GSBC - Caterpillar Target Among 10 Companies To Announce Annual Dividend Increases In June

2023-05-29 09:19:29 ET

Summary

• The latter half of May was disappointing for dividend growth investors, as Lowe’s pulled back on its dividend growth rate and Union Pacific skipped its annual increase.
• The big increases came from smaller companies. The only double-digit boost came from chemical company Ashland, while staffing firm Insperity and regional bank TowneBank announced 9% boosts.
• The announcements of dividend increases will slow down as summer approaches, but we should still see double-digit boosts from Kroger, UnitedHealth and Great Southern Bancorp.

This is the latest in my series of articles where I provide predictions of annual dividend increases for a variety of long-term dividend growth companies. In the middle of May, I provided predictions for 12 dividend growth companies that have historically announced annual payout increases in the second half of May. In this article I'll look at another 10 dividend growth companies that I expect will announce their annual dividend increases in June.

Before I get to that, dividend growth investors should know that cell tower REIT American Tower Corporation ( AMT ) announced a 0.6% dividend increase to an annualized $6.28. The company usually announces increases each quarter but skipped its boost last quarter. The payout bump, which extends the company's dividend growth streak to 13 years, gives American Tower a forward yield of 3.45%.

Here are the results from my predictions from the second half of May (as always, the original predictions are available here ), followed by my predictions for the dividend increases that I'm expecting to be announced in June:

(All yields are based on stock prices at the market close on Friday, May 26th.)

Results for Dividend Increase Announcements from the Second Half of May

Ashland Inc. ( ASH ) - 13 years

Prediction: 9.0 - 11.9% increase to $1.46 - $1.50.

Actual: 14.9% increase to $1.54.

Forward yield: 1.77%.

Despite slowing growth, the specialty chemical company announced a good increase this year.

Donaldson Company, Inc. ( DCI ) - 34 years

Prediction: 6.5 - 10.9% increase to $0.98 - $1.02.

Actual: 8.7% increase to $1.00.

Forward yield: 1.55%.

The filtration company's double-digit earnings growth leaves enough room for a good dividend increase and continued share buybacks.

Flowers Foods, Inc. ( FLO ) - 21 years

Prediction: 0 - 4.5% increase to $0.88 - $0.92.

Actual: 4.5% increase to $0.92.

Forward yield: 3.57%.

The bakery company announced another year of 4-cent annual dividend growth - its 7th straight.

Lennox International Inc. ( LII ) - 14 years

Prediction: 10.4 - 12.3% increase to $4.68 - $4.76.

Actual: 3.8% increase to $4.40.

Forward yield: 1.57%.

The HVAC company fell far short of my expectations with its latest boost.

Lowe's Companies, Inc. ( LOW ) - 59 years

Prediction: 23.8 - 28.6% increase to $5.20 - $5.40.

Actual: 4.8% increase to $4.40.

Forward yield: 2.13%.

This year's dividend increase from Lowe's is a big disappointment, as the company has traditionally boosted its payout by more than 20% annually. But with increasing interest rates and a potential recession in the housing market, Lowe's is playing it safe while still growing its dividend.

LyondellBasell Industries N.V. ( LYB ) - 11 years

Prediction: 4.2 - 5.9% increase to $4.96 - $5.04.

Actual: 5.0% increase to $5.00.

Forward yield: 5.73%.

As demand for its products slows, the chemical company's dividend growth rate is falling. This year's increase is below the 5-year average of 5.8% and last year's 5.3% boost.

Medtronic plc ( MDT ) - 44 years

Prediction: 4.4 - 7.4% increase to $2.84 - $2.92.

Actual: 1.5% increase to $2.76.

Forward yield: 3.39%.

Foreign exchange effects caused EPS to fall this year for the medical devices company, resulting in a minimal increase.

Monro, Inc. ( MNRO ) - 9 years

Prediction: 3.6 - 7.1% increase to $1.16 - $1.20.

Actual: 0% increase to $1.12.

Forward yield: 2.59%.

It looks like the auto repair and tire company will defer its next dividend boost to later in the year.

Northrop Grumman Corporation ( NOC ) - 19 years

Prediction: 7.5 - 9.8% increase to $7.44 - $7.60.

Actual: 8.1% increase to $7.48.

Forward yield: 1.71%.

Dividend growth at the defense contractor slowed from last year's 10% increase.

