5 Large-Cap Stocks with a High Dividend Payout Ratio
By: Ned Piplovic,
Income-seeking investors generally hunt for equities with the highest yields to maximize their dividend income flow. However, because high yields often represent outsized risks or financial troubles, investors also should consider other measures of financial performance, such as the Dividend Payout Ratio.
The dividend payout ratio represents the total amount of dividend distributions paid to shareholders relative to the company’s total earnings or net income. Generally, a low dividend ratio indicates that the company has enough earnings to support future dividend distributions or sustain a rising dividend payout policy, which investors value highly. Alternatively, a high payout ratio is a sign that the company is providing most of its earnings as dividends and that even a minor financial hiccup could force a reduced dividend distribution or eliminate the dividend distributions outright.
A payout ratio above 100% would be acceptable only if earnings are lower than expected or negative for a short period because of an unusual event like an unplanned acquisition, a lawsuit judgment or a natural disaster. Otherwise, a company must dip into other funding sources to cover the excess distributions above 100% of earnings.
Generally, a dividend payout ratio of approximately 30% to 50% indicates that the company provides sustainable dividend distributions and retains sufficient funds to support its operations and finance expansion activities.
The list below includes five major companies with a market capitalization of more than $10 billion, whose current dividend payout ratio is above 80% and which have positive total returns for at least the past 12 months. The companies are sorted by their payout ratio in ascending order.
#5: Kimberly-Clark Corporation (NYSE:KMB)
Dividend Payout Ratio: 81%
The Kimberly-Clark Corporation manufactures and markets personal care, consumer tissue and professional products in almost 180 countries.
While the company’s current dividend payout ratio exceeded the 80% mark, investors should take a closer look at other indicators of financial strength to ensure that KMB is not in danger of cutting its payouts. KMB has been a stellar source of consistent dividend payouts and the company has hiked its annual dividend amount for the past 46 consecutive years. Just over the past two decades, KMB advanced its total annual dividend amount four-fold and maintained a 7.2% average annual growth rate over that period.
Another positive indicator is that the company’s current payout ratio is lower than the 95% average over the past five years, which indicated that KMB might be moving its payout ratio in the right direction.
Furthermore, after dropping nearly 25% between its January 2017 peak and its 52-week low in April 2018, the company’s share price has reversed trend and gained 17%. This gain was sufficient to make the 50-day moving average cross above the 200-day average, indicating that the share price might have more room on the upside.
#4: Thomson Reuters Corporation (NYSE:TRI)
Dividend Payout Ratio: 83%
Thomson Reuters Corporation provides news and information for professional markets worldwide. The company’s current 83% payout ratio might seem a reason to raise concern among investors. However, a brief look at additional financial indicators quickly reveals that the situation is not as dire as it originally appears. This current ratio is lower than the company’s 98% five-year average payout ratio. Furthermore, the company managed to reward its shareholders with 13 consecutive annual dividend hikes, albeit at less than one tenth the growth rate of the next entry on this list.
Following a pattern similar to most entries on this list, TRI’s share price declined more than 15% towards its 52-week low in May 2018 but recovered to close on September 11, 2018, 2.7% higher than it was one year earlier. Investors should continue to monitor the payout ratio to make sure that it continues moving lower towards a long-term sustainable level below 50%.
#3: International Business Machines Corporation (NYSE:IBM)
Dividend Payout Ratio: 98%
The International Business Machines Corporation (IBM) operates as an integrated technology and services company worldwide. As the dividend payout ratio indicates, the company currently distributes all its earnings to shareholders as dividend distributions.
The company marked its 20th consecutive annual dividend hike with a 4.7% quarterly dividend increase from $1.50 in the last period to the current $1.57 payout. This new quarterly amount corresponds to a $6.28 annualized dividend and currently yields 4.3%. Just over the past five years the company advanced its annual dividend payout at an average growth rate of 11.35% per year.
Unlike the other entries on this list that saw their share price fall and then recover almost fully, IBMs share price first advanced more than 23% towards its mid-January 2018 peak, but then lost all those gains to close only 0.7% higher than it was one year earlier.
#2: PepsiCo, Inc. (NASDAQ:PEP)
Dividend Payout Ratio: 108%
PepsiCo, Inc. operates as a food and beverage company worldwide. While the company’s share price continues to rise as it has for the past 20 years, PEP also has maintained its streak of consecutive annual dividend hikes for the past 47 consecutive years. The company’s current 3.3% dividend yield is more than 17% above the company’s own 2.8% five-year average yield.
A portion of that yield increase comes from a share-price decline of 1.5% over the past 12 months. The share price’s 52-week low in early May was actually almost 17% lower than at the beginning of the trailing 12-month period. However, the share price reversed trend and recovered nearly all its losses to close on September 11, 2018, marginally lower than it was one year earlier. Furthermore, technical indicators suggest that the share price should continue to gain, at least over the next several periods.
Therefore, with all other major indicators humming along, investors should monitor the payout ratio to make sure it moves lower towards more sustainable levels.
#1: The Coca Cola Company (NYSE:KO)
Dividend Payout Ratio: 271%
The Coca-Cola Company manufactures and distributes various nonalcoholic beverages.
Despite the extremely high payout ratio, the company has maintained its record of boosting annual dividend payouts for the past 56 consecutive years. The company’s most recent boost was a 5.4% hike in the first quarter of 2018. This increase brought the annualized dividend amount to $1.56, which currently yields 3.4%. This yield is nearly 10% above the company’s 3.1% average yield over the past five years.
Most importantly, that yield increase was not driven by a declining share price. While declining with the overall market pullback in early February, the share price recovered fully to close on September 11, 2018, at $46.02, which was less than 1.5% below the share-price level from one year earlier.
KO continues to perform well in terms of dividend distributions and asset appreciation. However, a dividend payout ratio at this level is a legitimate cause for concern. Current shareholders and interested investors must monitor the direction of the payout ratio and act accordingly.
A high dividend payout ratio is generally a warning sign that the company will have to cut or eliminate dividend distributions altogether. However, consider if the high payout ratio is the only negative indicator among positive signs that otherwise present the security in favorable light. In each of the stocks on this list, investors should just keep an eye on the payout ratio to ensure that the situation is improving to be able to enjoy the rewards of total returns from these five securities.
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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.