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S&P 500 Low P/E Dividend Aristocrats

June 23, 2014 | About:
Chris Mydlo

Chris Mydlo

24 followers
I used the GuruFocus All-In-One Screener to refine the “S&P 500 Dividend Aristocrats” screen to only include stocks with P/E ratios lower than the overall S&P 500. In my search for dividend yielding stocks, I also wanted a low valuation. Stable dividends will help provide cash flow as well as provide support for a stock if there is a downturn in the overall markets. My search resulted in six companies: AT&T (T), Chevron (CVX), Consolidated Edison (ED), Exxon Mobil (XOM), Wal-Mart (WMT), and Cincinnati Financial (CINF). All of the companies have low P/E ratios due to their slowing growth. Although growth has slowed, their earnings are stable and can support their dividends. Four out of the six companies have dividend with higher yields than the U.S. 10-year treasury of 2.63 percent. Four of the companies have been buying back stock as well, adding to capital that is returned to shareholders.

AT&T (T)

Business Predictability: 1/5, Financial Strength: 5/10, Profitability & Growth: 8/10

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AT&T is trading at P/E of 10.30 and has a dividend yield of 5.14 percent. The company is leading provider of telecommunication services and well known for wireless and U-Verse. AT&T will be the exclusive carrier for Amazon’s new phone. Its P/E is almost half of its 10-year median of 19.3. The low valuation is due to its slow growth in earnings. Earnings have grown at annual rates of 1.60 percent over the past ten years and 0.60 percent over the past five years. Even with slow growth, the earnings yield is attractive at 11.80 percent using Joel Greenblatt (Trades, Portfolio)’s version of operating income divided by enterprise value. The dividend is stable and has been growing every year for at least the past ten years. The dividend payout ratio is at a manageable 0.53, and the company has been buying back stock at an annual rate of 2.08 percent over the past five years.

Chevron Corp (CVX)

Business Predictability: 2/5, Financial Strength: 7/10, Profitability & Growth: 7/10

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Chevron is trading at a P/E of 12.90 and has a dividend yield of 3.08. According to market cap, it is the third largest integrated oil and gas company in the world behind Exxon Mobile and Royal Dutch Shell. The energy sector had a rough start to the year being down over 7 percent for the first month, but has since rebounded 23 percent for the rest of 2014. Just like AT&T, earnings growth has slowed. The stock is attractive based on it high earnings yield of 12.90 percent. The dividends are sustainable with its stable earnings and low payout ratio of 0.35. Shares outstanding have been decreasing at a rate of 0.85 percent over the past five years.

Consolidated Edison (ED)

Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 6/10

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Consolidated Edison is trading at a P/E of 13.50 and has a dividend yield of 4.39 percent. It is a utility company that provides energy to customers in New York, New Jersey, and Pennsylvania. The company is also a slow grower. Earnings have grown at annual rates of 3.9 percent for both the past ten and five years. Con Ed’s stock is not likely to go anywhere, but the dividend will remain stable. It has a payout ratio of 0.68.

Exxon Mobil Corporation (XOM)

Business Predictability: 2.5/5, Financial Strength: 9/10, Profitability & Growth: 7/10

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Exxon is trading at a P/E of 14.10 and has a dividend yield of 2.48 percent. It is the largest oil and gas company based on market cap and the second largest company overall in the S&P 500 behind Apple. The stock is a major holding of Warren Buffet’s Berkshire Hathaway. S&P Capital gives a positive outlook for the sector over the next 12 months. Exxon is strong just like Chevron with its earnings yield of 12.20 percent. Earnings growth is expected to be slow as well, but the dividend is safe with a low payout ratio of 0.33. Exxon has also been buying back stock an annual rate of 2.39 percent over the past five years.

Wal-Mart Stores Inc (WMT)

Business Predictability: 4.5/5, Financial Strength: 6/10, Profitability & Growth: 7/10

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Wal-Mart is trading at a P/E of 15.60 and has a dividend yield of 2.51 percent. The United States’ largest retailer has not been able to escape the overall sector trend. Retail has been a laggard so far this year and Wal-Mart is down 4 percent year-to-date. Just like Exxon Mobile, the stock is a major holding of Berkshire Hathaway. Wal-Mart has the highest business predictability of the companies on the list with a predictability rating of 4.5 out of 5. Earnings are stable and have been growing at a rate of 7-8 percent over the past ten years. The dividend is sustainable with its payout ratio of 0.68. Exxon has also been buying back stock at a rate of 4.04 percent.

Cincinnati Financial Corp (CINF)

Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 6/10

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Cincinnati Financial is trading at a P/E of 17.80 and has a dividend yield of 3.50 percent. It is the smallest and least known of the stocks on the list. It has a market cap of $7.96 billion. Cincinnati Financial is an insurance company that was founded back in 1950. The stock looks the least attractive of the companies with negative earnings growth over the past ten years. It also has the lowest earnings yield of 7.3 percent. Insurance companies typically invest most of their excess capital and float in fixed income, and today’s low yield environment has caused them to struggle with earnings growth. When interest rates begin to rise again, insurance companies are likely to benefit. Even in the low rate environment, Cincinnati Financial has been able to grow its book value at a rate of 5.53 percent per year. Although that is at a slow rate, a financial company with an increasing book value can maintain its dividend. The payout ratio is also at a manageable level of 0.53.


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