10 Dividend Growth Stocks For August 2017 – Seeking Alpha

This post was originally published on this site

As a dividend growth investor, I love David Fish’s CCC list of dividend growth stocks trading on U.S exchanges. Updated every month, the CCC list contains more than 800 stocks trading with at least five consecutive years of higher dividend payments. The accompanying spreadsheet provides key statistics of the CCC stocks.

In my monthly 10 Dividend Growth Stock series, I identify 10 CCC stocks worthy of further research. To create the list, I trim the CCC list using various screens. I rank the trimmed list and assign a 7-star rating to each stock. Stocks rated 5 stars or better are worthy of further analysis.

Trimming The CCC List

The latest CCC list (dated 7/31/17) contains 829 stocks. This month I used the dividend stock screener provided by Simply Safe Dividends to select “Very Safe” stocks:

The Dividend Safety Score is a metric that rates the safety of a company’s dividend payment. The score is determined by considering a stock’s most important financial metrics. Dividend Safety Scores range from 0 to 100:

Source: Simply Safe Dividends

The screener produced 109 stocks, but three of those stocks do not appear in the CCC list.

Here is an analysis of the 106 candidates that do appear in the CCC list, courtesy of finbox.io:

Collectively, the 106 stocks have a fair value downside of about 6%, while they show a 7.6% 1-year return. The 106 stocks have outperformed the S&P 500 by about 29% over the last five years.

The Ranking Process

Usually, I rank all the candidates using data available in the CCC spreadsheet. This preliminary ranking helps me to further trim the list of candidates.

However, this month I decided to rank all 106 candidates using data from the CCC spreadsheet and additional sources like Morningstar, S&P Capital IQ, and F.A.S.T. Graphs.

My ranking system favors established dividend paying stocks with strong fundamentals and stocks potentially trading at or below fair value.

Here are the top 10 ranked stocks for August 2017:

Stocks I own in my DivGro portfolio are highlighted.

Four stocks from last month’s top 10 appear in this month’s top 10. The stocks are identified with a subscript that represents last month’s ranking. For example, HRL1 means HRL was ranked first last month.

Ratings and Sectors

The following table presents the top 10 ranked stocks by sector, along with my star ratings for each stock. This month, every stock earned a 6-star rating. I consider stocks with a 5-star rating or better worthy of further analysis:

Rank

Company

Rating

Sector

1

Hormel Foods (HRL)

✭✭✭✭✭✭✩

Consumer Staples

2

Lowe’s Companies (LOW)

✭✭✭✭✭✭✩

Consumer Discretionary

3

Texas Instruments (TXN)

✭✭✭✭✭✭✩

Information Technology

4

Williams-Sonoma (WSM)

✭✭✭✭✭✭✩

Consumer Discretionary

5

CVS Health (CVS)

✭✭✭✭✭✭✩

Consumer Staples

6

Altria Group (MO)

✭✭✭✭✭✭✩

Consumer Staples

7

T. Rowe Price (TROW)

✭✭✭✭✭✭✩

Financials

8

Lockheed Martin (LMT)

✭✭✭✭✭✭✩

Industrials

9

3M Company (MMM)

✭✭✭✭✭✭✩

Industrials

10

Cummins (CMI)

✭✭✭✭✭✭✩

Industrials

Key Statistics and Fair Value Estimates

The table below presents some key statistics as well as fair value estimates for the top 10 stocks. To estimate fair value, I use a multi-stage DDM analysis with proprietary adjustments. I set a required rate of return of 10% and use estimates of the annual EPS growth rate for the next 5 years. Thereafter, I taper the growth rate to a perpetual growth rate of 3% after 10 years. Adjustments to the calculated fair value are based on various factors, including an assessment of dividend safety.

In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS (earnings per share) payout ratio, and Debt is the ratio of debt to equity. The compound dividend growth rate over a 5-year period (5-Yr DGR) is provided, where available. Morningstar’s Moat and Standard and Poor’s Credit Rating, as well as Value Line‘s Safety and Financial Strength ratings also are provided. Finally, I present my own estimate of Fair Value.

