Investors looking for high-quality businesses should consider dividend growth stocks. The beauty of strong dividend growth companies is that they pay their investors rising streams of dividend income, regardless of the direction the market is going. This article will discuss the top 10 Dividend Achievers, ranked according to their expected returns found in the Sure Analysis Research Database.
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10: AmeriGas Partners
- Expected Annual Returns: 15%-16%
AmeriGas Partners (APU) is the largest propane distribution company in the United States, serving nearly 2 million customers in all 50 states through approximately 1,900 distribution locations. Propane sales account for nearly 90% of the company’s annual revenue, with related equipment and accessories accounting for the remaining 10%. AmeriGas has a market capitalization of $4.4 billion. UGI Corporation is AmeriGas’ general partner and also owns 26% of the partnership’s common units…
AmeriGas has traded at an average distribution yield of 7.9% over the past 5 years and an average distribution yield of 7.6% over the past 10 years. The partnership’s current distribution yield of 9.3% indicates that AmeriGas is undervalued. We expect valuation changes to add 1% to annual returns going forward. In addition, we expect AmeriGas to generate 5% annual earnings growth. Combined with the 9.3% dividend yield, total returns could exceed 15% annually.
9: Leggett & Platt
- Expected Annual Returns: 15%-16%
…Leggett & Platt (LEG) has been in business since 1883. Today, the company designs and manufactures a wide range of products, found in most homes and automobiles. Through 130 manufacturing facilities across 19 countries, Leggett & Platt manufactures bedding components, bedding industry machinery, steel wire, adjustable beds, carpet cushioning, and vehicle seat support systems.
…The stock is significantly undervalued. Leggett & Platt shares trade for a price-to-earnings ratio of 15.4. In the past 10 years, the stock traded for an average price-to-earnings ratio of 19.8. As a result, we believe a return to fair value could add 5%-6% to Leggett & Platt’s annual returns. In addition to a 3.6% dividend yield, total returns could reach 15%-16% per year.
8: Omega Healthcare Investors
- Expected Annual Returns: 17%-18%
Omega Healthcare Investors (OHI) is a Real Estate Investment Trust, or REIT. REITs own real estate properties and lease those properties to tenants in select industries. Omega Healthcare owns healthcare real estate, primarily skilled nursing facilities and senior housing. The company operates ~1,000 properties in 42 U.S. states and the United Kingdom.
…Omega Healthcare’s long-term growth trajectory remains intact. In the meantime, the stock has a dividend yield of 8.7%. Omega Healthcare expects to have a dividend payout ratio of 88% in 2018. It also has a strong balance sheet, with an investment-grade credit rating and no material debt maturities until 2022. We expect Omega Healthcare to grow FFO-per-share by 4%-5% each year moving forward. Combined with dividends and a modest expansion of the valuation, we expect 17% annual returns for the stock.
7: AT&T Inc.
- Expected Annual Returns: 18%-19%
…AT&T offers a variety of telecom services, including wireless and cable TV, as well as satellite TV through its subsidiary DirecTV. AT&T stock has declined 16% year-to-date, due to heightened competition and uncertainty surrounding the fate of a major acquisition.
… The major catalyst for AT&T moving forward is the pending $85 billion acquisition of Time Warner (TWX), but the fate of the deal is in doubt. In November the Department of Justice sued to block the proposed transaction, on antitrust grounds. The main portion of the trail recently concluded, with a final decision expected on 6/12/18.
The Time Warner acquisition would be a major boost to AT&T’s growth. Time Warner is a content giant, with a number of strong media properties, including TBS, TNT, HBO, and the Warner Bros. movie studio. If the Time Warner acquisition is approved, the combined company would have over 140 million mobile subscribers, and another 45 million video subscribers, worldwide. Along with 5G rollout and fiber network expansion, the Time Warner deal is among the most important growth catalysts for AT&T.
In the meantime, AT&T has a highly secure dividend payout. Based on 2018 earnings guidance, the company is on pace for a dividend payout ratio of approximately 58%. Absorbing Time Warner is a costly proposition for AT&T, which ended the most recent quarter with $133.7 billion of long-term debt. Fortunately, AT&T has a solidly investment-grade credit rating of BBB+, and the company generates more than enough cash flow to service its debt and pay its hefty dividend.
