In this period of low yields, many are looking for ways to upgrade portfolio income. S&P 500 Dividend Aristocrats, companies which have increased annual dividends for a minimum of 25 consecutive years, are an excellent source for investment ideas. The 5 best with the highest yields are discussed below.
Pitney Bowes (PBI)
I've had a small position in PBI for almost 20 years. In the 1990s, the annual reports bragged about double digit dividend increases when it was building a track record to become a Dividend Aristocrat. Double digit meant yearly increases of at least 10%. Then the increases were reduced to single digits (generally 2c or 4c) in the last decade, as rapid growth slowed. However, PBI has not given up.
Revenue for 2010 was $5.4 billion, a decline of 3% and adjusted EPS from continuing operations was $2.23 compared with $2.28 in 2009. The quarterly dividend was increased on February 8 (the 29th consecutive year) to 37¢ per share from 36.5¢ last year. In addition, PBI is increasing the share repurchase program by $100 million to $150 million.
PBI expects 2011 revenue will be flat to 3% growth from continued improvement in equipment sales and increased sales of new solutions like the Connect+ communications system. Another example of new programs is Volly (introduced last month), a new secure digital mail delivery system from a cloud-based platform, which empowers consumers to receive, view, organize and manage bills, statements, direct marketing catalogs, coupons and other content from multiple providers using a single application. Management guidance for 2011 is adjusted EPS from continuing operations of $2.15-$2.35 which generates a P/E of 11X. The yield is 5.7%, one of the highest for any NYSE stock.
Leggett & Platt (LEG)
Leggett & Platt is a diversified manufacturer that produces components found in most homes, offices, and automobiles; had a good recovery year in 2010. EBIT margins increased from 7.5% in 2009 to 8.6% in 2010. As per guidance, EPS rose to $1.15 and is guided to be $1.20-1.40 in 2011, enough to cover a dividend increase to $1.12 later in the year. LEG purchased 6 million Treasury shares in 2010 and expects to purchase another 10 million this year (a portion are resold to employees). LEG completed the sale of the seventh, and final, divestiture identified as a part of its strategic realignment, which collectively generated $433 million in the past 3 years. The P/E based on depressed earnings is 18X with a yield is 4.7%.
Kimberly-Clark (KMB)
Kimberly-Clark had a good enough report for 2010 to send the stock up $2 after it was reported. Q4 results (see conference call transcript here) had modest gains. EPS for 2010 was $4.45 and adjusted EPS was $4.68, in line with the previous guidance of $4.60-$4.70. Guidance for adjusted EPS in 2011 is $4.90-$5.05, 5-8% above 2010. The quarterly dividend was just increased to 70¢ from 66¢ last year. KMB initiated a 2-year pulp and tissue restructuring that is expected to increase operating profit at least $75 million annually. It also just announced a major capital expansion program in Brazil.
Share repurchases should be $1½ billion in 2011, partially funded by $700 million borrowed in January, after approving a new 50 million share program, augmenting the current 50 million share plan. The P/E is 13X with a yield of 4.3% based on the new dividend.
Abbott (ABT) and Johnson & Johnson (JNJ)
I recently published an article on these global healthcare giants. Their businesses have similar problems and outlooks. They are financially strong companies with outstanding credit ratings, track records and expect a large portion of future growth to come from business in emerging markets. Financial strength allows them to have significantTreasury stock purchase programs. But the global recession hurt results and product recalls in the last year have been an additional burden (which will pass over time).
ABT is projecting EPS in 2011 will be 10% higher to about $4.60 giving a P/E under 10X while JNJ is projecting EPS in 2011 will be up about 2% to $4.85 for a 12X P/E. The yield at ABT is 3.9% while JNJ has a 3.5% yield.
These stocks that have lagged behind popular markets averages in the last 2 years even though they continued raising dividends at a time when other Dividend Aristocrats did not. Their finances are strong allowing them to have significant Treasury share purchase programs, another major buyer of company stock. They also share similar business models, expecting much of future growth to come from sales in emerging market overseas. Higher yields are associated with higher risks, especially when yields are above 4%. But for those willing to accept added risk, high yields with growing dividends can provide a major portion of total return in a successful investment.
An excellent website to track Dividend Aristocrats, along with other higher yielding groups in the US and around the world, is here.
Disclosure: I am long PBI.
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