A longtime fund manager offers John Heinzl, reporter and columnist for Globe Investor, a quintet of US stocks that stand to benefit from the improving economic picture outside North America.
When Donald Taylor is screening companies for the Franklin US Rising Dividends Fund that he manages, the candidates have to pass a series of tests. Each stock must:
- have raised its dividend in at least eight of the past ten years
- have at least doubled its dividend over the past ten years
- be trading in the lower half of its ten-year price-to-earnings range
He and his team at Franklin Templeton Investments also look for companies with a conservative payout ratio (dividends as a percentage of profits), strong market position, and a management team that has demonstrated an ability to reinvest funds back into the business profitably.
The goal is to find “companies that we think can grow their dividends by 8%, 10%, or 12% a year—hopefully higher in some cases—for a long time to come,” Taylor says.
With the economy showing signs of strengthening, Taylor offered up five US dividend companies that stand to benefit from improving global economic growth. We’ve included the yield, dividend payout ratio (dividends per share as a percentage of estimated 2013 earnings per share), ten-year annualized dividend growth rate and the price-to-earnings multiple based on earnings estimates for the current fiscal year.
Consider this list as a starting point for further research, and be sure to do your own due diligence before investing in any company.
Chevron (CVX)
Yield: 3.1%
Payout ratio: 30%
Ten-year dividend growth rate: 10%
P/E: 9.6
Chevron’s oil and gas production is growing at a modest 1% or so annually, but as new projects come on line in the Gulf of Mexico and Australia, production stands to increase to about 4% by 2014, Taylor says.
That, coupled with a decline in capital expenditures, should translate into double-digit dividend increases. Although falling commodity prices and project delays are always a risk for energy stocks, Chevron’s low P/E indicates that they are already reflected in the stock price.
Pentair (PNR)
Yield: 1.7%
Payout ratio: 29%
Ten-year dividend growth rate: 9%
P/E: 16.4
Pentair’s filtration and processing division makes a wide range of water treatment equipment for residential, commercial, and municipal applications, while its flow management business produces valves, pumps, and other industrial products.
The latter division, which was beefed up with last year’s $4.9 billion acquisition of Tyco International’s flow control business, “gives them more exposure to the energy sector and oil production, which is a nice aspect of that merger," he says. "And there are a lot of synergies they can get by combining these two companies."
Air Products and Chemicals (APD)
Yield: 2.9%
Payout ratio: 44%
Ten-year dividend growth rate: 12%
P/E: 15.4
Four large companies dominate the global industrial gas market, and “they tend not to be that competitive with each other,” Taylor says. One of them is Air Products, which provides oxygen, nitrogen, hydrogen, and other gases to industries such as food and beverage, health care, and energy in more than 50 countries.
“They’re the strongest of the companies in delivering hydrogen to refiners on the US Gulf Coast, and there are opportunities in China and emerging markets as well,” he says.
Dover (DOV)
Yield: 1.9%
Payout ratio: 27%
Ten-year dividend growth rate: ten%
P/E: 13.9
Dover is a diversified global manufacturer whose products are used in energy, communications, printing, and other industries.
The company is also benefiting from growth in the smartphone market. “In recent years, through several acquisitions, it has gotten involved in speakers and microphones that go into mobile devices, with an increasing emphasis on sound quality,” he says.
United Technologies (UTX)
Yield: 2.4%
Payout ratio: 35%
Ten-year dividend growth rate: 16%
P/E: 15
United Technologies’ portfolio of well-known products includes Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, Carrier air conditioners, and Chubb security systems.
The company is now focused on integrating the $16.5 billion acquisition of Goodrich, the world’s largest maker of aircraft landing gear, which it bought last year in a bid to capitalize on long-term growth in global air travel.
“They paid a full price for Goodrich, but I think the synergies they can get by combining their existing businesses with it will make it worthwhile in the long run,” Taylor says.
