If we assembled a group of blue-chip stocks for income investors, it would likely resemble the Dividend Aristocrats, which are S&P 500 Index stocks that have raised their dividends for at least 25 straight years, observes Rich Moroney, editor of Dow Theory Forecasts.
Membership in the aristocrats signals a company has proven it can weave a path through the booms and busts of the business cycle while maintaining dividend growth.
But aristocrats do tend to have less flexibility for dividend growth than the typical stock. On average, the dividend consumes 62% of trailing earnings for the aristocrats, versus 51% for all S&P 500 dividend stocks.
3M (MMM) offers consistent, though not spectacular, dividend growth. A 1% dividend increase in the March quarter marked the 63rd straight year of higher cash distributions. 3M has grown its dividend at a 7% annualized rate over the past five years and 11% rate over the past decade.
3M’s payout ratio of 63% is higher than most dividend stocks we recommend, a potential constraint on future dividend hikes. But free cash flow surged 64% to $3.71 billion for the 12 months ended March.
Dividend growth remains management’s second priority for excess cash after capital investment; acquisitions and share repurchases rank third and fourth.
With the uneven global recovery, 3M said in April that supply-chain problems could reduce full-year earnings per share, yet the 2021 consensus has increased since 3M’s earnings report, now targeting 12% growth on 8% higher revenue. 3M is a Focus List Buy.
AbbVie (ABBV) has raised its dividend in 48 consecutive years, which includes years before the company split off from Abbott Laboratories (ABT) at the beginning of 2013. Since splitting from Abbott, AbbVie has grown its dividend at an annualized rate of 16%.
The stock yields 4.5%, above the average of 1.5% for the S&P 500 health-care sector. AbbVie shares rose on a solid March-quarter report that saw earnings per share climb 22% on revenue growth of 51%; both metrics topped consensus estimates.
Sales of Humira, an arthritis and autoimmune treatment that accounted for 43% of 2020 revenue, rose 4%. AbbVie also raised its full-year profit guidance. The pipeline looks strong, with five new drugs expected to be approved this year. AbbVie is rated A (above average).
Best known for its commercials featuring an irascible duck, Aflac (AFL) sells supplemental life and health insurance to aging populations in the U.S. and Japan, the two biggest insurance markets in the world.
Aflac has raised its dividend in 38 straight years, with annualized growth of 7% over the past decade. Earlier this year, Aflac hiked its quarterly dividend 18% to $0.33 per share, its biggest annual increase since 2008. The stock yields 2.4%, modestly above its industry average of 2.1%.
Aflac comfortably topped March quarter consensus estimates, with its adjusted earnings per share climbing 25% and revenue 14%. Aflac’s growth prospects for the remainder of 2021 appear more constrained, though analyst estimates are rising, with the consensus now projecting 2% higher earnings per share on 3% lower sales. Aflac is rated A (above average).
Parker-Hannifin (PH) grew March-quarter earnings per share 21% to $4.11 excluding special items, surpassing the consensus of $3.72. Revenue edged 1% higher to $3.75 billion, also ahead of the consensus.
The aerospace business remains sluggish, with sales dropping 20%, but the diversified-industrial segment continues to show strength, especially overseas, where sales rose 17%.
Management didn’t estimate when the aerospace unit may turn around, citing the difficulty in predicting the lag time between air-traffic trends, which are improving, and a rebound in sales.
However, the industrial business may be entering a multiyear upturn. Parker-Hannifin raised its outlook for fiscal 2021 ending June, implying June-quarter earnings per share of $4.00 to $4.30, good for growth of 57% to 69%. The consensus stood at $3.88 at the time of the announcement.
In April, the company raised its quarterly dividend 17% to $1.03 per share, marking its strongest annual growth since fiscal 2015. Parker-Hannifin has raised its dividend in 65 straight years, ranking among the five longest stretches of dividend growth in the S&P 500 Index. Parker-Hannifin, yielding 1.3%, is a Focus List Buy.