Investors looking for high-quality stocks should consider the list of Dividend Aristocrats, a group of 57 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. The Dividend Aristocrats possess durable competitive advantages, highly profitable business models, and strong brands that enjoy long-term growth.
In addition to their compelling dividends, the Dividend Aristocrats have generated superior stock price returns. According to S&P, in the past 10 years the Dividend Aristocrats generated total returns of 17.6% per year, compared with 15.9% average annual returns for the broader S&P 500 Index over the same period.
Not only did the Dividend Aristocrats beat the market in the past 10 years, they did so with less volatility. The Dividend Aristocrats had a standard deviation (a common measure of risk) of 12.2% over the past 10 years, while the S&P 500 Index had a standard deviation of 12.9%.
As a result, the Dividend Aristocrats could offer better performance, with lower risk than the S&P 500 Index. Five Dividend Aristocrats in particular look like excellent investments right now, for long-term dividend growth investors.
Dividend Aristocrat #5: Caterpillar (CAT)
Caterpillar is an industrial giant, manufacturing heavy machinery used in the construction and mining industries. The company also manufactures ancillary industrial products such as diesel engines and gas turbines. Caterpillar generates annual revenue of $58 billion.
Caterpillar is a fundamentally strong company. In the most recent quarter, revenue increased 11% to $14.3 billion. Construction product sales rose 8%, while resource segment revenue increased 21% for the quarter. For 2018, revenue increased 20% while adjusted earnings-per-share soared 63%, thanks to sales growth, margin expansion, and tax reform. Earnings per share of $11.22 set an annual record for 2018.
Caterpillar’s main growth catalyst is the steady expansion of the global economy. Global economic growth leads to rising demand for heavy machinery. However, Caterpillar is certainly not immune from recessions as slowdowns in the global economy are generally accompanied by lower commodity prices and slowing construction spending. Earnings per share declined 75% in 2009. Fortunately, it was only a brief decline. Earnings nearly tripled in 2010, with further growth thereafter.
Assuming no recession over the next five years, Caterpillar could generate attractive returns for shareholders. The stock has a P/E ratio of 10.9. This is significantly below average. In the past 10 years, the stock held an average P/E ratio of 16.7. Fair value is estimated as a P/E ratio of 15.5, a slight discount to the 10-year average.
Expansion to this level could boost annual returns by 7.3% per year over the next five years. In addition, shareholder returns will be driven by 6% expected EPS growth through 2024, and the 2.6% dividend yield. Overall, we expect total annual returns of 16% per year over the next five years.
Dividend Aristocrat #4: Cardinal Health (CAH)
Cardinal Health is one of the largest healthcare product distributors in the United States, competing alongside McKesson (MCK) and AmerisourceBergen (ABC). Cardinal Health’s core business is pharmaceutical distribution. It also has a medical products distribution segment.
As a major pharmaceutical distributor, Cardinal Health is under pressure from price deflation among branded pharmaceutical products. Shifting sales mix toward lower-priced generics has helped grow revenue, as distributors ship higher volumes. But the higher revenue has come at the cost of profit margins, which has led to falling operating profit.
These forces were at play in 2018. Cardinal Health reported revenue of $37.7 billion in the most recent quarter, a 7% increase compared to the same quarter last year. However, adjusted EPS fell 15% from the same quarter a year ago. Both of the company’s operating segments posted 14% declines in operating profit for the quarter.
The pharmaceutical distribution industry is challenged right now, but Cardinal Health has an entrenched position in the industry, serving over 24,000 pharmacies and more than 85% of hospitals in the U.S. In addition, the fundamentals of the U.S. healthcare industry are broadly healthy, with expectations of continued growth in healthcare spending over the next several years.
Cardinal Health is still highly profitable, with 2019 expected EPS in a range of $4.97 to $5.17. At the midpoint of guidance, Cardinal Health expects adjusted EPS of approximately $5.07 for 2019.
Cardinal Health stock trades for a P/E ratio of 9.7, based on expected earnings per share of $5.07 for fiscal 2019. Our fair value estimate for the stock is a P/E ratio of 14.0, meaning the stock is significantly undervalued today. Valuation changes could add 9.2% per year to shareholder returns each year through 2024.
In addition, we expect Cardinal Health to grow EPS by 5.0% per year going forward. Adding in the 3.9% dividend yield, total returns could exceed 18% annually for Cardinal Health shareholders buying at the current price.
Dividend Aristocrat #3: AT&T (T)
AT&T is a telecom giant that offers a wide range of services including cable, Internet, and wireless cell phone service. The company generates more than $170 billion in annual revenue. Telecoms like AT&T are typically known more for their stability and consistent profits rather than their high growth. However, the various acquisitions AT&T has conducted over the past year have positioned the company to generate outsized growth in the years ahead.
