The Dividend Contenders are those companies with at least 10 years, but less than 25 consecutive years, of dividend growth. Companies in this category have proven business models and a leadership position in their industry that have enabled shareholder returns in the form of dividend increases for at least a decade. Some of these companies will go on to achieve Dividend Champion status.
We will look at two Dividend Contenders who provide safe and secure income for investors.
Cummins Inc. (
CMI, Financial) is a leading designer and manufacturer of engines for a wide variety of trucks, including light, medium and heavy duty. It is a global company, serving nearly 200 countries around the world. The company is valued at $30.6 billion and produces annual revenue of almost $20 billion.
The compan raised its dividend 7.4% for the Sept. 2 payment, marking 16 consecutive years of dividend growth. For context, the dividend has a CAGR of nearly 17% over the last decade, so dividend growth this year was lower than usual.
That being said, Cummins new annualized dividend of $5.80 gives the stock a forward yield of 2.7%, which is above the stock’s 10-year average yield of 2.5% and the average yield of 1.25% for the S&P 500 Index.
Shareholders received $5.60 dividends per share in 2021. Wall Street analysts expect earnings per share of $15.11, giving Cummins an expected payout ratio of just 37% for the year. For 2022, analysts are calling for earnings per share of $18.23, causing the projected payout ratio to fall to 32% next year using the new annualized dividend. The estimated payout ratios for this year and next are close to Cummins’ 10-year average payout ratio of 33%.
Shares of Cummins closed the most recent trading session at $214, giving the stock a forward price-earnings ratio of 14.2 and 11.7 based on 2021 and 2022 earnings estimates. Shares have averaged 13.5 times earnings over the last decade, so the forward valuation isn’t too far off of the long-term performance.
The GF Value chart shows the stock to be a little ahead of its intrinsic value.
With a GF Value of $195.58, Cummins has a price-to-GF Value of 1.09. Shares would retreat 8.6% from current levels. Shares earn a rating of fairly valued from GuruFocus.
The Travelers Companies Inc. (
TRV, Financial) is a top name in the insurance industry. The company provides a wide range of insurance policies in the area of auto, home and business. The $38 billion company generated revenue of $29 billion in 2020.
The company raised its dividend by 3.5% for the June 30 distribution, giving Travelers a dividend growth streak of 16 years. Shareholders have seen the dividend compound at just over 8% per year over the last decade. The growth rate has deaccelerated to 3.5% over the past five years, matching exactly the most recent increase.
The annualized dividend of $3.52 equates to a forward yield of 2.3%, slightly below the stock’s 10-year average of 2.5%, but more than 100 basis points higher than the yield of the market index.
The company will pay out $3.49 of dividends per share in 2021. With analysts calling for $12.45 of earnings per share for the year, Travelers has an implied payout ratio of 28%. Next year’s estimates are for $12.60 of earnings per share, resulting in a payout ratio projection of 28% as well. Both estimates are below the 30% payout ratio that the company has averaged since 2011.
The stock closed Thursday’s trading session at $154.65. Using estimates for this year, Travelers has a forward price-earnings ratio of 12.4. The stock has a multiple of 12.3 based on next year’s expectations. This is in line with Travelers’ long-term average price-earnings ratio of 12.4.
The GF Value chart shows the stock to be trading near its intrinsic value.
Travelers has a GF Value of $158.70, giving the stock a price-to-GF Value of 0.97. Travelers would rise 2.6% if it were to meet its GF Value. The stock is rated as fairly valued.
The Dividend Contenders are a good place for investors to find companies paying reliable dividends. Cummins and Travelers both have dividend growth streaks of 16 years, showing each company values a rising distribution to shareholders. Both stocks also offer a market-beating dividend yield that looks to be well covered, suggesting investors looking for sources of safe and secure income consider Cummins and Travelers for their portfolio.
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