CVS Health (CVS) operates one of the largest domestic retail pharmacy networks and is a leading phar...
The Dividend Kings: Part 4
06/01/2018 5:00 am EST
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.
If you missed Part 2 of this series you can read it here.
If you missed Part 3 of this series you can read it here.
Nordson Corporation (NDSN)
Nordson is an industrial manufacturing firm that engineers, manufactures, and markets niche products such as adhesives, sealants, polymers, coatings, and other fluids. The company was founded in 1954 in Amherst, Ohio, and has grown to annual sales in excess of $2 billion and a market capitalization of $7 billion. Nordson’s 54 years of consecutive dividend increases qualify it to be a Dividend King.
For long-term dividend investors, there’s plenty to like about Nordson’s business model. The company operates a complex global supply chain that provides a very appealing amount of business diversification. In addition, Nordson’s global presence allows it to react more quickly to isolated product needs in individual markets.
Nordson also operates with an emphasis on research, which should help it to win in the ever-competitive industrial manufacturing industry. Nordson spends approximately 3% of its revenue on research and development each year. While this pales in comparison to some firms in the technology sector, it still allows the firm to file dozens of patents each year and continue to innovate on behalf of its clients.
Lastly, Nordson’s shareholders will benefit from the company’s entrenched position. Nordson is in the business of manufacturing niche, consumable products for other businesses. This creates a revenue stream that is recurring in nature and also creates very high switching costs. Once a supply agreement is signed between Nordson and a customer, that revenue stream is likely to last for a prolonged period of time.
Perhaps the only unappealing component of Nordson’s investment thesis is the firm’s valuation. Nordson is trading at a price-to-earnings ratio of about 20, while its long-term average valuation multiple has been around 18. Valuation contraction will likely harm Nordson’s future returns.
With that said, we believe that investors would do well to monitor Nordson closely and accumulate stock during any meaningful downturn in its stock price.
The Coca-Cola Company (KO)
The Coca-Cola Company is the world’s largest beverage company. It was founded in 1892 and today owns or licenses more than 500 non-alcoholic beverages, including both sparkling and still beverages.
Coca-Cola’s products are sold in more than 200 countries around the world, and the company has more than 20 brands that generate $1 billion or more in annual sales. With 55 years of consecutive dividend increases, Coca-Cola beats the requirement to be a Dividend King by a half-decade.
When it comes to investing in Coca-Cola, there are two important benefits for investors. The first is the company’s remarkable size and scale. Of the approximately 60 billion beverages consumed around the world each day, about 2 billion are manufactured by Coca-Cola. This creates significant economies of scale for the Dividend King, allowing it to operate with higher margins.
The second major characteristic of Coca-Cola’s business is its irreplaceable brand. According to Forbes, Coca-Cola is the sixth-most valuable brand in the world, with an aggregate brand value of approximately $57 billion. Importantly, Coca-Cola has the most valuable brand outside of the technology sector.
Unfortunately, this world-class beverage company is trading a hair above its long-term average valuation multiple. More specifically, Coca-Cola is currently trading at a price-to-earnings ratio of 20.2. The company’s 10-year average earnings multiple is 19.3. Investors should likely wait for a slightly better opportunity to invest in this high-quality Dividend King.
Colgate-Palmolive Company (CL)
The Colgate-Palmolive Company is a business that needs no introduction for most consumers. The company is one of the world’s largest manufacturers of oral care products, toothpaste, soap, home cleaning products, and pet foods, and owns well-known brands such at Colgate, Palmolive, Hill’s Science Diet, and more. Colgate-Palmolive’s 56 years of consecutive dividend increases allow it to qualify as a Dividend King.
Colgate-Palmolive is an attractive business for a number of reasons. It has a dominant position in the majority of its core product categories. This is particularly true in oral care, toothpaste, and toothbrushes. Colgate-Palmolive’s toothpaste market share is higher than the next-three biggest competitors combined.
Colgate-Palmolive’s brand recognition and high market share gives the company some pricing power. It can consistently raise prices over time, which contributes to revenue growth.
In addition, Colgate-Palmolive’s products are necessities of modern life. Consumers are unlikely to stop purchasing toothpaste when disposable income becomes constrained during economic recessions. For this reason, Colgate’s earnings are very recession-resistant, which makes the company appealing for investors concerned with downside protection.
Without a doubt, Colgate-Palmolive is a high-quality business. Sometimes high-quality businesses command premium valuations — but this is not necessarily the case with Colgate today. The company is actually trading at a discount to its long-term average valuation multiple.
Here’s what the numbers look like. Colgate-Palmolive is trading at a price-to-earnings ratio of approximately 20.6 and its average price-to-earnings ratio over the last 10 years has been 24.2. If the company’s valuation reverts to its long-term average, today’s investors will be handsomely rewarded.
Cincinnati Financial Corporation (CINF)
Cincinnati Financial is a diversified insurance company that was founded in 1950. The company offers business, home, and auto insurance as well as more specialized financial products like life insurance and annuities. Cincinnati Financial has increased its dividend for a remarkable 57 consecutive years, which easily qualifies it to be a member of the Dividend Kings.
The insurance sector is not known for having particularly strong competitive advantages. This is primarily due to the low barriers to entry within the industry.
With that said, the lack of competitive advantages within the insurance sector makes Cincinnati Financial’s near-six-decade streak of consecutive dividend increases even more impressive. The company’s strong historical performance has been driven by excellence in the two components of a healthy insurance operation: underwriting and investing.
On the underwriting front, Cincinnati Financial operates with prudent risk management practices. The firm has generated a positive underwriting margin each year since 2013.
On the investment side, Cincinnati Financial is unique because a significant portion of its investment portfolio is deployed in common equities. This is in stark contrast to the heavy weighting toward fixed income exhibited by many other public insurance companies. Importantly, this bias toward common stock investing will result in superior long-term performance for Cincinnati Financial — and, by extension, the insurer’s shareholders.
Despite Cincinnati’s appealing business model, the firm does not appear to be especially cheap at current prices. The firm has traded at an average price-to-book ratio of about 1.2 over the last decade and trades at 1.4 times book value today. For investors looking to invest in Cincinnati Financial, we recommend waiting for a more compelling price.
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