Bonus List: Top 10 Discounted Stocks

Only four of the top 10 stocks are trading at discounts to fair value. In ranking and rating the stocks, I estimated fair values for all candidates. The following table presents the 10 stocks that are discounted most compared to my fair value estimates:

Rank

Company

Rating

Sector

Discount

16

Brinker International (EAT)

✭✭✭✭✭✩✩

Consumer Discretionary

19.5%

5

CVS Health (CVS)

✭✭✭✭✭✭✩

Consumer Staples

16.9%

4

Williams-Sonoma (WSM)

✭✭✭✭✭✭✩

Consumer Discretionary

15.4%

58

Flowers Foods (FLO)

✭✭✭✭✩✩✩

Consumer Staples

15.4%

31

MSC Industrial Direct (MSM)

✭✭✭✭✭✩✩

Industrials

15.0%

28

Kroger (KR)

✭✭✭✭✭✩✩

Consumer Staples

14.8%

14

Cardinal Health (CAH)

✭✭✭✭✭✭✩

Health Care

13.4%

12

International Business Machines (IBM)

✭✭✭✭✭✭✩

Information Technology

12.2%

2

Lowe’s Companies (LOW)

✭✭✭✭✭✭✩

Consumer Discretionary

8.2%

98

Brookfield Infrastructure Partners (BIP)

✭✭✭✩✩✩✩

Utilities

7.0%

Please note that I consider stocks rated 5-stars or better worthy of further analysis, so I wouldn’t be interested in looking at FLO and BIP at this time.

Looking Back

Since the one-year anniversary of my monthly 10 Dividend Growth Stocks article series, I’ve been looking back to see how my year-ago selections performed. Here’s a chart showing the price performance of my top 10 ranked stocks from August 2016:

The arithmetic average of these returns is 16.5%. In comparison, the Vanguard Dividend Appreciation ETF (VIG) returned 8.1% over the same period.

Of my year-ago selection, Boeing (BA), Apple (AAPL), and UnitedHealth (UNH) performed the best, while CVS performed the worst. Please note that I’m comparing the performance of last year’s top 10 ranked stocks to VIG’s performance for fun.

Concluding Remarks

With my monthly 10 Dividend Growth Stocks articles, I rank a selection of the CCC stocks and present the top 10 ranked stocks as candidates for further analysis. This month I favored dividend safety.

Of the top 10 ranked stocks that I don’t own, LOW and TXN pique my interest. CAH from the top 10 discounted stocks list looks attractive, too.

Following are charts from F.A.S.T. Graphs for the stocks I’ll be looking at in the upcoming weeks. In these charts, the black line represents the share price and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the time frame in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart.)

LOW’s price line (black) is just below the stock’s normal P/E ratio (BLUE) but above the primary valuation line (orange). Earnings estimates for 2018 and 2019 create an impressive trend line, providing visual evidence that my fair value estimate of $83.90 probably is appropriate.

TXN is trading at a premium to fair value, as the price line is above both the primary valuation line and the stock’s normal P/E ratio. While not so smooth as LOW’s trend line, I like TXN’s growth prospects. Because TXN is trading at a premium, I recently sold a put option to “choose” my preferred entry price:

Sold to Open 1 Contract of Option TXN Jan 19 2018 75.00 P

I’m willing to buy 100 shares of Texas Instruments Inc (TXN) for $75.00 per share on or before 19 January 2018. With volatility rising as measured by the CBOE’s Volatility Index, VIX, perhaps I’ll repeat a similar put options trade on TXN.

Finally, CAH’s price line below both the primary valuation line and the stock’s normal P/E ratio, indicating that the stock is trading below fair value.

Please note that the top 10 ranked stocks are candidates for further analysis, not recommendations.

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Disclosure: I am/we are long HRL, CVS, MO, TROW, LMT, MMM, CMI, IBM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.