Barron\'s - April 6 2020

April 6, 2020 BARRON’S 31

INCOME INVESTING

To preserve capital for its dividend,Chevron has

cut 2020 capital spending by 20%, to $16 billion.

Its stock recently yielded 7.2%

These 8 Aristocrats

Have Safe Dividends.

(Safe Being Relative.)

A

s dozens of compa-

nies have cut or sus-

pended dividends in

recent weeks to pre-

serve cash amid the

uncertain impact of

the coronavirus pan-

demic on the economy, the deteriorat-

ing payout picture has become a fa-

miliar refrain in this column.

Where, then, to turn when nothing

is a given?

Barron’s started with the S&P 500

Dividend Aristocrats, which have

raised their dividends for at least 25

straight years, for ideas. The group

has 64 members, and with the help of

FactSet data, we whittled it down to

eight that appear to have some bul-

wark to maintain their dividends, as

the accompanying table shows. (There

soon will be 66 Aristocrats due to

United Technologies (ticker: UTX)

merging with non-Aristocrat Ray-

theon (RTN) and two companies be-

ing spun out.)

The criteria for our list included a

net debt (debt minus cash) to earnings

before interest, taxes, depreciation,

and amortization (Ebitda) ratio below

2, a reasonable level. We also looked

for companies with debt-to-capital

ratios below 40% and an increase in

free cash flow in recent years. (The

data cover the companies’ three most

recent fiscal years.)

The working assumption for those

criteria is that the less leveraged a

company is, the better for dividend

safety, especially as a steep recession

looms. A more subjective criterion

was to focus on businesses that ap-

pear to have a relative advantage to

maintain their operations and divi-

dends during the pandemic—selling

toilet paper, coronavirus testing kits,

or generating fees from assets under

management, for example.

Of course, past isn’t prologue, partic-

ularly since this exercise is occurring

against a backdrop in which dividends

are under pressure from a pandemic

with no modern precedent. Even indus-

tries that have been traditional dividend

havens, such as staples and utilities,

pose risks for income-oriented inves-

tors looking for increases. “They al-

ready have high payout ratios and are

unlikely to lift them further,” says To-

bias Levkovich, chief U.S. equity strate-

gist at Citigroup Global Markets.

But if a company maintains its divi-

dend in this environment, it’s a victory.

From now until the crisis abates, pay-

out increases are much less likely.

Levkovich expects the S&P 500’s

earnings to drop 24% this year and

dividends to fall by 30%. The energy

sector, he says, is “front and center on

cutting payouts” as the economy craters

and oil prices plummet, as Saudi Ara-

bia and Russia engage in a price war.

Yet our list of durable Aristocrats

includes Chevron (CVX), one of the

biggest energy companies. That’s be-

cause Chevron CEO Mike Wirth, in a

recent interview with Barron’s , said

the company will use its balance sheet

to protect the dividend. “We have one

of the strongest balance sheets in the

industry,” Wirth says. “We can use it

when we need it.” That could include

taking on more debt or selling assets,

if needed, to maintain the payout.

To preserve capital, the giant en-

ergy firm has already suspended stock

buybacks and slashed 2020 capital

spending by 20%, to $16 billion. The

company has raised its dividend for

more than 30 years. The stock’s yield

was recently 7.2%, the highest among

the field of eight.

Our list also includes Procter &

Gamble (PG) and Kimberly-Clark

(KMB), both of which sell a lot of con-

sumer products. Their yields were

recently 2.7% and 3.3%, respectively.

Procter’s brands include Bounty

paper towels, Puffs tissues, and

Charmin toilet paper, key products

that consumers covet right now as

they hunker down in their homes. The

company has increased its payout for

63 straight years. Kimberly Clark’s

brands include Kleenex and Cottonelle

toilet paper. It has raised its dividend

for 47 consecutive years.

Levkovich notes that it’s important

to look at average sector payout ratios,

which measure the percentage of

earnings paid out as dividends. Tech-

nology is around 30% and health care

was at about 35% at the end of 2019.

That, in theory at least, gives cer-

tain companies in those sectors room

to raise their payouts, “but we wonder

if they will, under the current back-

drop,” Levkovich says.

The three health-care firms on the

list include Medtronic (MDT), whose

many medical devices include ventila-

tors—a crucial piece of equipment as

the pandemic widens and hospitals

need them in increasing numbers. The

stock was recently yielding 2.4%, and

the company has raised its dividend

for 42 years in a row.

Another health-care product maker,

Johnson & Johnson (JNJ), has a

strong balance sheet and AAA credit

rating—one of the few companies with

that distinction. J&J said on March 30

that it could have a Covid-19 vaccine

available for emergency use early next

year, a potential long-term boon for its

shares. The stock’s recent yield was

2.9%, and the company has boosted its

dividend for 57 straight years.

Meanwhile, Abbott Laboratories

(ABT) recently received emergency

approval from the U.S. Food and Drug

Administration for a Covid-19 test that

takes as little as five minutes. The stock

was recently yielding 1.8%, the lowest

on the list, and Abbott has increased its

payout for 47 consecutive years.

Rounding out our list are Hormel

Foods (HRL) and asset manager T.

Rowe Price (TROW). Hormel, whose

products include comfort foods that

could appeal to home-bound consum-

ers, has raised its dividend for 54 years

in a row; T. Rowe Price has reached the

34-year mark. They yield 2% and 3.7%,

respectively. Neither has a heavy debt

load, something that should help them

weather this downturn with their pay-

outs intact, if not rising.

Bottom line: Nothing is certain, so

long as the coronavirus pandemic

rages on, but these Aristocrats come

as close to a safe bet as possible.B

By Lawrence C.

Strauss

Durable Aristocrats

Among the 64 S&P 500 Dividend Aristocrats, the dividends of these eight stocks look safe for now, thanks in part

to relatively low debt loads.

Recent Market YTD Dividend

Company /Ticker Price Value (bil) Return Yield Industry

Abbott Laboratories /ABT $79.05 $139.9 -8.7% 1.8% Health care products

Chevron /CVX 71.46 135.2 -39.0 7.2 Energy

Hormel Foods /HRL 46.54 25.2 4.1 2.0 Meat/Fish/Dairy

Johnson & Johnson /JNJ 131.27 350.7 -9.4 2.9 Pharmaceuticals/Health care

Kimberly-Clark /KMB 127.74 45.2 -6.2 3.3 Household/Personal care

Medtronic /MDT 90.22 123.4 -19.8 2.4 Medical devices

Procter & Gamble /PG 110.02 284.0 -11.5 2.7 Household/Personal care

T. Rowe Price Group /TROW 97.71 23.1 -19.1 3.7 Asset management

Data as of March 31 Source: FactSet