Without a significant promotion, relatively view people could say they got a 7.3% raise this year.
However, that’s the combined average 2012 dividend income increase from these five of some of the strongest dividend payers around. And considering they offer an average dividend yield of over 3%, that’s not so bad.
These five businesses have fairly strong balance sheets, are some of the largest players in their industries, and have 25 or more years of consecutive annual dividend growth. Many of the bluest of blue chips can potentially have their dividend growth taken for granted since it occurs like clockwork, so it’s good to observe and recognize raises from some of the strongest dividend payers.
The Coca Cola Company (KO)
Topping this particular list with 8.5% annual dividend growth this year is Coca Cola. Sporting only a 2.67% dividend yield, it’s a little light for current income (it is, after all, supporting a P/E of around 20), but the company has strong finances, among the widest of moats thanks to its distribution system and brand strength, and very consistent dividend growth for about five decades.
The dividend income is well-covered by earnings, with a dividend payout ratio from earnings of around 55%. The balance sheet has been a bit strained from the bottler acquisition from not too long ago, but it holds well enough, with a strong interest coverage ratio of over 25.
A key thing to take into account, in my view, about Coke, is that while their reach extends quite so far, it’s still doesn’t have near the market penetration in some of the world’s most populous nations as it does in North America.
From the last Coca Cola Analysis:
Although the Coca Cola Company already has worldwide distribution, their potential in emerging markets is substantial. The average per-capita annual consumption of Coca Cola products is 89 servings according to their own information. The nation with the highest annual consumption is Mexico, with 675 annual 8 ounce servings per capita. The United States is fourth on the list, with 394. The consumption in China and India is only 34 and 11 respectfully, and these are the two most populous countries in the world. Other high population areas such as Nigeria, Pakistan, and Indonesia only consume 28, 15, and 13 servings per year.
So from a health perspective, this probably isn’t good news. But from a financial standpoint, it looks like Coca Cola’s year-after-year growth shows little sign of stopping. That being said, with their valuation where it is now, I’d look for dips before putting more capital towards their shares.
3M Company (MMM)
One might not expect it, but some of the companies with the longest streaks of dividend increases are semi-cyclical engineering businesses- companies like Emerson Electric, Dover Corporation, Illinois Tool Works, Leggett and Platt, and 3M Company. 3M offers a 2.77% dividend yield, with 7.3% annual dividend growth for 2012.
The company’s six business segments are:
Industrial and Transportation
Health Care
Consumer and Office
Displays and Graphics
Safety, Security, and Protection
Electro and Communications
To get more specific, from the 2012 3M Analysis, here are some of their targeted growth areas:
-Water purification
-Environmental protection, sustainability, renewable energy
-Health care in both developed and developing countries
-Automotive OEM growth
-International/Emerging consumer products
-Increased and sustained unemployment in the developed world
-A long term increase in petty crime resulting from economic problems, and 3M’s corresponding safety, security, and protection businesses
-A trend towards worker protection in emerging markets
-The continued trend toward electronic and software interaction, robotics, communication, and globalization
Overall, 3M also offers one of the strongest balance sheets on this list, with total debt/equity under 30%, and an interest coverage ratio of over 30. I’d look for a price dip of 10% or more before committing to a position, however. With Eurozone uncertainty, we may get a bigger broader dip than that.
Johnson and Johnson (JNJ)
Johnson and Johnson offers the highest dividend yield on this list, at 3.83%. I’ve been looking towards health care as a fairly decent area for long-term investment, and yet since the recession, their stock prices have been relatively flat. But flat stock prices and sustainable continued dividend growth means bigger yields, and if JNJ boosts the dividend next year by the same rate as this year, and the stock price is still the same, it’ll breach a 4% yield.
Although many investors have not been impressed by company management over the last few years, at least their drug pipeline is strong, and their areas of operation remain as diverse as ever in pharmaceuticals, medical devices, and consumer products.
From the 2011 JNJ Analysis:
Johnson and Johnson has a strong presence in emerging markets, including the BRIC countries of Brazil, Russia, India, and China. Double digit emerging market growth helps to offset lackluster performance in developed countries, and over the long-term, many developed countries have an aging population that will continue to require large amounts of medical treatment.
As far as comparing balance sheets, Johnson and Johnson is the one on this list that has an AAA rating, and based on balance sheet metrics such as interest coverage, debt/equity, and overall diversification, it looks deserved.
Procter and Gamble (PG)
Much like Johnson and Johnson, PG’s performance over the last few years has been lackluster. The 50+ years of consecutive dividend growth are appreciated, but it’s the future that matters. Can this $180 billion company showcase another half-century of dividend increases going forward, or is it running out of steam?
The company currently offers a 3.50% dividend yield and 7% recent dividend growth for 2012. The dividend certainly looks safe for now, since less than 2/3rds of earnings are being paid out as dividends and the balance sheet is respectable enough, with interest being covered more than 15 times over by operating income, and with a very manageable total debt/equity situation.
From the 2011 PG Analysis:
At it’s core, Procter and Gamble is a brand management company. Their products are often the best around, but their brands just as important. The company owns 23 billion-dollar brands and 20 half-billion-dollar brands.
Developing markets are playing a larger and larger role in the growth of the company, accounting for 29% of sales in 2007 and 32% of sales in 2009. The company has over 4.2 billion customers, and targets 5 billion by 2015.
I view PG as being reasonably valued at the current time, but am not particularly excited about its long-term prospects compared to some smaller businesses, or some higher-yielding businesses. Procter and Gamble is currently undergoing multi-billion-dollar restructuring, including several divestitures, in order to reignite EPS growth. Both JNJ and PG face the need to continue EPS growth if they hope to continue dividend growth.
Colgate Palmolive (CL)
Colgate Palmolive is a leaner competitor to Procter and Gamble. They have the lowest dividend yield and 2012 dividend growth on this list, at 2.45% and 6.9% respectively. The company has been paying consecutively growing dividends since the 1960′s, and currently has a market capitalization of approximately one third of what Procter and Gamble has.
In addition, although Procter and Gamble’s global diversification is impressive, in terms of international sales as a percentage of total sales, Colgate Palmolive actually leads Procter and Gamble. From the 2012 Colgate Report:
Colgate-Palmolive is a very high-quality and diverse international company. Approximately 75% of sales come from outside of North America, and the company defines approximately half of their sales as coming from emerging markets.
The fact that most of the sales of this company come from abroad allows North American investors to participate in the faster growth of some foreign markets. Even among blue-chip American companies that as a group have rather large global exposure, Colgate-Palmolive is ahead of the curve. The company markets their products in over 200 countries and territories, and the Colgate brand has been in Asia for over 50 years and Latin America for over 75 years.
Unfortunately for value investors, Colgate has completely defied the latest market decrease, and went ahead and breached $100 to get a new all-time high. I’d look elsewhere until the stock is a bit less heated.
For a more actionable current investment, this week’s analysis of Philip Morris presents an argument as to why the company is a solid buy at the current price.
Full Disclosure: As of this writing, I am long KO, JNJ, PG, LEG, and EMR.
You can see my dividend portfolio here.
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