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The Dividend Kings: Part 6
06/15/2018 5:00 am EST
Today we conclude our special 6-part report from Ben Reynolds, editor of Sure Dividend. We hope you've enjoyed this 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.
If you missed Part 4 of this series you can read it here.
If you missed Part 5 of this series you can read it here.
Genuine Parts Company (GPC)
Genuine Parts Company is a diversified automotive supply company that is best known for its retail chain NAPA Auto Parts. The company was founded in 1928 and has grown to a market capitalization of $14.0 billion. Genuine Parts Company is a very global business. Its stores span North America, Australia, New Zealand, and Europe and total approximately 3,100 locations. Genuine Parts Company has increased its dividend for 61 years in a row.
Genuine Parts Company has strong competitive advantages in the fragmented automotive supply industry. Its large size allows it to extract attractive prices from suppliers and pass these savings onto its customers. Still, a large question surrounding Genuine Parts’ future is how it will react to e-commerce competition.
Fortunately, we believe that Genuine Parts is positioned to succeed in an online-first world. Automotive repairs are often complex, challenging tasks, which means that the industry expertise provided by Genuine Parts’ staff members is very valuable.
In addition, Genuine Parts’ brand recognition and market leadership (it has the #1 or #2 position in each of its four operating segments) means that it should capture a large portion of the demand from customers who need in-person advice on automotive supplies.
From a valuation perspective, Genuine Parts Company appears to be trading near fair value today. Its stock is trading at a price-to-earnings ratio of approximately 16.7. For context, Genuine Parts has traded at an average price-to-earnings ratio of around 17 over the last decade. For dividend investors looking for a long-term position to add to their portfolios, Genuine Parts Company is providing the opportunity to buy a wonderful business at a fair price.
The Procter & Gamble Company (PG)
Procter & Gamble is one of the world’s largest consumer goods companies, with ownership of brands like Tide, Bounty, Gillette, Downy, Duracell, Charmin, and Pringles. Its products are sold in more than 180 countries, generating tremendous sales and earnings that justify its $195.0 billion market capitalization. Procter & Gamble has increased its dividend for 61 consecutive years and has paid uninterrupted dividends for 127 years in a row.
What stands out about Procter & Gamble is its remarkable brand strength. The company’s products are household names in countries around the world. Procter & Gamble recently doubled-down on its most important brands by selling approximately two-thirds of its weakest brands. The proceeds from this restructuring were used to execute share repurchases and pay down debt. This shareholder-friendly activity is indicative of a broader culture that places great emphasis on maximizing shareholder value.
High-quality Dividend Kings will typically trade at premiums to the broader stock market because of their qualitative appeal and pedigree as dividend growth stocks. Procter & Gamble is no exception. However, today is a rare exception.
Procter & Gamble is currently trading at a price-to-earnings ratio of 18.6 and its 10-year average price-to-earnings ratio is 18.6. In other words, the company appears to be trading very close to fair value today. Investors who purchase Procter & Gamble at its current valuation will profit mostly from dividend payments (and growth) and earnings-per-share increases, with very little impact from changes to its earnings multiple.
Dover Corporation (DOV)
Dover Corporation is a diversified global industrial manufacturer that generates annual revenue of approximately $8 billion. The company is well-diversified by business segment. Last year, its sales breakdown was as follows: Engineered Systems, 33%; Fluids, 29%; Refrigeration & Food Equipment, 20%, Energy, 18%. Dover trades with a market capitalization of $12.2 billion and has 62 years of consecutive dividend increases.
As an industrial manufacturing firm that does not interact directly with consumers, one might think that Dover has little in the way of competitive advantages. That is not the case. In fact, Dover’s 62-year streak of consecutive dividend increases is especially impressive given the business cyclicality of many of its customers.
What are the sources of the company’s competitive advantages? Dover’s ability to thrive over such a long period of time speaks to its deep technical expertise as well as its robust relationships with customers. In addition, Dover has a very diversified product portfolio that allows its customers to rely on it as the “one-stop shop” for all manufacturing needs. Lastly, Dover has developed expertise in acquiring smaller manufacturers. The company has spent $3.0 billion in the last four years on a series of obscure bolt-on acquisitions.
Dover’s earnings multiple is very appealing for the price-sensitive investor. The company is currently trading at a price-to-earnings ratio of 13.5. For context, the industrial manufacturing firm has traded at an average valuation multiple of 16.2 over the last decade. Today’s investors will benefit not only from dividend payments and earnings growth, but also long-term valuation expansion from this high-quality Dividend King.
Northwest Natural Gas Company (NWN)
Northwest Natural Gas is a utility that delivers natural gas to customers in the Pacific Northwest. The company was founded in 1859 and has grown to serve 740,000 customers. Northwest Natural Gas trades with a market capitalization of $1.7 billion and has increased its dividend for 62 years in a row.
Northwest Natural Gas has a unique competitive advantage that comes from its lack of competition in the natural gas space. More specifically, it focuses on servicing areas where it can be the only provider of natural gas. While Northwest Natural Gas still has to compete with other forms of heat (including propane, fuel oil, and electricity), this significantly improves the economics of its business model and allows it to experience high rates of customer growth.
Like most dividend-paying utility companies, Northwest Natural Gas’ has additional competitive advantages that come from its entrenched position in a highly-regulated and capital-intensive industry. It takes tremendous investment and strong relationships with competitors for an upstart to enter the natural gas utility industry and pull market share away from Northwest Natural Gas.
Because of this, we are inclined to believe that Northwest Natural Gas’ multi-decade-long streak of consecutive dividend increases is likely to continue for many years to come.
Unfortunately, Northwest Natural Gas is materially overvalued. The stock currently trading at a price-to-earnings ratio of 24.9. For context, Northwest Natural Gas’ 10-year average price-to-earnings ratio is 21.3, which is arguably still quite high for a utility business. We believe that valuation contraction will present a meaningful headwind for today’s investors in Northwest Natural Gas and are recommending that investors look elsewhere for opportunities for the time being.
American States Water Company (AWR)
American States Water is a water utility corporation that operates in two business units: Utilities and Services. The company is headquartered in California, the only region in which its Utilities segment operates. Elsewhere, the Services unit operates in several U.S. states. American States Water trades with a market capitalization of $2.0 billion and has 63 years of consecutive dividend increases.
Like Northwest Natural Gas earlier in this article, American States Water has the typical competitive advantages of a utility business. The capital intensity and regulatory scrutiny that are characteristic of the utility sector make it difficult for new competitors to gain market share. This insulates companies like American States Water from new competitors and makes their existing market position extremely powerful.
In addition, American States Water is in the business of providing humanity’s most essential service: drinkable water. Because of this, the company is exceptionally recession-resistant. American States Water’s adjusted earnings-per-share declined by just 4.5% during the 2008-2009 financial crisis. We believe that the company is likely to perform similarly well during future economic downturns.
American States Water’s valuation is perhaps the only major negative component of its investment thesis. The stock is very overvalued today. American States Water is trading at a price-to-earnings ratio at 29.5 while its 10-year average price-to-earnings ratio has been only 20.4. Investor who purchase American States Water at current prices are almost certain to experience significant valuation contraction over long periods of time.
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