Consumer cyclical dividend stocks – my next purchase in September

It’s time to go shopping! The Consumer Cyclical sector is the lowest weighted sector in my dividend stock Portfolio this week. The last purchase I made in this sector was in June when I purchased HD and MAR.

The Consumer Cyclical sector, also known as Consumer Discretionary, is a general grouping of companies that sell ‘nice to have’ items; this includes automotive, housing, entertainment and retail industries. The performance of the sector is linked to the economy, since more luxury products are bought when times are good and fewer when times are bad. Its counterpart is the Consumer Defensive sector which is grouped around more mandatory items that in theory is less impacted by the economy since everyone needs soap and other essentials.

My Portfolio

Here’s my portfolio as of 5-September, showing the sectors and their current weights. The Consumer Cyclical sector is the lowest and outside the +/- 10% range, followed by Energy then Basic Materials.

My Portfolio as of 5 September showing the Consumer Cyclical sector as lowest weight, followed by Energy then Basic Materials.
My Portfolio as of 5 September showing the Consumer Cyclical sector as lowest weight, followed by Energy then Basic Materials.

I’m using my dividend investing rules to guide my selection.

My Consumer Cyclical dividend stocks

I have currently have positions in MCD, HD, MAR and LB in the Consumer Cyclical sector.

L Brands (LB)

L Brands (LB) is a $19B retail company selling clothing lines, personal care and beauty products to women. Its biggest brands are Victoria’s Secret and Bath & Body Works.

The company pays a 2.1% dividend, having increased it for the last 3 years starting 2011. Its payout ratio is 40% which is in-line with the yearly values since 2005 with the exception of 2009 when low earnings increased the ratio to 92%. The annualized dividend growth over the last 5 years is the third highest in this round-up at 18%.

Its P/E of 20.8 is higher than the industry average of 22.5 and the S&P 500 average of 18.7. Since 2012 LB’s P/E has always been higher than the S&P 500 although the gap is decreasing. Projected EPS growth over the next 5 years is 11%.

The company isn’t on the US Dividend Champion list; I bought this stock originally in early 2013 solely because of its strong brand name and retail / media presence. It is prone to paying out special dividends (2010, 11, 12 & 14) in addition to its ordinary dividends.

Home Depot (HD)

Home Depot (HD) is the world’s largest home improvement retailer with a market cap of $123B. It operates 2,200 stores in the United States, Canada and Mexico.

Home Depot is a 5 year Dividend Challenger with a current yield of 2.1%. The dividend has increased with a 5 year dividend growth rate of 16% – the second highest rate in this roundup. The payout ratio is a steady 41% which it’s held since 2011.

HD has a P/E of 21.9 vs. the industry average of 21.4 and the S&P of 18.8. The P/E has been higher than the S&P each year since 2008 with the biggest gap of 7 points seen in 2012. Estimated 5 year EPS growth is 16% which is the second highest in this review.

McDonalds (MCD)

McDonalds (MCD) is the world’s leading global foodservice retailer. With a market cap of $91B, it operates 35,000 locations serving approximately 70 million customers in over 100 countries every day.

The current dividend yield is 3.5%. The current 58% payout ratio has been slowly increasing from a low of 43% in 2008. MCD’s dividend growth over the last 5 years has been about 10%.

The company has a P/E of 16.9 which is less than the Industry average of 28.5 and the S&P’s 18.7. Starting from 2006, last year’s P/E of 17.5 was the first year since 2009 that the P/E decreased below the S&P’s average. Projected 5 year EPS growth is 6.2%.

Marriott International (MAR)

Marriott International (MAR) is a $20B company operating several hotel chains across different price levels: Residence Inn, Courtyard, Fairfield Inn, Marriott and Renaissance among others.

MAR pays a 1% dividend which has been increasing over the last four years at a 55% annualized rate (the highest rate of increase in this review). The payout ratio is 32%, a value held since 2012. Low earnings per share of $0.55 raised the P/E to 70% in 2011, but otherwise the P/O has been below 34 since 2004.

MAR is an expensive stock. It has a current P/E of 32, which is lower than the industry average of 36 but almost double the S&P Index average of 18.7. This follows a historical trend however; the P/E has been higher than the S&P for each year since 2004. Projected EPS growth for the next 5 years is 17%, the highest in this roundup.