According to ValueLine estimates, AT&T is expected to generate adjusted earnings-per-share of $3.45 in 2018. The stock currently trades for a price-to-earnings ratio of just 9.4, compared with an average of 13.4 over the past 10 years. Therefore, we believe the stock is significantly undervalued, and an expanding price-to-earnings ratio could add 8% to shareholder returns each year. Assuming 4%-5% annual earnings growth, AT&T stock can provide returns of 18%+ per year, through a rising valuation, earnings growth, and dividends.
6: Invesco Ltd.
- Expected Annual Returns: 18%-19%
Invesco (IVZ) is a financial services company. It provides investment management and a variety of other services, to retail, institutional, and wealth management customers around the world. The company has a market capitalization of $11.1 billion.
…ValueLine analysts expect Invesco to generate earnings-per-share of $2.85 in 2018. Based on this, Invesco stock trades for a price-to-earnings ratio of 9.5. We believe a fair valuation for Invesco is a price-to-earnings ratio of 14-15. As a result, a rising valuation could add approximately 8% to total returns. In addition, we believe Invesco can reasonably generate annual earnings growth of 6%. Along with the 4.2% dividend yield, total returns could reach 18%+ per year.
5: Energy Transfer Equity
- Expected Annual Returns: 19%
Energy Transfer Equity (ETE) is a Master Limited Partnership, or MLP, which owns and operates energy infrastructure such as natural gas, natural gas liquids, refined products, and crude oil pipelines, as well as retail and wholesale motor fuel operations and LNG terminals. Energy Transfer also owns the General Partner and 100% of the incentive distribution rights (IDRs) of Energy Transfer Partners, L.P. (ETP) and Sunoco L.P. Energy (SUN). Energy Transfer also owns the Lake Charles LNG Company.
…Energy Transfer Equity has an attractive distribution yield of 7.3%, and the distribution payout appears to be sustainable going forward. The company reported a distribution coverage ratio of 1.48x in the 2018 first quarter, which means it generated 48% more distributable cash flow than it needed to pay distributions last quarter.
Energy Transfer Equity is expected to generate distributable cash flow of $3.50 per unit in 2018, according to ValueLine analysts. As a result, the MLP currently trades for a price-to-DCF ratio of 4.8, a very low valuation that indicates the units are undervalued. Over the next five years, an expanding valuation could add approximately 8% to Energy Transfer Equity’s annual returns. Combined with expectations of 4% DCF growth and its 7.3% distribution yield, total annual returns could reach 19%.
4: Walgreens Boots Alliance
- Expected Annual Returns: 21%-22%
Walgreens Boots Alliance (WBA) is the largest retail pharmacy in both the United States and Europe. The company operates approximately 13,200 stores in 11 countries. It also operates one of the largest global pharmaceutical wholesale and distribution networks, with more than 390 distribution centers that deliver to upwards of 230,000 pharmacies, doctors, health centers, and hospitals each year.
Walgreens stock is a unique opportunity, because it has been negatively impacted by the retail downturn. The so-called demise of brick-and-mortar retailers has taken down Walgreens along with the rest of the industry. Shares of Walgreens have dropped 20% in the past 12 months and yet, the company continues to rack up excellent growth. Walgreens reported strong results for the fiscal second-quarter, including 9.4% organic sales growth, along with 27% earnings growth.
…Along with quarterly results, Walgreens raised full-year earnings guidance. The company now expects adjusted earnings-per-share of $5.85 to $6.05 this year. At the midpoint of guidance, Walgreens expects 17% earnings growth for 2018. Given the company’s strong track record of growth, we believe that 8%-10% annualized growth in earnings per share is feasible for the foreseeable future. In addition, returns will be boosted by Walgreens’ 2.5% dividend yield, as well as a rising valuation.
Based on the midpoint of 2018 earnings guidance, the stock trades for a price-to-earnings ratio of just 10.6. This is well below our estimate of fair value, which is a price-to-earnings ratio of is 16.7. If the company’s valuation can revert to its historical mean over a time period of 5 years, this will add 9%-10% to annual shareholder returns. Combined with dividends and earnings growth, Walgreens could produce excellent total returns of 21%-22% each year moving forward.
3: Cardinal Health
- Expected Annual Returns: 22%-23%
Cardinal Health (CAH) is another Dividend Aristocrat, as it has raised its dividend for over 30 years in a row. Right now is an opportune time to buy this Dividend Aristocrat. Shares of Cardinal Health have declined 30% in the past one year, due to the pressure facing the pharmaceutical distribution industry. Falling prices for pharmaceutical drugs and mounting social and political uproar surrounding the U.S. opioid crisis have eroded investor sentiment.
