Top 7 Dividend Aristocrats: The Best of The Best

Over the past three months I have analyzed each of the 54 Dividend Aristocrats. The complete list of Dividend Aristocrats sorted by sector is included in the tables below:

The consumer goods and services sector have the most stocks in the Dividend Aristocrats index. There are no banks in the index and very few technology companies. There is only one utility in the index as well. The constituents of the Dividend Aristocrats index show that durable competitive advantages are most likely to be found in companies that sell products to consumers in slow-changing industries.

Each of the 54 Dividend Aristocrats was ranked using The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing take into account yield, valuation, growth, and volatility to determine the strongest dividend stocks to invest in without bias. The Top 7 Dividend Aristocrats using The 8 Rules of Dividend Investing are:

1. Walmart
2. ExxonMobil
3. PepsiCo
4. McDonald’s
5. Coca-Cola
6. Abbott Laboratories
7. AFLAC

The seven stocks above are a good mix between Energy (ExxonMobil), Retail (Walmart), consumer offerings (PepsiCo, Coca-Cola, McDonald’s), health care (Abbott Labs), and insurance (AFLAC). The top 7 Dividend Aristocrats are listed in order above. This article will give an investment thesis for each of these 7 high quality businesses.

Walmart investment thesis

Walmart is the largest retailer in the world and the eighth-largest publicly traded corporation in the U.S. The company has generated over $480 billion in sales over the last 12 months and has a market cap of nearly $270 billion. Walmart operates 11,156 stores over five continents and employs about 2.2 million people, making it the largest corporate employer in the world. Walmart has accomplished all this in only 52 years; the company was founded in 1962.

Walmart is slowly repositioning itself to take advantage of growing ecommerce demand. The company generated over $10 billion in e-commerce sales in its fiscal 2015 and is expecting 30% to 40% e-commerce growth over the next several years. Walmart is investing heavily in digital and ecommerce growth. The company recently announced it would invest between $1.2 billion and $1.5 billion in digital growth in its fiscal 2016. This number will likely be even higher over the next several years.

Walmart’s planned digital growth will slow brick and mortar growth somewhat. With that said, Walmart is experiencing strong growth in its U.S. neighborhood market stores. These stores are Walmart’s take on grocery stores. Neighborhood market stores grew comparable store sales 5.5% in the company’s most recent quarter.

Going forward, investors in Walmart can expect 20%+ growth in ecommerce, combined with slow growth in the company’s brick and mortar stores. Walmart is a timely investment. The company is currently trading at a P/E ratio of about 17 and has a dividend yield of 2.3%. Walmart appears undervalued as it is trading for less than the S&P 500’s P/E ratio of about 20. The company makes an excellent investment for long-term investors seeking years of growth from ecommerce and traditional stores combined with growing dividend payments. Additionally, investors may see short-term gains from a rise in the company’s P/E ratio if Walmart reports strong comparable store sales growth or ecommerce growth in its next quarter release.

ExxonMobil investment thesis

ExxonMobil is the largest oil and gas corporation in the world with a market cap of around $388 billion. The company generates about 80% of its operating income from its highly profitable upstream operations. ExxonMobil can trace its lineage back to Rockefeller’s Standard Oil.

ExxonMobil’s investment thesis is simple. The stock is undervalued due to low oil prices and will very likely rise with oil prices. ExxonMobil currently trades at a P/E ratio of under 12. In the meantime, investors profit from the company’s 3% dividend yield. ExxonMobil has weathered low oil prices before. In 2009, oil prices fell to $40 per barrel. ExxonMobil remained profitable in 2009, generating earnings of $3.98 per share. The company had EPS of $6.22 in 2010 when oil prices started to recover.

The oversupply of oil brought about by increased North American production and the refusal of OPEC to limit production has caused oil prices to fall. Oil prices will not stay low forever. Oil prices have historically been volatile. With volatility comes price rises and falls. We have low oil prices now, but the inherent instability in the world will cause oil prices to rise again in the future. When they do, we will likely see ExxonMobil shareholders benefit from a dual rise in earnings and the company’s P/E ratio.

PepsiCo investment thesis

PepsiCo owns 22 brands that generate over $1 billion per year in revenue. The company owns Frito-Lay and its strong portfolio of brands including Lay’s, Fritos, Sun Chips and Doritos. Additionally, the company owns Gatorade, Quaker, Aquafina, Lipton, Tropicana, 7Up, Mountain Dew, Brisk and Pepsi. PepsiCo supports its consumer brands with advertising spending of about 6% of revenues. In full fiscal 2013, PepsiCo spent $3.9 billion on advertising. $3.9 billion buys a lot of brand awareness.

PepsiCo is a low-risk investment with strong growth prospects. The company currently trades at a P/E ratio of about 21.5, slightly more expensive than the overall market. PepsiCo is a high quality business that should demand a premium price over the S&P 500. I believe it is fairly valued at this time relative to the market.

Shareholders of PepsiCo will benefit from continued growth in the company. PepsiCo has grown revenue per share at 10% a year over the last decade. The company is expecting 9% EPS growth in its full fiscal 2014. PepsiCo’s future growth will come from high single-digit or low double-digit growth in emerging markets and single-digit growth in the developing world. The company will fuel its continued expansion into developing markets with its projected $4+ billion advertising budget.

