Evaluating the S&P 500 Dividend Aristocrats

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past year, I (along with many other investors) have recognized the awesome beauty of dividend stocks. Once considered the stodgy old men of the investing world, dividend-paying companies have become young and hip, and very, very attractive.

One of the most famous lists of high-quality dividend-paying companies is the S&P 500 list of Dividend Aristocrats, defined as large-cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for the past 25 years.

This time frame pretty much guarantees a stable, dependable company, one that has successfully weathered the ups and downs of the last quarter-decade. These companies made it through the 2008 fiscal crisis without having to cut their distributions, which is a great accomplishment.

In the past few months, while I have been building my own Dividend Portfolio, I have reviewed dozens of companies, a number of which are included in the Dividend Aristocrat list. In this article, I will examine five that I have not previously analyzed.

I review the companies on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.

I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories. The hard thresholds that I utilize are a 10-year dividend paying history, and a 3% minimum yield. A company which obtains an 18-20 point rating generally is an automatic choice for the portfolio. One scoring 15-17 merits further consideration and watching for a change in dividend metrics, and anything scoring a 14 or below is rejected.

The top companies of the Dividend Aristocrats, in terms of market cap, are Abbvie (which is already included in my Dividend Portfolio), Lowe’s Companies (which I recently reviewed and rejected), McGraw-Hill (recently reviewed and rejected), Medtronic (recently reviewed and rejected), Nucor Corp, Leggett & Platt, Pentair (rejected for a low dividend yield of 1.7%), W.W. Grainger (recently reviewed and rejected), Family Dollar Stores (rejected for low yield of 1.4%), Emerson Electric, Cardinal Health and Stanley Black and Decker.

The first company is Nucor (NYSE: NUE), a steel company. It is currently trading at $47 per share and yields 3.1%. The company has been paying and raising dividends consistently for 40 years, and its 5-year Dividend Growth Rate (DGR) is 18.3%. Its PE is a high 29.9, and its twelve-month total return is 14.4%. The payout ratio is 92%. The company is currently trading at its 52-week high, and is up 7% from last year.

The 21 analysts who cover the company rate the stock a 2.2 (1.0 = Strong Buy, 5.0 = Sell). It has 5 Strong Buys, 8 Buys, 7 Holds, and 1 Underperform. They have set a one-year target price on the company of $47.46. Within the Motley Fool community, NUE is a four-star CAPS pick, with 2,115 Bulls and 87 Bears (95% positive sentiment).

Nucor scores a 13 on my ratings system; I reject the company based on its high payout ratio, high PE, and mediocre recent and future growth metrics.

Next is Leggett & Platt (NYSE: LEG), a steel company. It is currently trading at $29 per share and yields 3.9%. The company has been paying and raising dividends consistently for 41 years, and its 5-year DGR is 8.3%. Its PE is a high 23.6, and its twelve-month total return is 31.6%. The payout ratio is high at 90%. The company is currently trading at its 52-week high, and is up 34% from last year.

The 23 analysts who cover the company rate the stock a 2.3 with 4 Strong Buys, 4 Buys, and 15 Holds. They have set a one-year target price on the company of $57.42. Within the Motley Fool community, LEG is a five-star CAPS pick, with 210 Bulls and 39 Bears (84% positive sentiment).

Leggett & Platt scores an 18 on my ratings system; I will likely be adding it to my portfolio soon.

Emerson Electric (NYSE: EMR) is currently trading at $57 per share and yields 2.9%. The company has been paying and raising dividends consistently for 56 years, and its 5-year DGR is 8.2%. Its PE is 21.4, and its twelve-month total return is 15.5%. The payout ratio is average at 56%. The company is currently trading at its 52-week high, and is up 11% from last year.

The 6 analysts who cover the company rate the stock a 2.4 with 1 Strong Buy, 2 Buys, and 3 Holds. They have set a one-year target price on the company of $28.56. Within the Motley Fool community, EMR is a five-star CAPS pick, with 1,381 Bulls and 26 Bears (98% positive sentiment).

Emerson Electric scores a 15 on my ratings system; its yield is just a bit too low, and its other metrics, aside from the number of years, are only mediocre.

Next is Cardinal Health (NYSE: CAH), a healthcare company. It is currently trading at $45 per share and yields 2.4%. I am not quite sure why it is on the S&P Aristocrats list, because by my sources, the company has been paying and raising dividends consistently for only 16 years. Its 5-year DGR is 16.5%, its PE is 14.1, and its twelve-month total return is 9.0%. The payout ratio is low at 30%. The company is currently trading at just below its 52-week high, and is up 5% from last year.

The 16 analysts who cover the company rate the stock a 1.8 with 6 Strong Buys, 7 Buys, and 3 Holds. They have set a one-year target price on the company of $48.21, a potential gain of 8%. Within the Motley Fool community,CAH is a four-star CAPS pick, with 442 Bulls and 41 Bears (92% positive sentiment).

Cardinal Health scores a 16 on my ratings system; its yield is too low, and its 12-month return is also low.

The last company is Stanley Black & Decker (NYSE: SWK), the tool manufacturer. It is currently trading at $76 per share and yields 2.5%. The company has been paying and raising dividends consistently for 45 years, and its 5-year DGR is 8.3%. Its PE is 14.4, and its twelve-month total return is 12.5%. The payout ratio is low at 30%. The company is currently trading at 6% less than its 52-week high, which was reached in March, and is up 9% from last year.

The 16 analysts who cover the company rate the stock a 2.3 with 3 Strong Buys, 6 Buys, and 7 Holds. They have set a one-year target price on the company of $82.90, which is a potential gain of 8%. Within the Motley Fool community, SWK is a four-star CAPS pick, with 187 Bulls and 23 Bears (89% positive sentiment).

Stanley Black & Decker also scores a 15 on my ratings system; its yield is too low, and its other metrics, aside from the number of years, are only mediocre.

I have found this evaluation of the S&P 500 Aristocrats list to be a valuable exercise, even though most of them were rejected. I did locate one new addition to my portfolio, which I will profile more in-depth in the next couple of weeks.

In the meantime, however, I want to state that all of these companies are excellent in terms of their dividend metrics, and they would be a terrific choice for a dividend portfolio.

 

 

 

 


khern0203 is long ABBV. The Motley Fool recommends Emerson Electric Co. and Nucor. 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!

blog comments powered by Disqus