Danger Ahead With These Dividend Aristocrats!!

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

It seems like everyone is screeching after yield buying up consumer staples, REITS, and even student loan backed securities. Dividend Aristocrats, those companies that have steadily raised their dividend for 25 years or more, have been go-to stocks for those yearning for yield. But...not every aristocrat is created equal.

Three names that require caution are Family Dollar (NYSE: FDO), Leggett & Platt (NYSE: LEG), and McCormick & Company (NYSE: MKC). Investors need to consider would they want to be in these names if there weren't any yield.

Caution ahead

A name I wrote a SWOT analysis on in the past was Leggett & Platt, which operates as a diversified manufacturer of furniture and mattress innards, springs and such, as well as making automotive and aerospace seating and components and retail furnishings, shelves, display units. As a double play on both a housing and auto industry resurgence the market has taken it up 35.23% in the last year. The shares hit a 52 week high on March 4 and trade at an 18.21 P/E. Of more concern is the yield at 3.80% at a 67% payout ratio.

The main reasons to worry about Leggett & Platt going forward are twofold. One of their biggest clients has been J.C. Penney as they buy Leggett & Platt's products to refurbish their stores. With a client like J.C. Penney, although it just renegotiated some lines of credit, there is risk their turnaround strategy will get overturned and Leggett & Platt will be holding the bag with future orders canceled.

J.C. Penney's orders were responsible for buoying Leggett & Platt's Commercial division sales numbers from being what would have been flat to below average sales. The stores do indeed look much better and brighter thanks to Leggett & Platt, but with J.C. Penney stock hitting new 52 week lows almost daily the desperation of JCP management to do something to improve their outlook is a red flag.

The second concern is that the mattress stocks have been whipsawed lately with no consensus whether people are willing to make a fairly pricey purchase especially if their current bedding is less than 10 years old. They don't call mattresses consumer durables for nothing...they're supposed to last.

Other things that worry me are the short interest at 7.20% which seems high for a Dividend Aristocrat and the level of debt which also bothers Fool Dan Caplinger. He also mentions the company's dividend growth is less than 10% and their revenue growth at 2.3% is not encouraging. Finally, the company has two competitors that are threats: bigger Genuine Cast Parts and nimbler Flexsteel are both giving Leggett & Platt a run for the money.

Don't go through a red light

One company that could do with some Leggett & Platt refurbishing is Family Dollar. The stores are tired-looking and the stock is exhausted, down more than 20% from its June 24 high of $74.73. This stock is only up 6.35% over the last year after the dollar store stocks had a great run the early part of last year.

The yield is only 1.40% although at a sustainable 23% payout ratio. At 7,600 stores in 45 states it is right in the middle in size between Dollar Tree and Dollar General. With sequestration and a pinched consumer one would think Family Dollar would be on fire again. The return on equity is 33.77% but the company lowered guidance at the last earnings release, announced shrinking margins, and barely beat last years' earnings for the same quarter, making only a penny more. The company has total debt of $725.36 million to total cash of $121.83 million.

Competitor Dollar Tree has been soaring after better-than-expected earnings so it's not the sector at fault. I have liked Dollar Tree better for some time as it has better growth prospects and could conceivably initiate a dividend. If it did there would be little reason to be in Family Dollar. For these reasons I think Family Dollar is a no-go.

Yellow means slooow down

McCormick & Company, the global spice and seasonings monger, hit a multi-year high on March 4 of $69.26. This takes it up 37.26% over the last year alone. It's growing in emerging markets (a new plant in China and special status there as an honored brand) and has number one market share in the majority of brands. It's just one among many consumer staples to benefit from surprising interest and strength. So what's not to like?

McCormick has more than ten times total debt to total cash (mainly due to recent non-spice acquisitions) so there's a yellow light right there and the PEG has climbed to 2.53. Also the short interest has increased by 11% since the end of January obviously expecting a pullback from these recent highs. Caution with McCormick is really a valuation call as this is still a great company with growth globally as well as a sterling reputation for quality.

At a 22.77 P/E and a 2.00% yield Warren Buffett could just as easily have bought McCormick rather than Heinz. Heinz is actually a customer of McCormick as are big cap names like Pepsico, Sysco, McDonald's, Yum! Brands, and General Mills. Unlike Leggett & Platt I don't see any of these customers canceling orders with McCormick. Kraft Foods is also a customer but as McCormick branches out from spices into shelf-stable products like seasoned rices (Zatarains') Kraft and Unilever may soon become competitors.

McCormick has more than doubled since its 2009 low in the thirties. If only, if only, it hadn't run so far.

The final traffic report

Leggett & Platt should be approached with caution and investors should be willing to take an alternate route for yield. Just drive by Family Dollar and if you have to buy a dollar store stock, consider Dollar Tree. If the previous two had no yield there would be little compelling about the stocks. As for McCormick, even without yield it would be interesting but take it easy with this one. It's a great company, doing all the right things but the market has taken it too far, too fast. I'm only going to write you a warning this time.




leglamp has no position in any stocks mentioned. The Motley Fool recommends McCormick. 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!

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