By Richard Moroney
Companies in the S&P 500 Index paid a combined $311.77 billion in dividends in 2013, up 11% from 2012. That is below the three-year annualized growth of 15%, though that 15% is the best three-year rate in at least 25 years and reflects the restoration of some of the dividend cuts of 2009 and early 2010.
Will the robust growth continue? A look at historical precedents provides some clues. Last year, the S&P 500 Index paid out an estimated 32.6% of its earnings in dividends. The current payout ratio (dividends as a percentage of earnings) is higher than that seen during most of the 2003 to 2007 bull market but lower than the average of 39% over the last 25 years and 44% over the last 50 years. Lower payout ratios reflect greater flexibility to boost dividends going forward.
Index dividends accounted for 22.8% of estimated cash flow (net income plus depreciation) last year, slightly above the 10-year average. Dividends have risen as a percentage of both earnings and cash flow over the last two years — no surprise, given the aggressive dividend hikes and modest operating momentum.
The consensus projects per-share-profit growth of 11% for the index next year, a target many market watchers (including me) find overly optimistic.
The picture looks a little different when we consider dividends as a percentage of cash holdings. Last year, index companies paid out about 8.4 of their cash in dividends, below the 10-year average of 10.6%.
Higher dividends for the index don't just reflect a few massive payouts from the biggest companies; this is a marketwide phenomenon. In 2009, publicly traded companies announced 1,191 dividend increases or extra payments, versus 804 cuts or omissions.
The number of positive dividend actions rose in each of the next four years, and in 2013 good announcements (2,895) outnumbered bad announcements (299) nearly 10-to-1.
What does all this mean? If S&P 500 dividends keep growing 15% annually, the index's dividends as a percentage of earnings and cash flow will rise above historical norms, a trend that seems unlikely given corporate executives' caution regarding cash deployment and the financial sector's newfound focus on strong balance sheets.
That said, many companies have cash to spend and a commitment to raising the payout. In 2014, dividend growth of 9% to 15% seems likely. However, the index's dividend growth has averaged 6% annually since 1988, and growth seems likely to revert toward that long-run pace over the next few years.
Below are five stocks that have raised their dividends aggressively over the last year but still have the flexibility to fund more growth.
Fifth Third Bancorp Fifth Third Bancorp offers investors a blend of strong share-price action (up 38% in 2013) and a solid dividend yield of 2.3%, which exceeds its five-year average of 1.6% and the 1.8% average for regional banks in the S&P 500 Index.
The stock also trades at just 12 times trailing earnings, a 10% discount to its peer-group average. The quarterly dividend, currently $0.12 per share, has a long way to go before returning to its pre-recession high of $0.44 per share. But it consumes just 28% of trailing earnings, and management seems eager to raise the payout in the year ahead if it gets the Federal Reserve's blessing.
Current regulations prevent 30 large banks from paying dividends or buying back stock unless the Fed approves their capital-deployment proposals in March. Stock buybacks shaved 6% from Fifth Third's share count in the past year — only five of the 81 financial recession stocks in the S&P 500 Index repur- chased their stock more aggressively. Fifth Third is a Dow Theory Forecast Buy and a Long-Term Buy.
Kroger Kroger provides income-minded investors a play on a key component of higher dividend growth: steadily improving operating performance. Operating profit margins have risen in six straight quarters, while cash from operations increased in eight of the past 10 quarters and same-store sales climbed in 40 straight quarters. Last month, management reiterated its long-term profit-growth target of 8% to 11%.
The grocer still faces some challenges, particularly the November reduction in food stamps that has squeezed its least affluent shoppers. However, management believes that so far these shoppers have cut back in areas other than groceries. Eventually, Kroger's profit margins could compress as the company protects its market share by lowering prices. Nevertheless, the stock earns a Value rank of 89 despite its 55% total return in 2013, well ahead of the 33% average of S&P 500 consumer-staples stocks. Kroger, yielding 1.7%, is a Dow Theory Forecast Focus List Buy and a Long-Term Buy.
No comments:
Post a Comment