As a dividend growth investor, I always look forward to companies announcing dividend increases. Three companies that have recently done so have more than 70 years of dividend growth combined.
Brady Corp. (BRC, Financial) manufactures and markets specialty materials that are designed to improve safety, security and performance. The company is composed of two segments: Identification Solutions and Workplace Safety. End markets include telecommunications, manufacturing and construction, among others. Brady has a market capitalization of $2.2 billion and has generated $1.1 billion in sales over the last four quarters. Shares are down almost 27% in 2020.
Brady might be a small company, but it has shown a dedication to growing its dividend over a long period of time. Following a 1.1% raise for the upcoming Oct. 30 payment, the company has now increased its dividend for 35 connective years. The dividend has normally been raised by a penny or two each year for the last 10 years. Dividend growth, as you might expect, has been tiny with a compound annual growth rate of just 1.9% over this period of time.
Shares of the company yield 2.1% as of Friday, which is below the 10-year average yield of 2.5%, but above the average yield of 1.8% for the S&P 500 .
With an annualized dividend of 88 cents and an expected earnings per share of $2.53, Brady has a projected payout ratio of 35%. This compares favorably to the average payout ratio of 46% since 2010 and would tie for a low over this period of time.
Brady's shares closed Friday at just under $42, which gives the stock a forward price-earnings ratio of 16.6. This is below the average price-earnings ratio of 18.7 that the stock has traded with since 2010 according to Value Line.
Brady may not be well known among the average investor, but the company's dividend growth streak is impressive and almost twice as long as the other two names discussed here. This is especially true given that its business is quite cyclical. Shares don't offer much in the way of income, but the stock appears to be undervalued..
With a valuation above $1.5 trillion, Microsoft Corp. (MSFT, Financial) is one of the most valuable companies in the world. The company offers a wide variety of both software and hardware products. The portfolio includes cloud services, operating systems, tools for software development, video games and gaming-related hardware. The company has sales in excess of $143 billion over the last year.
Microsoft announced last week that shareholders would receive a 9.8% dividend raise for the December 10 payment. This is slightly below the 10-year average increase of 12%. The tech giant has now raised its dividend for 19 years in a row.
Despite a recent decline in price, shares of the company are up 27% year to date and 45% for the last year. This has led to a decline in the dividend yield. The yield of 1.2% today is less than half of the 10-year average yield of 2.6%.
The new annualized dividend is $2.24, which is expected to consume 35% of expected earnings per share of $6.46. This is below the average payout ratio of 40% since 2010. The dividend has plenty of room to continue to grow in future years.
If there is a complaint to be made with Microsoft, it is the stock's valuation. Using the most recent closing price of $200, the stock has a forward price-earnings ratio of 31. The 10-year average price-earnings ratio is under 19. That said, the company has really seen its fortunes improve over the last five years or so and this has been reflected in the share price. Even then, the average multiple over the last half-decade is around 22.
Microsoft is the single largest position in my personal portfolio, so I am not looking to buy more of the stock at this point. However, if I was looking to initiate or build a position in the company, I would wait for a further pullback before purchasing Microsoft.
Texas Instruments Inc. (TXN, Financial) manufactures semiconductors and other electronic products. The company's product portfolio includes digital signal processors and analog devices. Texas Instruments' products can convert physical data, like sound or temperature, into digital signals. The company is currently valued at $132 billion and net sales were $13.7 billion over the last 12 months. The stock is up a little more than 8% this year.
Texas Instruments raised its dividend by 13.3% for the Nov. 16 payment. This marks 17 years of dividend growth for the company. The most recent increase is a solid double-digit figure, but trails the annual average increase of almost 21% for the last decade.
The stock now yields 2.9%, which is superior to its decade-long average of 2.5%. It should be noted that this would be Texas Instruments' highest yield since at least 2004 if averaged for an entire year.
The new annualized dividend totals $4.08. With analysts expecting earnings of $5.17 per share for 2020, the projected payout ratio is steep at 79%. This is well above the payout ratio of 46% that the stock has averaged over the last 10 years.
Texas Instruments closed Friday's trading session at $139, which means that the stock has a forward price-earnings ratio of 26.9. This is a premium to the stock's 10-year average price-earnings ratio of 18.5. Like Microsoft, Texas Instruments has become more of a growth stock in recent years, but shares are still expensive against the five-year average multiple of 19.7 times earnings.
While Texas Instruments has the highest yield and gave the largest increase of the names discussed in this article, I would still want to see a better price prior to adding the stock to my portfolio. The high levels of dividend growth have been excellent over the last decade, but the payout ratio gives me pause.
Dividend increases, no matter the size, are always welcomed by income investors. Texas Instruments and Microsoft both gave increases that are approximately 10% or higher, while Brady stuck to its traditional method of raising its dividend by a penny for the year. However, both Texas Instruments and Microsoft trade with a valuation that is considerably higher than either the respective five or 10-year averages. As such, I would not be a buyer of either name just now. Brady trades at a price-earnings ratio that is below its long-term average, which might be appealing to investors looking for value names in the industrial sector.
Disclosure: The author maintains a long position in Microsoft.
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