m being too optimistic here, but I think Landstar at least matches its record increase from 2007, and could even go so far as to double its dividend. The company can certainly afford to be aggressive right now: Even doubling its payout wouldn’t push the stock’s yield over 1% and would barely get its forward payout ratio above 15%.
Lindsay Corporation (LNN)The designer and manufacturer of irrigation systems launched its current dividend growth streak by giving shareholders a 43% raise on July 29, 2003. Since then, the company hasn’t come close to matching that lucrative dividend hike, but it has been remarkably consistent: Lindsay has raised its quarterly dividend by a half-penny each of the last seven years, always within a nine day window (July 12 to July 20).
There’s something to be said for predictability, but the longer the company increases its dividend by the same amount the less impact its raises have: A half-penny increase in 2004 boosted Lindsay’s payout by 10%, while the 2010 version only resulted in a 6.3% increase.
Important Stats: 11.5% forward payout ratio, eight year dividend growth streak, last seven dividend hikes have averaged 7.9%.
Forecast: An increase to the quarterly dividend of either $0.005 or $0.015 per share. Lindsay’s currently distributing a smaller portion of its earnings than ever before, which is usually an indication that a dividend growth company is about to reward its shareholders with a big raise. But that’s been the case a few other times in recent years for Lindsay, and the company has just kept on giving those half-penny increases.
I didn’t provide a range because I don’t think there’s a middle ground here. I say the company either holds to its recent trend of giving its shareholders a lame $0.005 raise, or (propeled by its blowout third quarter results) goes big and boost its quarterly payout by $0.015 to an even $0.10 per share. That would easily register as the company’s biggest hike (18%) since the 2003 anomaly.
Walgreen Company (WAG)The drugstore operator has raised its dividend every year dating back to 1976, the fourth-longest active streak among retailers: Only Lowe’s (LOW), Target (TGT), and Walmart (WMT) have it beat. The Class C Dividend Dynamo traditionally announces its annual dividend hike in the first half of July, and I expect this year to be no different.
Considering its low payout ratio, it would be pretty unbelievable if Walgreen chose to halt its dividend growth streak any time soon. Especially considering the efforts the company has taken to ramp up its payout in recent years: Walgreen has increased its dividend by a compound annual growth rate of 24.3 percent over the last six years and grown its dividend output by 10% or better for eight consecutive years (including 20% or better each of the last six years). Last year the company gave its shareholders a 27% raise on July 14, which was its biggest dividend hike ever.
Important Stats: 23% forward payout ratio, 35-year dividend growth streak, record 27% dividend hike in 2010, last eight increases have averaged 21.3% and ranged between 15% (2003) and 27% (2010).
Forecast: An increase of 20-30%. Walgreen could afford to do a lot more, but the low end of this range is in line with its recent dividend hikes. The high end provides a little upside if it decides to trump last year’s record dividend hike. An increase within this range would put the company’s quarterly payout in a range of $0.21 to $0.23 per share, and would likely push its dividend yield above 2%.