“Dividend Aristocrats” is the moniker bestowed upon companies that have raised their annual dividend for more than 25 years running. This is a pretty exceptional record for many reasons. First, it means that these companies have been so successful that they not only have lots of free cash flow, but that free cash flow is either growing or so enormous that the company can afford dividend growth.
Second, Dividend Aristocrats have also figured out how to manage their free cash flow. Free cash can be used for many things, including growing the business, paying dividends or repurchasing stock.
That the companies are comfortable enough with present and future expected free cash flow projections that they increase that dividend every year says a lot about their future. That future seems to have only good macro news ahead.
With that in mind, here are the three Dividend Aristocrats with the highest five-year annualized dividend growth rate.
Dividend Aristocrats With Highest Growth Rates: Cintas Corporation (CTAS)
Cintas Corporation (NASDAQ:CTAS) is one of those wonderfully boring Dividend Aristocrats. Most people probably have no idea what CTAS even does and, frankly, neither did I.
Get this: It provides uniforms for businesses all over the world. It seems silly, but somebody has to do it, and some uniforms have special requirements, like being fire-resistant. The company is only 50 years old.
CTAS is in solid Peter Lynch stalwart territory with 7% earnings growth expect for FY18 and 12% annually for the next five years.
The five year annualized dividend growth rate for Cintas is 20%, and it now has an annual payment of $1.33 per share. Now, that barely comes to a 1%. So you have to decide if CTAS will continue to rise significantly in price — despite trading at 28x earnings — to make up for that small dividend yield.
Dividend Aristocrats With Highest Growth Rates: Hormel Foods (HRL)
Hormel Foods Corp (NYSE:HRL) is one of America’s granddaddies. Back in 1891, the company was founded, and today it is the name behind many of America’s packaged food staples. You know the names: Jennie-O, Skippy, Muscle Milk, SPAM!, Lloyd’s, Hormel Chili … the list goes on and on.
HRL has a very important business — convenient canned and packaged foods that millions of people will always need. They are cheap, easy to buy and store and get the job done when you’re hungry. Hormel has more than $650 million of cash and only $250 million in debt — chump change by most standards. Many companies with their long history draw down tons of debt to keep growing.
HRL has a five year annualized dividend growth rate of 18.9%, and only paid about $296 million in dividends in FY16, from FCF of $737 million. It’s a bit anemic on the earnings, only growing at 5%, and HRL stock is pricey at 20x earnings.
Dividend Aristocrats With Highest Growth Rates: VF Corp (VFC)
I was also surprised to learn of another Dividend Aristocrat that I had not heard of before: VF Corp (NYSE:VFC).
With a name like that, it must be fascinating! As it turns out, I had heard of it before, but only under its brand names like The North Face, Vans, Timberland, JanSport and Eagle Creek, among others.
If you’re hip to these names, you know that VFC has made its bones on high-quality outdoor and sports apparel. I think I see The North Face stamped on more than 75% of the gear when I go hiking.
Margins are pretty impressive as retailers go, and these items tend to be priced for the serious enthusiasts. Thus, cash flow is good and dividend increases are no surprise. Five-year annualized dividend growth rate is 18.4%, and it is currently $1.68 per year, or about 2.92%.
Earnings have been a bit erratic, yet with FCF of about $1.3 billion in FY16, and only $950 million in FY15, VFC still keeps its payout ratio in the 50-60% range.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.