Insperity, Inc. ( NSP ) - 13 years

Prediction: 13.5 - 17.3% increase to $2.36 - $2.44.

Actual: 9.6% increase to $2.28.

Forward yield: 2.06%.

This is the first year of sub-10% dividend growth for the human resources company in a while.

TowneBank ( TOWN ) - 12 years

Prediction: 10.9 - 15.2% increase to $1.02 - $1.06.

Actual: 8.7% increase to $1.00.

Forward yield: 4.18%.

Despite a 13% drop in EPS, the regional bank still rewarded investors with a good dividend boost.

Union Pacific Corporation ( UNP ) - 16 years

Prediction: 3.8 - 6.2% increase to $5.40 - $5.52.

Actual: 0% increase to $5.20.

Forward yield: 2.69%.

The railroad is deferring its next dividend increase to later in the year.

Predictions for Dividend Increases for June

There are 10 long-term dividend growth companies I expect to announce their annual increases in June. Here are my predictions for two featured companies:

Caterpillar Inc. ( CAT ) - 29 years of dividend growth

Heavy machinery company Caterpillar is continuing to fire on all cylinders. The company posted a 28% growth in its adjusted EPS last year and followed up on that with 70% year-over-year growth in the first quarter of 2023. This growth is being driven by double-digit sales growth across all of Caterpillar's business segments - Construction Industries, Resource Industries, and Energy & Transportation - and is primarily due to the company's ability to pass on the effects of inflation.

Caterpillar has a good dividend growth history, balancing longevity with decent-sized increases. The current annual payout of $4.80 has doubled since the end of 2013 and last year the company increased the dividend by 8%, outpacing inflation.

What will this year bring for income investors? The only potential headwind to continued dividend growth from Caterpillar is the relatively high debt-to-equity ratio, but the debt burden is easily managed with the company's free cash flow. In fact, the company uses most of its free cash flow for share buybacks, having repurchased more than 12% of all outstanding shares since 2018. With the earnings growth, the only question is how much of the free cash flow will be used for share buybacks and how much for dividend growth. I expect Caterpillar to continue to boost its payout in the high single digits, with a chance of a 10% increase.

Prediction: 7.5 - 10.0% increase to $5.16 - $5.28.

Predicted Forward Yield: 2.44 - 2.49%.

Target Corporation ( TGT ) - 55 years

After rewarding investors with a 20% dividend increase last year, Target is likely to disappoint this year. The company recently reported first quarter earnings announced that adjusted EPS had fallen more than 6% year-over-year due in large part to economic pressures on consumers. The company also announced that it expects theft and shoplifting to reduce profitability by more than $500 million in 2023.

This follows the 2022 annual earnings report, where the company announced that comparable sales and traffic growth had fallen from 12% in 2021 to less than 3% in 2022. This resulted in a 55% drop in adjusted EPS for the full year. With the drop in EPS, Target's payout ratio jumped from 32% to more than 70%, which will limit the dividend growth this year.

Historically, Target has grown its dividend in the high single digit percentages. The headwinds of increased theft and a slowdown in the economy will make this scenario the best that can be expected. Investors will see a 56th year of dividend growth, but it'll be in the range of mid-single digit percentages as the company hunkers down.

Prediction: 4.6 - 7.4% increase to $4.52 - $4.64.

Predicted Forward Yield: 3.25 - 3.34%.

Here are my predictions for the 8 other companies which should announce annual increases in the second half of the month:

Summary

Dividend increases were disappointing in the latter half of May. Union Pacific, expected to announce its next annual increase, deferred its announcement while Lowe's - which historically announces 20%+ increases - increased its dividend by a disappointing but still respectable 5%. Medical device company Medtronic announced a minimal 1.5% increase. And auto repair company Monro also decided to defer its dividend boost.

On the positive side, specialty chemical company Ashland announced a 15% boost while there were several high single-digit percentage increases from filtration company Donaldson, defense contractor Northrop Grumman, staffing company Insperity, and regional bank TowneBank. The other increases were all at or below 5%.

With the Memorial Day holiday and the summer slowdown in the United States, the number of dividend increase announcements will slow down. But investors should be able to look forward to double-digit percentage boosts from regional bank Great Southern Bancorp, supermarket chain Kroger, and healthcare insurer UnitedHealth in June. Widely held construction equipment manufacturer Caterpillar should announce a boost in the high single digits, while retailer Target - which is dealing with headwinds right now - will likely slow its dividend growth to the mid-single digit percentages.

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