One of my investing strategies for this year is buying shares of companies that are increasing dividends by at least 10%. Dividend growth was muted or paused last year for many companies, so I imagine that management teams giving shareholders a double-digit increase must feel more confident in the company’s business going forward.
As such, we will examine two large-cap stocks whose shareholders just received a double-digit increase.
FedEx
FedEx Corp. (FDX, Financial) is one of the largest transportation and shipping companies in the world. Services offered include overnight and door-to-door delivery of documents and packages. The company is composed of several segments, including Express, Ground and Freight. FedEx has a market capitalization just over $78 billion and generated nearly $79 billion in revenue over the last four quarters.
The company announced a 15.4% dividend increase for the upcoming July 12 payment. This increase is significant not only because of the size, but also because shareholders had received the same amount in dividends for the 12 previous quarters. In doing so, FedEx’s streak of 18 consecutive years of dividend increases ended. Still, the dividend had a compound annual growth rate of 16.3% from 2011 through 2020, showing that increases, when they did occur, were very high.
With a new annualized dividend of $3 and a current share price of $289, FedEx has a forward yield of just 1%. This is below the average yield of 1.4% for the S&P 500, but higher than the stock’s long-term historical average of 0.8%, so the company has never been a very high yielding name.
According to Yahoo Finance, Wall Street analysts expect FedEx to earn $17.98 per share in fiscal year 2021 (the company’s fiscal year ends May 31), which would be a 17.4% improvement from the prior year. Last year was especially fruitful for FedEx as a surge in demand for services related to Covid-19 led to almost 25% earnings growth. To put into perspective just how successful the prior fiscal year was and how good the current fiscal year is expected to be, FedEx saw its earnings compound at an annual rate of 15.1% over the last 10 years.
Using the current share price and analysts’ estimate, shares have a forward price-earnings ratio of 16.1. According to Value Line, FedEx has an average multiple of 15.6 times earnings over the last decade.
On the other hand, GuruFocus’ estimate of intrinsic value, known as the GF Value, shows that FedEx has gotten ahead of itself by a wide margin.
FedEx has a GF Value of $217.65 at the moment, resulting in price-to-GF Value ratio of 1.33. This earns the stock a rating of significantly overvalued. Shares would need to decline almost 25% to trade with the GF Value.
FedEx recently ended its dividend pause in a big way as the most recent raise fell much more in-line with the long-term average. This is a very positive sign, as is the fact that the company performed quite well last year as demand for services skyrocketed during the pandemic. That growth is expected to continue into this year. FedEx is overvalued against its GF Value, but shares are very close to the average valuation seen since 2011. Between the valuation versus its history, improving business fundamentals and a mid-teens dividend raise, I believe FedEx can still be bought at the current price.
UnitedHealth Group
UnitedHealth Group Inc. (UNH, Financial) is a diversified health and well-being company. Products and services are marketed to individuals and the company is composed of four segments, including UnitedHealthcare, OptumHealth, OptumInsight and OptumRx. UnitedHealth Group is valued at almost $378 billion and produced revenue in excess of $257 billion last year.
UnitedHealth Group raised its dividend 16% for the upcoming June 29 payment date, extending the company dividend growth streak to 12 consecutive years. The company has been quite aggressive in growing its dividend as the compound annual growth rate is nearly 23% since 2011. Growth has slowed more recently, but remains strong at 15% over the last five years. The most recent raise comes in just over the medium-term average.
The new annualized dividend amounts to $5.80. The stock trades hands at $391, resulting in a forward yield of 1.5%, which tops the market index average but comes in just under the stock’s 10-year average yield of 1.6%.
UnitedHealth Group is expected to produce earnings per share of $18.57 in 2021, which would be a 10% increase from the prior year. This is fairly close to the stock’s 10-year average earnings per share growth rate of 13.6%.
Shares trade with a forward price-earnings ratio of 21.1 using analysts’ estimates, which is a premium to the long-term average price-earnings ratio of 15.5. Narrowing the view to just the last five years, the multiple has averaged 17.8 times earnings. The current valuation is above this mark, but slightly less so.
GuruFocus finds the stock overvalued relative to intrinsic value.
UnitedHealth Group has an estimated GF Value of $331.94, giving shares a price-to-GF Value of 1.17. The stock is viewed as modestly overvalued and would need to decline 14.7% to reach the GF Value.
UnitedHealth Group’s most recent dividend increase was above its recent average, forecasting leadership’s belief the business is in good shape. Analysts expect the company will post another solid year that is within striking distance of its decade-long earnings growth rate. Both of these are positive signs and lead me to believe that UnitedHealth Group is a quality name to own.
Final thoughts
High dividend growth rates tend to mean the underlying business is performing exceptionally well and the company is likely to continue to do so at least in the near term.
FedEx and UnitedHealth Group are two companies that turned in excellent results last year and are expected to do so again this year. This has allowed both names to provide mid-double-digit dividend increases. While neither name provides much in the way of income, the dividend raises are very generous.
As with FedEx, UnitedHealth Group is trading with a valuation that is above both its long-term average and its GF Value. For value-orientated investors, this might cause them to avoid both names. For those looking for high dividend growth rates to go along with well-run companies, FedEx and UnitedHealth Group should both be considered for purchase.