I originally bought MAR back in 2013 when I was travelling more and staying in hotels; it wouldn’t qualify as a new purchase based on my current screener. I am interested to see where its dividend goes in the future so I’m not considering to sell it at this time. Plus I’ve always wanted to own a hotel ever since playing Monopoly.

Choosing new stocks to consider

I already have 4 stocks in this sector, with 5 being my maximum allotment so I’m not in a hurry to fill the fifth slot.

My initial screening of the Dividends Champion List is as follows:

  • Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in (Consumer Cylical)
  • Include only stocks which have projected positive growth in both the next 1 or 5 years
  • Include only stocks with a dividend yield above 2%

Of the 21 companies matching that filter, I added the following 4 dividend champions to see how they compare.

Target Corp. (TGT)

Target Corp. (TGT) is a $38B retailer operating approximately 1800 stores in the US and 130 in Canada.

Its dividend yield is 3.1% with a payout ratio of 76% and it has increased its dividend each year for the last 47 years. The higher payout ratios of the last two years are a marked contrast to the more typical levels of 13-25% seen since 2005. The annualized dividend growth over the last 5 years is the second highest in this roundup at 26%.

With a P/E of 25.8, TGT beats both the Industry average of 18.3 and the S&P average of 18.7. The TTM value this year is significantly different from the pattern since 2007 when TGT’s P/E was typically 2 points lower than the S&P average. Estimated 5 year EPS growth is 12%.

Wal-Mart Stores inc. (WMT)

Wal-Mart Stores inc. (WMT) is the world’s largest retailer with a market cap of %250B and around 10,000 stores globally with its Wal-Mart and Sam’s Club stores.

It’s another Dividend Champion having increased its dividend each year for the last 41 years. Its current dividend yield is 2.5% with a payout ratio of 40%. The current payout ratio has been fairly flat since 2004, typically in the high twenties / low thirties range with the biggest increase occurring last year to 38%. The annualized dividend growth over the last 5 years is 12%.

The P/E ratio of 16.1 is below both the industry average of 18.3 and the S&P’s 18.7. The current P/E level against the S&P average is similar to 2013’s value; although more typically WMT’s P/E is usually very close to the S&P’s average P/E. Estimated EPS growth over the next 5 years is 7%.

Leggett & Platt Inc (LEG)

Leggett & Platt Inc (LEG) is a $4.5B diversified manufacturer that designs and manufactures products found in homes, offices, retail stores and automobiles. It operates in 4 segments: Residential Furnishings, Commercial Fixturing & Components, Industrial Materials and Specialized Products.

The current dividend yield is 3.4% and the company has grown the dividend for each of the last 43 years. The payout ratio is 166% currently and it’s had some high values over the last 10 years including 278% in 2007, 137% in both 2008 & 9 and 105% in 2011. The 5 year annualized growth is 3.3%.

P/E is high at 48.3, beating both the industry average of 36.4 and the S&P 500 average of 18.7. The P/E has been typically higher than the S&P since 2007 but lower earnings this year are pushing the P/E much higher than usual. Estimated 5 year EPS growth is 15%; the third highest in this roundup.

Genuine Parts Co. (GPC)

Genuine Parts Co. (GPC) is a leading distributer of replacement automotive parts with a $13.5B market cap, primarily in the US and Canada. It also distributes industrial and office replacement parts.

Its dividend yield is 2.6% with a payout ratio of 51%. GPC is a Dividend Champion and has increased its dividend each year for the last 58 years. The Payout Ratio is holding steady at 50% and the historical trend is largely flat with 50% being the typical level since 2004. The annualized dividend growth over the last 5 years has been 7.5%.

Its P/E of 20.1 is lower than the industry average of 48.3 but higher than the S&P average of 18.2. The P/E has tracked the S&P’s average value fairly well since 2004; this year’s value is a higher increase than the last two years. Estimated 5 year EPS growth is 6.3%.

Honorable mentions

Coach (COH)

Coach is a popular dividend stock in the Apparel industry; It has a 5 year dividend history with a good yield of 3.6%.

Cracker Barrel Old Country (CBRL)

I used to love eating at Cracker Barrel when I lived in Alabama and it was nearly always packed. There’s not one very close to where I live now so I’ve had to cut back on my Cracker Barrel fix which is much better for my weight. It has a 12 year history with a yield just under 4%.

