5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection
By: Ned Piplovic,
While equities with the highest dividend yields maximize dividend income flow for income-seeking investors, in times of economic crisis and market pullbacks investing in low dividend payout ratio consumer goods stocks could be the right strategy for preservation of dividend income.
The current economic retraction has certainly erased at least nine to 12 months of capital gains. Just over the past 60 days, the three major indices have lost approximately one fifth of their values. NASDAQ declined 17%, the S&P 500 pulled back 20% and the DOW 30 lost 22%.
Reflecting the general price movement in the overall market, many individual equities also have lost a considerable share of their recent capital gains. However, the share price declines also boosted dividend yields. The dividend yield is a simple ratio of the total annual dividend distribution in the numerator and the share price in the denominator. Therefore, a declining share price – smaller denominator – will effectively increase the dividend yield.
The higher yields are an opportunity for income-seeking investors to lock in higher income payouts at discounted prices. However, that works only if the equities at least maintain their dividend payout levels and avoid dividend cuts. Therefore, in addition to finding companies with strong fundamentals that are likely to recover quickly, investors also must consider an equity’s dividend payout ratio.
The dividend payout is another basic but important ratio used to evaluate the value of an equity as a potential long-term investment with reliable income distributions. The payout ratio represents the total amount of dividend distributions paid to shareholders relative to the company’s total earnings or net income. A high payout ratio indicates that the company is using a high share of earnings to cover its dividend payouts.
Equities from certain sectors can sustain higher payout ratios and certain equity types, such as real estate investment trusts (REITs), must distribute at least 90% of their income as dividend distributions to maintain their status and enjoy the exemption from paying corporate taxes. However, investors generally consider payout ratios above 50% unsustainable. As the payout ratio approaches and exceeds 100%, the probability of a cut or outright dividend suspension increases exponentially.
Alternatively, low dividend ratios indicate that the company has enough earnings to support future dividend distributions or sustain a rising dividend payout policy, which investors value highly. Investors commonly consider payout ratios below 30% low. The dividend payout ratio of approximately 30% to 50% seems to be the sweet spot. A payout ratio in that range indicates that the company provides sustainable dividend distributions but also keeps adequate funds to support current activities, as well as finance growth.
The list below includes five large-cap Consumer Goods stocks with low dividend payout ratios, which investors could use to protect the income flow in their portfolio. All five stocks below have market capitalizations in excess of $10 billion and current dividend payout ratios below the 30% mark.
Only one of the five companies has managed to maintain a positive total return over the trailing 12-month period. However, as large companies with solid fundamentals, long records of dividend distributions and low payout ratios, these stocks might offer a better chance for recovery while providing substantial dividend income payouts.
The companies are sorted by their payout ratio in descending order.
5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection: #5
Campbell Soup Company (NYSE:CPB)
The Campbell Soup Company has a long record of dividend distributions. The company began paying dividends in 1902. Over the past two decades, the company has cut its dividend only once, in 2001. Since that cut, the company has also boosted its annual dividend distribution 12 out of the last 17 years, or more than 70% of the time.
The current $0.35 quarterly distribution is equivalent to a $1.40 annualized amount. This annual distribution corresponds to a 2.94% forward yield, which is 4.6% higher than the company’s own 2.81% five-year yield average.
Campbell’s improved financial performance resulted in a current dividend payout ratio of 29%, which is significantly lower than the company’s own 132% payout ratio average over the past five years. With a low payout ratio, the Campbell Soup Company might be able to build on its 28% total return over the past 12 month and deliver strong returns on shareholders’ investment over the long term.
5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection: #4
Tyson Foods, Inc. (NYSE:TSN)
Tyson Foods began dividend distributions in 1976. The company paid a flat $0.16 annual dividend from 1999 through 2011. However, over the past nine years, Tyson Foods has enhanced its annual payout amount more than 10-fold, which corresponds to an average dividend growth rate of 30% per year.
The company’s current quarterly payout of $0.42 converts to a $1.68 annualized distribution and yields 2.93%, which is nearly 80% higher than Tyson’s own 1.64% average yield over the past five years.
While the current 29% payout ratio exceeds the 19% five-year average, it is still below the 30% low end of the sustainable payout range. This payout ratio level indicated that the company’s current earnings are more than sufficient to support future dividend hikes at the current growth rate.
5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection: #3
Magna International, Inc. (NYSE:MGA)
While paying dividends since 1992, Magna International suspended dividends in the aftermath of the 2008 financial crisis. After missing four consecutive periods, the company resumed dividend distributions in the second-quarter 2010.
However, since resuming dividend payouts in early-2010, the company has enhanced its annual distribution payout amount more than six-fold. This advancement pace corresponds to an average dividends growth rate of more than 20% per year.
Magna International’s $0.40 payout is nearly 10% higher than the $0.365 distribution amount from the same period last year. The current $1.60 annual payout corresponds to a 4.8% forward dividend yield, which is 70% higher than the company’s own 2.8% yield average over the past five years.
5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection: #2
Johnson Controls International plc (NYSE:JCI)
With introduction of distributions in 1887, Johnson Controls has been paying dividends for more than 110 years. Despite a few pullbacks and some fluctuations, the dividend payouts increased 13-fold since 2000. This advancement pace is equivalent to an average dividend growth rate of 13.7% each year for the past two decades.
The current $0.26 quarterly distribution converts to a $1.04 annualized payout. This annual distribution amount yields 3.7%, which outperformed the company’s own 2.4% five-year yield average by 53%.
Furthermore, the company’s current dividend payout ratio of just 16% is only slightly more than half the 30% lower limit of the sustainable range. Additionally, the current payout ratio is considerably lower than the 78% payout ratio average over the last five years. This is a move in the positive direction and indicates that the company is now in a much better position to maintain its dividend payouts.
5 Consumer Goods Stocks with Low Payout Ratio to Use for Dividend Protection: #1
Ambev S.A. (NYSE:ABEV)
The Brazilian beer, soft drinks and food giant has the shortest record of dividend payouts in this group. Beginning distributions in 2014, Ambev pays dividends at irregular intervals and in various amounts. Over the past six years, the company has paid an average annual dividend of $0.125. So far in 2020, the company has already distributed a dividend of $0.103 in the first quarter.
The company’s current 2.7% forward dividend yield trails the company’s own 3.13% five-year average 13.7%. However, Ambev has plenty of room on the upside to increase its dividend distributions. With an 11% dividend payout ratio, the company uses just slightly more than one tenth of its earnings to cover dividend payouts. Therefore, even with the short-term pressure from the current economic pullback, the company should be able to maintain its current dividend payout levels, or perhaps even embark on a rising dividends strategy.
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Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.