This week it’s the turn of the Financials sector to be the lowest weighted sector in my dividend stock Portfolio. I own three Financial dividend stocks, having added T. Rowe Price in June, so I’ve picked some other stocks from the Dividends Champion List that caught my eye to see how they compare and if starting a new position to diversify is worthwhile.
Here’s my portfolio as of 17-August grouped by market sector. Financials is the lowest sector this week followed by the Healthcare then Consumer Cyclical sectors. This week marks the first week that none of the sectors are below my +/- 10% of average value rule so I’m actually free to pick stocks from nearly any sector this month. The lone exception is the Technology sector which at 13% of my portfolio is above the 11% maximum this rule allows. Note: the red/green arrows in the table represent above or below average weighting, not stock price gains.
In any case, I’ve decided to stick with the Financials sector this week.
My financial dividend stocks
I currently have positions in JPM, AXP and TROW in the Financials sector.
JPMorgan Chase (JPM) is a $215B bank and financial services company. Notable for its colorful CEO, it looks to have its legal troubles under control after a $13B settlement last year. The company has increased its dividend since 2010 when it cut them. Its payout ratio is 40% with a current dividend yield of 2.7%. The last 5 years’ annualized dividend growth from 2009 to 2014 is about 24%.
Its P/E of 14.7 is lower than the industry average of 17.2 and the S&P 500 average of 18.2. For the most part of the last ten years, the P/E has been significantly below the S&P average; exceptions being 2004 & 2008 when low earnings increased the P/E ratio to 22 and 40 respectively. Currently this year the P/E is closer to the S&P average than it has been for the previous 3 years. 5 year estimated EPS growth is 4.5%.
American Express (AXP) shouldn’t need any introduction being one of the world’s major credit card companies, although less accepted in Europe than Visa / MasterCard. It’s a $91B company with a current dividend yield of 1.1%. This has increased for the last 3 years and is backed by a low payout ratio of 18%. Over the previous 5 years the dividend growth has been 6.4%.
AXP has a lower P/E of 16.4 vs. the industry average of 16.9 and the S&P of 18.2. Since 2007, its P/E has been lower than the S&P except for 2010 when it reached 26 from low earnings. For the last two years, its P/E has been the same as the S&P average; its current P/E value is closer to the level below the S&P average it had in 2010 & 2011. Estimated 5 year EPS growth is 9.6%.
Bert, one of the Dividend Diplomats reviewed AXP recently.
T. Rowe Price Group (TROW) is one of the largest publically held mutual fund companies with a $21B market cap. The company offers a wide range of low cost mutual funds as well as managing investment accounts. It has increased its dividend each year over the last 27 years. The current dividend yield is 2.2% with a payout ratio of 38%. TROW’s dividend growth over the last 5 years has been about 12%.
The company has a P/E of 18 which is the same as the Industry average of 18.1 and the S&P’s 18.2. Historically since 2004, the TROW’s P/E has always been higher than the S&P’s, so this year’s equal P/E level is a significant change from that trend. Estimated 5 year EPS growth is 13.8%.
Choosing new stocks to consider
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
- Exclude any stock which has had negative growth in the last 5 years
- Exclude any stock which is projected to have negative growth in the next 5 years
- Include only stocks with a dividend yield above 2%
There were 53 companies meeting the above criteria, all of them having had paid dividends for 5 years or more. I’ve chosen four of them below.
The new contenders shortlist
I don’t own any of the following four companies; I included them to see how they compare to what I own and if they might be worthwhile purchases.
Chubb Corp (CB) is a $22B holding company which manages property and casualty insurance. It’s a dividend champion, having increased dividends for each of the last 32 years. The current dividend yield is 2.2% with a 23% payout ratio. The dividend growth over the last 5 years has been 7.4%.
The company has a P/E of 11.1 which compares well with the industry average of 12.0 and the S&P’s 18.2. In fact the P/E has been significantly lower than the S&P’s average each year since 2004. The gap has increased significantly since 2012 when CB’s P/E was closing in on the S&P average. Estimated 5 year EPS growth is 6.4%.
AFLAC Inc (AFL) is a $28B insurance company offering live and supplemental health insurance in the US and Japan. Its dividend yield is 2.4% with a payout ratio of 23% and it has increased its dividend each year for the last 31 years. AFL’s dividend growth over the last 5 years has been 5.7%.
Its P/E of 9.6 is considerably lower than the industry and S&P averages of 13.6 and 18.2 respectively, although AFL’s P/E has been lower than the S&P’s P/E for nearly every year since 2004 (except for 2007 & 2008). Estimated 5 year S growth is 4.4%.
Lanny, Dividend Diplomat extraordinaire, purchased AFLAC this month.
Old Republic International Corporation (ORI) is a $3.8B insurance underwriter. It’s another long term dividend champion having increased its dividend each year for the last 33 years. Its dividend yield is 4.9% with a payout ratio of 45%. ORI’s dividend growth over the last 5 years has been about 1.5%.
The P/E ratio of 9.5 is well below the industry average of 14.0 and the S&P’s 18.2. Historically the P/E has been significantly lower than the S&P average over the last 10 years, with the exception of 2010 when its P/E shot up to 108 due to low earnings and 2008-2009 / 2011-2012 when it did not make any profit. Estimated 5 year EPS growth is 10%.
Cincinnati Financial Corp (CINF) is a $7.9B property insurer that has increased its dividend payment for the last 54 years although the 5 year dividend growth rate is a low 2.3%. Yield is good however at 3.7% and it has the highest payout ratio of stocks in this roundup at 67%.
Its P/E ratio of 18.5 is above the industry average of 12.0 and the S&P’s 18.2. Over the last 10 years, the P/E ratio has been generally lower or the same as the S&P average with the recent exception of 2011 when it nearly reached 30. Estimated 5 year EPS growth is 1.5%.
What to buy?
Looking at all 7choices, my criteria of requiring a 5 year dividend growth history eliminates both my current holdings in AXP and JPM from the start. AXP froze dividends from 2009 through 2012 and JPM lowered dividends in 2010 but has been increasing them ever since.
The remaining 3 companies have suitable dividend yield, however my criteria requiring a 3% dividend growth rate eliminates ORI and CINF, leaving CB, TROW and AFL.
All three remaining stocks offer around the same dividend yield between 2.2 to 2.4% with Aflac the most generous. Almost everything is equal between the three companies in attributes I look for. TROW has potentially a higher growth in the long term but has a higher Payout Ratio and slightly shorter dividend history.
I already own TROW but don’t have any insurance stocks currently so I’ve decided to purchase CB over AFL. While AFL has a higher current yield, I think CB has potential for a more stable and higher dividend growth in the long term. Since TROW’s price is a few percentage points lower than when I purchased them in June, I’m also going to purchase a small amount ($50) to take advantage of the lower price.
I also made a mistake in my original evaluation and was incorrectly attributing CB with a 48 year dividend growth history as reported on dividend.com. For this article I’ve corrected it to the lower 32 year growth history per David Fish’s list and the score dropped slightly as a result. I’m still sticking with the CB decision however so let’s see what the next 30 years brings.
Here’s the outcome visually.
My purchases this week
So total purchases this week will be:
- $350 Individual Stocks (CB)
- $50 Individual Stocks (TROW)
This purchase should increase my yearly dividend income by about $7.5.
Full disclosure: I am long JPM, AXP & TROW.
Quote of the day
Normal is getting dressed in clothes that you buy for work, driving through traffic in a car that you are still paying for, in order to get to a job that you need so you can pay for the clothes, car and the house that you leave empty all day in order to afford to live in it.