One of my favorite investing strategies is to buy shares of companies that raise dividends by at least 10%. Double-digit dividend growth can be a sign that a company believes its business is set to improve in the near term.
I feel that this is appropriate now more than ever as dividend increases were muted amid the uncertainty of last year's operating environment due to the Covid-19 pandemic.
In this article, we will take a look at three companies that recently increased dividends by at least a double-digit percentage in order to see if they could make attractive investments.
Otis
Otis Worldwide Corporation (OTIS, Financial) was spun off from United Technologies in April of last year. Otis, which can trace its origins back to 1853, is one of the world's leading elevator and escalator manufacturing companies. Otis is valued at more than $30 billion and produced revenues of nearly $13 billion in 2020.
Shareholders received a 20% dividend increase for the upcoming June 6 payment. Including the time the company was part of United Technologies, Otis' dividend growth streak now numbers 27 years. Using the new annualized dividend of 96 cents, Otis has a current dividend yield of 1.3%, slightly below the average yield of the S&P 500.
According to analysts surveyed by Yahoo Finance, Otis is expected to earn $2.74 per share this year, resulting in a projected payout ratio of 35%, which is in-line with the average payout ratio that United Technologies had from 2011 through the spinoffs. Expected earnings per share would be a 9% improvement from 2020 if achieved.
Otis closed Friday's trading session at $71.28, giving the stock a forward price-earnings ratio of 26. Using United Technologies as a guideline, the average price-earnings ratio over the last decade was 16.3. Shares do look expensive compared to this historical multiple.
Otis benefits from its leadership position in elevators and escalators, a business that tends to perform well when the economy is expanding and new construction is taking place. The company has an aftermarket business that provides for the maintenance and upkeep of already installed products. This is a higher margin business. Otis also has nearly three decades of dividend growth dating back to its pre-spinoff days. Shares are not cheap, but investors looking for exposure to the industrial sector might find the business model and dividend growth history attractive enough to buy Otis on a pullback.
Parker-Hannifin
Parker-Hannifin Corporation (PH, Financial) is a global leader in the manufacturing of motion and control technologies and systems. The company's precision-engineered products are used in a variety of end markets, including aerospace, commercial, industrial and mobile. Parker-Hannifin generated $13.7 billion of revenue in fiscal year 2020 (the company's fiscal year ends June 30) and is currently valued at just over $41 billion.
The global pandemic weighed heavily on Parker-Hannifin's results last year, but the company maintained its dividend. In fact, shareholders have received the same payment for eight consecutive quarters.
That changed in a significant way when the company announced a 17% increase for the June 4 payment date. Parker-Hannifin has now increased its dividend for 65 consecutive years, a streak just a handful of other names can beat. Double-digit dividend growth is something that investors have come to expect from the company as Parker-Hannifin's dividend has compounded at a rate of 11% annually since 2011. Parker-Hannifin yields 1.3% as of the most recent close, below its 10-year average yield of 1.9%.
Analysts expect the company to earn $14.19 per share in the current fiscal year, which would be a 32% increase from the prior year. With an annualized dividend of $4.12, the payout ratio would be just 29%, matching the 10-year average payout ratio.
Parker-Hannifin closed the most recent session at $318.12, resulting in a forward price-earnings ratio of 22.4. For context, the average price-earnings ratio is just over 15 for the last decade.
Following a difficult fiscal year, Parker-Hannifin is projected to see a much improved fiscal 2021. Earnings per share are seen as increasing at a substantial rate. Adding to this is the company's most recent dividend increase, which is considerably higher than even its long-term average. Shares aren't cheap as a result of investor enthusiasm for the company, but Parker-Hannifin has proven itself over the long haul as it has navigated multiple recessions and still grown its dividend. The low payout ratio shows that leadership has prudently managed its dividend. On a pullback, Parker-Hannifin's strong business model and dividend growth track record will likely be appealing to investors searching for safe and reliable income.
Whirlpool
Whirlpool Corporation (WHR, Financial) is a leading provider of home appliances, including refrigerators, freezers, washers, dryers and cooking appliances. The company has 13 major brands and sells products in a dozen countries. Whirlpool had revenue of $19.5 billion last year and has a market capitalization of $15 billion.
The pandemic also impacted the company's results in the first half of last year, but Whirlpool returned to growth in the second half of 2020. That strength accelerated in the most recent quarter, as sales were up almost 24% year-over-year.
In response, Whirlpool increased its dividend 12% for the June 15 payment date. The company has 11 consecutive years of dividend growth and has a dividend CAGR of 10.9% since 2011. Shares now yield 2.3% compared to the 10-year average yield of 2.6%.
Whirlpool is expected to see earnings per share grow 18% to $21.86 this year. With a new annualized dividend of $5.60, the stock has a projected payout ratio of 26%, just under the long-term average payout ratio of 27%.
With the stock trading at $238.94, Whirlpool has a forward price-earnings ratio of 10.9. Since 2011, shares have traded with an average price-earnings ratio of 11.
Whirlpool enjoyed a nice recovery towards the end of last year that has continued thus far into 2021. Earnings per share are expected to grow at a high double-digit rate this year and the company increased its dividend at an above average rate. Even so, shares trade in-line with their long-term average valuation. Therefore, Whirlpool could be an excellent option for those looking for growth at a reasonable valuation.
Final thoughts
Double-digit dividend growth, especially after a difficult period last year, could be a sign that a company expects its future prospects to improve. Otis, Parker-Hannifin and Whirlpool have all announced dividend increases of at least 12% recently. All three are well-run companies that have very low payout ratios, which should give investors peace of mind that the dividend is likely to see future growth.
Otis and Parker-Hannifin are solid businesses with long dividend growth track records, but these stocks would be much more attractive at a lower price. Of the three stocks discussed in this article, only Whirlpool is trading below its 10-year average price-earnings ratio, making it the one stock I would consider adding to my portfolio at the moment.
Author disclosure: the author has no position in any stock mentioned in this article.
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