What is a Dividend King?

The Dividend Kings are an exclusive group of stocks that have paid increasing dividend payments each year… for 50 consecutive years.

There are currently just 16 Dividend King. For a business to pay increasing dividends each year for 50 consecutive years, it must have a strong competitive advantage.

Of course, not all Dividend Kings are the same. Some are growing much faster than others. This article takes a look at the 3 fastest growing Dividend Kings.

These 3 stocks combine safety, dividends, and growth. There is a certain level of stability and safety that comes with paying increasing dividends for 50 years. Additionally, these 3 businesses provide fairly high dividend growth expectations with stability.

3rd Fastest Growing Dividend King: Colgate-Palmolive

Colgate-Palmolive (CL) has the 3rd fastest dividend growth rate of the Dividend Kings over the last decade. The company has grown its dividend payments at 10.9% a year over the last decade. Colgate-Palmolive has paid increasing dividends for 52 consecutive years.

There are many impressive branded consumer goods businesses. Colgate-Palmolive is at the top of the list. The company has a strong portfolio of high quality brands with global reach. The company’s well known brands include: Colgate, Palmolive, SoftSoap, and SpeedStick. The image below shows Colgate-Palmolive’s portfolio of high quality brands:

Colgate-Palmolive supports its strong global brands with large marketing spending. The company has spent between $1.7 billion and $1.9 billion on advertising in each of the last 5 years. The cumulative effect of large advertising spending increases brand awareness for the company and leads to revenue growth.

Large advertising spending helps etch the company’s brands into consumer’s minds. Advertising spending has given Colgate-Palmolive 44.8% of the worldwide toothpaste market and 33.8% of the worldwide manual toothbrush market.

Colgate-Palmolive is among the most profitable consumer goods companies. After-tax return-on-capital was 29.7% for the 4th quarter of 2014, significantly higher than the company’s peer group average of 18.5% and the S&P 500’s average of just 8.0%.

Over the last decade, Colgate-Palmolive has grown earnings-per-share by 6.7% a year and revenues-per-share by 6.3% a year. The company has made efficiency gains over the last decade as earnings-per-share have increased at a faster rate than revenue-per-share. Dividends-per-share have grown significantly faster than revenue-per-share over the last decade. This means that Colgate-Palmolive has grown its dividend payments partially by raising its payout ratio. The company currently has a payout ratio of 57%. While not excessive, the company’s payout ratio is now high enough so that dividends will likely grow in-line with earnings-per-share growth over the next decade.

Colgate-Palmolive’s future growth will be driven by several key factors. The company is expecting continued growth in emerging markets. Emerging markets constant-currency revenue grew 6.5% from the 1st quarter of fiscal 2015 to the 1st quarter of fiscal 2015. Colgate-Palmolive currently generates 55% of its sales in emerging markets.

Additionally, the company plans to grow by increasing gross margin through price increases, primarily in emerging markets. The company’s global growth and efficiency program should help to further reduce expenses which will also help the bottom line.

The company will use these savings to increase advertising spending, further reinforcing growth. All told, I expect Colgate-Palmolive to grow earnings-per-share and dividends per-share at between 6% and 8% a year over the next decade. With its current 2.3% dividend yield, this means total returns of 8.3% to 10.3% a year for shareholders.

Colgate-Palmolive is a truly exceptional business. This does not mean the company’s stock makes an exceptional investment. Colgate stock is currently trading at a price-to-earnings ratio of 26.4 at this time. Over the last decade, Colgate-Palmolive has traded for an average price-to-earnings multiple of around 20. Patient dividend growth investors should wait for the business to return to its historical average price-to-earnings ratio before purchasing more shares of Colgate-Palmolive.

2nd Fastest Growing Dividend King: Parker-Hannifin

Parker-Hannifin (PH) is a diversified industrial goods manufacturer with a market cap of $16.7 billion. The company was founded in 1918 and has grown its dividend payments for 59 consecutive years. Over the last decade Parker-Hannifin has grown its dividend payments at 15.2% a year. The company has over 57,000 employees and generates over $13 billion in sales each year.

Parker-Hannifin operates in 2 segments. Each segment is listed below along with the percentage of total operating income generated by each segment in the company’s most recent quarter.

• Diversified Industrial: 84% of operating income
• Aerospace Systems: 16% of operating income

The diversified industrial segment is by far the company’s largest. The segment is further divided into North American and International segments. The North American segment generated 63% of the diversified industrial segment’s operating income in the company’s most recent quarter, while the International segment generated 37% of operating income.

Parker-Hannifin has managed to grow earnings-per-share at 8.8% a year over the last decade. Revenues-per-share has grown at 7.7% a year over the same time period. Parker-Hannifin’s earnings have grown faster than revenues over the last decade. This shows the company is slowly realizing higher margins and better efficiency. Parker-Hannifin’s most recent restructuring operation has been a great success; the company continues to streamline its operations and grow margins.

