Announcements Quicken After Summer Lull

Dividend growth investing is the strategy of buying shares in companies with reliable and consistently increasing dividend payouts to shareholders.

I have used this strategy since early 2013, and have kept a log of all the dividend increase announcements in my portfolio since its inception. By doing so, I am able to see which companies I own announce new dividends on which dates, and see if there is any pattern to the announcements over the years.

I have found that there is typically a lull in announcements made during the summer months, with most announcements made in either quarter surrounding the New Year. This makes intuitive sense, as companies are generally declaring new rates at the end of either their fiscal or the calendar year.

However, there was one last increase before summer ended, as Altria Group Inc. $MO declared an 8.2% increase to $0.66, just as I had predicted. This new annual rate of $2.64 brings the yield to an attractive 4.1%, making Altria one of the rare cases where you can get a 4%+ yield along with high single-digit growth.

I now turn to the month ahead, and see who is next on the docket for higher dividends.

Expected Dividend Increases For September

I scanned my list of historical announcements and identified four companies that are likely to declare new dividend rates during the month of September: Philip Morris International Inc. $PM, Microsoft Corporation $MSFT, McDonald’s Corporation $MCD, and Lockheed Martin Corporation $LMT.

Here are their increases going back to 2013:

As you can see, the companies are consistent with announcement dates, with Philip Morris announcing between the 10th-15th, Microsoft the 15th-20th, McDonald’s the 18th-29th, and Lockheed Martin the 22nd-24th.

It looks like the 3rd week in September will be a fun one for the portfolio!

Expanding a bit on each of those companies, here are their dividend growth histories from David Fish’s U.S. Dividend Champions List:

The long-term dividend growth rates for each of the companies are impressive, with Microsoft, McDonald’s, and Lockheed Martin each growing payouts at a double-digit rate over the last decade, and Philip Morris at a high-single digit rate over the last five years.

However, each of them announced lower growth rates with the most recent increase. Philip Morris and McDonald’s have had the biggest drop in growth rates, with Philip Morris announcing just a 2.0% increase in 2016, while McDonald’s was just 5.6%.

Let’s see where those dividends are headed going forward.

My Dividend Growth Predictions

In past articles discussing my predictions, I’ve noted that utilities and consumer staples are often the easiest ones to predict, as management generally gives guidance on targeted payout ratio.

However, none of the four companies being discussed today offer this type of guidance. This makes forecasting dividend growth a bit more tricky, as it becomes more of a guessing game about the companies’ intentions.

In place of guidance I will be looking at historical payout ratios and recent history as the basis for my predictions.

Philip Morris International $PM has seen slower growth in the dividend in recent years as it has struggled to grow earnings against currency headwinds and declining volumes of cigarette sales.

This resulted in the payout ratio rising from a typical 65% to nearly 93%, despite raising the dividend by just 2% in each of the last two years.

Earnings are expected to grow by 8% to $4.82 in 2017, and by another 13% in 2018, so it appears that the days of slow earnings growth may be ending.

However, with management previously targeting a payout ratio at a much lower 65%, I suspect there will be another minimal raise to continue working that payout ratio down.

Thus, I am predicting just a $0.02 raise to $1.06, an increase of 1.92%. This provides an 88% payout ratio on 2017 EPS estimates, and allows for a cushion should the earnings outlook change.

It wouldn’t surprise me to see another year or two of those minimal raises until the payout gets back to below the 70% level.

Microsoft Corp. $MSFT has turned into a dividend growth powerhouse, as it’s now increased the dividend for 15 straight years, and done so at a 14.8% annual rate over the last decade.

The problem is that earnings growth hasn’t kept pace with dividend growth, causing the payout ratio to expand from ~30% to ~50% over the last few years.

Analysts are forecasting negative EPS growth for the current fiscal year, which leads me to expect a rather pedestrian dividend increase with this announcement.

My prediction is that Microsoft will give a 5.13% increase to $0.41, which would keep the payout ratio near the 50% level.

Microsoft has a huge cash pile overseas, and is one of many tech companies that would benefit greatly if a reduced tax on repatriated funds were passed by congress. I don’t know how likely that is to happen, but it’s something to keep in mind with the stock.

McDonald’s Corp. $MCD was written off for dead by many when earnings growth went negative in 2014 and 2015.  However, it has seen a resurgence in recent years, and once again trades near all-time highs.

Growth has returned in a big way on the back of all-day breakfast and other initiatives, as earnings grew by 15% in 2016 and are on pace for 14%  growth in 2017.

McDonald’s has historically paid out about 50% of earnings as dividends, so the current payout ratio of 65% is well above normal levels.

So despite the strong EPS growth expected this year, my guess is the dividend growth will be similar to last year’s 5.6% raise. My prediction is that McDonald’s will raise the dividend from $0.94 to $1.00, an increase of about 6.4%.

Lockheed Martin Corp. $LMT is the last stock on the list. It has a 14-year dividend growth streak, and has consistently raised the payout at a double-digit rate in recent years.

Like the others, it does not offer any guidance on payout ratio, which makes forecasting a bit difficult. It has expanded the payout ratio in recent years, but seems to be settling in to a ~55% payout of late.

Growth is expected to be a bit flat in 2017 before rising at a double-digit rate again in 2018. With a current payout ratio of 59% and growth of just 2%, I think the streak of double-digit increases will come to an end.

My prediction is that Lockheed will raise the dividend to $1.92, a 5.5% increase, which will give investors a decent income boost while still keeping the payout ratio from crawling too much higher.

Here is a summary of my expectations for the dividend increases:

With an average increase of just 4.73%, I am expecting that dividend growth rates will be slowing substantially for these four companies this year.

That said, the earnings growth prospects for all them are positive going forward, so I’m hoping this slower dividend growth will be a temporary phenomenon.

Summary & Conclusion

This was a challenging forecast, as none of the four companies provide guidance on dividend policy, and slow earnings growth in 2017 has caused a few to see higher dividend payout ratios than usual.

However, these are all high quality companies with long track records of growth, and analysts expect that to continue going forward.

I’m looking forward to the upcoming dividend declarations (however big or small they may be), as they will continue to help in my portfolio‘s quest for higher income.

Additional Reading

I have been quiet on DGI For The DIY of late, but was able to write a few articles on Seeking Alpha during August. Here are some links if you are interested in reading further:

Altria: Buying ‘Big MO’ At A 4% Yield – This article describes my quest to add Altria Group to my portfolio, and how I was able to buy at a 4% yield despite missing out on the low of the recent drop.

I also discuss the news of potential FDA regulations on nicotine, and why I think concerns about its impact on Altria are overblown.

10 Bargain Stocks To Buy Amid The Retail Sector Slump – The retail sector has been hit hard in recent months, with many stocks trading well below 52-week highs.

This article highlights ten retail stocks that I think are worth a look at current prices.

If I Had A Million Dollars: 2 Years Later – My second update article in response to a reader question of how I’d invest $1 Million.  I show the results from the initial and 1YR update portfolios, and what changes I’d make going forward.

Finally, JULY INCOME UPDATE: FISHING FOR DIVIDEND GROWTH provides an update on my portfolio’s dividend income and details where the growth has come from.

Happy Investing!