The Dividend Kings: Part 2

05/18/2018 5:00 am EST

Focus: DIVIDEND

Ben Reynolds

CEO, Sure Dividend

Today we continue with our special 6-part report from Ben Reynolds, editor of Sure Dividend — a weekly countdown of the Dividend Kings, an elite group of 24 stocks with 50 or more consecutive years of dividend increases.

If you missed Part 1 of this series you can read it here.

ABM Industries (ABM)

ABM Industries is a leading provider of facility solutions. The company’s capabilities include janitorial, energy solutions, electrical and lighting, HVAC and mechanical, landscape and turf, parking, and other services. ABM Industries generates revenues of $5.5 billion and employs more than 130,000 people. The company was founded in 1909 and has increased its dividend for 50 consecutive years.

ABM Industries’ long dividend history show that its core services have been in demand for the last 5+ decades. It’s hard to envision the need for the company’s facility solutions to go away. Said another way, ABM Industries operates in a slow changing industry which makes it likely the company will continue to survive and grow far into the future.

The company is expecting to generate earnings-per-share of between $2.00 and $2.10 in fiscal 2018. This equates to a price-to-earnings ratio of 14.9 at current prices. For comparison, ABM has traded at an average price-to-earnings ratio of 17.5 over the last decade. The company appears a bit undervalued currently based on its historical average valuation.

ABM Industries has a long history of dividend growth, but this has not translated into a high payout ratio. The company currently pays out $0.70/share in dividends annually. This equates to a payout ratio of just 34% using expected 2018 earnings. The key takeaway here is that ABM’s dividend is safe and highly likely to continue rising in the future.

The company also has a growth catalyst with its recent acquisition of GCA Services. GCA Services is a leading provider of facility services in the education and commercial sectors. ABM paid $1.25 billion for GCA, consisting of $851.0 million in cash and 9.5 million units of common stock. The acquisition should add about $1.1 billion in revenue and $100 million in adjusted EBITDA.

ABM Industries could generate total returns of around 10% annually for shareholders over the next several years. These returns will come from the stock’s current 2.3% dividend yield, earnings-per-share growth in the 6% range through organic growth and the GCA acquisition, and a 2% tailwind from valuation multiple expansion. ABM is an excellent example of a high quality stock trading at a fair price.

California Water Service Group (CWT)

The California Water Service Group is a water utility holding company that provides services through six operating subsidiaries. The company can trace its roots back to the California Water Service Company’s incorporation n 1926. Today, California Water Service Group provides utility services to approximately two million people. Operations within California accounts for 94% of total customers and 94% of revenue. California Water Service Group has increased its dividend for a remarkable 51 consecutive years.

Interestingly, California Water recently confirmed a proposal to purchase fellow water utility Dividend King SJW Group (SJW) for $68.25 per share. This all-cash transaction implies a total price of $1.9 billion.

Unfortunately for California Water Service Group the acquisition is unlikely to go through. California Water Service Group’s hostile takeover bid was rejected in favor of an all-stock deal with Connecticut Water Service (CTWS).

While we believe that the all-cash offer is superior, the lack of support of SJW’s largest shareholder (the Roscoe Moss Jr. Revocable trust) leads us to believe that it will not be successful.

A trustee from Roscoe Moss stated that they are “deeply disappointed” by the bid and called it “expensive and distracting.” We advise that California Water shareholders monitor the situation closely moving forward.

The acquisition not closing may be a blessing in disguise for California Water Service Group. Water utilities in general are trading for elevated price-to-earnings ratios. A cash acquisition of SJW Group is untimely. SJW Group shares are up around 100% since late 2015. Now is not the time to buy into water utilities in general due to high valuations.

With that said, it’s difficult to find a safer industry than water utilities. It’s highly likely that California Water Service Group continues to pay rising dividends far into the future, regardless of the recent acquisition excitement.

Tootsie Roll Industries (TR)

Tootsie Roll Industries is a manufacturer of candies and gum that is most well-known for its namesake Tootsie Roll taffy. Tootsie Roll was founded in 1896 and has grown to a market capitalization of nearly $2 billion. The company has increased its dividend for 52 consecutive years.

In addition to the company’s Tootsie Roll brand, it also owns the following brands (among others):  Junior Mints, Dots, Andes, Dubble Bubble, Sugar Daddy, and Tootsie Pops. Tootsie Roll’s competitive advantage comes from its portfolio of well-known candy brands.

While Tootsie Roll’s dividend streak is impressive, the company has simply not been able to meaningfully grow earnings-per-share in recent years. Tootsie Roll generated $0.93 in earnings-per-share in 2014… and generated $0.93 in earnings-per-share in 2017.

The candy market is competitive. While Tootsie Roll owns iconic brands, this is not translating into growing sales. The company is attempting to return to growth by repurchasing shares and experimenting with new spin-off flavors and products for its iconic brands.

Stocks with sluggish growth often trade for depressed price-to-earnings multiples. This is not the case with Tootsie Roll. The company is currently trading for a sky-high price-to-earnings multiple of 30. The company’s growth prospects do not justify such an inflated valuation.

On the plus side, Tootsie Roll has a low payout ratio of around 35% of earnings on top of its long streak of rising dividends. Even if earnings-per-share growth doesn’t resume, the company can continue to increase its dividend for several years thanks to its low payout ratio. Tootsie Roll stock currently offers investors a dividend yield of just 1.2%, well below the S&P 500’s dividend yield.

Hormel Foods Corporation (HRL)

Hormel Foods Corporation is a manufacturer, distributor, and marketer of branded food products. Hormel was founded in 1891 and has increased its dividend for 52 consecutive years.

Hormel’s long dividend streak is evidence of a strong and durable competitive advantage. The company has managed to grow dividends and earnings over the long run thanks to its portfolio of well-known food brands.

The company’s product portfolio includes Spam, Skippy peanut butter, Jennie-O turkey, Muscle Milk, and others. Hormel has 35 products that have either #1 or #2 market share in their product categories.  Hormel’s management is adept at acquiring other packaged food brands and growing them. The company’s Skippy and Muscle Milk brands are two examples of brands which Hormel acquired to bolster growth.

In the past year alone, Hormel has acquired the Cerratti brand in Brazil for $104 million and the Fontanini Italian Meats and Sausages in Chicago for $425 million. Continued growth through acquisitions is likely for this Dividend King.

There’s much to like at Hormel for investors seeking growing dividends. First, the packaged food industry changes slowly. People are likely to be purchasing packaged food 30 years from now, just as they were 30 years ago. Additionally, the packaged food industry is recession-resistant.

Consumers tend to dine at home more frequently when times get tough – increasing packaged food sales. These factors make the packaged food industry in general and Hormel in particular a favorable place to look for stable growth over the long run.

Hormel stock currently has a dividend yield of 2.1%, slightly higher than that of the overall market. Additionally, the stock has a payout ratio of just 39%. Hormel’s low payout ratio, recession resistance, and long history of rising dividends make it very likely that investors continue to receive dividend raises far into the future.

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