FAST - 5 Stocks That Recently Increased Their Dividend

2023-12-05 09:42:04 ET

Summary

• Dividend growth stocks consistently increase their dividend year after year with a 5-year growth rate of 10% or more.
• Companies must generate strong free cash flow to sustain dividend growth.
• All 5 of these stocks have recently increased their dividend, with the largest increase being as high as 25%.

When it comes to investing, one of my favorite types of stocks to invest in are those that increase their dividend on a regular basis, particularly dividend growth stocks.

I consider a stock to be a dividend growth stock when they show their ability to consistently increase their dividend year in and year out and do so with a 5-year dividend growth rate of 10% or more.

In order to do this, companies must generate strong amounts of free cash flow, since this is truly where dividends are paid from.

The Home Depot ( HD ) is an example of a great of a dividend growth stock, as they have shown their ability to grow their dividend year in and year out. Here is a look at the company's dividend growth over the last 10 years.

The company has grown their dividend for 14 consecutive years and counting.

Today, we are going to look at 5 companies that have recently increased their dividend. These stocks may not all be dividend growth stocks, but they have hiked the dividend which is usually a sign of confidence for the company moving forward.

5 Stocks That Have Recently Increased Their Dividend

Dividend Stock #1 - PulteGroup, Inc. ( PHM )

PulteGroup is the nation's 3rd largest builder with a lot of coastal presence in the US. The builder has a market cap of $20 billion, which trails the likes of D.R. Horton ( DHI ) and Lennar ( LEN ). Over the past 12 months, shares of PHM are up a staggering 100%.

Homebuilding stocks have been on fire in 2023 as homebuilders can't build homes fast enough given the drastic supply shortage we have in the US. Higher interest rates have not slowed these large builders, but instead the pressure has come with existing home sales which just saw its slowest sales pace in 13 years.

As you can see here, Home Sales Revenues have climbed every quarter this year, with sales increasing 3% in the most recent quarter and EPS up 8% year over year.

Pulte has generated Free Cash Flow of $1.96 billion over the past 12 months, which easily covers the dividend. PulteGroup is not a big dividend payer with a yield slightly below 1%, but they have been growing their dividend at a strong clip of late. The company just announced a 25% dividend increase and over the past 5 years they have an average dividend growth rate of 12.2%.

Strong dividend growth and stock performance, but does the valuation make sense, let's have a look.

Looking at this Fast Graphs chart you can see that analysts are looking for earnings to slow in the next year, falling 2%. Homebuilding is a very cyclical business, so a lot can change rather quickly. Using the 2024 EPS estimates, PHM shares trade at a forward P/E ratio of just 8.0x, which is in-line with their five year average, so no real discount from this standpoint.

Dividend Stock #2 - NIKE, Inc. ( NKE )

Next we have Nike which is the largest sports apparel and footwear company in the country, having a presence across the globe. The company currently has a market cap of $173 billion in what has been a less-than-stellar year for the company with shares up only 2% over the past 12-months. The stock hit a 52-week low of $88 in October, but shares have climbed nearly 30% since hitting those lows a few months back.

Higher rates, economic slowdown, along with a slowdown in China, one of the company's largest territories, are all headwinds that Nike has been dealing with. Regardless, Nike recently reported stronger than expected top line revenue in the face of these headwinds, part of the reason we have seen the big run in the stock. In the company's most recent quarter, at a time when revenues were expected to fall, NKE generated 2% revenue growth and margins stayed relatively flat, all positive takeaways.

With that, Nike announced a dividend increase of 8.8%, giving investors a little confidence from management moving forward. Nike yields a dividend of 1.3% and they have a five-year dividend growth rate of 11.1% with 11 consecutive years of dividend growth. Nike has historically had a fast growing dividend, above double digits making them a dividend growth stock, although the growth has slowed in recent years.

In terms of valuation, NKE shares are expected to generate EPS of $3.70 per share in 2024 giving shares a Price to Earnings multiple of 30.6x. Over the last five years, shares of NKE have traded at an average multiple of 34x. Higher multiple stocks tend to generate strong EPS growth, and NKE is planning for that with projected EPS growth of 15%, 16%, and 18% each of the next three years.

Dividend Stock #3 - Fastenal Company ( FAST )

Fastenal Company operates out of the industrial sector and they are a wholesale distributor of construction supplies. The company has a number of different supplies from fasteners to screws and bolts, and many more.

Fastenal has a market cap of $35 billion and over the past 12 months the stock has risen 18%, up nearly 30% in 2023.

The stock is approaching there all-time high in the mid-$60 range. One reason behind this is the fact that the company continues to turn in positive results. The primary customer base for Fastenal is construction workers, not just residential, but residential has been a hot sector as we saw when discussing PulteGroup earlier.

Fastenal's revenues continue to grow year in and year out and that is not expected to change any time soon.

