In this 4-part series (concluding next Friday), Ben Reynolds, CEO and editor of Sure Dividend, highlights his 12 favorite dividend aristocrats — a group high quality stocks that have increased their dividend for 25+ consecutive years, meet certain minimum size and liquidity requirements and are in the S&P 500.
If you missed Part 1 of this report, you can read it here:
If you missed Part 2 of this report, you can read it here:
AT&T (T)
AT&T is one of the largest telecommunications companies in the United States based on its $200+ billion market cap. Its only competitor of similar size is Verizon (VZ). AT&T generates more than $20 billion in profit annually. And, the company has paid increasing dividends for 35 consecutive years.
What stand out about AT&T’s stock is its high dividend yield of 6.8%. AT&T is the highest yielding Dividend Aristocrat. -While AT&T has a high yield, the dividend is amply covered by the company’s profits. AT&T expects to pay out less than 60% of fiscal 2019 profits as dividends.
AT&T has a low valuation. The stock is currently trading for just 8.2 times expected 2019 earnings-per-share of $3.60. AT&T’s stock is cheap because the company has increased its debt load after the large acquisitions of both DirecTV and Time Warner.
While AT&T does have an elevated debt load, the company’s management has clear plans to deleverage. AT&T expects $26 billion in cash flows in fiscal 2019. The company plans to use funds to deleverage significantly.
AT&T is targeting a debt-to-EBITDA ratio of 2.5 by the end of fiscal 2019, a reasonable level. There appears to be more fear surrounding AT&T’s stock than actual risk of a dividend cut or worse due to over-leverage.
The Time Warner and DirecTV acquisitions have increased AT&T’s debt, but they’ve also enhanced the company’s growth prospects. AT&T is focusing on both the means of content distribution (its primary telecom business) and content creation (Time Warner).
The combination will create a company with higher margins moving forward. With a low valuation, a high yield, and decent growth prospects ahead, AT&T is a strong buy for income oriented investors at current prices.
T. Rowe Price Group (TROW)
T. Rowe Price is a large asset management firm with a $20+ billion market cap. The company was founded in 1937 and has assets under management of just under $1 trillion.
In the asset management business performance matters. And T. Rowe has proven itself to be one of the best asset manages around. More than 80% of the company’s funds outperformed their Lipper category averages in the last 3, 5, and 10 years.
While T. Rowe’s funds have exhibited strong performance as a whole, the asset management industry is seeing its fee revenue slowly decline over time. This is due to low cost ETFs and ‘robo advisors’ taking share from traditional actively managed mutual funds.
Additionally, asset managers tend to see large declines during recessions as they are hit by both fund outflows from people pulling out of the market and declining asset values.
Despite the aforementioned weaknesses within the asset management industry, T. Rowe has delivered strong performance over the long run.
First, the company remained profitable through the Great Recession. Earnings-per-share declined from $2.40 in 2007 to a low of $1.65 in 2009 before recovering to new all-time highs (at the time) of $2.53 in 2010. Second, T. Rowe has seen its earnings-per-share grow every year since 2009.
T Rowe. has proven itself to be one of the best asset managers around, both for shareholders and investors in its funds. The company is currently trading at a price-to-earnings ratio of just 14.2 times expected fiscal 2019 earnings-per-share of 6.95. I believe fair value is closer to a price-to-earnings ratio of 16.
Also, T. Rowe stock has an above-average 2.9% dividend yield and has increased its dividend payments for 32 consecutive years. This should appeal to income-oriented investors looking for rising income over time.
Target (TGT)
Target is the 4th largest discount retailer in the United States based on its $37 billion market cap. Only Amazon (AMZN), Wal-Mart (WMT), and Costco (COST) are larger. Target has the longest active dividend streak of the discount retailers, with an amazing 51 consecutive years of dividend increases.
Over the last 4 fiscal quarters, Target has generated more than $75 billion in sales and $2.8 billion in profits. The company distributes around 40% of its profits as dividends to shareholders. The company’s stock yields 3.6%. Target’s combination of a sub-50% payout ratio and long dividend streak make it very likely the company continues paying rising dividends into the future.
Target is also an unusually safe stock for recessions. The company saw earnings-per-share fall from $3.33 in 2007 to a low of $2.86 in 2008 before rebounding new highs (for the time) of $3.88 in 2010.
Target’s strong cash flows during the Great Recession market downturn allowed the company to buy back a significant amount of shares. The company’s share count declined by 14% from 2007 through 2010. Target has continued to aggressively repurchase its shares; averaging a 3.6% reduction annually over the last decade.
Target’s sales have returned to growth after struggling for the last 5 years. The company was beset by a data breach scandal, a botched Canada expansion, and pressure from online retail. It appears that Target’s difficult period is behind it. Overall, I expect earnings-per-share growth of around 6% annually from a mix of share repurchases and sales growth – both from brick and mortar and online channels.
This growth combined with Target’s above-average 3.6% yield and a reasonable price-to-earnings ratio of 14.7 times expected fiscal 2018 earnings-per-share of $5.40 make Target an interesting investment for dividend growth investors today. Disclosure: Ben Reynolds is long AT&T.
