Top 10 Dividend Champions: Lowest Payout Ratios

The payout ratio is an often discussed metric for determining whether a dividend payer is a solid investment.  This is particularly true from a dividend growth perspective.

The premise of the argument is that a company paying most of its earnings in dividends doesn’t have room to increase its dividend payment going forward.  For instance, if a firm has net earnings of $3 per share per year and pays out $2.70 of those earnings in dividends, a 90% payout ratio, it has only $0.30 per year with which to increase dividend payments.

Danger?

Accordingly, investors should seek firms with low payout ratios.  Those firms have room to increase their dividends without consuming most of their earnings in the process.  The theory says investors are likely to see the dividend stream from that investment grow over time given the headroom afforded by the low payout ratio.

With that perspective in mind, the firms in the table below are the Top 10 Dividend Champions by Payout Ratio on 1.31.19.  All deliver 25+ year records of increasing dividend payments while carrying the lowest payout ratio among all Dividend Champions.

Company	Payout Ratio
Consolidated Edison	13.45
NACCO Industries	15.10
West Pharmaceutical Services	19.11
Black Hills Corp.	20.12
SEI Investments Company	20.95
Roper Technologies Inc.	21.07
Stepan Company	21.28
California Water Service	22.77
Nordson Corp.	23.18
Brown & Brown Inc.	23.19

Although this metric appears solid upon first glance, one should also look at the dividend yield.  It’s possible a firm with a low payout ratio is paying a low dividend as well.  A good exercise here would have been to drop another column to the right of the payout ratio in which to add the respective yields of the firms for comparison purposes.  Maybe next time.

Another item to keep in mind is that a firm with a low payout ratio and low dividend yield, ostensibly having room to grow its dividend, may never deliver a dividend stream as strong as that of an alternative firm already sporting a high dividend yield and high payout ratio.  See the post on Dividend Growth vs Dividend Yield for additional thoughts on this matter.

Buying a low payout ratio, low dividend stock might be considered the equivalent of paying several multiples above book value with the hope in both cases that actual results eventually meet expectations.  This can be a questionable proposition.  As a result, the Dividend Farmer prefers to buy a bird in hand rather than two in the bush.

In any event, looking for low payout ratio dividend payers is a popular screening method when hunting for dividend opportunities.  Your investing philosophy will help you determine whether or not emphasizing payout ratio is right for you.  Either way, it’s a metric to keep in mind when analyzing alternatives.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: General Dynamics

In the first post of this year’s blog, I looked at The Southern Company as a potential dividend investment selection for my Dividend Farm.  Since I’ve been a fan of the aviation and aerospace industry for decades, I decided to review General Dynamics (GD).  It’s got a long history of dividend payments so I thought it might be a good candidate to peruse given my portfolio is underweight in manufacturing related holdings.

The table below provides a summary of factors considered as part of the selection process based on data reviewed on January 7, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives e.g., The Southern Company.

FACTOR	TARGET METRICS	GENERAL DYNAMICS
CCC List	Champion	Champion
Current Yield	4.0%	2.4%
Company Profile	Red Flags	None
Industry Leadership	Top 10	#4
Market Cap	$10 B+	$42.7 B
P/E	< 20	15.4
P/B	< 2	3.6
Debt / Equity	< 1	2.1
Dividend History	25 Years	27 Years
12 Month Price Range	Lower Half	Bottom Quartile
Dividend Payout Ratio	< 75%	35.3%
Portfolio Weight	Under to Slightly Over	Under

The first column lists primary factors.  The middle column lists target benchmarks.  The last column highlights General Dynamics’ metrics so I can see how well they align with my benchmarks.

CCC List: The list references firms found on the DRIPinvesting.org web site in the Champions, Contenders, Challengers list.  GD is a Champion so it’s off to a great start.

