In the world of investing, Dividend Kings are the best of the best when it comes to returning cash to shareholders over the long term. These are stocks that have at least 50 years of consecutive dividend increases, making them unrivaled in terms of returning cash to shareholders. You can see the full list of Dividend Kings here.
In this article, we'll explore four Dividend Kings that are trading with the largest discounts to fair value today. The four stocks we'll examine are: Dover Corp. (DOV) , Federal Realty Investment Trust (FRT) , ABM Industries, Inc. (ABM) , and Johnson & Johnson (JNJ) .
Dover is a global industrial manufacturer with a diverse revenue base. The company has raised its dividend for 62 consecutive years, has annual revenues of about $8 billion, and trades at market capitalization of around $12.3 billion.
Dover's second-quarter results were released on July 19 and they were strong. Revenue moved 3% higher while operating earnings rose 17%, and earnings per share increased 21% on an adjusted basis. EPS guidance was updated to a range of $4.75 to $4.85 for this year, thanks to its push for expense reductions to boost margins. Overall, Dover's Q2 report was robust and investors reacted favorably to it.
Federal Realty is one of the largest REITs in the U.S. It focuses on high-income, densely populated coastal markets in the U.S. that have very high rent rates. Its market capitalization is $9.2 billion, and it produces about $900 million in annual revenue.
The company's first-quarter results were released on May 2, and it was generally in- line with the company's typical report. Funds from operations were up 5% as property operating income growth rose nearly 4%. The REIT also signed another 400 thousand square feet of leases at a very high rate of $31.51 per square foot, further boosting the average price in its portfolio. Funds-from-operations guidance was reiterated as well, with the midpoint at $6.16 per share.
ABM Industries is a leading provider of facility services, including electrical and lighting, energy, facilities engineering, landscaping, janitorial services and parking. The company should produce about $6.5 billion in revenue this year and its current market capitalization is $2 billion.
ABM's dividend has been increased for 51 consecutive years. The company reported Q2 earnings on June 6 and results were driven by acquisitions. Revenue was up 21% in total and 4.5% on an organic basis, driven by strength in the Business & Industry segment. Adjusted income from operations increased 12% and EPS guidance was updated to $1.85-$1.95 for this year. This 7% reduction in EPS guidance was due to labor cost inflation.
Johnson & Johnson
Johnson & Johnson is a global healthcare conglomerate that was founded in 1886 and has since grown to a $347 billion market capitalization. The company services just about any customer need in the pharmaceutical, medical device and consumer markets for healthcare products, exceeding $81 billion in annual revenue.
J&J's second-quarter results were released on July 17 and the report topped expectations. Earnings per share were up 15% to $2.10 and revenue increased 11% to nearly $21 billion.
Valuation & Expected Total Returns
Dover's valuation has remained fairly steady in recent months, and the stock trades well under our estimate of fair value. The shares trade at around 13.7 times this year's earnings against our fair value estimate of 16.2 times earnings. The yield is also 2.4% at present, which is slightly higher than Dover's historical norm, which is closer to 2%. Overall, we see strong total returns, consisting of the following:
-- Earnings-per-share growth: 5.0%
-- Dividend yield: 2.4%
-- Valuation expansion: about 3%
Federal Realty's valuation has settled just under fair value after a sharp rally off of the lows earlier this year. The stock trades for 20.1 times FFO for this year against our estimate of fair value, which is 22.6. Like Dover, the yield is also higher than it typically is for Federal Realty at 3.3%, against historical norms in the high-2% range. We are expecting total returns of 11.2% moving forward, comprised of:
-- Earnings-per-share growth: 5.5%
-- Dividend yield: 3.3%
-- Valuation expansion: about 2%
ABM shares have consolidated in recent weeks, causing the valuation to fall under our fair value estimate. The stock was recently trading for 15.7 times our earnings estimate for this year against fair value of 17.5 times earnings. In addition, this has boosted the yield to 2.3%, helping to fuel 10%+ total returns annually:
-- Earnings-per-share growth: 6.0%
-- Dividend yield: 2.3%
-- Valuation expansion: ~2%
Johnson & Johnson's recent rally has the stock close to our estimate of fair value at 15.8 times earnings, as shares now trade at a price-to-earnings ratio of 15.7. The yield is still robust at 2.7%, but Johnson & Johnson has the lowest projected total returns of this group at 7.6% annually:
-- Earnings-per-share growth: 4.8%
-- Dividend yield: 2.7%
-- Valuation expansion: about 0%
All of these stocks offer decades of increasing dividends, which is an amazing accomplishment. Their commitment to returning cash to shareholders is unparalleled and each of these companies should continue their dividend increase streaks indefinitely.
These stocks offer exposure to very different industries and all offer strong total projected returns, with Johnson & Johnson lagging thanks to its recent rally. In order of projected total annual returns, we see Johnson & Johnson at 7.6%, ABM at 10.5%, Dover at 11.1% and Federal Realty at 11.2%. Federal Realty also offers investors the highest dividend yield of the group, coming in at 3.3%, while the others are all 2.7% or less.
Dividend Kings are the best when it comes to rewarding shareholders with cash each year. The four companies discussed here offer investors more than 50 years of dividend increases, proving the sustainability of each business model. Those looking to build long-term wealth can look at these stocks that offer not only terrific histories of dividend increases, but are also trading for reasonable valuations. This combination has all four of these stocks offering strong prospective total returns in the years ahead with Federal Realty the strongest for both current yield and projected returns.
(This article was originally sent Aug. 1 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 Nick McCullum, Hale Stewart, Peter Tchir, Jonathan Heller and others.)