We are rapidly approaching the end of the calendar year and it is now a time when many companies raise their dividends. In this article I highlight three Dividend Aristocrats that are raising their dividends: Hormel Foods Corporation (HRL), McCormick & Company Incorporated (MKC), and Becton, Dickinson and Company (BDX). These three stocks are long-time favorites for me and investors focused on dividend growth investing because of the returns and steady stream of growing income. I provide summary analysis of these companies for my readers.
Hormel Foods Corporation (HRL)
Hormel is an iconic American company that traces its history back to 1891. Hormel is a branded food company that focuses on meat proteins, non-meat proteins, and flavor enhancers. It has well-known brands of Hormel, Spam, Black Label, Jennie-O, Applegate, Dinty Moore, Justin’s, Natural Choice, Columbus, and Skippy as well as many others. Hormel has No. 1 or No. 2 market share in over 40 categories. The company is well known in the dividend growth investor community as a Dividend King. Hormel has now paid a growing dividend for 54 consecutive years and a continuous dividend since 1928. Few companies can match this track record. Hormel tends to grow through acquisitions and also organically. Over time this has led to excellent returns for investors. The trailing 10-year return is ~17% and the trailing 15-year return is ~14%. The company is also becoming more cost efficient as gross, operating, and net profit margins have trended up over the past 10-years. The most recent dividend increase was 10.7% to $0.2325 per quarter. The forward dividend yield is now about 2.1%. This does not seem high but it is greater than the current average yield of the S&P 500 of 1.8%. The dividend is also very safe. The current annual dividend is $0.93, and consensus 2019 EPS is $1.76 giving a payout ratio of roughly 53%. This is below my threshold of 65%. The dividend is also well covered by free cash flow. In 2018, Hormel had operating cash flow of $1,241.7M and capital expenditures of $379.9M giving FCF of $861.8M. The dividend cost $388.1M giving a dividend-to-FCF ratio of about 45%, which is well below my threshold of 70%. Furthermore, the company has almost no debt reducing risk to the dividend. Hormel is a stock that most dividend growth investors should keep on their watch list. The stock is trading at an elevated valuation right now. But if the price comes down then one should take harder look at starting an entry position or adding to an existing position.
McCormick & Company (MKC)
The second stock that I discuss is McCormick, which raised the dividend 8.8% to $0.62 per quarter. This is the 34th straight increase of the dividend. McCormick traces its history back to 1889. Most people have probably used McCormick branded spices when cooking. The company owns McCormick brand, Old Bay, Zatarain’s, Thai Kitchen, Frank’s Red Hot, and French’s. McCormick is another company that tends to grow through a combination of bolt-on acquisitions and organic growth. This has led to dominance in the spice and seasonings market. McCormick has roughly 20% share of the global spice and seasonings market making it significantly larger than its competitors. But with that said, the market is still fragmented, and the company has room to grow further. The forward annual dividend is now $2.48 giving a yield of ~1.5%, which is nothing to write home about. But the dividend is very safe from the perspective of earnings and free cash flow. The payout ratio is only about 46% based on consensus 2019 EPS of $5.35. In 2018, the dividend required about $273M but free cash flow was $652M giving a dividend-to-FCF ratio of roughly 42%. This is well under my threshold of 70%. Debt is also not much of an issue despite the recent large acquisition of some brands. Short-term debt is about $560M and long-term debt is ~$4,053M. But the latter is coming down as the company deleverages. Interest coverage is over 5X, which could be better, but the company can pay its obligations. McCormick is another stock that most investors should keep on their watch list. It is seemingly always overvalued and is now trading at price-to-earnings multiple over 30X. But occasionally, the stock price drops like at the end of 2018 and early 2019 giving investors the opportunity to add to positions or make an initial purchase.
Becton, Dickinson and Company (BDX)
The third stock that I am discussing is Becton, Dickinson. This stock is probably not as well known to most investors. The company used to grow slowly organically with periodic bolt-on acquisitions. But in 2017, Becton, Dickinson bought CareFusion doubling size. This was followed by the acquisition of C.R. Bard. Today the company is the world’s largest manufacturer and seller of surgical products including needles and syringes. The company also produces catheters, diagnostic equipment, reagents, specimen and blood collection products, flow cytometry systems, cell-imaging systems, and others. Becton, Dickinson raised the dividend 2.6% to a quarterly rate of $0.79 per share. This the 47th consecutive increase placing the company on the short list to become a Dividend King. The current dividend yield is low at about 1.2%, but there is room for many more increases as the payout ratio is only ~25%. Obviously, the dividend is well-covered by earnings. The dividend is also safe from the perspective of free cash flow. In FY 2018, operating cash flow was $2,865M and capital expenditures was $895M giving FCF of $1,970M. The regular and preferred dividend required $927M giving a dividend-to-FCF ratio of 47%. A conservative value. Becton, Dickinson has total debt of $19,939M a high value. But the company has sufficient cash flow to pay down principal. Interest coverage is ~8X so obligations can be met. Becton, Dickinson is another stock that usually overvalued. But with that said, the valuation has come down recently. It now trades at a forward multiple of about 20.7X a more reasonable level. But the yield is low, and investors should keep the company on their watch list for a better entry point or to add to a position.
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