Current Yield:  GD’s yield is at 2.4% which means any significant addition to the portfolio will reduce the portfolio average below my target of 4%.  With that said, DRiPInvesting.org shows GD sporting a dividend growth rate in excess of 10% for 1, 3, 5, and 10 year periods.  If the payout ratio is fairly low, that growth right might be sustainable.  The question is, how many years of high growth rate are required for it to generate a dividend return equivalent to an alternative already paying 5% or 6%?

Company Profile:  GD is an aerospace and defense contracting firm providing commercial and military aviation services, combat services, information technology services, and marine services for U.S. Navy and commercial maritime customers.  It’s been in business for nearly 70 years.  Coupled with its size, it shows no indication of decline nor are there immediately obvious red flags from a business perspective.

Industry Leadership:  Preferencing Top 10 companies within their industry means looking for established leaders.  Army-Technology.com listed GD as the 5^th largest aerospace and defense firm in the United States.  That’s a good sign.

Market Capitalization:  Yahoo Finance listed GD’s market cap at $47.7 billion which exceeds another benchmark.

Price to Earnings:  The P/E for GD is well under the maximum target figure of 20.

Price to Book:  P/B is nearly double my target metric.  That could be problematic since I’d prefer not to purchase too much “blue sky” even if it is an aerospace firm.

Debt to Equity:  D/E is more than double my target metric as well.  If a firm is pricing in blue sky along with too much debt, I begin leaning away from it.

Dividend History:  27 consecutive years of dividend payments with the aforementioned dividend growth rate is solid and appealing.

Price Range:  The price range for the stock currently is in about the bottom quartile for the preceding 12 months.  This is goodness to an extent.  However, even at that point, it’s still above $157.  As a result, if I want to add to my portfolio, I’ll have to continue adding to my powder while keeping it dry.

Payout Ratio:  The payout ratio just over 35% could be attractive.  With the healthy dividend growth rates mentioned earlier, the payout ratio indicates those rates may be sustainable for some time.  They have to be to catch alternatives currently paying above 4%, though.

Portfolio Distribution:  Acquiring GD would certainly help my portfolio balance by adding to the manufacturing sector which is light at the moment.  However, I would need to generate a fairly substantial add to move the needle on the balance meter but reduce my portfolio yield in the process.

Analysis:  GD was off to a reasonably good start.  The P/B and D/E figures give me pause as does the general price range.  I’m not convinced that building an investment pool to get more than a handful of shares is worth the blue sky and debt that come with it – particularly if doing so reduces my total yield.   

I don’t currently have a stake in GD.  Whether or not GD stacks up well to alternatives and to my pot of funds available will determine whether or not it gets added.  At the moment, GD and SO appear to be in the same boat, albeit for different reasons.  However, there are several firms to review before I pull the trigger.  Meanwhile, spring is just around the corner with preparation for farming season in full swing.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.

Dividend Farming Scorecard: The Southern Company

In an early December post on selecting investments for my Dividend Farm, I highlighted factors I investigate when considering whether or not to add a firm to my portfolio.  It’s a new year and time to think about adding seed money to expand my crop of dividend payers.  With that in mind, I thought it might be interesting to begin analyzing possible additions.

The table below provides a summary of factors I consider as part of my selection process as applied to Southern Company on January 1, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives.

FACTOR	METRICS	THE SOUTHERN COMPANY
CCC List	Champion	Contender
Current Yield	4.0%	5.7%
Company Profile	Red Flags	Telco Svcs?
Industry Leadership	Top 10	#9
Market Cap	$10 B+	$45 B
P/E	< 20	18.3
P/B	< 2	1.8
Debt / Equity	< 1	6
Dividend History	25 Years	18 Years
12 Month Price Range	Lower Half	Yes
Dividend Payout Ratio	< 75%	98.3
Portfolio Weight	Slightly Over	Yes

The first column lists the primary factors I review.  The middle column lists the benchmarks I’m aiming for.  The last column highlights The Southern Company’s metrics so I can see how well they align with my benchmarks.

CCC List: The list is in reference to firms found on the DRIPinvesting.org web site in the Champions, Contenders, Challengers list.  SO is located in the Contenders section so it’s off to a great start.

