Dividend Aristocrats With Strong Cash Flows

Published Tue, 22 Dec 2015 16:45 CET by TopYields.nl


Many investors shoot for the S&P 500 Dividend Aristocrats, the list of 50+ stocks handled by the S&P Dow Jones Index. Over the past 25 years, the Aristocrats have raised their annualized dividends per share. In addition, a research conducted by Research Affiliates finds that the group has outperformed the Large-Cap 1000, the High-Dividend-Yield 200 and the High-Yield, Low-Profitability 100 groups with a 5-year dividend growth rate of 18.6% and an average total return of 12.8% for the period 1964-2014.

Seeking for high dividend yields is, perhaps, the easiest way investors can buy income. Savvy investors who follow blue chips or smaller companies with a high growth potential know that by making the right picks and keeping them for the long-term, they can create a strong dividend portfolio in terms of total return.

This article discusses three large-caps that trade in different industries, but share similar characteristics. All three companies generate sustainable, strong cash flows, thus delivering rising dividends with payout ratios above the industry average. Their estimated average earnings growth rate ranges between 7.3% and 7.7% per year, and they all have outperformed the market and the NYSE, currently trading almost in line with their 52wk high.

Clorox, Kimberly Clark and SYSCO YTD Stock Performance Graph
Clorox (NYSE: CLX) is an Oakland-headquartered manufacturer and marketer of consumer products. The company operates in the Housewares & Accessories industry and sells its leading brands to mass retail outlets, e-commerce channels, distributors, and medical supply providers through its four strategically structured segments, Cleaning, Household, Lifestyle and International. The company’s current network includes more than 25 countries where it manufactures its reputable household names, including Green Works, Pine-Sol, Fresh Step, Hidden Valley, Burt's Bees and Glad, and more than 100 countries, where it sells its products.

Q1 2016 Results: Clorox has demonstrated growth in all of its segments with Cleaning and Household accounting for 35.76% and 29.57% of its revenues, respectively. Revenues reached $1.39 billion, up 2.8% YoY from $1.35 billion, whereas the gross profit margin was 45% from 43% in Q1 2015. Operating expenses of $1.13 billion, down 0.7% YoY from $1.134 billion generated a 21.1% YoY increase in operating income, $264 million from $218 million, and a 193.3% YoY increase in net income, $172 million from $90 million in the same quarter last year. [Note: Clorox has its Fiscal Year in June; therefore, the company reported its Q1 2016 results on November 2.]

Dividend Strength: Clorox currently delivers an annualized dividend of $3.08 per share, yielding 2.42% at a payout ratio of 61%. The company’s dividend growth for the period 2000-2015 is 266.7%

FY 2016 Outlook: For 2016, Clorox’s management anticipates a sales growth in the range of 1% to 4% on a currency-neutral basis. The company remains focused on its ongoing cost savings and efficiencies program to fuel growth and increase shareholder value in 2016. Analyst consensus estimates a 5-year average earnings growth of 7.5% per year and a 3-year average EPS of $5.19, up 3.32% from current EPS of $5.02.

Kimberly Clark (NYSE: KMB) is a Dallas-based company that engages in the manufacturing and marketing of personal care products both in the U.S. and internationally. KMB operates through three segments, Personal Care, Consumer Tissue, and K-C Professional, providing Kleenex, Viva, Scott, Cottonelle, Huggies, Kotex, and Pull Ups reputable brands to more than 175 countries.

Q3 2015 Financial Highlights: Kimberly-Clark’s growth in international markets, mainly Brazil, China and the Eastern Europe have led to strong Q3 2015 results, in spite of lower net income. The company’s high debt-to-equity ratio 114.7 is fully justified by the company’s aggressive financing to support its international expansion. Compared to Q3 2014 results, Kimberly-Clark’s Q3 2015 results are as follows:

  • Revenues down 6.7% YoY to $4.7 billion from 5.1 billion due to changes in foreign currency exchange rates
  • Gross profit margin, slightly improved, 36% from 35%
  • Operating expenses down 5.7% YoY to $3.9 billion from $4.2 billion
  • Operating income down 11.2% YoY to $779 billion from $877 million
  • Net income down 8% YoY to $517 million from $562 million
  • Annualized dividend per share $3.52, yielding 2.85% at a payout ratio of 216% (average payout ratio of Personal & Household Products Industry is 143.4%
  • Share repurchases of $1.4 million, looking-forward to FY 2015 total share repurchases of $800 million
  • Dividend growth between 2000 and 2015, 226% with 43 consecutive years of raising dividend payments

Future Outlook: Kimberly-Clark features a strong portfolio of high quality brands that generate stable cash flows and trade off the company’s relatively slow growth. The company is expected to continue paying rising dividends for the coming quarters, thus increasing shareholder value and investor confidence. The analysts that follow Kimberly-Clark estimate an average earnings growth rate of 7.7% for the next five years and an average EPS growth of 281.6% through 2017 (the current EPS are $1.63).

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Clorox 127.59 102.95 131.78 23.93% -3.18% 16.40 25.42 15.09 0.52 61%
Kimberly Clark 126.37 103.04 126.23 22.64% 0.11% 44.84 76.64 114.76 0.86 216%
SYSCO 41.27 35.45 42.03 16.42% -1.81% 22.89 37.23 0.57 0.55 114%

SYSCO (NYSE: SYY) is a Houston-based company that engages in the selling, marketing and distribution of food and food-related products to the food service or food-away-from-home industry.
SYSCO’s main segments are Broadline and SYGMA, whereas the company operates 196 distribution facilities serving approximately 425,000 customers, including restaurants, lodging establishments, healthcare and educational facilities, and more.

Q1 2016 Results: Although SYSCO is one of the largest players in the food wholesale industry, the FY2015 diluted EPS declined from $1.58 to $1.15 following the blocked merger with the US Foods by the Federal Trade Commission (FTC). SYSCO’s Q1 2016 results demonstrate remarkable gross margin management in a challenging deflationary environment. Revenues reached $12.6 billion, up 0.9% YoY from $12.5 billion and operating income reached $493.5 million, up 6.0% YoY from $465.6 million in Q1 2015. Gross profit margin remained unchanged at 18%, while operating expenses increased 0.7% YoY to $12.07 billion from $11.98 billion and net income was down 12.3% YoY to $244.4 million from $278.8 million in Q1 2015. [Note: SYSCO has its Fiscal Year in June; therefore, the company reported its Q1 2016 results on November 2.]

Dividend: Sysco has a solid 3.06% dividend yield with an annualized dividend per share $1.24. The company’s dividend growth since 2000 is 158.3% and current payout ratio is 114%, twice the average payout ratio of 55.3% of the Food Processing Industry.

Future Outlook: Given that the food-service industry is highly competitive, yet slow to change, SYSCO is expected to remain a leader in the field due to its stable cash flows and sustained strong results. The company seeks to accelerate its cost improvement program in order to meet its 2018 operating income and return on capital goals. Analyst estimate an EPS growth of 105.7% through 2019 (current EPS $1.09) and an average earnings growth of 7.3% annually through 2020.


Stock name Dividend Yield
Kimberly-clark 3.17
Sysco 2.56
Clorox 2.47

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