Dividend Champions Smackdown XII: Price/Sales Edition - Seeking Alpha

Dividend Champions Smackdown XII: Price/Sales Edition - Seeking Alpha

In previous installments of the Smackdown series, I screened the Dividend Champions list of companies that have paid higher dividends for at least 25 straight years (which can be found here)using factors such as yield, payout ratio and, most recently, the PEG ratio. This time, I decided to start with the Price/Sales ratio, which compares a stock's price to its sales on a per-share basis. This ratio is a basic measure of how the stock market is valuing a company's revenues, which have to maintain a certain strength and momentum in order for the company to continue to be profitable (and to pay dividends). The lower the ratio is, the better. So I screened as follows:

Step 1: Sort the companies by Price/Sales ratio (column X), from low to high. There were 22 Champions with a ratio of less than 1, which is about half the average for the 100 Champions (2.05). I thought that the group might be dominated by retailers, which typically need to generate a lot of sales because of their small profit margins, but that really wasn't the case.

Step 2: Eliminate companies with yields and latest increase percentages below 2%. I didn't want to select companies that had excessively low payouts or increases that were negligible. This cut the field down to 11 companies.

Step 3: Compare the remaining companies by the percentage increase of next year's EPS estimate over this year's EPS estimate (column AB). I wanted to make sure that earnings growth was expected to be healthy enough to support future dividend increases. I eliminated companies whose earnings are expected to decrease or increase by less than 4% in 2012. I also eliminated any company that had negative earnings for the last 12 months. Nine candidates remained.

Step 4: Compare the candidates by their 1-, 3-, 5-, and 10-year Dividend Growth Rates (columns AJ to AM). I eliminated any company that had a DGR of less than 2% in any of these periods. The list of remaining candidates follows:

(Note that Challengers don't always have a 10-year dividend history; I eliminated those with negative 10-year DGRs – which indicate a dividend reduction – but kept those with “n/a.”)

There is a wide range of yields among the Contenders and Challengers, which offer a number of “younger” dividend increasers to augment the Champions. Keep in mind that growth estimates are subject to change, as are other numbers. Whatever industries the reader is interested in adding to his or her portfolio, there seem to be some good candidates. As always, please consider this no more than a starting point for more in-depth research.

Disclosure: I am long BMS, GPC, RPM, LMT, OKE, RTN, R.