3 Income Favorites Raising Dividends
- By Nathan Parsh
The more defensive sectors of the economy are usually some of the best places to find stocks with growing dividends. Companies that can navigate difficult economic conditions generally have consistent growth over a long period of time. The defensive sectors are usually the home of some of the longest dividend growth streaks in the market as this long-term consistency often leads to excess capital that can be returned to shareholders through dividends.
Warning! GuruFocus has detected 10 Warning Signs with JNJ. Click here to check it out.
NYSE:JNJ) is one of the largest companies in the world. The company is composed of three business segments, including pharmaceuticals, consumer health care and medical devices. The company generated revenue of nearly $83 billion in 2020.
Johnson & Johnson increased its dividend by 4.7% for the June 8 payment date, marking the 59th consecutive year of dividend growth for the company. Few names in the market can top this growth streak. The company has a dividend compound annual growth rate of 6% over the last decade. Shares yield 2.6% as of the most recent close, which is below 2.9% yield that the stock has averaged since 2011, but is a full percentage point above the average yield for the market index.
The new annualized dividend is $4.24. Analysts surveyed by Yahoo Finance expect the company to earn $9.57 per share in 2021, resulting in a projected payout ratio of 44%. The average payout ratio is 47% over the last 10 years, so the estimated payout ratio appears very safe.
Johnson & Johnson closed Friday's trading session at $165.52, giving the stock a forward price-earnings ratio of 17.3 when using analysts' estimates. According to Value Line, shares of the company have traded with an average multiple of 17.8 times earnings since 2011, so shares would be trading at a discount to historical average.
GuruFocus finds the stock as trading above its intrinsic value.
3 Income Favorites Raising Dividends Johnson & Johnson has a GF Value of $148.12, which equates to a price-to-GF Value of 1.12. As such, shares earn a rating of modestly overvalued.
Johnson & Johnson has one of the longest dividend growth streaks available to investors, yet the payout ratio remains very healthy and allows for a margin of safety in case of a significant reduction in the company's business. Shares are also trading below the historical valuation. The company is one of our largest holdings and we added to the positions in late January. While that trade is still slightly in the red, Johnson & Johnson remains a core holding and we would be comfortable adding at the current price.
Procter & Gamble
Procter & Gamble Co. (NYSE:PG) is a leading consumer products company, whose brands include Pampers, Tide, Bounty and Charmin. Procter & Gamble is valued at $328 billion and produced revenue of $75 billion over the last four quarters.
The company raised its dividend 10% for the May 17 payment date. This is notable because the company's dividend has a CAGR of just over 4% since 2011. Investors have grown accustomed to smaller dividend increases recently, so this double-digit raise is a welcome sign that the company believes business is on sound footing. Procter & Gamble's dividend growth streak has now expanded to 65 years, a length nearly unmatched in the market. The stock now yields 2.6%, though this is below the 10-year average yield of 3.1%.
With an annualized dividend of $3.48 and expected earnings per share of $5.63, Procter & Gamble has an estimated payout ratio of 62%. This projected payout ratio matches the 10-year average payout ratio.
Procter & Gamble closed last week at $133.94. Using expected earnings per share for the year, the stock has a forward multiple of 23.8 times earnings. The average price-earnings ratio since 2011 is 19.8, showing that the stock is ahead of its long-term valuation.
Procter & Gamble finds that the stock is just above its GF Value.
3 Income Favorites Raising Dividends With a GF Value of $127.30, Procter & Gamble has a price-to-GF Value of 1.05. The stock receives a rating of fairly valued as a result.
Procter & Gamble has an even longer dividend growth streak than Johnson & Johnson as the company has taken advantage of its massive market share in its sector. The payout ratio, though above 50%, is still reasonable and in line with the 10-year average. Shares can be considered slightly expensive on a historical basis, but trade just 5% of its intrinsic value as calculated by GuruFocus. One of our investing rules for the year is to purchase shares of companies that raise dividends by at least 10%, and that was what we did in mid-April following the announced increase.
Southern Company
The Southern Company (NYSE:SO) is one of the largest utility companies in the U.S. It has nearly 9 million customers, primarily located in the southern states, is valued at $69 billion and had revenue in excess of $20 billion last year.
Southern Company raised its dividend 3.1% for the June 7 payment date, giving the company 20 consecutive years of growth. Utility companies are often perceived as slow but consistent growers. This is true for the company's dividend, which has a CAGR of 3.1% since 2011. At 4%, Southern Company has the highest yield of the names discussed. However, shares have averaged a yield of 4.6% over the last decade.
The new annualized dividend totals $2.64. With expected earnings per share of $3.31, Southern Company has an expected payout ratio of 80%. This is on the higher side, but not too far off the norm for the company. Southern Company has an average payout ratio of 76% since 2011, with the payout ratio never falling below 70% during this time. The higher payout ratio helps to explain the low dividend growth.
Currently trading at $65.33, Southern Company has a forward price-earnings ratio of 19.7. Over the long term, the company has an average price-earnings ratio of 16.5, so shares can be considered expensive using the average earnings multiple.
Southern Company also has the highest price-to-GF Value of the names discussed here.
3 Income Favorites Raising Dividends With a GF Value of $51.23, the price-to-GF Value is 1.28, earning Southern Company a rating of modestly overvalued.
Like most utility stocks, Southern Company offers an attractive dividend yield, even if it is below its decade-long average. The payout ratio is high, but something investors in the company are likely comfortable with given how the payout ratio has been above 70% every year since 2011. We added to our position in February at around $61, so we have a slight gain in that purchase, but we are waiting for a pullback before adding more to Southern Company given the premium it is trading with to its average valuation and intrinsic value.
Final thoughts
Consumer staples, health care and utility stocks are among our favorite places to look for dividend-paying stocks as the business models can provide for rising income. Johnson & Johnson, Procter & Gamble and Southern Company are three of our favorite names for income.
We don't mind paying up for quality and we consider all three quality names. We have added to each position since the start of the year. Of the three discussed, Johnson & Johnson is trading below its historical valuation while Procter & Gamble looks the most reasonable priced when considering intrinsic value. On the other hand, we would prefer to see a pullback in Southern Company.
Disclosure: The author maintains a long position in Johnson & Johnson, Procter & Gamble and Southern Company.
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This article first appeared on GuruFocus.
