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Stock Screen: Dividend Growth with Low Risk - July 13, 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 7% 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 3.0%, 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, several of which are Dow 30 components. Here are some highlights:
Genuine Parts Company
Genuine Parts Company (GPC) distributes auto parts throughout North America. Its primary business is automotive replacement parts (50% of 2010 sales), which it operates via its NAPA and Mitchell Repair Information franchises. It also distributes industrial replacement parts in the United States and Canada through its Motion Industries subsidiary (31%). S.P. Richards Company, the Office Products group, distributes business products in the U.S. and Canada (15%) and the Electrical/Electronic group (4%), EIS, sells electrical and electronic components in the U.S., Canada, and Mexico.
The company has been a poster child for steady dividend growth over its history. It has increased its annual payout even in tough times, such as 2009 when earnings hit a snag and declined by 14%. Much of this can be attributed to the diversified portfolio of businesses, which acts to insulate it from downturns of any severity. As a result, Genuine Parts has been able to generate relatively steady cash flow and provide investors with a safe investment alternative.
And the outlook appears bright. Management was able to right the ship and get growth back on track last year. It appears as if 2011 will be an especially strong year, with a slowly improving economy fueling another double-digit earnings gain. This, coupled with a healthy war chest of cash, ought to be to the liking of risk-averse, income-seeking investors.
Raytheon Company (RTN) represents the late-1997 merger of (old) Raytheon Co. and the defense electronics business of Hughes Electronics Corp. This corporation is a major global provider of ground-based air defense systems, air intercept missiles, airborne and ground-based radar systems, communications and other military systems, and is an important producer of electronics-based aerospace and defense products. The United States government is the company’s largest customer, accounting for 88% of total sales in 2010.
Not historically as attractive as the aforementioned “old” Raytheon stock in terms of yield, the new Raytheon has stepped up its game of late. Indeed, it was the top-yielding stock of the three reviewed in this writing at the time this report was released. The company seems to have placed a great emphasis on improving shareholder returns, and Value Line analyst Ian Gendler expects this trend to continue. Gendler forecasts that Raytheon will continue to use strong cash flow and its large cash hoard to buy back stock and increase the dividend. With a Financial Strength rating of A++, Raytheon is as financially sound as they come, and remains a solid risk-adjusted option for those seeking to bolster the income stream of their portfolios.
Novartis AG (NVS) is a major Swiss-based pharmaceuticals and health care company. Sales by business category for 2010: Pharmaceuticals, 65%; Generics (Sandoz), 18%; Consumer health, 12%; Vaccines and Diagnostics, 5%. Major therapeutic area: hypertension. Major products include Diovan, Lotrel, Gleevec, Zometa, Neoral, Femara, Sandostatin, Lamisil, and Zelnorm.
Value Line analyst Jeremy Butler likes what he sees here. The recent acquisition of the remainder of Alcon gives the company the largest eyecare operation in the world. That business carries a relatively high margin and is expected to be accretive to the tune of $0.15 a share this year. Although there was some disappointing news on the drug front, there were some bright notes as well. Indeed, Merck’s decision to withdraw its oral multiple sclerosis medicine, Cladribine (due to the FDA’s safety concerns), has presented Novartis with a golden opportunity, considering its MS drug, Gilenya is the only oral option currently available on the market.
These opportunities, along with a solid balance sheet, speak volumes about Novartis’ financial health and the company’s future. Although drug development is an expensive and risky industry, a diversified business model alleviates some of the risk, and should allow for ample dividend growth out to mid-decade.
To see all 15 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.