While many investors are mostly concerned with the ups and downs of the share price, dividend growth investors' primary concern is generating enough income to cover expenses. Reaching that milestone requires annual dividend growth. In this article, we will take a look at three companies that have recently raised their dividend payments.
Target
Target Corp. (TGT, Financial) is one of the largest discount retailers in the world. The 118-year-old company sells consumer products and groceries in its nearly 1,900 stores. Besides its “big box” store types, Target also has smaller stores in urban areas that are tailored to consumer tastes. The company trades with a market capitalization of $59 billion as of June 11.
Target raised its dividend by 3% on Thursday. Investors who want to capture the dividend raise for the Sept. 10 payment will need to own the stock prior to the ex-dividend date, which is Aug. 18. The company now has a dividend growth streak that numbers 53 years in a row, which qualifies Target as a Dividend King. There are only a handful of companies in the entire market place with at least 50 years of dividend growth.
The company’s dividend has a compound annual growth rate of 3.7% over the past five years and 12% over the past decade. Dividend growth is obviously slowing, but the growth streak remains impressive. Shares yield 2.3% as of Thursday’s close compared to the stock's average yield of 2.8% since 2010.
Following the increase, the new annualized dividend is $2.72. Using Wall Street analysts' EPS estimates of $5 for the year, Target has a payout ratio of 54%, which is higher than the 10-year average payout ratio of 41%. The expected payout ratio isn’t at a level where a dividend cut is very likely.
Shares of Target closed Thursday at $118, giving the stock price-earnings ratio of 23.6. Over the last decade, the stock has averaged a price-to-earnings ratio of 14.8.
Target is overvalued at the moment when using either dividend yield or the price-earnings ratio against its historical averages. The company’s dividend growth streak speaks for itself, but I am waiting for a pullback before adding to my position in Target.
UnitedHealth Group
UnitedHealth Group Inc. (UNH, Financial) is a diversified health company. UnitedHealth has four distinct business segments: UnitedHealthcare, which provides network-based health care benefits to individuals, companies and Medicare and Medicaid beneficiaries; Optum, which works to lower healthcare costs and improve patient outcomes; OptumInsight, which uses data and analytics to assist participants in the health care sector; and OptumRx, which provides pharmacy care services. UnitedHealth traces its history back to 1974. It currently has a market cap of $269 billion.
UnitedHealth raised its dividend by 15.7% for the upcoming June 30 payment. The ex-divided date is June 19. This marks the 11th consecutive year of dividend growth for the company. UnitedHealth has compounded its dividend at an annual rate of 26% over the past 10 years. The stock offers a current dividend yield of 1.8%, which compares favorably to the average yield of 1.5% that the stock has had since 2010.
Using the annualized dividend of $5 and the midpoint for the company’s EPS guidance for the year of $16.50, UnitedHealth has a payout ratio of 30%. This is above the 10-year average payout ratio of 22%, but not dangerously so. UnitedHealth’s dividend should be considered safe even if EPS were to suffer a severe decline.
Based off the most recent closing price of $283.73 and EPS estimates for 2020, UnitedHealth has a forward price-earnings ratio of 17.2. The 10-year average price-earnings ratio is 14.6. EPS growth has accelerated over the last five years which has led to the market applying a higher multiple to the stock. The average price-earnings ratio is 18.1 over the past five years.
UnitedHealth’s current yield offers is a bit more generous than its long-term average, but income-oriented investors may not care for the yield. Dividend growth has been quite strong these last 10 years. That said, EPS growth in recent years has been rewarded with a higher multiple. As such, UnitedHealth looks slightly undervalued today, in my opinion.
Universal Health Realty Income Trust
Universal Health Realty Income Trust (UHT, Financial) is a real estate investment trust, or REIT, that focuses on buying and developing properties for use in the healthcare sector. The trust’s portfolio includes medical office buildings, acute care hospitals, rehabilitation hospitals and childcare centers. Overall, the trust has 69 properties spread out over 20 states. Universal Realty has been in existence since 1986 and the trust trades with a market capitalization of $1.2 billion as of June 11.
Universal Health raised its dividend 0.73% for its June 30 payment date, with an ex-dividend date of June 15. The trust has an impressive dividend growth history, having now increased its dividend for 35 consecutive years. This little-known real estate company has the second longest dividend growth streak among all the names in the real estate sector. Universal Health has raised its dividend by just 1.2% over the last 10 years. The annualized dividend of $2.76 gives the stock a 3.1% yield today, well below the average yield of 5% that shares have offered over the last decade.
Universal Health is projected to generate $3.35 of funds from operation, or FFO, in the current fiscal year, which means that the trust’s dividend is estimated to have a payout ratio of 82%. It is not unusual for REITs to have a high payout ratio, as they are required by law to payout out least 90% of income in the form of dividends. Universal Health does indeed have a high historical payout ratio, averaging 88% since 2010. However, the expected payout ratio is actually below the long-term average. In fact, the payout ratio has generally improved since 2011, where dividends accounted for 94% of FFO. Since then, the general direction of the payout ratio has been lower, hitting 81% last year. Still, I expect that Universal Health will continue its recent trend of raising its dividend $0.01 per share per quarter in the coming years as the payout ratio remains high.
Shares of Universal Health closed the most recent session at $88.80. Using expected FFO for the year, the stock has a forward price-to-FFO ratio of 26.5. Since 2010, the average price-to-FFO has been 19.5.
Universal Health’s dividend growth streak is impressive. The stock’s yield is quite low against its own historical average. The valuation is also very rich. I respect the company’s dividend growth streak, but I am staying on the sidelines when it comes to Universal Health.
Final thoughts
The market may move up or down, but those investors focused on growing dividend income look forward to the next dividend increase. The three stocks discussed in this article have recently raised dividends and have an ex-dividend date coming soon.
That doesn’t mean investors should rush in and buy these names at the current prices. Of the three discussed here, I feel that only UnitedHealth could be bought at the current price, but would wait for a pullback in both Target and Universal Health.
Author disclosure: The author has a long position in Target Corporation.
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