What to buy?

Looking at all 8 companies, my criteria of requiring a 5 year dividend growth history eliminates LB and MAR from the start.

Of the remaining 6 companies, LEG is eliminated on the grounds of its 166% payout ratio.

This leaves a shortlist of 5: HD, MCD, TGT, WMT & GPC all match my minimum criteria.

Despite a high growth prospect, HG is penalized by the lowest yield of the 5 shortlisted stocks. It also has the shortest growth history and a change in their dividend payment schedule gives them a 2 year stable period.

With its amazing 58 year dividend growth history, GPC loses points due to a low dividend growth rate and a fairly low yield leading to a lower projected income value.

Likewise WMT also loses points due to a lower projected income value with a low starting yield and single digit growth.

It’s more or less equal between MCD and TGT; both have the same projected income with MCD’s higher current yield offset by TGT’s higher potential growth. At 47 years TGT has the better growth history but MCD has a better payout ratio.

Here is the comparison visually.

Yield #Yr DivGr5 P/O% EstGr5 Projected Stable Score Status
MCD 3.5 38 10.1 58 6.2 22 5 45 Buy
TGT 3.1 47 25.9 76 12.0 22 5 45 Buy
WMT 2.5 41 11.9 39 7.0 15 5 42 Buy
GPC 2.6 58 7.5 51 6.3 16 5 42 Buy
HD 2.1 5 15.9 43 16.6 15 2 27 Buy
LEG 3.4 43 3.3 166 15.0 26 5 0 Hold
LB 2.1 3 17.8 42 11.3 14 4 0 Hold
MAR 1.0 4 55.3 33 16.9 8 4 0 Hold

My purchases this week

My conclusion is that I’m going to take advantage of MCD’s recent price drop and add to my position this week. Both TGT and MCD have been in the news of late; minimum wage and millennials’ dislike of the menu for MCD and residual impacts of the data breach for TGT. MCD does have more global diversification to potentially compensate for slow economic growth in the US.

Total purchases this week are:

  • $330 Individual Stocks (MCD)

These investments should increase my yearly dividend income by about $11.

Full disclosure: I am long HD, MCD, MAR & LB.

 

Quote of the day

A budget tells us what we can’t afford, but it doesn’t keep us from buying it.

0 thoughts on “Consumer cyclical dividend stocks – my next purchase in September”

    1. Hi DFG,

      The sector weight is the sector’s market value as a percentage of my portfolio’s value. So number of shares multiplied by the price of those shares.

      Since I started out more or less equally balanced, buying the valued lowest sector should mean buying the cheapest shares in my portfolio.

      Best wishes,
      -DL

    1. Hi DGJ,

      Yes I think MCD’s price was affected by declining sales, particularly in China where there were some quality issues with their suppliers. But in the long term, they have the brand recognition, market presence and the money to overcome that.

      The worst thing about writing an analysis of MCD and looking over their investor website is that I so wanted a Big Mac – even though I’ve not eaten fast food for a couple of years now!

      Best wishes,
      -DL

    1. Hi Henry,

      Yes I must admit that I write for purely selfish reasons – so I can look back at any purchase and see what was thinking! 🙂

      I tend to avoid the whole fair price / valuation process too so I’m curious how that will work in the long term.

      Best wishes,
      -DL

  1. DL,

    Seems like a reasonable buy here. It’s certainly valued attractively, though the ugly sales report that came out today continues much of the same. But even with very little SSS growth, the company should be able to generate decent returns going forward. It could be a blockbuster investment, however, which is frustrating to a degree. I hope at some point the SSS declines level off and we can see where things are going. But if this continues I’m not sure new store openings will be able to counteract their issues. We’ll see!

    Glad to have you on board as a fellow shareholder!

    Best regards.

    1. Hi DM,
      Sorry for the slow reply – life’s been catching up with me this week 🙁
      Things certainly aren’t great for MCD in the short term; but I imagine there are a whole bunch of resources being committed to turn the sales decline around so I’m taking a long term view based on their brand and cash position. It’ll certainly be interesting to see what happens as you say.
      Thanks for commenting – I always value your insight!

      Best wishes,
      -DL

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