In terms of free cash flow, the company is expected to surpass $1 billion in 2023 after generating $767 million all of last year. Strong free cash flow growth gives me a lot of confidence in the safety of the dividend as well as the expectation for continued growth.

As we have continued along today, our dividend yields continue to climb, as Fastenal yields a dividend of 2.3%. The company is a dividend aristocrat as they have increased their dividend for 25 consecutive years and they have a five-year dividend growth rate of nearly 13%.

Speaking of dividend growth, Fastenal has been known to pay a special dividend from time to time. They did it in 2008, again in 2012, and most recently in 2020. Just recently, the company announced a special dividend of $0.38 per share after already announcing and paying four quarters of dividends, so essentially you are getting a fifth quarterly payment, nice little end of year gift for investors.

Now for valuation where shares do not look all that cheap from a price to earnings standpoint. Analysts have the company generating 2024 EPS of $2.13 per share which equates to a 28x multiple, in-line with the company's five year average, so with that, shares appear fairly valued. FAST shares might be a name to keep high on the watchlist for when a better opportunity presents itself.

Dividend Stock #4 - McCormick & Company ( MKC )

Alright, let's spice things up a little now, literally, since McCormick & Company is the world's largest spice company. If you are someone that BBQ's or cooks often, you are well aware of McCormick's spices and seasonings.

MKC has a market cap of roughly $18 billion. Food products and supply companies have not performed all that well in 2023 and McCormick is no different as the stock has fallen more than 20% over the past 12 months.

Unlike the first three stocks we have looked at thus far, McCormick is one I have some real concerns about as not only has revenue growth slowed to next to nothing, margins have also come under pressure. Not a good combination to have.

The free cash flow from the business has been healthy, but they have used a lot of that over the years to make acquisitions that are yet to pay off. For years, FCF was growing for 8 straight years, but that has fallen and fallen hard each of the past two fiscal years.

In terms of the dividend, MKC recently increased their dividend by nearly 8%, which gives the stock a dividend yield of 2.6%, our highest yield so far today. The company is a dividend aristocrat with more than 36 consecutive years of dividend growth, inching closer towards dividend king status. The company has a five-year dividend growth rate of 8.5%, so the latest dividend hike was pretty much in-line with recent hikes over the past few years.

Looking at valuation, given that shares have fallen as hard as they have, I would expect a bit of a discount here compared to its five year history. Analysts are expecting the company to generate EPS of $2.88 per share in 2024, which equates to a forward P/E multiple of 22.9x, well below their five year average of 31.6x.

The P/E multiple should never be looked at alone because it can be misconceiving. MKC shares appear cheap for a reason, they have not been performing all that well and do not deserve the multiple they had when revenues were growing faster, free cash flow was higher, and margins were much higher. As such, this stock is a "pass" for me.

Dividend Stock #5 - Merck & Co. ( MRK )

Merck & Company is one of the largest pharmaceutical companies in the world, and if you have been following the markets this year, well then you know health care has been one of the worst performing sectors to be in.

On the year, shares of MRK have fallen 7% and currently trade with a market cap of $262 billion.

Merck is one of the 30 components within the Dow Jones Industrial Average. The company's best selling drug is Keytruda, which has seen its revenues explode over the past 5+ years. In 2018, sales were $7.17 billion and at the end of 2022 they were $20.94 billion.

This drug is a blockbuster for the company and is expected to take the top selling spot in the world this year, whereas it was third in 2022. Within the next five years, annual sales of Keytruda are expected to reach the $30 billion mark.

There is a lot to like when it comes to Merck, and I like to compare them to the likes of ABBV, who for years had the number one selling drug in Humira. The company has a blockbuster drug, a strong pipeline, and strong management to steer the company ahead.

Let's finish off our list today with our highest dividend yield of roughly 3%. The company recently announced a dividend hike of 5.5% and they have increased the dividend for 12 consecutive years and counting, halfway to dividend aristocrat status.

In terms of valuation, Merck is a stock high on my watchlist and let me show you why. Analysts are looking for adjusted EPS of $8.58 next year which equates to a P/E multiple of 12x, slightly below their five year average of 15.4x. EPS growth is expected to grow at a strong clip the next few years, making valuation looking intriguing.

The average 12-month price target from analysts is $126, implying more than 20% upside to go along with that 3% growing dividend.

Investor Takeaway

Today we took a look at five stocks that have recently increased their annual dividend. As we went through the five stocks, we started with the lowest yield and grew to our largest yield, which actually coincide with the highest dividend hike to the lowest. This makes sense as lower yield stocks tend to have faster dividend growth.

Dividend hikes are usually a form of confidence from management about future cash flows, but does not mean an investor should invest because of it. Merck was the most intriguing in terms of valuation out of the five stocks with McCormick & Company being my least intriguing.

Down in the comment section below, let me know which of these five stocks you like and which you do not like at today's valuation.

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