This article is the second installment of a short series in which we analyze which are the companies with the best dividends (the so-called Dividend Aristocrats) of the S&P 500. In this series composed of 2 articles we establish a study framework using a data panel to obtain the best stocks among all the companies that make up the Dividend Aristocrats and, finally, we share the result of that study.
In the article you are reading you will find the results of the aforementioned study. Although this article is useful in isolation from its predecessor, we recommend that you start reading the first in the series: Who are the “Dividend Aristocrats” and why should you buy their shares?
Dividend-paying companies with higher sales growth and better net margin
Starting from the analysis framework established in our previous article, we perform a first exercise by selecting from 2 criteria: “Sales Growth” and “Net Profit Margin”, in that order, with the restriction that both values are equal to or greater than 15%.
This would allow us to know which are the companies with the best trajectory during the last 5 years in these two variables.
The first variable would reflect the growth of the business and the second would indirectly integrate efficiency in the management of costs and expenses, without which it is impossible to achieve good margins.
At the end of the day, we already know that all members of the Dividend Aristocrats club have increased their dividends for at least the last 25 years.
The only company with an average sales growth rate and average net margin of no less than 15% was the following:
It presented a sales growth of 16.99% and an average net margin of 18.11%.
AbbVie is a pharmaceutical company in the healthcare and drug manufacturing industry with an emphasis on immunology and oncology.
Its lead drug, Humira, accounts for about 50% of its current earnings.
The company was spun off from Abbott in early 2013. The company’s recent acquisition of Allergan adds several new drugs for aesthetics and women’s health.
It is based in Chicago, Illinois (USA), and has about 50,000 employees.
The war conflict in Europe is not expected to seriously affect pharmaceutical companies such as AbbVie, as its business exposure in Russia and Ukraine is minimal.
On the other hand, let’s remember that stocks of companies in this sector are often considered defensive in times of high volatility or recessions.
The primary and secondary trend of the stock is markedly bullish.
what would happen if we reduced the minimum average net margin from 15% to 10%?
In that case 3 more companies besides AbbVie enter the group:
Linde PLC (LIN)
It presented a sales growth of 23.93% and an average net margin of 13.10%.
Linde is a company in the basic materials and specialty chemicals industry and is the world’s largest supplier of industrial gas with operations in more than 100 countries.
Its main products are atmospheric gases (including oxygen, nitrogen and argon) and process gases (including hydrogen, carbon dioxide and helium), as well as equipment used in the production of industrial gases.
Linde serves a wide variety of end markets, including chemicals, manufacturing, healthcare and steel fabrication.
It is headquartered in Surrey, UK, and employs some 72,327 people.
Management forecasts that earnings per share growth is expected by 2022.
According to some industry analysts, Linde’s fair share price would be around $325.00, which would represent an appreciation of approximately 12.7% from current levels.
The stock’s primary trend is up and it is currently in a correction on this trend.
Nucor Corp (NUE)
Presented sales growth of 17.62% and an average net margin of 10.46%.
Nucor Corp is a company in the basic materials and steel industry that manufactures steel and steel products. It is considered a cyclical stock.
Nucor also produces direct-reduced iron for use in its steel mills.
Its operations include international trading and sales companies that buy and sell steel and steel products manufactured by the company and others.
The operating business segments are: steel mills, steel products and raw materials, with the steel mills segment having the highest revenues.
Nucor is headquartered in Charlotte, North Carolina (USA), and has 28,800 employees.
Itis considered a cyclical stock, in fact, its current beta is 1.32, so it fluctuates more than the market average.
Between 2008 and 2021 it remained within a sideways range. Its secondary trend is upward, albeit with fairly high volatility.
Abbott Laboratories (ABT)
It presented sales growth of 15.61% and an average net margin of 11.61%.
Abbott is a company in the healthcare and medical device industry that manufactures and markets medical devices, as well as adult and pediatric nutritional products, diagnostic equipment, test kits and branded generic drugs.
Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, infant formulas, adult nutritional fluids, molecular diagnostic and immunoassay platforms, and point-of-care diagnostic kits.
Abbott derives approximately 60% of its sales outside the U.S. and is considered an aggressive growth stock, despite being an excellent dividend payer.
It is headquartered in Abbott Park, Illinois, USA, and has about 113,000 employees.
The company has taken advantage of the Covid-19 impact, which is reflected in the growth of its diagnostics and testing segment. In fact, this is expected to continue in 2022.
Other segments such as medical devices, nutrition and its pharmaceutical divisions have shown more modest performance.
However, the company is expected to continue to grow. The primary trend of the stock is upward and it is currently in a correction.
We remind you that we have obtained these companies after analyzing the 65 S&P 500 stocks with the best dividend payouts using a data panel that considers 16 different metrics, as we have detailed in the first article of this series.
