As dozens of companies have cut or suspended dividends in recent weeks to preserve cash amid the uncertain impact of the coronavirus pandemic on the economy, the deteriorating payout picture has become a familiar refrain in this column.
Where, then, to turn when nothing is a given?
Barron’s started with the S&P 500 Dividend Aristocrats, which have raised their dividends for at least 25 straight years, for ideas. The group has 64 members, and with the help of FactSet data, we whittled it down to eight that appear to have some bulwark to maintain their dividends, as the accompanying table shows. (There soon will be 66 Aristocrats due to United Technologies merging with Raytheon (RTX) and two companies being spun out.)
The criteria for our list included a net debt (debt minus cash) to earnings before interest, taxes, depreciation, and amortization (Ebitda) ratio below 2, a reasonable level. We also looked for companies with debt-to-capital ratios below 40% and an increase in free cash flow in recent years. (The data cover the companies’ three most recent fiscal years.)
The working assumption for those criteria is that the less leveraged a company is, the better for dividend safety, especially as a steep recession looms. A more subjective criterion was to focus on businesses that appear to have a relative advantage to maintain their operations and dividends during the pandemic—selling toilet paper, coronavirus testing kits, or generating fees from assets under management, for example.
Of course, past isn’t prologue, particularly since this exercise is occurring against a backdrop in which dividends are under pressure from a pandemic with no modern precedent. Even industries that have been traditional dividend havens, such as staples and utilities, pose risks for income-oriented investors looking for increases. “They already have high payout ratios and are unlikely to lift them further,” says Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets.
But if a company maintains its dividend in this environment, it’s a victory. From now until the crisis abates, dividend increases are much less likely.
Levkovich expects the S&P 500’s earnings to drop 24% this year and dividends to fall by 30%. The energy sector, he says, is “front and center on cutting payouts” as the economy craters and oil prices plummet, as Saudi Arabia and Russia engage in a price war.
Yet our list of durable Aristocrats includes Chevron (CVX), one of the biggest energy companies. That’s because Chevron CEO Mike Wirth, in a recent interview with Barron’s, said the company will use its balance sheet to protect the dividend.
“We have one of the strongest balance sheets in the industry,” Wirth says. “We can use it when we need it.” That could include taking on more debt or selling assets, if needed, to maintain the payout.
To preserve capital, the giant energy firm has already suspended stock buybacks and slashed 2020 capital spending by 20%, to $16 billion. The company has raised its dividend for more than 30 years. The stock’s yield was recently at 7.2%, the highest among the field of eight.
Our list also includes Procter & Gamble (PG) and Kimberly-Clark (KMB), both of which sell a lot of consumer products. Their yields were recently at 2.7% and 3.3%, respectively.
Procter’s brands include Bounty paper towels, Puffs tissues, and Charmin toilet paper, key products that consumers covet right now as they hunker down in their homes. The company has increased its dividend for 63 straight years. Kimberly Clark’s brands include Kleenex and Cottonelle toilet paper. It has raised its dividend for 47 consecutive years.
Levkovich notes that it’s important to look at sector payout ratios, which measure the percentage of earnings paid out as dividends. Technology is around 30% and health care was at about 35% at the end of 2019.
That, in theory at least, gives certain companies in those sectors room to raise their payouts, “but we wonder if they will, under the current backdrop,” Levkovich says.
The three health-care firms on the list include Medtronic (MDT), whose many medical devices include ventilators—a crucial piece of equipment as the pandemic widens and hospitals need them in increasing numbers. The stock was recently yielding 2.4%, and the company has raised its dividend for 42 straight years.
Another health-care company, Johnson & Johnson (JNJ), has a strong balance sheet and AAA credit rating—one of the few companies with that distinction. J&J said on March 30 that it could have a Covid-19 vaccine available for emergency use early next year, a potential longer-run boost to shares. The stock’s recent yield was 2.9%, and the company has boosted its dividend for 57 straight years.
Meanwhile, Abbott Laboratories (ABT) recently received emergency approval from the U.S. Food and Drug Administration for a Covid-19 test that takes five minutes. The stock was recently yielding 1.8%, the lowest on the list, and the company has increased its payout for 47 consecutive years.
Rounding out our list are Hormel Foods (HRL) and asset manager T. Rowe Price (TROW). Hormel, whose products include comfort foods that could appeal to home-bound consumers, has raised its dividend for 54 years in a row; T. Rowe Price has reached the 34-year mark. They yield 2% and 3.7%, respectively. Neither company has a heavy debt load, something that should help them weather this downturn with their payouts intact, if not rising.
Bottom line: Nothing is certain as long as the coronavirus pandemic rages on, but these Aristocrats come as close to a safe bet as possible.
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