"Dividend Aristocrats" are S&P 500 stocks that meet certain minimum size and liquidity requirements and have at least 25+years of consecutive dividend increases. They're an exclusive group of companies -- just 53 stocks currently make the cut - but often trade at lofty valuations, making them unsuitable for value investors.
However, here are four that trade below their historic average price-to-earnings ratios, making them appealing for income investors interested in good long-term opportunities:
Walgreens Boots Alliance
Walgreens Boots Alliance (WBA) is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens chain and certain joint ventures, the company has a presence in more than 25 countries and employs over 385,000 people.
WBA's 42 years of consecutive dividend increases qualify it as a Dividend Aristocrat, and the company appears positioned to deliver $5.95 of adjusted earnings per share for fiscal 2018. Combined with the stock's current price, that implies a price-to- earnings ratio of just 11. For context, Walgreens has traded at a 16.7 average P/E over the past decade.
The stock's cheap current valuation stems from three main factors. The first is the potential entry of Amazon (AMZN) into the health-care-distribution business. However, we haven't seen any tangible evidence that Amazon is making headways into this space, so we believe the probability of such a disruption remains quite low.
The other two factors contributing to Walgreens' cheap valuation are: 1) its perceived role in the opioid crisis, and 2) the U.S. government's rhetoric on reducing drug prices. These issues are likely more substantial than the Amazon threat, but we believe that Walgreens' low current valuation more than compensates investors who are willing to invest despite these risks.
All in all, WBA appears profoundly undervalued, presenting a compelling buying opportunity for long-term dividend investors.
Cardinal Health Inc.
Cardinal Health (CAH) one of the "Big Three" U.S. drug-distribution companies, serving more than 24,000 U.S. pharmacies and over 85% of America's hospitals. CAH also has a presence in some 60 other countries, and the company's 32 years of consecutive dividend increases qualify it to be a Dividend Aristocrat.
However, the same factors facing Walgreens Boots Alliance - Amazon's potential entry into the space, a perceived role in the opioid crisis and negative political rhetoric surrounding drug pricing -- negatively impact Cardinal's stock price as well. But as we mentioned with WBA, some of these concerns seem overblown.
More relevant is a price war currently underway between Cardinal and rival "Big Three" drug-distribution firms AmerisourceBergen (ABC) and McKesson (MKC) . This has led to declining profits at Cardinal that have alarmed Wall Street despite the company's rising revenues driven by increased unit volume.
Still, Cardinal's valuation more than compensates investors for the temporarily elevated competition. The company appears likely to deliver around $5.38 in adjusted earnings per share for fiscal 2018, which implies about a 10.1 price-to-earnings ratio.
By contrast, CAH's average P/E since 2010 (the year the firm executed the significant spinoff) has been 15.5. So, we view it as highly likely that Cardinal's valuation will rise moving forward, creating compelling returns for today's investors.
T's current corporate structure stems from an intricate array of mergers since the old Bell System's 1984, but today's version of AT&T has increased its dividend for 33 consecutive years. Still, T's valuation has declined recently due to two factors.
The first is rising U.S. interest rates. With a dividend yield above 6% and a very recession-resistant business model, income investors often use AT&T as a higher- yielding bond substitute. But as 10-year U.S. Treasury yields have climbed to around 3%, some investors have been selling AT&T stock in favor of lower-yielding (but safer) fixed-income instruments.
Meanwhile, AT&T's $85 billion acquisition of Time Warner faced a U.S. Justice Department lawsuit that T only recently won. However, the merger has now gone through, and we believe this should catalyze AT&T's share price to go higher in coming months.
But for now, the stock remains relatively cheap. AT&T should deliver $3.45 of fiscal- 2018 earnings per share, which implies just a 9.4 price-to-earnings ratio. For context, AT&T's 10-year average P/E has been 13.4.
So, valuation expansion going forward should be a meaningful contributor to this stock's future total returns.
Personal-care-products giant Kimberly-Clark (KMB) distributes products in 175 countries, qualifying as a Dividend Aristocrat thanks to 45 years of consecutive dividend hikes.
However, the stock currently carries a pessimistic valuation, largely due to rising competition and consumers who've become markedly more price-sensitive in recent years. Moreover, Kimberly-Clark has been experiencing price pressures from retailers (Wal-Mart (WMT) , Target (TGT) , etc.) that sell its products.
This has resulted in poor financial performance, with KMB failing to grow revenues for six consecutive years. Accordingly, Kimberly-Clark's stock price has fallen to near a four-year low.
However, that means that KMB's dividend yield has climbed to a six-year high. And importantly, while Kimberly-Clark hasn't grown revenues in years, it's still managed to grow EPS thanks to stock repurchases and aggressive cost cutting.
Looking to next year, the company appears capable of delivering around $7 in adjusted EPS. Combined with its current stock price, that implies about a 14.5 price-to- earnings ratio.
For context, Kimberly-Clark has historically traded at about a 20x earnings multiple. Investors willing to take advantage of the company's relatively cheap current valuation should be handsomely rewarded if Kimberly-Clark merely reverts to its long- term average P/E.
Some Final Thoughts
Buying high-quality businesses like Dividend Aristocrats when they're trading below historic multiples is an excellent strategy for long-term wealth creation.
However, high-quality companies rarely become cheap for no reason. Each of the names above faces some sort of short-term difficulty that's contributing to its cheap current valuation.
But while these company-specific issues have created some uncertainty in the short term, we believe investors willing to look past the noise should realize excellent total returns over the longer run. Or as mega-investor Warren Buffett once said: "The best thing that happens to us is when a great company gets into temporary trouble. ... We want to buy them when they're on the operating table."
-- By Nick McCullum
McCullum is president at Sure Dividend LLC. You can find the full list of high-yield MLPs compiled by Sure Dividend here.
(This article was sent June 20 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Robert Powell, Peter Tchir, Jonathan Heller and others.)