AT&T’s major growth investment was the $85 billion acquisition of Time Warner, Inc., owner of multiple media brands including TNT, TBS, CNN, and HBO. It also owns the Warner Bros. entertainment studio. AT&T’s acquisition of Time Warner was a meaningful contributor in the fourth quarter. AT&T generated $48.0 billion in quarterly revenue, a 15% increase from the same quarter last year. Adjusted EPS rose 10% for the quarter, and 15% for 2018.
In addition to content and advertising, the looming nationwide rollout of 5G is a meaningful growth catalyst for AT&T. Overall, AT&T is expected to produce adjusted EPS of $3.60 for 2019, which would represent 2% growth from 2018. Debt repayment is a priority for AT&T this year, but the company is expected to return to higher EPS growth of approximately 6% per year through 2024.
AT&T has a compelling dividend yield of 6.7%. This makes it the highest-yielding Dividend Aristocrat, which is appealing for income investors. AT&T is also an undervalued stock, with a price-to-earnings ratio of just 8.5. AT&T has traded at an average P/E ratio of 13.4 over the last decade.
If AT&T’s P/E ratio expands to fair value, this will boost its total returns by around 9.5% per year over the next five years. In addition to the 6.7% dividend and 2% expected earnings growth, total expected returns exceed 18% over the next five years.
Dividend Aristocrat #2: Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance is a pharmacy retail giant, with over 18,000 stores in 11 countries around the world. It also operates one of the largest global pharmaceutical wholesale and distribution networks in the world, with more than 390 centers that deliver to nearly 230,000 pharmacies, doctors, health centers and hospitals each year.
Walgreens stock has underperformed the S&P 500 in the past year, as investor sentiment seems to have deteriorated due to the possible entry of e-commerce giant Amazon (AMZN) into the healthcare industry. Amazon’s $1 billion acquisition of online pharmacy PillPack last year was widely viewed as a precursor to a much bigger move into healthcare.
For its part, Walgreens remains fundamentally healthy. Revenue increased 11% in fiscal 2018, along with 18% adjusted EPS growth. Then, in the fiscal 2019 first quarter, sales increased 10% while adjusted EPS increased 14%. Double-digit revenue and EPS growth certainly do not indicate a deteriorating company.
Walgreens’ biggest growth catalyst is its strong pharmacy segment. Pharmacy sales increased 18% last quarter, while prescriptions rose 11% including the acquisition of thousands of Rite Aid stores last year. Walgreens acquired over 1,900 Rite Aid stores last year, along with three distribution centers and related inventory for $4.4 billion.
Walgreens is expected to grow EPS by 8% each year through 2024. Expansion of the P/E from its current level of 9.7 to our fair value estimate of 15, results in an additional 9.1% annual return boost. Lastly, Walgreens stock has a dividend yield of 2.8%, leading to total expected returns of approximately 20% per year over the next five years.
Dividend Aristocrat #1: AbbVie (ABBV)
The top Dividend Aristocrat in terms of future expected returns is AbbVie (ABBV). AbbVie is a pharmaceutical giant, which was spun off from Abbott Laboratories (ABT) in 2013. AbbVie generates annual sales in excess of $30 billion.
AbbVie has generated impressive growth in recent years, due largely to its flagship multi-purpose drug Humira, which is now the world’s top-selling pharmaceutical product. But the company’s future growth will be fueled by new products. AbbVie has had to discount Humira prices in Europe significantly now that similar products have flooded the market, and Humira will see biosimilar competition in the U.S. in 2023.
Therefore, AbbVie has invested heavily in research and development of new products that can offset lost Humira sales. For example, the company allocated more than $10 billion to R&D spending last year alone. The good news is that AbbVie is starting to see meaningful results from its roster of new products.
In the fourth quarter, revenue of $8.3 billion increased 7%, due primarily to 42% growth for Imbruvica. Humira’s growth rate slowed down to just 0.5% for the period, but new products helped generate higher growth. AbbVie’s EPS rose 28% in the fourth quarter, and 41% for 2018. For 2019, AbbVie expects adjusted EPS in a range of $8.65 to $8.75, which would represent 9%-11% for the year.
Based on expected earnings per share of $8.70, AbbVie stock trades for a P/E ratio of 9.2. Our fair value estimate for AbbVie is a P/E ratio of 13.0, which means an expanding valuation multiple could boost shareholder returns by approximately 7.2% per year over the next five years. In addition, we expect annual EPS growth of 9%-10% through 2024. Lastly, the stock has a current dividend yield of 5.3%. In total, we expect annual returns of 22% per year over the next five years for AbbVie stock.
Sure Dividend helps self-directed investors and investment professionals find high quality dividend growth stocks for the long run. We specialize in long-term investing for rising passive income over time. Sure Dividend was founded in 2014 and is trusted by more than 100,000 investors who receive Sure Dividend’s free dividend information.
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