Can The Top 10 S&P 500 Dividend Growers Continue Their Rapid Dividend Growth?

On April 29, Seagate Technology PLC (NASDAQ:STX) reported its third quarter fiscal 2016 financial results, which missed earnings-per-share expectations by a significant margin of $0.15 (40.5%). The company posted revenue of $2.6 billion in the period, matching Street forecasts.

However, it projected fourth-quarter revenue of $2.3 billion, below the average analyst estimate of $2.61 billion. It was the first time in its last nine quarters where Seagate missed estimates, as shown in the table below.

Source: Yahoo Finance

The company’s Board of Directors has approved a quarterly cash dividend of $0.63 per share, which will be payable on May 24, 2016, to shareholders of record as of the close of business on May 10, 2016. During the third quarter, the company generated approximately $205 million in operating cash flow and paid cash dividends of $188 million.

Seagate has been paying dividends since 2003 but had stopped its payments in 2009 and 2010. On October 21, 2015, Seagate increased its quarterly dividend by 17% to $0.63 per common share. The forward annual dividend yield is very high at 11.58%, and the payout ratio is very high at 225%. The annual rate of dividend growth over the past three years was high at 33.6%, over the past five years was very high at 83.7%, and over the last ten years was at 22.9%.

However, the company said that the payment of any future quarterly dividends will be at the discretion of the Board and will be dependent upon Seagate’s financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Board of Directors.

Considering the company’s very high payout ratio, I do not believe that it will raise its dividend payment. Moreover, the management’s cautious statement about the future quarterly dividends makes me think that even the current quarterly dividend is not sustainable.

Host Hotels and Resorts Inc (NYSE:HST)

Host Hotels and Resorts Inc (NYSE:HST) is a publicly owned real estate investment trust (REIT). The company primarily engages in the ownership and operation of hotel properties. It invests in the real estate markets of United States. It also invests in Canada, Mexico, Chile, the United Kingdom, Italy, Spain, and Poland. The firm primarily invests in luxury and upper upscale hotels. It was formerly known as Host Marriott Corporation. The company was founded in 1927 and is based in Bethesda, Maryland.

Image Source: Host Hotels & Resorts

On April 29, Host Hotels and Resorts Inc (NYSE:HST) reported its first quarter 2016 financial results, which beat EPS expectations by $0.03 (7.9%). The company posted revenue of $1.34 billion in the period, falling short of Street forecasts of $1.36 billion. HST showed earnings per share surprise in its three last quarters, as shown in the table below.

Data: Yahoo Finance

Host Hotels paid a regular quarterly cash dividend of $0.20 per share on its common stock on April 15, 2016, to stockholders of record as of March 31, 2016. The annual dividend yield is very high at 5.06%, and the payout ratio is pretty high at 116%. The annual rate of dividend growth over the past three years was high at 33.6%, over the past five years was very high at 83.2%, and over the last ten years was at 7.1%.

CEO Edward Walter said in the report that the company remains committed to its long-term goal of returning value to its stockholders through consistently strong dividends and stock repurchases. According to the company, it continues to make significant progress toward its asset sale goals and expects continued improvement in its operational and financial performance throughout the remainder of the year.

Since its year-end 2015 earnings call on February 17, 2016, the company has distributed $230 million of capital to its stockholders through dividends and stock buybacks. Year-to-date, the company repurchased 5.1 million shares at an average price of $16.08 for a total purchase price of approximately $81 million.

The company has a strong balance sheet, and it continues to execute on its strategic plan of reallocating capital out of markets where it expects lower growth or higher capital expenditure requirements. As such, and due to its commitment to its long-term goal of returning value to its stockholders, I believe that the future quarterly dividend is sustainable. However, I doubt that it can maintain such a high dividend growth rate because of the high payout ratio.