U.S. Treasury securities have long been considered risk-free investment instruments. However, the Standard and Poor’s downgrade of the U.S. sovereign credit rating back in 2011 has dented the Treasuries’ “risk-free” luster. The credit downgrade has generally increased the cost of credit insurance of U.S. debt against default or other credit event.
This, in turn, has raised to prominence several corporate credit issuers, whose debt is considered to have a lower risk of default or other adverse credit event than U.S. debt. Thus, due to sound financial standing and prudence of a select group of U.S. corporate credit issuers, it now costs less to insure debt of these large corporations than to insure debt of the U.S. government, as measured by the credit default swap (CDS) spreads.
For prudent dividend investors, particularly interesting are dividend-paying companies with sound financial standing, consistent earnings power, and years of dividend growth. Among the reputed S&P Dividend Aristocrats, representing stocks of companies that have raised dividends for at least 25 consecutive years, there is a small group of firms that are considered less risky than the U.S. government, from the point of CDS spreads.
While the stocks of those companies do not necessarily have the highest yields or dividend growth, they can be considered “safe” dividend investments for long-term income investors.
3M Co (NYSE:MMM) has raised dividends for 55 consecutive years. It has a dividend yield of 2.4% and a payout ratio of 37% of the current-year EPS estimate. Over the past five years, the company’s dividend has grown at a CAGR of 3.9%. Since 2003, the company has realized a 6% sales CAGR, 11% EPS CAGR, and an average return on invested capital [ROIC] of 22%. Last year, the company’s EPS expanded by 7%, mainly due to strength in its health care and industrial segments. In the 2013-2017 period, the company targets organic sales CAGR of 4%-to-6%, EPS CAGR of 9%-to-11%, and ROIC above 20%.
Growth will be driven by higher penetration rates in emerging markets, which will boost emerging market sales at a long-term CAGR of 8%-to-12%. 3M Co (NYSE:MMM) also sees its innovation as a major growth driver in the future. Aside from paying dividends as a way to boost shareholder value, the company plans to spend between $7.5 billion and $15 billion in share buybacks in the next five years. Given all these strong attributes, the stock’s price has rallied 23.4% and is currently trading at high valuation levels. Its forward P/E of 15.5x is higher than the average for its respective industry. Last quarter, 3M Co (NYSE:MMM) was popular with value investor Jean-Marie Eveillard’s First Eagle Investment Management (check out this hedge fund’s top picks here
Colgate-Palmolive Company (NYSE:CL) has raised dividends for the past 50 years in a row. It has a dividend yield of 2.3%, payout ratio of 48% of the current-year EPS estimate, and five-year annualized dividend growth of 12.3%. The stock has been known as a defensive growth play. Its growth potential comes from innovativeness and expansion in emerging markets. As a result, emerging market sales now represent more than half of Colgate-Palmolive Company (NYSE:CL)’s overall revenues.
The company targets its sales CAGR of 6%-to-7%, with growth driven by market expansion and innovation through new products, claims, and packaging. The company’s bottom line is expected to grow at a CAGR of close to 10% for the next five years, three times as fast as the forecasted growth rate of the U.S. economy. In the medium term, Colgate-Palmolive Company (NYSE:CL)’s EPS expansion will be supported by costs savings from restructuring and supply chain optimization.
In the long run, Colgate-Palmolive Company (NYSE:CL)’s prospects rest on emerging markets, in which rising per capita incomes will enable an additional 1 billion people by 2020 to buy the company’s products. In terms of valuation, CL is trading at 20.5x forward earnings, representing a small premium to its peer group’s multiple. Last quarter, hedge fund Lansdowne Partners was bullish on Colgate-Palmolive Company (NYSE:CL) (see the hedge fund’s major holdings here