The "Dividend Kings" are the pinnacle of dividend stock royalty. To be a Dividend King, a company must pay rising dividends for 50+ consecutive years. This is no small feat. Only 25 stocks make the cut, explains Ben Reynolds, a MoneyShow.com contributor and editor of Sure Dividend.
Dividend Kings measure success in decades, not quarters or years. They are the ultimate in dividend longevity.
A long dividend history is important because it proves that a company has been able to maintain its competitive advantage over the long run. Companies with long dividend histories have proven they can thrive in a variety of economic conditions and through changing technologies and consumer sentiments.
This article has detailed analysis on our six favorite Dividend Kings. We estimate total returns by analyzing valuation, growth on a per-share basis and dividend yield. This gives a complete picture of where total returns will come from so investors have a clear view of how the Dividend Kings will generate 10%+ expected total returns over the next five years.
ABM Industries (ABM)
ABM Industries is a leading provider of facility solutions. The company's capabilities include janitorial, energy solutions, electrical and lighting, HVAC and mechanical, landscape and turf, parking and other services. ABM Industries generates revenues of $5.5 billion and employs more than 130,000 people. The company was founded in 1909 and has increased its dividend for 50 consecutive years.
ABM's long dividend history show that its core services have been in demand for the last 5+ decades. It's hard to envision the need for the company's facility solutions to go away. Said another way, ABM operates in a slow-changing industry, which makes it likely the company will continue to survive and grow far into the future.
The company is expecting to generate earnings-per-share of between $2.00 and $2.10 in fiscal 2018 (October). This equates to a price-to-earnings ratio of 14.8 at current prices. For comparison, ABM has traded at an average price-to-earnings ratio of 17.5 over the last decade. The company appears a bit undervalued currently based on its historical average valuation.
ABM has a long history of dividend growth, but this has not translated into a high payout ratio. The company currently pays out $0.70/share in dividends annually. This equates to a payout ratio of just 34% using expected 2018 earnings. The key takeaway here is that ABM's dividend is safe and highly likely to continue rising in the future.
The company also has a growth catalyst with its recent acquisition of GCA Services, a leading provider of facility services in the education and commercial sectors. ABM paid $1.25 billion for GCA, consisting of $851.0 million in cash and 9.5 million units of common stock. The acquisition should add about $1.1 billion in revenue and $100 million in adjusted EBITDA.
ABM could generate total returns of around 10% annually for shareholders over the next several years. These returns will come from the stock's current 2.3% dividend yield, earnings-per-share growth in the 6% range through organic growth and the GCA acquisition, and a 2% tailwind from valuation multiple expansion.
ABM is an excellent example of a high-quality stock trading at a fair price.
Federal Realty Investment Trust (FRT)
Federal Realty Investment Trust is an equity real estate investment trust (REIT) -- the only REIT that is also a Dividend King. The trust specializes in retail and mixed-use properties in the Northeast and Mid-Atlantic regions. Federal Realty owns approximately 104 real properties with roughly 24.2 million square feet.
Federal Realty is one of the newer members of the Dividend Kings. The trust has increased its dividend for precisely 50 consecutive years.
This REIT combines a long history of rising dividends with a solid 3.4% dividend yield. As a REIT, Federal Realty is required by law to pay out at least 90% of its income to unitholders. This ensures that the company will continue paying out the bulk of its profits to shareholders going forward.
Earnings are not the best metric to gauge Federal Realty. Funds from operations better reflect the underlying economic reality of the business. REITs record large depreciation charges that obscure earnings, making funds from operations the preferred metric for valuation.
Federal Realty expects funds from operations per share to be in the range of $6.08 to $6.24 in 2018. Based on this guidance, Federal Realty is currently trading at a price-to-FFO ratio of around 19 at the midpoint. Over the last decade, this REIT has traded at an average price-to-FFO ratio of 22.6. Federal Realty looks a bit undervalued at current prices.
Federal Realty focuses on densely populated, high-income areas on the U.S. East Coast. The company's focus on a relatively affluent market helps it to perform remarkably well during recessions. In fact, funds from operations per share did not decline during the Great Recession.
Federal Realty Investment Trust offers investors reasonable growth prospects, a fair valuation, an above-average yield and excellent marks for safety and stability.
Dover Corporation (DOV)
Dover is a diversified global industrial manufacturer that generates annual revenue of approximately $8 billion. The company is well-diversified by business segment. Last year, its sales breakdown was as follows: Engineered Systems, 33%; Fluids, 29%; Refrigeration & Food Equipment, 20%, Energy, 18%. Dover trades with a market capitalization of $11.8 billion and has 62 years of consecutive dividend increases.
As an industrial manufacturing firm that does not interact directly with consumers, one might think that Dover has little in the way of competitive advantages. That is not the case. In fact, Dover's 62-year streak of consecutive dividend increases is especially impressive given the business cyclicality of many of its customers.
