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Stock Screen: Dividend Growth with Low Risk – April 6, 2011
In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project to continue providing investors with dividends that are likely to increase at above-average rates.
We began our search with stocks whose dividends have advanced at a compounded annual rate of at least 5% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 7% over the next three to five years. We also set a minimum estimated yield for the year ahead of 3.4%, which is 100 basis points (100 basis points equals one percentage point) higher than the current median for all dividend-paying stocks under our review.
We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better), two of Value Line’s many proprietary ranks. Companies whose shares earn high marks for these metrics generally will fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.
The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that have and are likely to advance at a rate exceeding the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Indeed, other industries, such as healthcare, had a strong showing. Not surprisingly, our list is dominated by large-cap industry leaders. Here are some highlights:
ConocoPhillips (COP) is an integrated energy and petrochemicals company with operations worldwide. The company derives revenues from four primary sources: Refining and Marketing (72% of 2010 sales) Exploration & Production (23%), Midstream (4%), and Chemicals/Emerging Businesses (1%). The company also has a 20% ownership stake in LUKOIL, an international integrated oil and gas company with headquarters in Russia.
The oil and gas company has several things going for it at present, most notably rising commodity prices. This inflation is partly attributable to concerns about supplies in the Middle East. In addition, recent divestitures and a focus on higher-margined projects should facilitate healthy earnings advances over the next two years. In particular, ConocoPhillips intends to focus on the Exploration & Production segment. In fact, it has allocated 90% of its capital spending to this unit in 2011.
The company’s board of directors recently raised the quarterly dividend 20%, to $0.66 a share. Regular dividend hikes are not uncommon, and the healthy balance sheet and strong cash flow should support ongoing dividend increases.
Genuine Parts Company (GPC) is a distributor of automotive replacement parts in the United States, Canada, and Mexico. The company also distributes industrial replacement parts, office products, and electrical/electronic materials. It owns and operates automotive parts distribution centers and stores under the NAPA name. Additionally, the company’s four operating segments (Automotive, Industrial, Office Products, and Electrical) serve multiple industries such as food, forest products, paper, and mining.
Value Line analyst Andre Costanza estimates that Genuine Parts will realize double-digit earnings growth over the next two years. His sanguine outlook stems from a more favorable economic picture, which should lead to less budgetary constraints on consumers than in the recent past. Furthermore, the company’s Office Products segment may well be the biggest beneficiary of improved macroeconomic conditions if unemployment levels continue to decrease. In addition, recent acquisitions are expected to boost top- and bottom-line growth.
The company generates strong cash flow and its manageable debt balance adds to its ability to pay a generous dividend. Indeed, management recently instituted a 10% dividend increase (the new quarterly distribution is $0.45 a share).
Waste Management (WM) is the largest solid waste company in North America. It provides integrated waste management services and offers collection, transfer, recycling, disposal, and waste-to-energy services. Its 2010 revenue breakdown consisted of collection (66% of sales), landfill fees (20%), and waste-to-energy/recycling/transfer stations (14%). The company also rents portable restroom facilities to municipalities and commercial customers and provides services on behalf of third-parties that intend to construct waste facilities.
The company’s top and bottom lines are set to advance modestly over the next two years. Price increases and a more favorable economic backdrop will likely be beneficial. That said, some hindrances may be experienced from integration costs associated with a recent acquisition, as well as a decline in customers since Waste Management severed ties with some of its lower-margined accounts.
Income-oriented investors may find this equity well-suited to their portfolios because of its attractive dividend yield. What’s more, the board of directors recently increased the quarterly dividend payment to $0.34 a share. The 8% hike reflects consistent annual increases since the mid-2000’s.
To see all 11 companies that our screen came up with, complete with Timeliness, Safety, and Financial Strength ratings, subscribers can click here. As usual, we advise investors to carefully review both full-page and supplementary analyses in our Ratings & Reports before making commitments to any of the equities on the list of stocks produced by our screen.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.