3 A-list, dividend payers

There aren't many companies that have consistently raised payments to shareholders for over 25 years.

By TheStockAdvisors Feb 22, 2013 11:17AM
Woman reading newspaper in livingroom copyright Tetra images, Getty ImagesBy J. Royden Ward, Cabot Benjamin Graham Value Letter

In my view, dividends are the most reliable indication of a company's growth and stability. Dividends are payments to shareholders of a company's hard-earned profits. A company's ability to continually pay dividends provides concrete evidence that the company is performing well.

Here's a look at 3 stocks that are on my A-list of dividend payers, as well as S&P's elite list of Dividend Aristocrats that have increased dividends annually for 25 years: Aflac (AFL), HCP Inc. (HCP) and Target (TGT).

Headquartered in Columbus, Ga., and founded in 1973, Aflac is the world's largest supplemental cancer insurance provider, deriving 75% of its business from Japan.

Aflac has expanded its product line and added new marketing venues in recent years. Non-cancer insurance policies now account for 70% of new sales. Aflac's rapid growth in Japan is propelled by its success in selling through banks and post offices where sales reps are located.

AFL shares sell at 8.4 times the latest earnings per share (EPS), which is well below Aflac's 10-year average price-to-earnings ratio (P/E) of 10.6. Lower risk in Aflac's bond holdings and further successes in Japan will produce strong growth in future years.

The 2.9% dividend yield adds significant value. The quarterly dividend is 6% higher than a year ago. The dividend coverage ratio for AFL is a very conservative 24% -- well below my maximum target of 50%.

HCP, Inc.
HCP, formerly Healthcare Property Investors, is a real estate investment trust (REIT) started in Long Beach, Calif., in 1985. HCP's portfolio of assets includes senior housing, post-acute/skilled nursing and life science facilities, medical offices and hospitals.

The trust primarily generates revenue by leasing properties under long-term leases. Most of HCP's rents and other earned income from leases are received under triple-net leases or leases that provide for a substantial recovery of operating expenses.

HCP recently increased its dividend by 5%, and shares now provide a hefty 4.5% yield. HCP has increased its dividend every year for the past 28 years.

Incidentally, HCP is the only REIT included on Standard & Poor's elite list of Dividend Aristocrats. The dividend is well covered by EPS: 76% is well below the REIT industry standard of 90%. Buy.

Target, formerly Dayton Hudson, was founded in 1902 and is the second largest discount retailer in the U.S., behind Wal-Mart.

Two years ago, Target purchased 220 Zellers stores in Canada, and has sold or sub-leased over 80 of the stores since the purchase, and has converted or rebuilt 125 stores that will be ready to open during the next 12 months. The new Canadian stores are expected to add sizeable sales and earnings in 2013.

Growth has slowed during the past year because of the substantial project in Canada and extensive remodeling in the U.S. During the next two years, though, sales and earnings growth acceleration will be impressive. EPS will likely increase 9% during the 12 months ending 1/31/14 and another 15% in the following year.

At 14.3 times latest EPS and with a dividend yield of 2.4%, TGT shares are quite attractive. Target has paid dividends since 1965 and increased its dividend every year during the past 41 years.

I expect another healthy dividend increase before mid-year. The quarterly dividend is 20% higher than a year ago. The dividend is well- covered by EPS: 33% is well below my maximum target of 50%. Buy.

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