The 6 Best Dividend Aristocrats For 2019

Walgreens Boots Alliance is a Dividend Aristocrat. Here, Russ Gremel, 98 of Chicago, Ill. speaks about his decision to donate more than $2 million to the Audubon Society to establish a wildlife refuge, on June 1, 2017 at his home in Chicago. He bought the shares more than six decades ago. (Photo by Stacey Wescott/Chicago Tribune/TNS via Getty Images)Getty

The Dividend Aristocrats Index is made up of just 53 stocks in the S&P 500 that each have 25 or more years of consecutive dividend increases. These are stocks that have proven they can pay rising dividends in a wide variety of market conditions — including the Great Recession, explains Ben Reynolds, CEO and editor of Sure Dividend and regular MoneyShow.com contributor.

The Dividend Aristocrats Index has outperformed the S&P 500 over the last decade, with lower volatility. Over the last 10 years, the Dividend Aristocrats Index has generated annualized total returns of 15.5% versus 14.3% for the S&P 500.

Over the same time period the Dividend Aristocrats Index has annualized volatility of 13.0% versus 13.2% for the S&P 500. While the Dividend Aristocrats Index is filled with high-quality dividend growth stocks, not all are set for strong performance in 2019. Our 6 favorite Dividend Aristocrats for 2019 are analyzed below.

#6) Leggett & Platt

Leggett & Platt is a furniture, bedding and industrial manufacturer. The company was founded in 1883 and has a market cap of $4.2 billion. The company has paid increasing dividends for 47 consecutive years. Leggett & Platt has continued to grow in recent history. The company has compounded its earnings-per-share at 8.2% annually from 2012 through 2017.

Share repurchases have aided growth, with shares decreasing by 1.6% annually over the time period above. Leggett & Platt’s use of both share repurchases and dividend payments shows that this shareholder-friendly company is willing to return capital to shareholders.

The company is expecting earnings-per-share of $2.45 at the median of its guidance for fiscal 2018. This is just below earnings-per-share of $2.46 in fiscal 2017. Sales are expected to grow 8% year-over-year. Weak earnings-per-share guidance numbers are due in large part to lower margins resulting from an increase in material costs and greater promotional activity. While earnings-per-share growth will likely pause in 2018, we expect sustained earnings and dividend growth over the long run from Leggett & Platt.

One catalyst is the recently announced acquisition of Elite Comfort Solutions – a foam bedding provider – for $1.25 billion, more than 25% of Leggett & Platt’s market cap. This large acquisition is expected to have no impact on earnings-per-share in 2019, and be accretive to earnings-per-share in 2020 and onwards.

Overall, we expect Leggett & Platt to grow its earnings-per-share at around 6% per year over the next several years from a mix of share repurchases, organic growth, integration of Elite Comfort Solutions and smaller acquisitions.

Leggett & Platt is currently trading for a price-to-earnings ratio of 14.8 using expected 2018 earnings-per-share of $2.45. The company’s average price-to-earnings ratio over the last decade is near 20. Leggett & Platt looks undervalued at current prices.

Leggett & Platt is undervalued, offers investors a solid 4.1% dividend yield, and has reasonable growth prospects going forward. Additionally, the company’s long dividend history and shareholder-friendly management make future dividend growth likely.

#5)
Cardinal Health

Cardinal Health is one of 3 large pharmaceutical distributors that control the vast majority of the industry in the United States.
McKesson
and
AmerisourceBergen
are its two large competitors. Cardinal Health has increased its dividend for 32 consecutive years and currently has a $15.6 billion market cap.

Cardinal Health posted solid results in its most recent quarter. Sales grew 8% while adjusted earnings-per-share jumped 18%. Operating income declined 11%, but this was more than offset by a 3.8% reduction in share count year-over-year and a significant tax rate decline from 34.2% to 19.4%.

While Cardinal Health has a long history of growth as shown by its excellent dividend record, the company has struggled in recent years.  Adjusted earnings-per-share peaked at $5.40 in fiscal 2017. Fiscal 2018 (the company’s fiscal year ends June 30) adjusted earnings-per-share came in at $5.00. Fiscal 2019 guidance calls for adjusted earnings-per-share of just $5.02.

The company’s weak results have been caused primarily by lower margins in its pharmaceutical distribution segment brought on by pricing pressures from its competitors and pressure for the pharmaceutical industry in general to lower prices. The opioid epidemic and hints that Amazon may be entering pharmaceutical distribution have also weighed on the stock price.

But pessimism has created a buying opportunity in this high-quality Dividend Aristocrat. Shares of Cardinal Health currently offer investors an above-average 3.8% dividend yield. And the stock is trading for a price-to-earnings ratio of just 10.0 using expected fiscal 2019 adjusted earnings-per-share of $5.02. For comparison, the company’s average price-to-earnings ratio going back to 2010 is around 15.

Cardinal Health’s management has taken advantage of low prices, gobbling up 3.8% of shares outstanding over the last fiscal year alone. We expect large share repurchases to continue.

While Cardinal Health is unlikely to return to double-digit growth rates it has seen in the past, we expect earnings-per-share growth of 5.0% after fiscal 2019 driven by a mix of share repurchases and organic growth. The real appeal of these shares is there low valuation and above-average yield, coupled with the safety of a reasonable payout ratio of around 40% and the high likelihood of rising dividends in the future.

#4) T. Rowe Price Group

Like Cardinal Health, T. Rowe Price has a surprisingly low price-to-earnings ratio of just 12.9 using expected adjusted earnings-per-share of $7.15 for fiscal 2018. The company also has an above-average 3.0% dividend yield and a payout ratio of just under 40% using expected adjusted earnings for fiscal 2018.