You have the above data panel at your disposal as a Google Spreadsheets document, so that you can look at the analysis done and apply filters to the stocks with the best dividends according to your own criteria: https://docs.google.com/spreadsheets/d/1sIr6…
This is the power of grouping data in a simple spreadsheet and applying filters. We now know which are the 4 most consistent companies over the last 5 years in terms of sales growth and net margin.
It is important to note that this represents only one exercise, as we considered in our research no less than 16 variables and in this case we have filtered from only 2.
Therefore, for these 4 stocks with best dividend, high growth and good margin we are not evaluating other metrics.
Stocks with the highest dividend yield and sustainability
We performed a second exercise selecting from 3 criteria: “Dividend Yield”, “Total Debt to Equity” and “Payout Ratio”, in that order, with the restriction that the yield is greater than or equal to 4%, while Debt/Equity and Payout Ratio are less than or equal to 70%.
In terms of dividends, the best positioned companies in the group are those with the best average yields.
However, those with the best probability of maintaining a sustainable dividend payout over time are those with the lowest debt to equity ratio and whose dividend payments do not represent too heavy a burden on their net income.
In this case we have 3 companies that simultaneously meet these 3 conditions:
Exxon Mobil Corp (XOM)
It presented an average dividend yield of 5.15%; a Debt/Equity ratio of 28.30% and a payout ratio of 64.92%.
Exxon Mobil is a company in the energy sector and the integrated oil and gas industry that explores, produces and refines hydrocarbons worldwide.
In 2021, it produced 2.3 million barrels of liquids and 8.5 billion cubic feet of natural gas per day.
By the end of 2021 its reserves were equivalent to 18.5 billion barrels of oil, 66% of which were liquids.
Exxon Mobil is the world’s largest refiner with a total global refining capacity of 4.6 million barrels of oil per day and one of the largest manufacturers of feedstocks and specialty chemicals.
Its stock is considered a “hard asset.” It is headquartered in Irving, Texas (USA), and has about 63,000 employees.
The company’s focus is on doubling profits and cash flow by 2027. It also expects to improve its return on equity.
The company’s growth is the result of significant cost reductions, production volume growth and margin improvements from new projects.
Its long-term trend is sideways; however, its secondary trend is upward.
Already in our January 28 article on “Top 5 stocks with huge potential to invest in 2022”xOM was highlighted even before the outbreak of the war in Europe and the spill-over of oil prices.
People’s United Financial (PBCT)
It had an average dividend yield of 4.38%; a Debt/Equity ratio of 17.62% and a payout ratio of 52.10%.
People’s United Financial is a holding company in the financial services sector and regional bank industry. It operates in two segments: Commercial and Retail Banking.
Commercial Banking, which generates the bulk of its revenues, includes commercial real estate lending, middle market and business banking, mortgage and asset-based lending.
It also provides treasury management services, capital markets capabilities and commercial deposit products.
Retail Banking includes consumer lending and consumer deposit-takingactivities.
It is headquartered in Bridgeport, Connecticut, USA, and has approximately 6,499 employees.
Since 2021, M&T Bank Corp. (MTB) has proposed an acquisition of People’s United Financial, which has been approved in all instances, including Federal Reserve approval.
Of the total stake in the combined company, 28% will be held by People’s United shareholders and the remainder will be held by M&T Bank shareholders.
Once the two entities are consolidated , significant cost synergies and increased earnings per share are expected in 2023.
The stock’s primary trend is sideways, while its secondary trend is bullish at this time.
Chevron Corp (CVX)
It presented an average dividend yield of 4.32%; a Debt/Equity ratio of 22.56% and a payout ratio of 65.15%.
Chevron is a company in the energy sector and integrated oil and gas industry with exploration, production and refining operations worldwide.
Itis the second largest oil company in the United States with production of 3.1 million barrels of oil per day, including 7.7 million cubic feet per day of natural gas and 1.8 million barrels of liquids per day.
Its production activities take place in North America, South America, Europe, Africa, Asia and Australia.
Its refineries are in the U.S. and Asia with a total refining capacity of 1.8 million barrels of oil per day.
Its proved reserves at the close of 2021 amounted to an equivalent of 11.3 billion barrels of oil, including 6.1 billion barrels of liquids and 30.9 trillion cubic feet of natural gas.
Like XOM, this stock is considered a hard asset. It is headquartered in San Ramon, California (USA), and has 12,204 employees.
The company is expected to continue its share buyback policy of about US$5-10 billion per year, until it achieves 25% of outstanding shares by 2026.
This will allow it to continue increasing dividends in the coming years.
The stock’s primary trend is sideways, while its secondary trend is clearly bullish.