…We view the price deflation in the pharmaceutical industry as a short-term event. Healthcare is still seeing robust demand in the U.S, which should remain strong due to the aging population. As a result, prices are likely to at least stabilize over the long-term.
Despite the negative headlines, Cardinal Health is still a highly profitable company, with an entrenched position in its industry. The company expects adjusted earnings-per-share in a range of $4.85 to $4.95 this year. As a result, the stock is significantly undervalued. Based on 2018 earnings estimates, the stock has a price-to-earnings ratio of 10.6, at the midpoint of guidance. We estimate a price-to-earnings ratio of 16.8 as fair value, which is equal to its 10-year average.
Cardinal Health stock could generate 9%-10% annual returns, just from expansion of the price-to-earnings ratio. In addition, we believe the company has potential for 8%-10% annual earnings growth, in a normalized operating environment. Combined with the 3.6% dividend yield, total returns could reach 22%-23% per year.
2: Owens & Minor
- Expected Annual Returns: 26%-27%
Owens & Minor (OMI) has increased its dividend for 20 years in a row, and currently has a 6.4% dividend yield. The reason for Owens & Minor’s high dividend yield is the massive stock decline over the past year. Shares of Owens & Minor are down by nearly 50% in the past 12 months.
Owens & Minor is a healthcare distribution, transportation, and data analytics company. It provides healthcare products, mainly pharmaceuticals, for hospitals and other medical centers. Its other clients include group purchasing organizations, product manufacturers, the federal government, and at-home healthcare patients.
…Falling prices in the pharmaceutical industry have weighed on Owens & Minor’s already-thin margins. The company’s revenue and earnings-per-share declined 4% and 26% in 2017, respectively. Fortunately, operating conditions improved to start 2018. On 2/10/18, the company released first-quarter financial results. Revenue of $2.37 billion increased 1.7% year over year, thanks to 2.3% revenue growth in the core Global Solutions Group.
…We believe Owens & Minor can achieve a long-term annual earnings growth rate of 8% to 10%. In the meantime, the stock is significantly undervalued, and also has a high dividend yield. Analysts expect Owens & Minor to generate earnings-per-share of $2.00 in 2018. As a result, the stock trades for a price-to-earnings ratio of just 8.1. We believe the stock deserves a price-to-earnings ratio of 14-15, equal to a fair value price of $29 for Owens & Minor.
Expansion of the price-to-earnings ratio could add 12% to annual returns for shareholders. Adding 8% earnings growth and a 6%+ dividend yield results in expected total returns of 26%+ for Owens & Minor stock.
Top Dividend Achiever No. 1: Buckeye Partners
- Expected Annual Returns: 27%-28%
The highest-ranked Dividend Achiever in the Sure Analysis research database is Buckeye Partners (BPL), a midstream MLP. Buckeye has approximately 6,000 miles of pipelines, and more than 135 liquid petroleum product terminals, with over 176 million barrels of total storage capacity. Approximately 95% of EBITDA is derived from fee-based sources.
Buckeye’s portfolio of pipelines and terminals is located in the East Coast, Midwest, and Gulf Coast regions of the U.S. It also has a significant international presence, with a 50% interest in VTTI. In 2017, adjusted EBITDA and DCF rose 8.3% and 0.7%, respectively. However, performance deteriorated to start 2018. In the first quarter, adjusted EBITDA declined 5.7% year-over-year, while DCF fell 11%. Fortunately, Buckeye can return to EBITDA growth, through new projects.
…We expect Buckeye to generate a very high rate of return going forward, because the stock has an attractive combination of growth potential, undervaluation, and a high yield. We expect Buckeye will generate EBITDA-per-unit of $6.77 in 2018. Based on this, the MLP is currently trading at a price-to-EBITDA ratio of just 5.3. We believe fair value is a price-to-EBITDA ratio of 7-8, which would add 7% to Buckeye’s annual returns. In addition, Buckeye has the potential for 6% EBITDA growth each year. When combined with its 14% distribution yield, Buckeye could generate total returns of 27%+ per year.
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Earnings estimates embody analysts’ opinions of factors such as sales growth, product demand, competitive industry environment, profit margins and cost control. Thus, earnings estimates serve as a valuable tool while taking investment decisions. Earnings estimates also help analysts assess the cash flow to determine the fair value of a firm.