While T. Rowe is priced like a value stock with an above average yield, the company has generated strong growth. Through the first 3 quarters of fiscal 2018, the company has grown adjusted earnings-per-share by 43.2%.

While a lower tax rate accounted for much of this growth, the company has generated revenue growth and operating income growth of 14.3% and 15.3%, respectively, over the first 3 quarters of fiscal 2018. Adjusted earnings-per-share have grown every year since 2009, more than doubling from 2012 through expected fiscal 2018 numbers.

The pessimism surrounding T. Rowe is likely due to its position in the asset management industry. There are two headwinds for the industry. The first is the growing likelihood of a recession. Asset managers tend to see both fund outflows as customers panic sell, and declining asset values during recessions. This results in typically steeper earnings-per-share declines than the overall market.

While this is true of the industry, T. Rowe actually performed surprisingly well during the Great Recession. Adjusted earnings-per-share only declined 31.3% from highs in 2007 to lows in 2009; and, the company raised its dividend throughout the recession.

The second headwind facing the asset management industry is downward pressure on advisory fees brought about by ETFs and robo advisors. Again, while these are headwinds for the industry in general, T. Rowe has navigated them quite well. Operating margin for the company is up from 43% in 2008 to an expected 47.5% in fiscal 2018. T. Rowe is a top-flight asset manager with a long history of rising dividends that appears undervalued at current prices.

#3)
Walgreens Boots Alliance

Walgreens is the largest retail pharmacy in both the United States and Europe. In the United States, its only competitor of similar size is
CVS Health
(CVS). Walgreens has a market cap of $77.9 billion and has increased its dividend for 42 consecutive years.

What makes Walgreens an exciting investment is its mix of earnings and dividend growth potential, safety and value. The company has compounded its earnings-per-share by 12.5% from 2011 through fiscal 2018. Current CEO (and the company’s largest shareholder) Stefano Pessina took over as CEO in 2015. From 2014 through 2018, Walgreens has compounded its earnings-per-share at 20.0% annually — amazing results for a large cap corporation.

We don’t expect Walgreens to be able to keep up this rapid growth, but we do expect solid growth of 9% annually over the next several years. Growth will be driven by a mix of integration of the
Rite Aid
acquisition, continued share repurchases, and organic growth through new market expansion.

While Walgreens has generated excellent growth since CEO Pessina took the reins, the company is priced as if growth stagnated. The company is trading for just 13.1 times fiscal 2018 earnings, and 12.0 times expected fiscal 2019 adjusted earnings-per-share of $6.55.

In addition to its solid growth prospects and low valuation, Walgreens currently offers investors a dividend yield of 2.2%, which is a bit above the S&P 500’s dividend yield of 2.0%. The draw of investment in Walgreens now is access to one of the best CEOs and management teams around for a bargain price.

#2)
AbbVie

AbbVie is a large biotechnology firm focused on immunology, oncology and virology treatments. The firm was spun off from fellow Dividend Aristocrat
Abbott Laboratories
in 2013, which grandfathers it in as a member of the Dividend Aristocrats. It currently has a market cap of $131.9 billion.

While AbbVie’s stand-alone history is shorter than other Dividend Aristocrats, the company has performed admirably since its spin-off.  Adjusted earnings-per-share and dividends have grown each year since 2013.  Adjusted earnings-per-share have compounded at a 15.6% rate from 2013 through fiscal 2017.

And, the company is expecting 41.3% adjusted earnings-per-share growth for fiscal 2018 based on the midpoint of the company’s guidance. This growth is a mix of operating income growth, share repurchases and substantial savings from a lower tax rate.

While AbbVie’s historical growth and expected growth in fiscal 2018 are excellent, the company is priced as if it were a stodgy low growth enterprise based on its adjusted price-to-earnings ratio of just 10.7 times expected 2018 adjusted earnings. A low valuation has pushed the company’s dividend yield up to 5.0%, making AbbVie one of the most reliable 5% dividend yielding stocks around.

The pessimism surrounding the company is due to the company’s blockbuster success drug Humira losing its patent protection. Despite already falling off the beginning of the patent cliff, Humira sales continue to grow, up 9.8% on an operational basis in the company’s most recent quarter.  Additionally, the company’s solid Humira cash flows allow it to invest in research and development and acquisitions which have bolstered the company’s product pipeline.

#1)
AT&T

Our favorite Dividend Aristocrat today is AT&T. Its dividend yield of 6.6% immediately stands out. And, the company’s dividend is well covered. AT&T’s management expects a payout ratio in the high 50% range for fiscal 2019. AT&T has increased its dividend for 35 consecutive years, showing that it can thrive in a variety of market conditions.

Like the other 5 Dividend Aristocrats on this list, AT&T appears undervalued. The company’s average dividend yield during the worst year of the Great Recession in 2009 was 6.4%. With a 6.6% yield now, AT&T is trading at recession level prices.

Pessimism surrounding AT&T is due in part to its large debt load thanks to the company’s acquisitions of DirecTV and
Time Warner
. The company expects to have a debt-to-EBITDA ratio of ~2.8x at the end of fiscal 2018, and 2.5x at the end of fiscal 2019.

The debt level is sustainable now and the company has extra cash flows to reduce debt further. AT&T is expecting operating income minus capital expenditures of $26 billion in fiscal 2019 against interest expenses of roughly $8.5 billion. Management is committed to deleveraging with excess cash flows.

While recent large acquisitions have increased debt, they will also generate cost savings (meaning higher margins and more earnings) as acquisitions are integrated.  The combination of reasonable growth prospects, a high yield, and a deeply undervalued stock make AT&T our number one pick among Dividend Aristocrats today.

 

source: forbes.com