Here are the 3 Best Dividend Aristocrats for 2019

12/31/2018 5:00 am EST

Focus: DIVIDEND

Ben Reynolds

CEO, Sure Dividends

The Dividend Aristocrats Index is made up of just 53 stocks in the S&P 500 that each have 25 or more years of consecutive dividend increases; these are stocks that have proven they can pay rising dividends in a wide variety of market conditions — including The Great Recession, explains Ben Reynolds, income expert and editor of Sure Dividend.

The Dividend Aristocrats Index has outperformed the S&P 500 over the last decade, with lower volatility. Over the last 10 years the Dividend Aristocrats Index has generated annualized total returns of 15.5% versus 14.3% for The S&P 500.

Over the same time period the Dividend Aristocrats Index has annualized volatility of 13.0% versus 13.2% for the S&P 500. While The Dividend Aristocrats Index is filled with high quality dividend growth stocks, not all are set for strong performance in 2019. Our 6 favorite Dividend Aristocrats for 2019 are analyzed below.

Walgreens Boots Alliance (WBA)

Walgreens is the largest retail pharmacy in both the United States and Europe. In the United States, its only competitor of similar size is CVS Health (CVS). Walgreens has a market cap of $77.9 billion and has increased its dividend for 42 consecutive years.

What makes Walgreens an exciting investment is its mix of earnings and dividend growth potential, safety, and value. The company has compounded its earnings-per-share by 12.5% from 2011 through fiscal 2018. Current CEO (and the company’s largest shareholder) Stefano Pessina took over as CEO in 2015. From 2014 through 2018, Walgreens has compounded its earnings-per-share at 20.0% annually — amazing results for a large cap corporation.

We don’t expect Walgreens to be able to keep up this rapid growth, but we do expect solid growth of 9% annually over the next several years. Growth will be driven by a mix of integration of the Rite Aid acquisition, continued share repurchases, and organic growth through new market expansion.

While Walgreens has generated excellent growth since CEO Pessina took the reins, the company is priced as if growth stagnated. The company is trading for just 13.1 times fiscal 2018 earnings, and 12.0 times expected fiscal 2019 adjusted earnings-per-share of $6.55.

In addition to its solid growth prospects and low valuation, Walgreens currently offers investors a dividend yield of 2.2%, which is a bit above the S&P 500’s dividend yield of 2.0%. The draw of an investment in Walgreens now is access to one of the best CEOs and management teams around for a bargain price .

AbbVie (ABBV) is a large biotechnology firm focused on immunology, oncology, and virology treatments. AbbVie was spun off from fellow Dividend Aristocrat Abbott Laboratories (ABT) in 2013, which ‘grandfathers’ it in as a member of the Dividend Aristocrats. AbbVie currently has a market cap of $131.9 billion.

While AbbVie’s stand-alone history is shorter than other Dividend Aristocrats, the company has performed admirably since its spin-off. Adjusted earnings-per-share and dividends have grown each year since 2013. Adjusted earnings-per-share have compounded at a 15.6% rate from 2013 through fiscal 2017.

And, the company is expecting 41.3% adjusted earnings-per-share growth for fiscal 2018 based on the midpoint of the company’s guidance. This growth is a mix of operating income growth, share repurchases, and substantial savings from a lower tax rate.

While AbbVie’s historical growth and expected growth in fiscal 2018 are excellent, the company is priced as if it were a stodgy low growth enterprise based on its adjusted price-to-earnings ratio of just 10.7 times expected 2018 adjusted earnings. A low valuation has pushed the company’s dividend yield up to 5.0%, making AbbVie one of the most reliable 5% dividend yielding stocks around.

The pessimism surrounding the company is due to the company’s blockbuster success drug Humira losing its patent protection. Despite already falling off the beginning of the ‘patent cliff’, Humira sales continue to grow, up 9.8% on an operation basis in the company’s most recent quarter. Additionally, the company’s solid Humira cash flows allow it to invest in research and development and acquisitions which have bolstered the company’s product pipeline.

Our favorite Dividend Aristocrat today is AT&T (T). Its dividend yield of 6.6% immediately stands out. And, the company’s dividend is well covered. Management expects a payout ratio “in the high 50% range” using operating income minus capital expenditures for fiscal 2019. AT&T has increased its dividend for 35 consecutive years, showing that it can thrive in a variety of market conditions.

AT&T appears undervalued. The company’s average dividend yield during the worst year of The Great Recession in 2009 was 6.4%. With a 6.6% yield now, AT&T is trading at recession level prices.

Pessimism surrounding AT&T is due in part to its large debt load thanks to the company’s acquisitions of DirecTV and Time Warner. The company expects to have a debt-to-EBITDA ratio of ~2.8x at the end of fiscal 2018, and 2.5x at the end of fiscal 2019.

With that said, the debt level is sustainable now and the company has extra cash flows to reduce debt further. AT&T is expecting operating income minus capital expenditures of $26 billion in fiscal 2019 against interest expenses of roughly $8.5 billion. Management is committed to deleveraging with excess cash flows.

While recent large acquisitions have increased debt, they will also generate cost savings (meaning higher margins and more earnings) as they are integrated. The combination of reasonable growth prospects, a high yield, and a deeply undervalued stock make AT&T our favorite Dividend Aristocrat today.

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