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Stock Screen: Dividend Growth with Low Risk – November 1, 2010
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:
McDonald's Corporation (MCD – Free Analyst Report) is a quick service restaurant with over 32,000 locations in more than 115 countries. The majority of the restaurants (over 80%) are operated by franchisees. The company is best known for its hamburgers and French Fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks
The company is coming off of a strong third-quarter performance in which it earned $1.29 a share, a few pennies higher than our $1.25 estimate and up 12% year to year. Solid margins and a 4% increase in overall sales (versus our forecast of a 3% advance) helped deliver the earnings gain.
Moreover, comparable-store sales were strong in the September period, jumping 6.0% on a global basis. At home, sales were driven by the nationwide promotion of the company's recently released McCafe Frappes and Smoothies. Classic meals and sandwiches, along with the value-oriented Dollar Menu lured diners to McDonald's. Value was a big theme overseas, as well, though expanded hours, reimaged restaurants, and limited-time offers also helped.
Looking ahead, the company appears well positioned to deliver another round of strong earnings in the fourth quarter. Management indicated that October got off to a strong start, and we believe that comparable-store sales were likely up in the 5%-6% range last month.
Conservative investors should like McDonald’s top-scores for Safety (1), Financial Strength (A++), and Price Stability (100). Too, the company has a long history of annual dividend increases, a trend that we expect to continue going forward.
Intel Corporation (INTC – Free Analyst Report) is a leading manufacturer of integrated circuits. In addition to primarily supplying manufacturers of personal computers, the company serves a multitude of other global markets, including communications, industrial automation, military, and other electronic equipment. Intel’s product line consists of microprocessors, with the Pentium series being the most notable. It also manufactures microcontrollers and memory chips. The company also sells computer modules and boards, and network products.
Intel reported strong results for the third quarter of 2010. In all, the company earned $0.52 a share on sales of just over $11.1 billion for the interim, which compared favorably to last year's figures of $9.4 billion and $0.33 a share, respectively. The result was also a little better than what we had estimated. Microprocessor unit sales hit a record for the quarter, thanks to healthy demand on the Enterprise (corporate) side, along with increased demand in emerging markets. The Enterprise group remained strong, as corporations continued to replenish their IT-related needs. Also, inventories in the enterprise channel appear to be at a healthy level. These factors helped to offset sluggish results on the consumer side.
The news is fairly positive for the December quarter as well. Management believes that revenues will be $11.4 billion (plus or minus $400 million), which equates to a sequential improvement of about 3%. This comes despite the probability of continued softness in the consumer segment, coupled with customers reducing inventories in anticipation of the Sandy Bridge (its next-generation chip that combines central processing and graphical functions) launch in the first quarter of 2011.
Like McDonald’s, Intel stock offers a generous dividend yield and garners our Highest mark for Safety. Moreover, the company has a strong balance sheet that earns it a top score for Financial Strength.
Abbott Laboratories (ABT) is a drug company that operates four business segments: Pharmaceutical Products (53.6% of 2009 sales) develops, manufactures, and sells a broad line of adult and pediatric pharmaceuticals, which are sold primarily on the prescription, or recommendation, of physicians; Diagnostic Products (11.6%) offers diagnostic systems and tests for blood banks, hospitals, labs, physicians’ offices, etc.; Nutritional Products (17.2%) sells a wide range of adult and pediatric nutritional products; and Vascular products (8.8%) markets coronary, vessel-closure, and endovascular devices.
Abbott also had a strong third quarter. Excluding nonrecurring items, the company earned $1.05 a share in the September period, in line with our forecast and up 14% from the year-earlier period. A 12% increase in sales and wider margins fueled the advance.
Abbott has been aggressive on the acquisition front of late, keeping with a broader trend in the drug industry. The company’s purchases of Piramal and Solvay have strengthened its position in key international markets. Indeed, Value Line analyst Joel Schwed notes that international sales growth has significantly outpaced U.S. growth, and an increased mix of international sales should compensate for any further softening in the domestic business.
This is another blue-chip company with a strong balance sheet and a generous dividend yield that is well covered by Abbott’s impressive cash flow. Annual dividend increases are common.
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.