Ethan Allen and Snap-on Have Dividend Appeal
Posted: October 12, 2021
October 11, 2021 (Maple Hill Syndicate) – When clients ask me to emphasize dividends, they usually mean dividend yield.
The yield is a stock’s dividend divided by its price. A $50 stock paying a $2 dividend annually has a yield of 4%, and dividend-conscious investors often look for a yield in that zone or higher.
I gently try to persuade them that the growth rate of dividends is more important than the yield.
To me, dividend growth is a sincerity barometer, indicating that when management makes bullish comments, they mean it. Company boards hate to have to cut the dividend, so when they raise it, they must be convinced that earnings progress is sustainable.
Here are five stocks that I think have dividend appeal today – both a decent yield and a good dividend growth rate.
Ethan Allen Interiors Inc. (ETD), a furniture retailer at the upper end of the mass market, has increased its dividend at a 13.9% annual pace for the past ten years, and even faster lately. The yield is 4.2%.
With people wanting larger homes, partly to accommodate home offices, the outlook for furniture sales should be robust for the next year or two.
Ethan Allen is a small-capitalization stock, followed by only three Wall Street analysts. Only one of them rates it a “buy.” I think it has strong capital-gain potential at the current price of about $24, which is only 10 times earnings.
The yield on ViacomCBS Inc. (VIAC) is unremarkable, at 2.4% but the growth rate is good: 13% compounded in the past ten years.
The big question for Viacom is whether its strength in content can compensate for the weakness of its streaming platform. Content it has aplenty, with a library of some 3,600 movies and 140,000 TV episodes.
In streaming, it’s behind the early, successful entrants, Netflix and Amazon Prime, and also behind powerful newcomer Disney. Netflix and Amazon have more than 200 million subscribers each, and Disney more than 100 million. Viacom’s streaming services (notably Paramount Plus) have about 36 million.
I see value in Viacom’s trove of content, and think the company would make a great acquisition for a content-hungry competitor such as Apple.
Tyson Foods Inc. (TSN), based in Springdale, Arkansas, is the nation’s largest producer of processed chicken and beef, and is also big in pork. It has grown slowly and steadily. The dividend yield is 2.3%, and the 10-year dividend growth rate is more than 31%.
You won’t make a lot of money in a hurry here, but I think you’re likely to make money slowly. Despite lots of problems at meat-packing plants during the early stages of the pandemic, the company’s annual revenue never faltered.
Based in San Mateo, California, Franklin Resources Inc. (BEN) is one of the larger investment management firms in the U.S., with annual revenue around $8 billion. Its business is split fairly evenly between stocks and bonds, and it is big in international investing (including the Templeton funds).
For years, Franklin’s net profit margin exceeded 25%. It’s still pretty high, at 17% to 20% the past three quarters. The dividend yield is 3.7% and the dividend growth rate has been about 15% over the past decade.
Both Tyson Foods and Franklin Resources are repeat picks; I also selected them last year.
The average age of cars on U.S. roads keeps increasing. I figure that’s good news for auto repair shops, and Snap-on Inc. (SNA) is a major supplier to them. The Kenosha, Wisconsin, company makes tools and software for repair professionals.
Snap-on has increased its dividend at a 15% clip for the past ten years. The yield is 2.3%.
My “Dividend Appeal” picks from a year ago returned 32.0%, versus 26.1% for the S&P 500. Apogee Enterprises Inc. (APOG) led the pack with a 53% return. Franklin Resources Inc. (BEN), Tyson Foods Inc. (TSN) and WestRock Co. (WRK) returned between 31% and 37% each. Intel Corp., the laggard, returned 2%.
Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes. These results shouldn’t be confused with the performance of portfolios I manage for clients. Also, past performance doesn’t predict future results.
Before today’s column, I’d written 21 columns about stocks with dividend appeal, starting in 1998. In 16 cases, my recommendations have been profitable, and in 11 cases they have beaten the Standard & Poor’s 500 Total Return Index. The average return has been 11%, compared to 10.7% for the S&P>
Disclosure: I own ViacomCBS personally and for most of my clients. For one or more clients, I own Apogee Enterprises, Ethan Allen, Franklin Resources, Snap-on and Tyson Foods.
John Dorfman is chairman of Dorfman Value Investments in Boston. His firm of clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.