In this low-interest-rate environment, investors have turned to high-yielding blue chips for retirement income. This is the final part of a five-part series outlining what I believe are the top five dividend aristocrat stocks, the ones most suitable for a retiree's portfolio.
You may wonder what unites stocks as diverse as paper products giant Kimberly-Clark (NYSE: KMB), engineering solutions behemoth Emerson Electric (NYSE: EMR), outsourcing payroll firm Automatic Data Processing (Nasdaq: ADP) and agricultural processor Archer Daniels Midland (NYSE: ADM). After all, they're certainly not linked by the businesses they're in. They are, however, all members of the S&P 500 Dividend Aristocrat Index.
Dividend aristocrats are, in many ways, the creme de la creme of the stock universe. Members must have raised dividends consistently each and every year for at least the past 25 years. They must have done so in good economic times and in bad.
Dividend aristocrats often have rising revenue and earnings streams -- they need to if they are to keep hiking their dividends. They often provide greater total returns than the S&P 500. And, the aristocrats frequently provide a good place for retirees to invest their capital, rewarding investors with a rising dividend income stream and share-price appreciation.
From Sept. 1, 2006, through August 2011 -- Family Dollar's fiscal year ends on Aug. 30 -- Family Dollar has provided 220% total returns with reinvested dividends (dividends that are invested into buying more shares of the stock). Compare that to the 129% return for the S&P 500 and you've got an outperformance of 71%. The company has also increased its dividend substantially during this time.
Family Dollar opened its first store in Charlotte, N.C., in 1959. Since then, it has opened more than 7,200 stores in 45 states -- with the greatest concentration located in the Deep South. There are 917 in Texas, 487 in Florida and 347 in Georgia.
The company targets consumers who are young to middle-aged, middle income, blue-and have a high school education or less. Frequently, the target household is headed by a female, and the household income is less than $40,000 per year.
Roughly 63% of stores are in strip malls and 35% in free-standing buildings. The stores are small -- they average only 7,500 square feet to 9,500 square feet, compared with the 108,000-square-foot size of the average Wal-Mart.
The majority of customers live less than 5 miles away. These customers are drawn by value and convenience: The average transaction is only $10.
In 2011, 66.5% of the store sales were so-called "consumables" -- items such as food, paper products, and health and beauty aids. Another 13.4% of revenue came from household products such as giftwares.
Men's, women’s and children's apparel, as well as seasonal items and electronics -- school supplies and prepaid cell phones -- each constituted about 11% of sales.
The company’s target marketing and merchandising strategy has been extremely successful. Over time, Family Dollar has been able to consistently grow revenue, earnings and dividends.
Solid technical outlook
Here's a three-year chart that begins in June 2009.
The first thing to note is the stock broke out of a multimonth "base" formation in early 2010, near the $30 level. Since that time, shares have been in a major uptrend that intersects the chart at about $53. The 40-week moving average that defines the long-term trend is just more than $60 and parallels the "accelerated" uptrend line, which has been in force since August 2011.
While the stock reached $74.73 in March of this year, it has since fallen along with the overall market. The first level of important support is near $65. Even more major support is at $60, where the stock found resistance -- the price above which it is unlikely to climb -- from October 2011 to March 2012. This level coincides with the 40-week moving average, which has provided support during the entire uptrend since 2010. Unless there happens to be a very strong bear market, it is difficult to imagine the stock dropping below this level. The downtrend line drawn from the $74.73 currently intersects at about $69.75 a share.
Strong fundamental outlook
Fundamentally, Family Dollar has demonstrated very strong growth in revenue, earnings per share and dividend distribution during the past several years.
In 2009, revenue was $7.4 billion. They expanded by 6.8% to $7.9 billion in 2010 and then they grew another 8.8% to $8.6 billion in 2011.Earnings have more than kept pace. They were $2.64 per share in 2009, jumped 16.2% to $3.15 in 2010 and then went up another 9.8% to $3.36 per share in fiscal year 2011.
The company has increased earnings per share by expanding its store numbers, squeezing more sales out of each location and shrinking its number of shares outstanding. Number of shares outstanding dropped from 137 million in 2009 to 119 million in 2011.
During this time, Family Dollar has increased its yearly dividend payout substantially: In 2009, it was $0.54 per share, went up nearly 15% to $0.62 in 2010 and jumped another 16% in 2011 to $0.72 per share. In the first quarter of 2012, the payout was raised to $0.21 a quarter or $0.84 per share a year. That amount provides a forward yield of 1.25% a year. The 25 analysts that follow the stock this year project the company is likely to earn $3.65 in 2012. This would give it a projected dividend payout ratio of only 23% ($0.84/$3.65) leaving the door open for dividend hikes well into the future.
Despite this strong growth, the stock is still reasonably valued. Its trailing price-to-earnings (P/E) ratio is 19, compared to 15.8 for the S&P 500. On a price-to-sales basis, the stock is cheap at 0.87, compared to 1.27 for the S&P 500.
Action to Take--> There are two strategies that could be used in purchasing Family Dollar. The first would be to buy the stock around support in the low $60s. The stock might pull back to those levels if there is market weakness this summer or fall. But if Family Dollar broke its downtrend line by exceeding $70, then it would indicate the decline from the $74.73 March peak was over. In that case, investors may wish to purchases shares immediately to take advantage of potentially strong growth and rising dividends for some time to come.