Dividends-per-share have grown an average of 6.4 percentage points a faster than earnings-per-share each year over the last decade. Parker-Hannifin’s tremendous dividend growth rate is partially explained by a rising payout ratio. Fortunately for Parker-Hannifin investor’s, rapid dividend growth should not wane any time soon. The company currently has a payout ratio of just 28.5% – leaving plenty of room for management to grow dividends faster than earnings-per-share.

Parker-Hannifin’s impress growth over the last decade is not solely from organic business growth. The company’s growth comes in large part from bolt on acquisitions. Parker has done more than 100 bolt on acquisitions in the last decade. The company has leading market share in the industrial motion and control manufacturing industries – and still controls only a tiny fraction of the diversified industry. This leaves the door open for more acquisitions in the future for Parker.

Unlike Colgate-Palmolive, Parker-Hannifin stock looks cheap at this time. The company is trading for a price-to-earnings ratio of just 15.7. The S&P 500 is currently trading for a price-to-earnings ratio of 21.6. Parker-Hannifin is significantly cheaper than the S&P 500 despite its 59 year streak of consecutive dividend increases and above average earnings-per-share growth rate. Additionally, the company’s dividend yield of 2.1% is higher than the S&P 500’s current dividend yield of 1.9%.

Parker-Hannifin is expected to grow earnings-per-share at 8% to 10% a year going forward. Parker’s expected earnings-per-share growth combined with its dividend yield of 2.1% gives investors an expected total return of more than 10% going forward. The company’s 10%+ total return potential combined with its reasonable price-to-earnings ratio make it a good choice for dividend growth investors looking for exposure to the industrial manufacturing industry.

Fastest Growing Dividend King: Lowe’s

Lowe’s (LOW) is the second largest big-box home improvement retailer in the United States based on market cap. The company has a market cap of $66 billion versus a $145 billion market cap for Home Depot. Lowe’s has paid increasing dividends for 51 consecutive years. Over the last decade, the company has grown its dividends-per-share at an amazing compound annual growth rate of 25.8%.

Lowe’s store count and operations are summarized below:

• 1,719 Lowe’s stores in the United States
• 74 Orchard Supply stores in the United States
• 37 Lowe’s stores in Canada
• 10 Lowe’s stores in Mexico

Lowe’s also has a joint venture operation with large Australian retailer Woolworth’s. Through the joint venture, Lowe’s has 33% ownership of 49 Masters Home Improvement stores in Australia as well as 33% ownership in the Australian Home, Timber, and Hardware Group.

Lowe’s is expecting to open between 15 and 20 new stores in fiscal 2015. This equates to a store-count growth rate of about 1%. Lowe’s and Home Depot have largely saturated the big-box home improvement market in the United States, but there is still room for store count growth in Mexico and Canada. The real growth driver for Lowe’s going forward will be comparable store sales growth rather than new store openings.

2015 will likely be a very good year for Lowe’s. The company is projecting 4% to 4.5% comparable store sales growth. Comparable store sales rose 5.3% in the company’s most recent quarter. Lowe’s is projecting earnings-per-share growth of 21.4% in fiscal 2015. Lowe’s 2015 growth drivers are summarized below:

• Total sales growth of 4.5% to 5.0%
• EBIT margin growth of 80 to 100 basis points
• Large share repurchases

Despite excellent expected 2015 results, Lowe’s earnings-per-share growth has been mediocre over the last decade. Lowe’s has seen earnings-per-share grow at about 5% a year over the last decade. The company reduced its share count by 5.3% a year over the same time period. All growth was a result of share repurchases; net profit actually declined slightly over the last decade for Lowe’s. For comparison, Home Depot grew earnings-per-share by 5.9% over the same time period, with share repurchases averaging about 5.3% points a year (the same as Lowe’s). Despite controlling significant market share in the U.S. big-box home improvement industry, neither Lowe’s or Home Depot has seen significant profit growth in the last decade.

The Great Recession and slow housing recovery damaged profitability for Lowe’s in the last decade. The company is especially sensitive to economic downturns. When home sales decline, consumers spend much less on home improvement.

Lowe’s plans to raise its payout ratio from 24.6% to 35% by 2017. The company is also targeting a 15% share count reduction by 2017. Large share repurchases, strong comparable store sales growth, and a rising payout ratio will drive rapid dividend growth for Lowe’s over the next few years. The company will likely generate 20%+ dividend-per-share growth.

The company’s rapid growth does not come without risk. If the housing market slows due to rising interest rates or another recession, Lowe’s share price and earnings will very likely suffer. Lowe’s is the ultimate feast-or-famine stock for dividend growth investors. During times of economic growth, Lowe’s sees rapid earnings growth. The company is far from recession proof; during recessions, the company struggles.