This is a guest contribution by Aristofanis Papadatos of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
The U.S. economy continues to recover from the coronavirus pandemic, and the stock market has raced to record highs. The S&P 500 has nearly doubled off its lows from last year. The downside of the stock market’s impressive performance is that it has made bargains harder to find.
Fortunately, there are still blue chip stocks with attractive dividend yields, and reasonable valuations that could result in strong total returns for investors in the coming years. In this article, we will analyze the prospects of three of our top-ranked dividend growth stocks.
Lockheed Martin (LMT)
Lockheed Martin is the largest defense company in the world. It generates approximately 60% of its revenues from the U.S. Department of Defense, 10% from other U.S. government agencies and the remaining 30% from international clients.
The company operates in four business segments: Aeronautics (40% of sales) - which produces military aircraft like the F-35, F-22, F-16 and C-130; Rotary and Mission Systems (26% of sales) - which houses combat ships, naval electronics and helicopters; Missiles and Fire Control (16% of sales) - which creates missile defense systems; and Space Systems (18% of sales) - which produces satellites.
Lockheed Martin manufactures aircraft and platforms that constitute the backbone of the U.S. military and some foreign militaries. These platforms have life cycles of decades, a major competitive advantage.
In the first quarter, Lockheed Martin grew its revenue 4% over last year’s quarter, primarily thanks to 10% revenue growth in the Rotary and Mission Systems segment. The company grew its earnings per share 8%, from $6.08 to $6.56, and exceeded analysts’ consensus by $0.25. Lockheed Martin has missed the analysts’ consensus only once in the last nine quarters. This is a testament to the strong business momentum of the company.
Management raised its full-year revenue guidance from $67.1-$68.5 billion to $67.3-$68.7 billion. It also raised its guidance for EPS from $26.00-$26.30 to $26.40-$26.70. Notably, the backlog of Lockheed Martin currently stands at $147.4 billion, which is worth more than 2 years of revenues. The backlog bodes well for the growth prospects of the company.
Lockheed Martin has a high expected rate of return. Lockheed Martin grew its earnings per share at a 13.5% average annual rate in the past 10 years. This rising earnings growth has fueled a higher share price and dividend increases, which are the two ways investors can maximize returns from stocks.
We expect Lockheed Martin to grow its earnings per share by 8% per year on average over the next five years. Moreover, the stock is offering a 2.7% dividend, which is safe thanks to the healthy payout ratio of 39%.
Furthermore, the stock is currently trading at a forward price-to-earnings ratio of 14.7, which is lower than our assumed fair price-to-earnings ratio of 16.0 for this high-quality stock. If the stock reaches our fair valuation level in five years, it will enjoy a 1.7% annualized gain in its stock returns. Given expected EPS growth of 8.0% and its 2.7% dividend yield, Lockheed Martin is likely to offer a 12.1% average annual return over the next five years.
Bristol-Myers Squibb (BMY)
Bristol-Myers Squibb is a pharmaceutical giant which develops, manufactures and markets drugs worldwide. Among others, the drug portfolio of the company includes Revlimid, a drug for the treatment of multiple myeloma, Opdivo, which is used in the treatment of cancer, and Eliquis, which serves to reduce the risk of stroke.
In late 2019, Bristol-Myers Squibb completed the acquisition of Celgene for $74 billion. The merger greatly enhanced the growth potential of the company in the areas of oncology, immunology, inflammation and cardiovascular disease. At the time of the acquisition, Bristol-Myers Squibb expected the takeover to increase its earnings per share by at least 40%. Management has proved correct, as Bristol-Myers Squibb is on track to grow its earnings per share approximately 60% this year vs. 2019.
In the first quarter, Bristol-Myers Squibb grew its revenues 3% over last year’s quarter, while adjusted earnings per share rose 1%. Management reaffirmed its guidance for record earnings per share of $7.35-$7.55 this year. At the mid-point, this guidance implies 16% growth over last year.
Even better, Bristol-Myers Squibb expects Opdivo to return to growth mode later this year thanks to new indications and fresh product launches. We expect the company to grow its earnings per share by 3% per year on average over the next five years.
Moreover, Bristol-Myers Squibb is currently offering a 2.9% dividend yield. Thanks to the markedly low payout ratio of 26% and its growth potential, the company can easily raise its dividend year after year. Furthermore, the stock is trading at a price-to-earnings ratio of 9.0, which is much lower than our assumed fair earnings multiple of 13.5.
If the stock reaches our fair valuation level over the next five years, it will enjoy an 8.5% annualized boost in its returns. Given also its 2.9% dividend and 3.0% annual growth of earnings per share, the stock could offer a 13.8% average annual return over the next five years.
Comcast Corporation (CMCSA)
Comcast is a media, entertainment and communications company. Its business includes Cable Communications (High-Speed Internet, Video, Business Services, Voice, Advertising, Wireless), NBCUniversal (Cable Networks, Theme Parks, Broadcast TV, Filmed Entertainment), and Sky, a leading entertainment company in Europe that provides Video, High-Speed Internet, Voice, and Wireless Phone Services directly to consumers.
Last year, Comcast was negatively affected by the coronavirus crisis, which hurt its NBCUniversal and Sky businesses such as filmed entertainment and theme parks. Due to the impact of the pandemic on its business, Comcast saw its earnings decrease in 2020 for the first time in a decade.
However, thanks to the recovery from the pandemic, Comcast is likely to recover strongly this year. In the first quarter, the company grew its revenues and its earnings per share by 2% and 7%, respectively. The Theme Parks segment remained under pressure with a 33% decline in revenues, but it is likely to return to growth mode in the remainder of the year.
Moreover, the Cable segment is likely to remain a significant growth driver for years thanks to growth in the customer count and rate hikes. The Video operation is fighting against the trend of cord-cutting, but higher revenues in the high-speed internet business have more than offset this headwind so far. Overall, we expect Comcast to grow its earnings per share by 12.0% per year on average over the next five years.
Comcast has raised its dividend for 12 consecutive years. The stock has a 1.8% dividend yield, which beats the average yield of the S&P 500 Index. With a low payout ratio of 35% and its strong balance sheet, Comcast can easily continue raising its dividend at a meaningful rate for many more years.
Comcast is now trading at a price-to-earnings ratio of 19.8, which is slightly lower than the historical average price-to-earnings ratio of 20.5 of the stock over the last decade. If the stock trades at its historical valuation level in five years, it will enjoy a modest 0.7% annualized gain in its returns thanks to the expansion of its valuation level.
Given also the aforementioned 12.0% expected earnings-per-share growth and its 1.8% dividend yield, Comcast can offer a 14.2% average annual total return over the next five years.