This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Investors looking for the best dividend growth stocks should take a closer look at stocks with long histories of dividend growth. Specifically, there are two prestigious lists related to dividend history, that investors should focus on. First, there is the Dividend Aristocrats, a group of 57 stocks in the S&P 500 that have raised their dividends for at least 25 years.
There is a another list of stocks with even longer histories of dividend growth, called the Dividend Kings. The Dividend Kings have raised their dividends for at least 50 years in a row. There are fewer than 30 stocks on the list, which shows how difficult it is for a company to increase its dividend each year for five decades.
We currently view the following 3 Dividend Kings as quality long-term holds for dividend growth investors. These 3 Dividend Kings provide an attractive combination of a long history of increased dividends, and future growth potential.
Dividend King #1: Johnson & Johnson (JNJ)
Johnson & Johnson, or J&J, is a health care conglomerate. The company generates over $82 billion in annual revenue, and the stock has a market capitalization of $376 billion. J&J is spread across pharmaceuticals, medical devices, consumer products. The pharmaceutical segment is its largest, comprising nearly half of total revenue.
J&J is an appealing dividend stock for long-term investors, primarily because of its highly impressive track record. According to the company, it has grown its adjusted earnings per share for 35 years in a row. Growth continues to be led by its pharmaceutical pipeline—in the third quarter, pharmaceutical revenue increased 6.4% on an adjusted basis. Total company-wide revenue increased 5% for the quarter, while adjusted earnings-per-share increased 3.4%.
J&J’s future growth will continue to be led by the pharmaceutical segment, and in particular its immunology and oncology portfolio. Immunology sales rose 9% last quarter, due primarily to nearly 30% growth for Stelara. Oncology sales increased 7%, primarily because of 54% growth for Darzalex.
Long-term investors also have the opportunity to capitalize on short-term concerns over litigation risk. J&J is currently facing multiple lawsuits related its talc products. But the long-term growth of the business is not likely to be impaired. The company still expects at least 8% adjusted earnings-per-share growth for 2019. In the meantime, the fears surrounding legal risks have kept the stock valuation reasonable, with an attractive dividend yield of nearly 3%.
J&J has increased its dividend for 57 consecutive years, an excellent history of steady dividend growth. The company has a pristine balance sheet (with a AAA credit rating) and leadership positions across multiple product categories. J&J should continue to increase its dividend for many years.
We expect J&J to generate adjusted earnings per share of $8.65 in 2019. With a quarterly dividend rate of $0.95 per share ($3.80 annualized), the company has a dividend payout ratio of 44%. J&J has a highly secure dividend, with room for future increases.
Dividend King #2: Lowe’s Companies (LOW)
Lowe’s long history of steady dividend growth may be surprising, given that it operates in a cyclical industry. Retail is a tough business, due to intense competition. And retailers struggle when the economy enters a downturn, as recessions are often accompanied by falling consumer spending. Lowe’s is particularly exposed to cyclical segments of the economy, namely housing and construction.
Still, Lowe’s has multiple competitive advantages that have fueled its impressive growth. First is that it operates in a concentrated segment of the retail industry. There are only two major home improvement retailers in the United States: Lowe’s and Home Depot (HD). This allows for Lowe’s and Home Depot to dominate the entire industry.
Lowe’s benefits from high barriers to entry. It operates or services more than 2,200 stores in the U.S. and Canada, generating over $71 billion in annual sales. It is highly profitable, which has allowed the company to raise its dividend each year, even in recessions. It has performed even better in the last 10 years, as the U.S. economy emerged from the Great Recession. Lowe’s has increased its net sales by 4.7% per year over the past 10 years.
In the most recent quarter, Lowe’s generated comparable sales growth of 2.2%, including 3% growth in the United States. Earnings, adjusted for certain one-time items, rose 36% compared with the same quarter last year. Lowe’s continues to benefit from steady U.S. economic growth, and a strong housing market.
The stock has a current dividend yield of 1.8%. While the stock has a fairly low current yield, it makes up for this with high dividend growth. Lowe’s has increased its dividend by 20% per year, on average over the past 10 years. Its earnings and dividend growth are likely to be limited if the U.S. economy enters a downturn going forward. But Lowe’s continued to raise dividends even throughout the Great Recession of 2007-2009, making it a surprisingly recession-resistant retailer.
Dividend King #3: Genuine Parts Company (GPC)
Genuine Parts has been in business for over 90 years. Its most widely-recognized brand is the NAPA auto parts retailer, but it also distributes industrial parts, electrical materials, and general business products. Its global span reaches throughout North America, Australia, New Zealand and Europe and is comprised of more than 3,100 locations. Over half the company’s sales are derived from its automotive parts group.
Genuine Parts has a market capitalization of $15 billion, with nearly $20 billion in annual revenue. It had record total sales of $5 billion in the most recent quarter, a 6.2% increase from the same quarter last year. The gain included a 1.2% comparable sales increase, as well as a 6.7% contribution from acquisitions. This was partially offset by a 1% headwind from currency translation and a 0.7% decline from the sale of the company’s Grupo Auto Todo business.
Genuine Parts has a long history of growth. According to the company, it achieved positive sales growth in 86 out of its 91 years in operation. It recorded profit growth in 75 out of its first 91 years. With steady sales and profit growth, the company has raised its dividend for 63 years in a row, including a 6% increase for 2019.
Continued growth is likely for Genuine Parts, as the company is benefiting from a broad structural change. The average vehicle age is increasing in the United States, as consumers are widely choosing to keep cars on the road longer. But as a vehicle ages, the average cost of repairs increases as well—hence the opportunity for Genuine Parts. According to a recent investor presentation, the most lucrative years for aftermarket repairs start at 6 years of age. Vehicles aged 6 years or longer currently comprise over 70% of the total U.S. fleet.
These trends have disproportionately benefited Genuine Parts. From 2009 to 2018, the company grew its sales and earnings-per-share by 7% and 10%, respectively. Future growth will benefit shareholders in the form of higher dividends. Genuine Parts has a nearly 3% yield, and the company is due to increase its dividend in February.