There are two income mutual funds that pursue stocks of companies with solid dividend payout ratios and consistent dividend growth of at least 5 years in a row. These funds are ASTON/River Road Dividend All Cap Value Fund (ARDEX)(ARIDX) and ASTON/River Road Dividend All Cap Value Fund II (ADVTX)(ADIVX). The two funds have similar compositions. The first fund is closed to new investments, but the second remains open to new money. More information about the featured funds, including their expense ratios, performance statistics, and holdings, can be found at the links to Fund I and Fund II. The first fund has achieved alpha of more than 3% for its two share classes over the past three years.
The two featured funds target companies with dividend yields of 3% or more, boasting financial strength through a significant free cash flow and reasonable debt. Their picks represent companies with “sustainable, predictable, and understandable business models” and shareholder-friendly management. At the time of inclusion into the funds, all selected stocks had a minimum 15% discount to the estimates of their absolute values. Seeking stocks of companies with these qualities, we took a look at five of the top 10 holdings in the alpha-generating ASTON/River Road Dividend All Cap Value Fund. The selection includes some value stocks with strong income potential and the capacity for capital appreciation in the future.
Automated Data Processing (NASDAQ:ADP), a payroll processing and business outsourcing company, has a dividend yield of 2.9%, a payout ratio of 60% of the current-year EPS estimate, and five-year annualized dividend growth of 10.7%. The company is an S&P Dividend Aristocrat with 38 consecutive years of dividend growth. It is also one of the companies raising dividends by a minimum of 10% annually over at least the past 10 years. Analysts forecast the company’s long-term EPS CAGR at 9.8%, about the same as over the past five years. ADP recently beat EPS estimates by a penny on the back of nearly 7% year-over-year revenue growth. It guided in line with the fiscal year 2013 consensus estimate on both EPS and revenues, expecting both top- and bottom-line growth of between 5% and 7% year-over-year.
The ensuing improvement in the U.S. job market will bode well for the company, which has proven to be highly resilient to downturns, sustaining average profitability and dividends even in dismal macroeconomic settings. The stock is somewhat pricey, trading at 20.1x its forward earnings, on par with its main rival Paychex, Inc. (NASDAQ:PAYX). First Eagle Investment Management held more than $191 million in ADP stock at the end of the third quarter of 2012.
BlackRock, Inc. (NYSE:BLK), the world’s largest asset manager, has a dividend yield of 2.8%, a payout ratio of 43% of the current-year EPS estimate, and five-year annualized dividend growth of nearly 24%. The company recently reported financial results that beat analyst expectations amid revenue growth and the expansion in assets under management. As the equity ETF-heavy asset manager, BlackRock has greatly benefited from the recent flood of inflows into equity funds. In the long run, the secular shift into passively-managed funds will be a catalyst for Blackrock’s robust growth, with the firm’s EPS CAGR forecasted at 12.0% annually for the next five years.
Over the past three months, the company has seen upward EPS estimate revisions for both 2013 and 2014 by 3.5% and 4.7%, respectively. The stock is trading at a new multi-year high, and the company has just raised its dividend by 12%. According to Investor’s Business Daily reporting, “the number of U.S. mutual and hedge funds with a stake (in BLK) has increased for eight quarters in a row.” The stock is trading at 15.1x forward earnings, about on par with its respective industry. BLK was popular with Highfields Capital’s Jonathon Jacobson in the third quarter of 2012.
Intel Corporation (NASDAQ:INTC), the world’s largest chip maker, has a dividend yield of 4.2%, a payout ratio of 46% of the current-year EPS estimate, and five-year annualized dividend growth of nearly 13.0%. The company has fared well, posting a modest revenue decline last year, despite a deep secular decline of the PC market. Still, a projected recovery in the chip market in 2013, with semiconductor revenue rising 4.5%, according to research firm Gartner, will improve Intel’s prospects. In the long-term, the company is expected to see the EPS CAGR of 9.6%, but its success will hinge on its ability to prosper in the mobile market.