Companies with long histories of dividend growth are often favored by those looking for income from their investments. In this article, we will examine three companies that have achieved the title of at least Dividend Aristocrats, meaning that they have at least 25 years of dividend growth, are in the S&P 500 and meet certain trading, market capitalization and liquidity requirements. There are only 65 companies meeting these requirements in the market.
Each stock in this article also trades below its GF Value Line, a unique intrinsic value estimate from GuruFocus that incorporates the following factors:
- Historical multiples, including price-earnings and price-to-free-cash-flow.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
3M Company
3M Company (MMM, Financial) is a diversified manufacturer and technology company that operates in 70 countries around the world. The company produces products used in various end markets such as industrial, healthcare, consumer and electronics. 3M is currently valued at $95.5 billion and has annual sales in excess of $32 billion.
3M has one of the more storied dividend growth histories, having raised its dividend for 62 consecutive years. This qualifies 3M as a Dividend King, which are those companies that have raised their dividends for at least 50 consecutive years. There are just a handful of companies with a longer track record for growing dividends. 3M raised its dividend 2.1% for the March 12, 2020 payment, well below the 10-year annual average increase of 10.6%. If the company sticks with its usual schedule, a dividend increase will likely be announced early next month.
With an annualized dividend of $5.88, shares of 3M yield 3.6% at the moment. The stock has averaged a yield of 2.6% over the last 10 years, a full percentage point below the current yield. The higher than usual yield was one reason I added to my 3M position at the end of October.
According to Yahoo Finance, analysts expect 3M to earn $8.51 per share in 2020, which would be a 6.5% decrease from the previous year. This gives 3M a projected payout ratio of 69%, which compares unfavorably to the 10-year average payout ratio of 47%. The higher payout ratio is likely one reason for the much lower than usual dividend increase. I am not terribly concerned with the stock's elevated payout ratio given that 3M has raised its dividend for more than six decades. I do expect dividend growth to be on the low side until earnings per share growth returns.
Shares closed the most recent trading session at $165.55, giving 3M a price-earnings ratio of 19.5 when using analysts' estimates for the year. The stock has traded with an average price-earnings ratio of 18.4 over the lase decade, but an average price-earnings ratio of 20.9 over the last five years. 3M is trading at a slight discount to its GF Value:
With a GF Value of $181.94, 3M has a price-to-GF Value ratio of $0.91. GuruFocus assigns a rating of fairly valued to 3M. Shareholders would see a return of 10% if the stock were to trade with its GF Value. The dividend would push total returns to the mid-double-digit range.
3M is a favorite amongst dividend growth investors for its lengthy history of dividend growth. Few names in the market can match this streak despite the company operating in a cyclical sector of the economy. The stock's current yield is superior to its 10-year average and shares offer solid upside using the GF Value. I continue to rate 3M as a buy for the long-term.
Leggett & Platt, Incorporated
Leggett & Platt, Incorporated (LEG, Financial) manufactures engineered products, including those used for bedding components, residential and office furniture, store fixtures, specialty wire products and auto seating suspensions, among others. The company has a market capitalization of $5.8 billion and generated $4.8 billion of revenue in 2019.
Leggett & Platt has a rich history of dividend growth as well. The company has increased its distributions for 49 consecutive years, which puts it just one year away from achieving Dividend King status. It should be noted that the company did not raise its dividend in 2020. Leggett & Platt raised its dividend 5.3% for the April 15, 2019 payment. The dividend has compounded at a rate of 3.9% per year over the last decade. An increase anytime in 2021 would allow the company to maintain its dividend growth streak.
The stock's annualized dividend of $1.60 equates to a yield of 3.7% today. This is just below the 10-year average yield of 3.8%.
Analysts expect the company to produce EPS of $2.07 in 2020, which would be a drop of 19.5% from the previous year. The expected payout ratio is 77%. For context, Leggett & Platt has had an average payout ratio of just under 70% since 2010. This could explain the lack of a dividend raise in 2020 and is something to keep an eye on going forward. That said, companies don't grow dividends for nearly 50 years on accident. Leggett & Platt has experienced difficult economic conditions before and still increased the dividend.
Leggett & Platt has a forward price-earnings ratio of 21.1 using Friday's closing price of $43.71 and expected EPS for the year. This is a premium to the 10-year average price-earnings ratio of 18.6, but the stock trades at a discount to its GF Value:
Leggett & Platt has a GF Value of $50.43, meaning that the current price-to-GF Value ratio is 0.87. This results in the stock earning a modestly undervalued ranking. Reaching the GF Value would result in a share price gain of 15.4%. Add in the stock's dividend yield and total returns could be as high as 19%.
Leggett & Platt is another company that has raised its dividend over a very long period of time even as its business can be considered cyclical. This is evidence of a company that has traditionally been well managed. The lack of a dividend in 2020 might be a warning sign, but I believe the company's track record is solid enough to give it the benefit of doubt. Investors who agree could be rewarded with a very strong total return.
People's United Financial, Inc.
People's United Financial, Inc. (PBCT, Financial) provides commercial and retail banking and wealth management services to clients through its network of 450 branches and 607 ATMs. The company has operations in six northeast states, including in Connecticut, Massachusetts and southeastern New York. People's United Financial has a market capitalization of greater than $6 billion and has annual revenues of $1.9 billion.
The company has increased its distributions to shareholders for 28 consecutive years, the most recent raise growing the dividend by 1.4%. This is a very low increase, but matches the company's compound annual growth rate of 1.4% for the last 10 years. Shareholders have received a penny per share increase since 2010.
People's United Financial has an annualized dividend of 72 cents, giving the stock a current yield of 5%. This compares favorably to the 10-year average yield of 4.4%. If the stock were to average the current yield for an entire year, it would be the highest annual average since 2012.
The company's EPS for 2020 is expected to decline 11.5% to $1.23, resulting in a projected payout ratio of 59%. People's United Financial's long-term average payout ratio includes several years where the payout ratio was above 100%. The five-year average payout ratio is 66%, so the projected payout ratio for 2020 is better than usual.
People's United Financial closed Friday at $14.42. Based off of analysts' estimates for the year, shares have a forward price-earnings ratio of 11.7. This is a steep discount to the stock's 10-year average price-earnings ratio of 17.5, though the three-year average multiple of 15.3 times earnings might be more instructive. Presently, the stock is also trading much lower than its GF Value:
The stock has a GF Value of $17.02. This gives People's United Financial a current price-to-GF Value ratio of 0.85, earning the stock a rating of modestly undervalued from GuruFocus. Investors buying at the current price could be looking at an 18% gain if the stock were to trade with its GF Value. The total return moves into the low 20% range when factoring in People's United Financial's dividend yield.
People's United Financial likely isn't the first name investors think of when considering an investment, but the company has almost three decades of dividend growth and provides a higher than usual yield. The stock is also the most undervalued compared to its GF Value among the names discussed in this article. Investors looking for a regional financial could do well owning People's United Financial.
Final thoughts
The Dividend Aristocrats are an exclusive group of companies that have increased dividends for a least a quarter of a century. 3M, Leggett & Platt and People's United Financial each trade below their GF Value and have the potential to offer at least a low double-digit total return. Investors looking for high quality companies offering growing distributions could do well with each of these stocks, in my view.
Author disclosure: the author has a long position in 3M.
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