We conclude our 4-part series from Ben Reynolds, CEO and editor of Sure Dividend, in which he 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:
If you missed Part 3 of this report, you can read it here:
Exxon Mobil (XOM)
Exxon Mobil is an energy giant with a market capitalization of ~$320 billion. The company currently generates $290 billion in revenue with net profits of over $21 billion on an annual basis.
Not only is the business massive, it is also diversified. Prior to the oil market downturn, the company generated ~90% of its earnings from its upstream segment – in other words, the production of oil and gas.
Recently, that has changed. In 2018, the oil major generated 60% of its earnings from its upstream segment, 26% from its downstream (mostly refining) segment and the remaining 14% from its chemicals segment.
Exxon Mobil is widely followed among self-directed investors because of its size, stability, and overall dividend safety. The company’s dividend history and coverage is impressive. Exxon Mobil has increased its dividend for 36 consecutive years, which means it has an 11-year streak of inclusion within the Dividend Aristocrats Index.
Moreover, the company is likely to book a dividend payout ratio of around 64% in the current fiscal year. These safety characteristics combined with Exxon’s 4%+ yield make it an excellent candidate for inclusion in the portfolios of risk-averse, income-oriented investors.
From a valuation perspective, Exxon Mobil is not quite as appealing. The company appears likely to generate adjusted earnings-per-share of around $5.25 in rascal 2019, which means it is currently trading at a forward price-to-earnings ratio of 15.
Exxon Mobil has traded at an average price-to-earnings ratio of about 13 over the last decade. This means that the company’s current valuation is above its normal level, and valuation contraction will likely be a negative contributor to total returns.
With that said, the company’s appealing dividend characteristics and its flight-to-safety status relative to smaller peers in the energy sector means that risk-averse investors might still benefit from considering investment in this blue-chip energy corporation.
Chevron Corporation (CVX)
Chevron is the third-largest oil major in the world based on its capitalization of $219 billion, behind only Royal Dutch Shell (RDS.A) and ExxonMobil. When oil was trading around $100, Chevron generated about 90% of its earnings from its upstream segment.
Lower oil prices have hurt the upstream segment – and greatly improved refining segment margins. While close industry peers Exxon Mobil, BP and Total produce crude oil and natural gas at approximately equal ratios, Chevron is more leveraged to the oil price, with a 57/43 production ratio.
Despite its smaller size, Chevron has actually delivered superior historical returns compared to its big brother Exxon Mobil. Investors who have held Chevron’s stock over the last ten years have earned annualized returns of 10% per year, compared to 4% annualized returns for Exxon.
With that said, many investors (my firm included) view Exxon as a safer investment. This is partially due to its larger size (market capitalization of $333 billion compared to $231 billion for Chevron), but also due to its longer dividend history.
While Exxon Mobil has increased its dividend for 36 consecutive years, Chevron’s dividend streak lasts “only” 32 years. In our opinion, this difference in safety measures is negligible and both businesses deserve a place in a dividend growth investor’s portfolio when they can be acquired at fair or better prices.
Speaking of prices, it is interesting to note that Chevron and Exxon Mobil trade at virtually the same valuation relative to their underlying earnings power. Chevron is likely to generate adjusted earnings-per-share of about $8.17 in fiscal 2019, which means it is currently trading at a price-to-earnings ratio of about 14.8.
A key difference here is that Chevron’s historical valuation has been much higher than Exxon’s. More specifically, Chevron has traded at an average price-to-earnings ratio of 15.8 over the last decade compared to Exxon’s 13.
While it is likely that investors were willing to pay up for Chevron’s superior growth record in the past, we believe that patient investors would do well to wait for better prices in both of these high-quality energy Dividend Aristocrats.
People’s United Financial (PBCT)
People’s United Financial is a diversified financial services company that provides commercial and retail banking and wealth management services via its network of over 400 branches in the Northeast. It has total assets of $48 billion and trades with a market capitalization of approximately $6.2 billion.
The company has more than doubled its total assets during the last decade thanks to organic growth, geographic expansion, and a series of acquisitions. More recently, People’s United Financials has grown its loans and its deposits at an 8% average annual rate in the last six year. During the last two years, People’s United financial has greatly benefited from the steady uptrend of interest rates.
Because of this, the bank has consistently enhanced its net interest margin, from 2.96% in Q2-2017 to 3.17% in the most recent quarter. However, the Fed is likely to slow the pace of interest rate hikes going forward. As a result, this tailwind is likely to somewhat revert in the upcoming years.
Overall, we believe that People’s United Financial offers an almost-unheard of level of dividend history and dividend safety relative to its peers in the lending industry. While many larger banks were forced to cut their dividends during the 2007-2009 financial crisis because of risky lending practices, People’s United Financial has actually increased its dividend 26 consecutive years.
Interestingly, the company is actually the only member of the Dividend Aristocrats to be a true lender. The other financial sector Dividend Aristocrats operate in other sub-industries like asset management, insurance, or data analytics and credit ratings.
Looking ahead, People United Financial’s current dividend is also well-covered by earnings, as the company is on pace to deliver a dividend payout ratio of less than 50% in the current fiscal year – a rarity among its peers in the 4%+ yielding space.
Because of these appealing characteristics, we believe that this Dividend Aristocrat holds appeal for conservative dividend growth investors looking to bolster their exposure to the financial sector.
