The Three ‘Kings’ of High Dividend Yield
Investors on the hunt for safe dividends should consider the Dividend Kings, a group of just 45 stocks that have increased their dividends for at least 50 consecutive years. Of the Dividend Kings, three in particular have high yields above 4% and safe dividends.
Good Medicine for Investors: AbbVie Inc.
AbbVie Inc. (ABBV) is a pharmaceutical company spun off by Abbott Laboratories (ABT) in 2013. Its most important product is Humira, which is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. Humira will lose patent protection in the U.S. in 2023. Even so, AbbVie remains a giant in the healthcare sector, with a large and diversified product portfolio.
AbbVie reported its second-quarter earnings results on July 29. Revenue of $14.58 billion rose by 4.4% year-over-year, while adjusted earnings per share of $3.37 beat estimates by $0.06. The company lowered full-year earnings guidance to a range of $13.78 to $13.98, from prior expectations of $13.92 to $14.12 per share.
AbbVie’s efforts in shielding Humira from competition through 2023 (in the U.S.) and its substantial R&D investments for next-generation drugs should allow the company to keep revenues growing over the coming years. Humira’s patent expiry in the U.S. is still a couple of years away, which gives AbbVie enough time to bring new drugs to the market.
AbbVie’s new, improved drugs that target the same indications as Humira have a good chance at capturing much of Humira’s current revenue stream. AbbVie’s management believes that company-wide revenues in 2025 will be higher than in 2020, despite the impact of losing Humira’s patent exclusivity. The acquisition of Allergan, which has closed in 2020, will also drive future revenue growth and diversify the company further.
AbbVie’s expected payout ratio for 2022 is 41%, at the midpoint of full-year EPS guidance. This means the dividend payout is secure. Shares currently yield 4.0%.
Northern Light: Canadian Utilities
Canadian Utilities (CDUAF) is a utility stock based in Canada. It has a market cap of approximately $8 billion with approximately 5,000 employees. ATCO owns 53% of Canadian Utilities. Canadian Utilities is a diversified global energy infrastructure corporation delivering solutions in Electricity, Pipelines & Liquid, and Retail Energy. The company prides itself on having Canada’s longest consecutive years of dividend increases, with a 50-year streak
Canadian Utilities on July 28 reported its second-quarter 2022 results for the period ending June 30, 2022. Revenues for the quarter amounted to $726 million in U.S. currency, 18.1% higher year-over-year, while EPS came in at $0.39 compared to a loss of $0.03 in the second quarter of 2022. Higher revenues were mainly the result of rate relief provided to customers in 2021 in light of the Covid-19 global pandemic and, subsequently, the decision to maximize the collection of 2021 deferred revenues in 2022. The growth in EPS was mainly due to inflation indexing on the rate base in Australia, the impact of the 2018-2019 General Tariff Application Compliance Filing decision, and the timing of operating costs in the Natural Gas Distribution business. Our updated estimates point towards FY2022 EPS of $1.80 (previously $1.77).
Canadian Utilities can slowly but progressively grow its earnings. The company consistently invests in new projects and benefits from the base rate increases, which grow at around 3% to 4% annually. Last year, management had filed an application with the Alberta Utilities Commission to postpone Canadian Utilities’ electricity and natural gas distribution rate increases. The company expects to receive the deferred revenues in early 2022. Combining the company’s growth projects, the potential for modest margin improvements, and — as voluntarily pursued — the postponed rate base increases, we retain our expected growth rate at 4%.
The company’s competitive advantage lies in the moat regulated uses are surrounded by. With no easy entry in the sector, regulated utilities enjoy an oligopolistic market with little competition threat. The company’s resiliency has been proven for decade after decade. Despite multiple recessions and uncertain environments over the past 50 years, the company has withstood every one of them while raising its dividend.
The company’s current annualized dividend rate comes to about $1.37 at the current exchange rates with the Canadian dollar. With a 2022 forecasted dividend payout ratio of 76%, the dividend payout looks safe, while currently yielding 4.4%.
Universally a Good Investment: Universal Corp.
Universal Corporation (UVV) is the world’s largest leaf tobacco exporter and importer. The company is the wholesale purchaser and processor of tobacco that operates between farms and the companies that manufacture cigarettes, pipe tobacco, and cigars. Universal Corporation was founded in 1886.
Universal is a Dividend King, as it has also raised its dividend payout for 50 consecutive years. This is due to Universal’s leadership position in tobacco leaf processing. It has maintained a long track record of steady profitability, despite the persistent headwind of declining smoking rates. Price increases have helped offset reduced demand for cigarettes, helping Universal remain highly profitable. For example, last year the company reported adjusted earnings-per-share of $3.49.
Maintaining consistent profitability from year-to-year allows Universal to return excess profits to shareholders through dividends and share repurchases. The stock currently yields 6.3%, while share repurchases have helped boost earnings-per-share growth by reducing the shares outstanding.
Going forward, Universal intends to continue growing by diversifying its business model. In response to the falling smoking rate, Universal has branched out into processing of other produce such as fruits and vegetables. It has conducted multiple acquisitions in this area to accelerate its diversification efforts.
For example, Universal acquired FruitSmart, an independent specialty fruit and vegetable ingredient processor. FruitSmart supplies juices, concentrates, blends, purees, fibers, seed and seed powders, and other products to food, beverage and flavor companies around the world. In 2021 Universal acquired Silva International, a privately-held dehydrated vegetable, fruit, and herb processing company. Silva procures over 60 types of dehydrated vegetables, fruits, and herbs from over 20 countries around the world.
We believe that an annual earnings-per-share growth rate in the low-single-digits is possible for this tobacco corporation, largely due to the possibility of buybacks.
UVV’s expected dividend payout ratio is 79% for the current fiscal year. This provides enough coverage for the current dividend payout. Shares currently yield 5.9%.