Current Yield:  SO’s yield is a healthy 5.7% as of the CCC chart last updated on 12.1.18.  A 5.7 yield handily beats my 4% target.  SO is two-for-two.

Company Profile:  In reviewing the profile I notice that SO is not just into generation and transportation of power (electric and gas), but it’s also got a play in the telco sector.  This strikes me as being outside the firm’s circle of competence (potentially) as Warren Buffett puts it, but it’s not a show stopper.  Additionally, I take a look at recent news articles about the company to see if there are any events being reported that may have long-term, negative implications.  I didn’t locate any for SO.

Industry Leadership:  I’m interested in companies in the Top 10 of their industry.  Investopedia listed SO as the 9^th largest utility in the United States so that’s good.

Market Capitalization:  SO’s market cap is well in excess of my target for large companies in which case it’s still on track as a possible add.  I should add that I’ll reference the market cap against revenue to ensure I’m not getting tangled up in something stratospherically priced relative to income.  I consider it a cross-check to the P/E.

Price to Earnings:  The P/E ratio is below my target metric as well.  The P/E is for the trailing 12-months rather than the leading 12-months.  I’d rather base my analysis on facts vs forecasts when possible.  Also, the P/E of 20 for the trailing 12-month period is a Benjamin Graham recommendation.  SO meets the mark here as well.

Price to Book:  P/B should be less than 2 in my estimation.  Beyond 2 and I figure I’m paying for blue sky, good will, or any number of other things that don’t translate into cash flow or profit.  This metric is another of Ben Graham’s.  SO squeezes under the bar on this one so it remains in the running.

Debt to Equity:  D/E is important to me for the same reason my debt relative to my income and net worth was important to my lender when I borrowed money to buy a house.  Too much of the former and not enough of the latter generally spells trouble on the mortgage front.  Therefore, a firm that’s too far of the market on this metric must provide a significant advantage or meet a critical need elsewhere as an offset.  However, when the D/E is 3x my target, I immediately consider taking a pass.

Dividend History:  18 consecutive years of dividend payments is solid.  However, it’s not outstanding because it’s less than 75% of my target.  Although not a show stopper by itself, in tandem with the D/E figure, it may well be.

Price Range:  The price at the time of this writing was $43.92 which put in in the lower half of SO’s twelve-month price range.  I’d rather be in the bottom half of the range than the top in order to avoid over paying or potentially getting caught in the hysteria of Mr. Market.  Also, I generally don’t look long at firms with stock prices well in excess of $100 a share.  I’d prefer buying a larger number of shares than smaller for a given dollar amount.  Less is more.

Payout Ratio:  I generally like the dividend payout ratio to be under 75% in hopes there may be a little extra headroom for growth.  However, I’m not overly concerned if it rises above that point as long as the firm delivers a steady, high yield due to my preference for high yield vs high growth, all things considered.  SO has a pretty steady dividend history so a high payout ratio, particularly in a regulated industry with large capital infrastructure costs and enormous barriers to entry like those of utilities, doesn’t give me heartburn.

Portfolio Distribution:  Last, but not least, I look at what the holding would do to my portfolio distribution if I add it.  Utilities fall into my Energy segment which is the third largest bucket of the nine I break my portfolio into.  The size of the additional investment I make will affect my decision.

Taken in a vacuum, SO appears promising.  Except for the high debt to equity figure and the potential effect on my portfolio balance it actually looks attractive to a conservative Dividend Farmer.  However, I don’t normally look at firms on a stand-alone basis.  Instead, I’ll run this analysis across multiple possibilities to see if any one of them provides a better fit than SO.  If the opportunity-cost exercise is favorable, then SO could be a valuable addition to the portfolio. 

I don’t currently have a stake in SO.  How the firm stacks up relative to other options and to my pot of funds available to invest will determine whether or not it gets added.  Stay tuned.  In the meantime, spring is just around the corner.  No better time than now to think about Dividend Farming.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.