To dividend growth investors, a dividend increase is a sign that the underlying company is on solid financial footing. In uncertain economic conditions, dividend increases represent strength. For those looking to live off of dividend income, these raises are important as they help offset inflation while increasing income. We will look at four stocks trading with a market capitalization above $10 billion that have recently increased dividends.
Cardinal Health
Cardinal Health Inc. (CAH, Financial) is one of the largest drug distributors in the U.S. The company provides products to more than 24,000 pharmacies and counts 85% of the nation’s hospitals as a customer. Analysts estimate that Cardinal Health will have more than $152 billion in revenue this year. The stock has a market capitalization of more than $14.3 billion.
Cardinal Health announced last week that it was raising its dividend 1% for the July 15 payment. The company now has 24 consecutive years of dividend growth, putting the company just one year away from achieving Dividend Champion status. The ex-dividend date is June 30. Shareholders have been given an average raise of 8.2% over the last five years according to the U.S. Dividend Champions. The most recent raise was well off the average, which is something that should be watched going forward. However, a raise is still a raise.
With an annualized dividend of $1.94 and expected earnings per share of $5.19 for the current year, the company has a payout ratio of 37%. This compare to the 10-year average payout ratio of 32%. Shares have a yield just under 4% as of Friday’s closing price. This is much higher than the stock’s 10-year average yield of 2.3% or the average yield of 2.1% for the S&P 500.
At $49, Cardinal Health’s stock trades with a forward price-earnings ratio of 9.4. This a discount to the stock’s decade-long average earnings multiple of 14.8.
Cardinal Health’s yield and valuation look extremely attractive compared to the company’s historical averages. The most recent raise was disappointing, but the stock has an extremely low payout ratio.
Costco
Costco Wholesale Corp. (COST, Financial) operates more than 800 warehouse stores around the globe, with the majority in the United States. The company offers products in bulk, often just above costs. Approximately three-fourths of sales for the company come from membership fees. The $131 billion company is expected to generate $164 billion in revenues this year.
The company increased its dividend 7.7% for the May 15 payment, giving Costco 17 years of dividend growth. The average increase over the last five years is 12.9%.
With an annualized dividend of $2.80 and expected earnings per share of $8.67, Costco has a payout ratio of 32%. This is nearly in line with the 10-year average payout ratio of 29%. Shares yield just 0.9% today. Costco has never been a high yielder, with an average dividend yield of 1.1% since 2010.
Costco shares trade hands at $299. This equates to a forward price-earnings ratio of 34.5, a significant premium to the stock’s 10-year average price-earnings ratio of 25.2.
The company will never be viewed as a high-yielding stock, so income investors will likely avoid the name. Value investors will probably look elsewhere as well due to the stock’s valuation. I own shares of the company, but feel that the earnings multiple needs to decline before I’ll add more.
PepsiCo
A leader in the global food and beverage industry, PepsiCo Inc. (PEP, Financial) has more than 20 brands that generate at least $1 billion in annual revenue. The company had more than $67 billion in revenue in 2019. The stock trades with a market capitalization of $190 billion.
PepsiCo increased its dividend by 7.1% for the June 30 payment, which is below the five-year average increase of 9%. Investors looking to capture this dividend need to own the stock prior to June 4. This gives the company 48 consecutive years of dividend growth, which means that PepsiCo is two years away from achieving Dividend King status.
Following the dividend increase, the new annualized payout is $4.09. This represents a payout ratio of 77% using consensus estimates of $5.34 earnings per share for the year. For comparison purposes, the stock has an average payout ratio of 58% over the last decade. Shares yield 3% at the moment, slightly better than the long-term average yield of 2.9%.
Shares of PepsiCo closed Friday’s trading session at $136. Using consensus estimates, the stock has a forward price-earnings ratio of 25.5. This compares unfavorably to the stock’s 10-year average valuation of 19.7 times earnings.
PepsiCo’s dividend track record is excellent and should give shareholders comfort that the dividend is likely safe. However, the stock’s valuation is rich and the yield is just slightly ahead of its 10-year average. I am waiting for a better price before adding to my position.
Qualcomm
Qualcomm Inc. (QCOM, Financial) provides integrated circuits for use in voice and data communications. The company’s products are widely used in smart phones, for which it receives royalty payments. The royalty payment business caused a major disagreement with Apple (AAPL, Financial), though the two companies eventually solved the dispute. Sales are expected to reach $21 billion this fiscal year. The stock has a market capitalization of $85 billion.
The company announced at the end of April that shareholders would receive a 4.8% dividend increase for the June 25 payment. This gives the tech giant 18 years of dividend growth in a row. The average increase over the last five years is 9%, so the most recent raise was almost half of what shareholders usually receive. The ex-dividend date is June 3.
The annualized dividend of $2.60 is expected to consume 70% of expected earnings per share of $3.74. Qualcomm’s payout ratio had been below 50% until very recently. The average payout ratio since 2010 is 41%. The stock has a current yield of 3.4%, 80 basis points higher than its 10-year average yield of 2.6%.
Trading at $76 today, Qualcomm has a forward price-earnings ratio of 20.3. The stock has an average price-earnings ratio of 15.7 over the last 10 years. For context, the stock has averaged a multiple of more than 20 times earnings for an entire year only once (2019) over the last decade.
Qualcomm’s yield is attractive, but the valuation is higher than I would be willing to pay for the stock. On a pullback, income investors looking for exposure to the technology industry might find the company an attractive investment.
Final thoughts
The four companies discussed have all increased dividend payments in recent weeks. While each raise was below their respective five-year dividend growth rates, investors should take each increase as a sign that the company’s dividend is safe. Dividend growth is not always guaranteed, especially given the uncertainty regarding the economic impact of the Covid-19 pandemic. Of the companies listed here, only Cardinal Health appears especially attractive, but I am watching the others for a pullback.
What are your thoughts on these stocks? What dividend growth stocks are looking to buy?
Author disclosure: The author is long Apple, Costco and PepsiCo.
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