2 Up-and-Coming Contenders for the Title of Dividend Aristocrats

I recently discussed several companies that are poised to qualify for the most rarified air of dividend-paying companies -- the Dividend Kings. An impressive group no matter how you look at them, but there is another group that is rather impressive because they've grown their dividends paid to shareholders for at least 25 consecutive years. There are many names for this cohort; they range from Dividend Champions to the better-known title awarded by S&P Dow Jones -- the Dividend Aristocrats. That also is the name of one of the more popular dividend-focused ETFs -- The S&P 500 Dividend Aristocrats ETF from ProShares. ProShares has more than $6 billion in assets for NOBL, and when the underlying S&P Dow Jones index that powers it is rebalanced it means the ETF will install positions in new S&P 500 Dividend Aristocrats (SPDAUDP) constituents. Per the index's methodology document, which can be read here, the Aristocrats universe is reviewed every January. So, let's take a look at potential entrants into both the Aristocrats index and the ProShares ETF. This means picking through the list of Dividend Contenders, which have grown their dividends consecutively the past 10 to 24 years. We're looking for those Contenders that are poised to graduate into the Aristocrats, which means focusing on the ones that have grown their dividends for at least 24 consecutive years. Based on this process, we find 10 potential candidates. I'm going to discuss in this column the two I believe are the most likely contenders, then will follow up with the next two later this week, when I also will include the other six Aristocrat prospects as well. The first contender is one that we own in the Trifecta Portfolio -- discount retailer Ross Stores Inc. , which operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less and dd's Discounts. Across its 1,480 locations in 38 states, Ross Dress for Less offers name-brand and designer apparel, accessories, footwear, and home fashions at savings of 20% to 60% off department and specialty store regular prices. dd's Discounts has a similar strategy, which is to offer goods 20% to 70% below moderate department and discount store regular prices at its 237 locations. Over the years Ross has expanded its footprint catering to consumers who are looking to stretch their disposable spending dollars. The strategy that enabled Ross to grow its annual revenue to $15 billion with operating cash flow of $2.1 billion entering 2019, up from $6.5 billion in revenue and $583 million in operating cash flow at the start of 2009. As those metrics rose, so did the company's quarterly dividend, to the current rate of $0.255 per share, up from $0.11 in 2009. On the back of a 3% rise in comparable-store sales, Ross recently beat quarterly top- and bottom-line expectations and raised its earnings-per-share (EPS) outlook to a range of $4.52 to $4.57 vs. the previous range of $4.41 to $4.50 and better than the $4.51 consensus. The wrinkle in the report was the company holiday shopping outlook that called for comp sales to grow 1% to 2% versus last year's 4% increase. I suspect Ross once again is being conservative in its outlook given that it recently completed its store growth plans for the year by opening 30 Ross Dress for Less and 12 dd's Discounts stores across 19 states. That timing should bolster favorable year-over-year comparisons for both the holiday season and most of 2020 and favor the likelihood for yet another dividend increase in the coming months. The other contender we'll tackle here and now is logistic company Expeditors International of Washington Inc. . The company originally started with air freight shipments between the U.S. and Asia, but now has operations in the Americas, Asia, Europe, Middle East, Africa and India. Those operations span air freight (35% of revenue), ocean freight (28%) and custom brokerage services (37%). As global trade has increased, in part due to the desire for low-cost goods out of Asia, Expeditors International's business has blossomed, which has allowed it to grow its semi-annual dividend to the current $0.50 per share, up from $0.06 in 1995. Despite the current U.S.-China trade war, Expeditors International's business only declined modestly year over year in the September 2019 quarter, which we view as speaking to its geographically diverse revenue exposure. And as companies seek to source products around the current U.S. tariffs, Expeditors is there for its customers. Candidly, given the $607.7 million in operating cash flow generated during the first nine months of 2019 versus $470.6 million over the same 2018 period, investors may not even think there was a trade war between the U.S. and China. That cash flow, along with cash on hand, bodes rather well for yet another dividend increase in the coming months.

2 Up-and-Coming Contenders for the Title of Dividend Aristocrats

Ross Stores and Expeditors International are among the potential candidates for receiving that distinction in the near future.

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