With this second exercise you now know which are the 3 companies with the highest and most sustainable dividend yields over time.
Best dividend stocks undervalued, with higher sales growth and better net margin
Finally, we performed an exercise selecting from 3 criteria: “Relative Undervaluation”, “Sales Growth” and “Net Profit Margin”, in that order, with the restriction that the current undervaluation be greater than or equal to 30%, while sales growth and net profit margin for the last 5 years were greater than or equal to 10%.
Here we seek to identify companies with a relative current undervaluation, but which have shown a good track record of growth and margin management.
In this case we have obtained 4 companies:
Nucor Corp (NUE)
Already appeared within the first fiscal year so we know that it has sales growth of 17.62% and a net margin of 10.46%.
In terms of undervaluation it presents a deviation of 65% below the P/E ratio of the industry, being the highest within this group of 4 companies.
Although they were not used in the filters, it is interesting to note that it presents an average dividend yield of 2.32%, a Debt/Equity ratio of 40.56% and a payout ratio of 7.32%.
Abbott Laboratories (ABT)
Similarly, it was within the results of the first fiscal year with a sales growth of 15.61% and a net margin of 11.61%.
Its relative undervaluation presents a deviation of 64% below the industry P/E ratio.
It has an average dividend yield of 1.44%, a Debt/Equity ratio of 50.42% and a payout ratio of 45.75%.
Cincinnati Financial Corp (CINF)
Presented an undervaluation of 54%, an average sales growth of 12.06% and an average net margin of 19.31%.
It had an average dividend yield of 2.43%, a Debt/Equity ratio of just 6.84% and a payout ratio of only 13.78%.
Cincinnati Financial Corp is a company in the financial services sector and the property and casualty insurance industry that generates revenues through written premiums.
A select group of independent agencies actively markets the company’s commercial, homeowners and autoinsurance within their communities.
These agents offer the company’s personal lines, as well as its standard, excess and surplus commercial lines policies in many regions of the United States.
Leasing and financing services are also offered. The vast majority of the company’s revenue is generated through its commercial lines, followed by its personal lines.
Itis considered an aggressive growth stock. It is headquartered in Fairfield, Ohio, USA, and has about 5,166 employees.
The company managed to significantly increase its revenues for 2021, exceeding earnings per share expectations for each of the 4 quarters of the year.
The stock’s primary trend is up, while its secondary trend is sideways.
T Rowe Price Group Inc (TROW)
It presented an undervaluation of 51%, an average sales growth of 12.36% and an average net margin of 38.09%.
It had an average dividend yield of 2.43%, a Debt/Equity ratio of 0% and a payout ratio of 33.42%.
Rowe Price is a company in the financial services and asset management industry that provides services for individual and institutional investors.
Itoffers a wide range of U.S. and international no-load equities, bonds and money market funds.
At the end of 2021, the company had $1.688 trillion in assets under management, comprised of equities (61%), balanced (29%) and fixed income (10%).
Approximately two-thirds of the company’s assets under management are held in retirement-based accounts, giving T. Rowe Price a somewhat more rigid client base than most of its peers.
The firm also manages private accounts, provides retirement planning advice, and offers fiduciary and discount brokerage services.
Itis considered a cyclical stock. It is headquartered in Baltimore, Maryland, USA, and has 7,529 employees.
Stagnation in its total revenue in Q3 and Q4 2021 meant a decrease in its net income for the same period, although on a year-over-year basis both metrics increased over 2020.
The stock’s primary trend is upward, but its secondary trend is clearly downward.
You now know which are the 4 companies that have the highest relative undervaluation with respect to their industry average, but at the same time have had a good track record in sales and net margin.
Conclusions: Should you invest in the best dividend stocks?
The S&P 500 Dividend Aristocrats stocks are a top choice in any long-term strategy based on income growth.
However, when studying any company all of its metrics should be thoroughly reviewed, not just 16.
The bottom line is that we cannot emphasize all aspects “at once.” That could eliminate all candidates from being part of an investment portfolio.
“We will not find companies that are perfect on all criteria, so we must emphasize a congruent set of them.”
Theories, of any kind, are a simplification of reality and, therefore, must reduce the causal factors that explain any phenomenon to a small group if they are to be consistent and logical. The contrary would generate incongruent postulates among themselves.
The same is true of an investment portfolio. There is no perfect portfolio for everyone.
We must be very clear about our objectives and strategy in order to reflect them in our portfolio.
We will not find companies that are perfect in all criteria, so we must emphasize a congruent set of them.
We have selected 9 companies among the best dividend payers that present important strengths in different aspects, but it is up to the reader’s discretion and responsibility to delve deeper into each one.
Remember that as an added value to this article you have the spreadsheet with the metrics we have used in this study.