PepsiCo operates in the slow-changing food and beverage industry. Its strong brands and advertising spending form its competitive advantage. The company is a low-risk investment that performs well in recessions. PepsiCo realized record EPS (for the time) in 2009 at the height of the Great Recession. The company will likely generate a double digit CAGR for shareholders from its dividend yield of 2.7% and 8% to 11% per year EPS growth.

McDonald’s investment thesis

McDonald’s is the largest restaurant company in the world with a market cap of over $90 billion, nearly three times as large as its closest competitor. The company’s long-term growth has been fueled by its iconic brand and golden arches as well as its franchise business model. McDonald’s has over 35,000 locations in over 100 countries and has over 1.9 million people working for it and its franchises.

McDonald’s has had a very poor year so far in 2014. The company is seeing negative comparable store sales in the U.S. due to poor publicity and lack of control of its marketing message. Sales in Europe are down due to the politically motivated closing of several McDonald’s in Russia. The company has also experienced negative growth in Asia due to one of McDonald’s suppliers being caught selling tainted meat. Bad news creates opportunities. McDonald’s is currently trading for a P/E ratio of just 18 which is about 10% below the S&P 500’s P/E ratio. McDonald’s traded at a premium to the S&P 500’s P/E ratio for much of 2011 and 2012.

McDonald’s presents a compelling opportunity for investors due to the recent weakness in the stock. McDonald’s management plans to turn around growth for the company by simplifying its menu and better controlling the company’s image through advertising. When McDonald’s returns to comparable store sales growth, its P/E ratio will likely rise. In the meantime, investors receive a 3.7% dividend yield. The company will likely raise its dividends in the future, as McDonald’s has increased its dividend payments for 38 consecutive years.

Coca-Cola investment thesis

Coca-Cola is best known for its classic Coca-Cola sodas. The company focuses exclusively on beverages (unlike PepsiCo) and has 17 brands that generate over $1 billion per year in sales. The company’s soda brand portfolio includes: Coca-Cola, Diet Coke, Coke Zero, Sprite and Fanta. Coca-Cola’s non-soda portfolio incudles: Simply juices, Minute Made, Del Valle, Powerade, Dasani and Honest Tea.

Coca-Cola’s investment thesis is similar to PepsiCo’s. The company is fairly valued but has a long history of growth and will likely continue to grow EPS in the high single digit range. Total shareholder return will likely be in double digits from Coca-Cola’s 2.9% dividend yield combined with its EPS growth.

The world is slowly transitioning from sodas to juices, teas and other non-carbonated beverages. Coca-Cola has positioned itself to take advantage of global non-carbonated beverage growth. The company has captured 33% of global juice growth since 2007. Moreover, eight of Coca-Cola’s newest $1 billion+ brands have been non-carbonated. Coca-Cola’s growth will likely continue far into the future as a result of its foresight in expanding into non-carbonated beverages long ago.

Abbott Laboratories investment thesis

Abbott Laboratories is the global leader in nutritional products. The company sells nutritional products under the Ensure, Pedialyte, Similac, Zone Perfect and Elecare brands, among others. In addition to nutritional products, Abbott Laboratories also sells pharmaceuticals, medical devices and diagnostic equipment.

Like PepsiCo and Coca-Cola, Abbott Laboratories appears fairly valued at this time. The company has an adjusted P/E ratio of about 21 and a dividend yield of 1.9%. The company increased its dividend by 57% this year, signaling to investors that it is focused on returning cash to shareholders. I expect further dividend increases from Abbott Laboratories that are more than underlying company growth as Abbott Laboratories increases its payout ratio.

Abbott Laboratories is expected to grow EPS at 10% a year this year. The company generates 50% of its revenue in emerging markets. Abbott Laboratories is the top pharmaceutical company in India, the top generic pharmaceutical company in Russia and a top 10 pharmaceutical company in Latin America. Abbott Laboratories has positioned itself to benefit from substantial growth in emerging market health care spending. The investment thesis for Abbott Laboratories is double digit EPS growth combined with a dividend yield of nearly 2% for total shareholder returns that reach double digits.

AFLAC investment thesis

AFLAC is the cheapest Dividend Aristocrat based on its P/E ratio of just 9.4. The company’s stock price is down due to fears about the Japanese economy, currency risk and the company’s exposure to Japanese government bonds. In total, AFLAC holds 38% of its investment portfolio in Japanese government bonds. Japan has the second-highest net debt to GDP ratio of any country, at 134%. Greece is highest at 155%.

Japanese fears have suppressed AFLAC’s P/E ratio. The company would likely see its P/E ratio increase if management better diversified its portfolio outside of Japanese debt. Currency fears do not impact the long-term competitive advantage of AFLAC. The company is the leading cancer insurer in the world and the number one insurance company in Japan. AFLAC’s long-term growth prospects and strength come from its innovative insurance sales channels in Japan combined with its brand recognition in both Japan and the U.S.

AFLAC has a dividend yield of 2.6% and has paid increasing dividends for 32 consecutive years. In addition AFLAC is planning on repurchasing about 5% of its shares in 2015. The company’s dividend yield and share repurchases alone will give shareholders a return of about 7.6%, even if the company does not grow. I believe AFLAC will grow its underlying operations, just as it has over the last several decades. Purchasing AFLAC for a P/E ratio of under 10 gives investors the chance to profit from EPS growth, dividends and an increase in the company’s P/E ratio.