Market-beating strategies are inherently hard to find. Based on the evidence from several major developed markets, dividend growth was the single largest contributor to nominal stock market returns over the past 40 years, according to Société Générale.
An exclusive club
A small group of companies pursues a policy of boosting shareholder value through consistent annual dividend increases for decades. Among the stocks with the longest streaks of consecutive dividend growth, the following five companies yielding more than 2% celebrate 40 years or more of dividend growth. Four of the featured stocks are constituents of the S&P 500 Dividend Aristocrats Index, while only one is a small-cap water utility stock.
Let’s get started
AbbVie Inc (NYSE:ABBV) is a research-based pharmaceutical company that spun off from Abbott Laboratories (NYSE:ABT) in late 2012, so it does not have its own, stand-alone historical metrics of long-term dividend growth. The new company is heavily dependent on the sales of its blockbuster immunology drug, Humira, enjoying patent protection until 2016. The drug sales still have room to grow as the drug’s growth continues to outpace the U.S. and key EU biologics markets’ growth rates. Still, the company will have to diversify its revenue base. In that regard, it has potential in several areas, developing products in late-stage trials for the treatment of hepatitis C virus, immunological diseases, multiple sclerosis, and Parkinson’s disease.
In terms of valuation, this stock is trading at 13.3x forward earnings, below its respective industry’s forward P/E of 15.2x. The stock, however, has a high price-to-book ratio. At the end of last quarter, AbbVie Inc (NYSE:ABBV) was a large new position in the portfolios of hedge fund managers Arthur B. Cohen and Joseph Healey of Healthcore Management as well as billionaire Steven Cohen of SAC Capital.
Kimberly Clark Corp (NYSE:KMB), a consumer goods giant, has grown its dividend at an average CAGR of 7.4% over the past five years. This annualized rate of dividend growth was close to the company’s rate of EPS growth, averaging 5.4%, over the past half-decade. Back in February, the company raised its dividend by 9.5%, above the noted five-year average, marking the firm’s 41st consecutive annual dividend increase. The stock has delivered strongly over the past decade at least, with its 10-year annualized total return averaging 10.2% versus 7.9% for the S&P 500 index.
The company has also delivered strong financial performance, with its overall organic sales growing 5% last year, and the international segment’s organic sales increasing 10%. Particularly robust has been growth in emerging market personal care products. Adjusted EPS grew 9% last year. It is projected to increase by 5%-to-8% this fiscal year. Aside from the market expansion, product innovation has been a key driver of growth. The company’s long-term growth prospects will largely depend on these growth drivers.
As regards its valuation, the stock is trading at 18.2x forward earnings versus 20.6x of the personal care industry. Last quarter, Kimberly-Clark was a large $191 million position in Ric Dillon’s 13F portfolio.
The best of the rest
PepsiCo, Inc. (NYSE:PEP), a snacks and soft drinks giant, has grown its dividend at an average CAGR of 8.8%, faster than its annual EPS growth of 5.7% over the same period. The company hiked its quarterly dividend by 5.6% in February, effective as of June 2013, marking the firm’s 41st annual dividend increase. Aside from dividends, PepsiCo, Inc. (NYSE:PEP) is also boosting shareholder value through share buybacks, authorizing $10 billion for the period between July 1, 2013 and June 30, 2016. In fact, this year alone, the company expects to return a total of $6.4 billion through dividends (some $3.4 billion) and share repurchases (about $3.0 billion).
Analyst forecast PepsiCo, Inc. (NYSE:PEP)’s EPS CAGR at 8.9% for the next five years, about the same as that of its archrival The Coca-Cola Company (NYSE:KO). PepsiCo, Inc. (NYSE:PEP)’s diversified product mix, including both snacks and beverages, will help it weather the weak soda sales trends in the U.S. market. Back in February, CLSA upgraded the stock to buy, citing valuation expansion expectations, higher Return on Invested Capital amid North American bottling restructuring, and forecasted earnings improvement.
Currently though, PEP is trading at a forward P/E of 18.0x, high but below the soft drinks industry’s 19.8x. Among fund managers, last quarter, the stock was popular with billionaire Donald Yacktman.
V.F. Corporation (NYSE:VFC) is a global leader in the branded apparel industry. Over the past five years, the company’s dividend grew at an average CAGR of 5.6%, slower than its EPS CAGR, averaging 16.7% over the same period. Last year, the company reported record revenues and profits, with its top line growing 15% and EPS expanding 17%, both in nominal terms. The diversity and strength of the company’s portfolio of brands is what has propelled it to record-high financial results.
The company expects somewhat slower growth this fiscal year, with revenues rising 6% for the year and EPS expanding at a projected 11%. Accounting for 37% of total sales in 2012, international revenues have been on a tear, having increased 29% last year, driven mostly by strong sales of the company’s Timberland brand, which V.F. Corporation acquired back in 2011. This year, however, sales of Timberland and North Face brands are expected to be slower.
In terms of valuation, V.F. stock is priced at 15.7x forward earnings, compared to 14.6x for apparel retailers, 14.2x for The Gap Inc. (NYSE:GPS) and 18.8x for Ralph Lauren Corp (NYSE:RL). Last quarter, Ric Dillon trimmed his V.F. share count by 5% to more than 917,000 shares, while Christopher Medlocki James boosted his share ownership by 181% to nearly 830,000 shares.
A small-cap bonus
Middlesex Water Company (NASDAQ:MSEX), a small-cap water utility company celebrating 115 years in operation, has grown its dividend at an average CAGR of 5.7%, nearly three times as fast as the company’s annual EPS growth over the same period. Middlesex operates in a supportive regulatory environment in a “low risk monopoly water distribution business,” according to the firm. It has a stable residential and commercial customer base and mainly regulated operations, which provides for stable cash flows and dividends. This stock is an income play. As regards its growth, last year, Middlesex reported an 8.1% increase in consolidated operating revenues, a 7.2% increase in earnings, and a 7.1% increase in diluted earnings per share. Continued water rate increases suggest continued revenue growth in the future. However, despite the robust top line growth, its EPS is pressured by rising operating and maintenance expenses. Despite its appeal as an income stock, in terms of total returns, Middlesex has underperformed the broader market and regulated water utilities as a group over the 1-year, 3-year, 5-year, and 10-year periods.
In terms of valuation, Middlesex is priced at 19.4x forward earnings, which is higher than the water industry’s forward multiple of 16.1x. Its five-year ROE of 8.1% is below the industry’s 13.2%. Among hedge funds, last quarter, Mario Gabelli held a relatively small $1.9 million stake in the stock.
These companies tend to have respectable market positions in their industries, boasting stability and consistency of earnings through all economic cycles. Generally, their capacity to generate ample cash flow and their prudent financial management have enabled them to grow dividends for such long periods of time. Each makes a solid investment over the long haul.