What are the sources of the company's competitive advantages? Dover's ability to thrive over such a long period of time speaks to its deep technical expertise as well as its robust relationships with customers. In addition, Dover has a very diversified product portfolio that allows its customers to rely on it as the "one-stop shop" for all manufacturing needs. Lastly, Dover has developed expertise in acquiring smaller manufacturers. The company has spent $3.0 billion in the last four years on a series of obscure bolt-on acquisitions.
Dover's earnings multiple is very appealing for the price-sensitive investor. The company is currently trading at a price-to-earnings ratio of around 13 using expected 2019 earnings. For context, the industrial manufacturing firm has traded at an average valuation multiple of 16.2 over the last decade. Today's investors will benefit not only from dividend payments and earnings growth, but also long-term valuation expansion from this high-quality Dividend King.
Genuine Parts Company (GPC)
Genuine Parts is a diversified automotive supply company that is best known for its retail chain NAPA Auto Parts. The company was founded in 1928 and has grown to a market capitalization of $13.8 billion. Genuine Parts is a very global business. Its stores span North America, Australia, New Zealand and Europe and total approximately 3,100 locations. Genuine Parts has increased its dividend for 61 years in a row.
Genuine Parts has strong competitive advantages in the fragmented automotive supply industry. Its large size allows it to extract attractive prices from suppliers and pass these savings on to its customers. Still, a large question surrounding Genuine Parts' future is how it will react to e-commerce competition.
Fortunately, we believe that Genuine Parts is positioned to succeed in an online-first world. Automotive repairs are often complex, challenging tasks, which means that the industry expertise provided by Genuine Parts' staff members is very valuable.
In addition, Genuine Parts' brand recognition and market leadership (it has the #1 or #2 position in each of its four operating segments) means that it should capture a large portion of the demand from customers who need in-person advice on automotive supplies.
From a valuation perspective, Genuine Parts Company appears to be trading near fair value today. Its stock is trading at a price-to-earnings ratio of approximately 16.5 using expected 2018 earnings-per-share. For context, Genuine Parts has traded at an average price-to-earnings ratio of around 17 over the last decade. For dividend investors looking for a long-term position to add to their portfolios, Genuine Parts is providing the opportunity to buy a wonderful business at a fair price.
The Procter & Gamble Company (PG)
Procter & Gamble is one of the world's largest consumer goods companies, with ownership of brands like Tide, Bounty, Gillette, Downy, Duracell, Charmin and Pringles. Its products are sold in more than 180 countries, generating tremendous sales and earnings that justify its $191 billion market capitalization. Procter & Gamble has increased its dividend for 61 consecutive years and has paid uninterrupted dividends for 127 years in a row.
What stands out about Procter & Gamble is its remarkable brand strength. The company's products are household names in countries around the world. Procter & Gamble recently doubled-down on its most important brands by selling approximately two-thirds of its weakest brands. The proceeds from this restructuring were used to execute share repurchases and pay down debt. This shareholder-friendly activity is indicative of a broader culture that places great emphasis on maximizing shareholder value.
High-quality Dividend Kings will typically trade at premiums to the broader stock market because of their qualitative appeal and pedigree as dividend growth stocks. Procter & Gamble is no exception. However, today is a rare exception.
Procter & Gamble is currently trading at a price-to-earnings ratio of around 18.1 using expected fiscal 2018 earnings-per-share, and its 10-year average price-to-earnings ratio is 18.6. In other words, the company appears to be trading very close to fair value today. Investors who purchase Procter & Gamble at its current valuation will profit mostly from dividend payments (and growth) and earnings-per-share increases, with very little impact from changes to its earnings multiple.
Johnson & Johnson (JNJ)
Johnson & Johnson is the world's largest healthcare corporation. The company has a market capitalization in excess of $300 billion and generates annual revenue of more than $70 billion. Johnson & Johnson operates in more than 60 countries around the world and employs approximately 131,000 people. The healthcare conglomerate has increased its dividend for 55 years in a row.
The most outstanding characteristic of an investment in Johnson & Johnson is the company's remarkable stability. The company is one of only two publicly traded companies to earn an AAA credit rating from Standard & Poor's, with the other being Microsoft (MSFT) . In addition, 2017 marked the 34th consecutive year of operational earnings-per-share growth. This is a track record that, to our knowledge, is unmatched in the public markets.
The combination of a AAA credit rating, 30+ years of rising EPS and 50+ years of rising dividends, low stock price volatility and global scale make Johnson & Johnson one of the safest stocks to own and hold anywhere in the market. The company's safety is closer to that of a utility than to most other healthcare stocks.
Looking ahead, the company's outlook remains bright. Johnson & Johnson's size allows it to aggressively invest in research & development while also pursuing growth through acquisitions.
As an example, Johnson & Johnson recently completed the sizeable $30 billion acquisition of Swiss pharmaceutical company Actelion Ltd. The all-cash transaction should be a meaningful driver of growth for Johnson & Johnson's large Pharmaceutical division over the next several years.
To summarize, we believe that Johnson & Johnson is appealing for conservative investors who are looking for a stable blue-chip company to hold for the long run.
