Today we begin a special report from Ben Reynolds, editor of Sure Dividend — a countdown of the Dividend Kings, an elite group of 24 stocks with 50 or more consecutive years of dividend increases. Each Friday over 6 weeks, Ben will offer an in-depth assessment of 4 of these dividend stalwarts.

SJW Group (SJW)

SJW Group is a water utility holding company headquartered in San Jose, California. It is the parent company of the San Jose Water Company, SJWTC, Inc., and the SJW Land Company. SJW provides water service to more than one million people near San Jose as well as Canyon Lake, Texas. The company has increased its dividend for 50 consecutive years. SJW trades with a market capitalization of approximately $1.2 billion.

There water utilities industry is one of the safest and most stable around. Water utilities combine the safety of high government regulation with local monopoly. There is in nearly every case only one water provider for a geographic region. This minimizes competition and ensure stable cash flows.

On top of this strong and durable competitive advantage, water is vital for life. It’s difficult to imagine a more necessary service than providing water. The strength of SJW’s competitive advantage is shown by its remarkable 50 consecutive years of rising dividend payments.

SJW Group has a long dividend history and is very likely to continue paying rising dividends. Unfortunately, it doesn’t offer a sizable current yield. The company’s dividend yield is currently 1.9%, nearly in line with the yield of the S&P 500.

While the company’s dividend yield is modest, SJW Group does offer strong growth potential for a utility. Over the past 10 years the company has compounded its earnings-per-share at 8.5% a year. We expect growth to decline a bit, but even if SJW Group grows its earnings-per-share at 7.0% a year going forward, investors will generate total returns of nearly 9% annually, including the dividend.

SJW Group’s long history is remarkable for its stability, but that has changed recently. SJW Group is currently battling through a complicated merger negotiation with Connecticut Water Service (CTWS). The transaction will create the 3rd largest publicly traded water utility in the United States.

Later, fellow Dividend King California Water Service Group (CWT) announced an unsolicited cash offer of $68.25 per share for SJW Group stock . The transaction price exceeds its all-time high price and represents a 30% premium to SJW’s share price at the time of announcement. SJW board member Robert Van Valer called the offer “deeply disappointing” and “expensive and distracting.”

What should investors make of these merger proceedings? We believe the cash offer to be more valuable and less complex. With that said, Mr. Van Valer – quoted in the last paragraph – is a trustee of the Roscoe Moss Jr. Revocable Trust, SJW’s largest shareholder. This leads us to believe that the original merger with Connecticut Water Service continues to be the most likely outcome.

Federal Realty Investment Trust (FRT)

Federal Realty Investment Trust is an equity real estate investment trust (REIT) — the only REIT that is also a Dividend King. The trust specializes in retail and mixed-use properties in the Northeast and Mid-Atlantic regions. Federal Realty owns approximately 104 real properties with roughly 24.2 million square feet.

Federal Realty is one of the newer members of the Dividend Kings. The trust has increased its dividend for precisely 50 consecutive years.

This REIT combines a long history of rising dividends with a solid 3.4% dividend yield. As a REIT, Federal Realty is required by law to pay out at least 90% of its income to unitholders. This ensures that the company will continue paying out the bulk of its profits to shareholders going forward.

With that said, earnings are not the best metric to gauge Federal Realty. Funds from operations better reflect the underlying economic reality of the business. REITs record large depreciation charges that obscure earnings, making funds from operations the preferred metric for valuation.

Federal Realty also expects funds from operations per share to be in the range of $6.08 to $6.24. Based on this guidance, Federal Realty is trading at a price-to-FFO ratio of around 19 today at the midpoint. Over the last decade, this REIT has traded at an average price-to-FFO ratio of 22.6. Federal Realty looks a bit undervalued at current prices.

Federal Realty focuses on densely populated, high-income areas on the East Coast of the United States. The company’s focus on a relatively affluent market helps it to perform remarkably well during recessions. In fact, funds from operations per share did not decline during the Great Recession.

Federal Realty Investment Trust offers investors reasonable growth prospects, a fair valuation, an above-average yield, and excellent marks for safety and stability.

Stanley Black & Decker (SWK)

Stanley Black & Decker is a diversified global manufacturing firm. It provides hand tools, power tools, engineered fastening systems, and other industrial products. The company sells its products under the Stanley, DeWalt, Black+Decker, and Craftsman brands, among others.

The company can trace its roots back to 1843 when The Stanley Works was founded by Frederick T. Stanley. Today’s Stanley Black and Decker was formed in 2010 when The Black & Decker Corporation was merger with The Stanley Works. The company reports financial results in three segments: Tools & Storage, industrial, and Security. Stanley Black & Decker has increased its dividend for 50 consecutive years.

Stanley Black & Decker's capital allocation policy is to divide its cash generation between mergers & acquisitions and dividends & buybacks. The company recently announced the acquisition of Nelson Fastener Systems. This $440 million cash acquisition was announced in December and closed in early April. More acquisition-based growth is likely moving forward.

Acquisitions will help boost growth in the future, as will share repurchases and possible efficiency gains resulting in margin improvements. Together, we expect Stanley Black & Decker to generate earnings-per-share growth of around 8% a year over the next several years.

Stanley Black and Decker continues to expect adjusted earnings-per-share in the range of $8.30 to $8.50. Using the midpoint of this guidance for fiscal 2018, the company is trading at a price-to-earnings ratio of around 17 today.

Stanley Black & Decker’s 10-year historical average price-to-earnings ratio is 15.7. The company may be slightly overvalued today based on its history, but its strong growth prospects and likely continued dividend growth make it a long-term hold.

The Stepan Company (SCL)

The Stepan Company produces specialty and intermediate chemicals sold to firms for use in a variety of end products. The company has three reporting segments: Surfactants, Polymers, and Specialty Products. Stepan was founded in 1959 and has increased its annual dividend for 50 consecutive years.

Like SJW Group and Stanley Black & Decker, The Stepan Company has a sub 2% dividend yield. Stepan’s dividend yield is currently just 1.3%, the lowest of the Dividend Kings in this article.

While the company does not offer a high current yield, it does have ample room for dividend growth in the future thanks to its payout ratio of just 22%. The company’s management clearly values the dividend streak, so its highly likely Stepan continues paying rising dividends far into the future.

We expect earnings-per-share growth of 4% to 5% annually for Stepan. The company should deliver modest organic growth combined with margin gains from its efficiency improvement plan. The company’s recent acquisition of a surfactant production facility from BASF Mexicana is another growth catalyst.

The facility is close to Mexico City and has more than 50,000 metric tons of capacity and 124,000 square footage of warehouse space. More acquisition-based growth is likely for Stepan Company diversified chemical corporation.

Stepan is a recession resistant company. It’s earnings-per-share grew significantly throughout the Great Recession. The company is more sensitive to input costs than the economy, which helps explain its exceptional recession performance.

While Stepan scores high marks for safety and has a remarkable dividend streak, it is not currently trading near fair value. The company’s historical price-to-earnings ratio over the last decade is 15, while the stock is currently trading closer to a price-to-earnings ratio of 20 today using expected 2018 earnings-per-share.

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