7 Safe Dividend Stocks for the Long Term: Part II
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In part one of this series, we discussed the fact that in “the reputed S&P Dividend Aristocrats, representing stocks of companies that have raised dividends for at least 25 consecutive years, there is a small group of firms that are considered less risky than the U.S. government, from the point of CDS spreads.”
We’ve found seven such companies, three of which are 3M, Colgate-Palmolive, and the McDonald’s. For your reading pleasure, we’d like to present the remaining four.
Who made the cut?
Target (NYSE: TGT) has raised dividends for 45 consecutive years. It pays a dividend yield of 2.1% on a payout ratio of 31% of its current-year EPS estimate. The company’s dividends have grown at a CAGR of 21.2% over the past five years. The company owes its historically enviable performance to strong consumer spending in the United States. Now, Target is pursuing an international expansion focused on Canada, where the company plans to open 200 new stores in the next 5-10 years. Recent anecdotal evidence suggests that sales are robust at a few newly opened stores in Canada.
The company’s growth plan is expected to help boost the its sales to $100 billion and EPS to $8.00 by 2017. Last year, Target’s full-year adjusted EPS rose 7.9% to $4.76. Analysts forecast the company’s EPS CAGR at 11.9% for the next five years. This is the same annualized rate of growth that will take Target’s current dividend to its 2017 target of $3.00 per share. That targeted rate of dividend increases looks generous. In terms of valuation, the stock is trading at 15.1 times forward earnings, a slight premium to its peers.
Last quarter, hedge funder John A. Levin (Levin Capital Strategies) trimmed his share ownership in Target by 28%, but still maintained a position worth nearly $100 million.
Yes, there’s even more
Procter & Gamble (NYSE: PG) has increased dividends for 56 years in a row. It has a dividend yield of 2.9%, payout ratio of 56% of the current-year EPS estimate, and five-year annualized dividend growth of 9.3%. P&G estimates its high-side long-term EPS potential CAGR at between 12% and 17%. The company enjoys leading positions in many international markets, with strong and diversified portfolio of brands, increasing presence in emerging markets, and robust product innovation through new offerings and packaging. The company saw subpar growth in fiscal 2012, which prompted its management to embark on the mission to boost top- and bottom-line growth, with targeted expansion in emerging markets and productivity and cost cutting initiatives.
Cost reduction initiatives are expected to produce savings of $10 billion by 2016, through reductions in cost of goods sold, marketing, and non-manufacturing overhead costs. This year, Procter & Gamble expects to realize organic sales growth of 3%-4%, excluding any foreign exchange effects, and core EPS growth of 2%-5%. For the next five years, analysts forecast an EPS CAGR of 7.8%. In terms of valuation, the stock is trading on par with its peers at 18.7 forward earnings. In the previous quarter, legendary value investor Warren Buffett reported holding almost $3.6 billion in this stock.
Wal-Mart (NYSE: WMT) has increased dividends for 38 consecutive years. It has a dividend yield of 2.5%, payout ratio of 35% of the current-year EPS estimate, and five-year annualized dividend growth of 13.2%. Wal-Mart is the world’s largest company by revenues. Its revenues have risen every year since 1998, and totaled $469 billion last year alone.
Over the past decade, Wal-Mart has achieved a sales CAGR of 7.3% and an EPS CAGR of 11.1%. The company projects its FY2014 EPS to be $5.20-$5.40, implying growth between 3.6% and 7.6% from the year earlier. Analysts forecast the company’s EPS CAGR at 9% for the next five years. The company has a wide economic moat, strong branding power, increasing market shares in key emerging markets, and strong cash flow generation that allows for sustained dividend growth.
Wal-Mart also has a low beta of 0.41, implying low volatility of this stock’s returns relative to those of the broader market. While the stock is priced almost on par with its respective industry, with a forward P/E of 14.5, it trades at a price-sales of only 0.6. In terms of hedge fund interest in Wal-Mart, based on the last available 13-F disclosures, Warren Buffet’s Berkshire Hathaway and the Bill & Melinda Gates Foundation Trust are the two largest fund owners of the stocks.
We promise, this is the last one
ExxonMobil (NYSE: XOM) has raised dividends for 30 consecutive years. It pays a dividend yield of 2.6% on a payout ratio of 28% of its current-year EPS estimate. The company’s dividends grew at a CAGR of 8.6% over the past five years. The company is the world’s second-largest dividend payer, with a total annual payout of nearly $10.1 billion.
As the largest integrated oil and natural gas company, ExxonMobil enjoys large economies of scale and scope. Its outlook is optimistic as the U.S. moves towards its energy independence and the title of the world’s largest energy producer. With a strong portfolio of shale assets, such as those in the Bakken Shale, and one of the largest exposures to natural gas through its XTO Energy subsidiary, ExxonMobil is well positioned to benefit from the boom in energy production.
The company is highly profitable, generates strong cash flows and has very little long-term debt on its balance sheet. It is also attractively valued, as it boasts a price-book of 2.4, below its five-year average, and trades at a forward P/E of 11.1, at an 18% premium to its industry, capitalizing from its large size and solid credit rating. The Bill & Melinda Gates Foundation Trust reported owning more than 7.6 million ExxonMobil shares at the end of the fourth quarter.
The basis for each company included on this list is its income-oriented potential, but it’s worth pointing out that each member offers something else that’s attractive as well. From McDonald’s cheap valuation to Target’s underrated EPS growth estimates, there are multiple reasons to like each of the stocks we’ve discussed here.
This article is written by Serkan Unal and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!