Five Companies That Should Double Their Dividends -- or More

Investing

Published: June 18, 2013 8:15 am

Last Updated: March 26, 2020 11:19 pm

It seems that investors suddenly have grown to dislike dividend-paying stocks, if you have been watching many of the riskier, high-dividend and high-payout sectors while interest rates have been on the rise. The notion that investors are turning away from dividends is simply silly and likely is being over-reported at a time when there is little dividend news. The summer is a slow time for dividend news, but 24/7 Wall St. is featuring five big-cap stocks that could double their dividends.

For starters, these should be considered companies that can “at least” double their dividends. Some of these industry giants are way behind their peers. This group is much different from our self-named Dividend Sinners, which refuse to pay dividends. We considered companies that already were paying dividends and have ample resources to grow their payouts. We included cash balances, cash flow, percentage of income paid out and dividends from rivals.

We also chose only one stock from each sector, and these had to be in the S&P 500 Index so that we kept a tally of the large companies. If companies who refuse to pay dividends are Dividend Sinners, and if companies raising their dividends year after year are considered Dividend Aristocrats, then these companies should maybe be considered Dividend Misers.

These are the five companies that should at least double their dividends: Cigna Corp. (NYSE: CI), FedEx Corp. (NYSE: FDX), Mastercard Inc. (NYSE: MA), Oracle Corp. (NASDAQ: ORCL) and Textron Inc. (NYSE: TXT).

Cigna Corp. (NYSE: CI) is supposed to be one of the health care insurance survivors, yet it is a true dividend laggard. The yield here is a mere 0.1%, and our take is that the company can double its payout multiple times over. The $19 billion insurer pays a $0.04 dividend, which is only paid annually rather than quarterly. Cigna raised its earnings guidance back in May to a range of $1.735 to $1.865 billion, or $6.00 to $6.45 per share for this year. With more than $3 billion in cash, this company’s earnings payout ratio is too small to even count. Here are the approximate yields from rivals: industry-giant UnitedHealth is closer to 2%, WellPoint is close to 1.9% and both Aetna and Humana are about 1.3%. Cigna does at least pay a dividend, and the company may be saving its cash for an acquisition, but at some point its investors likely will face health care reform exposure by looking elsewhere. Cigna could double its dividend, followed by another two doublings of its dividend, and its yield would still lag peers.

FedEx Corp. (NYSE: FDX) recently hiked its dividend. The problem is that the dividend hike was too small to even matter. Early in June came news that FedEx increased its dividend by $0.01 to $0.15 per share per quarter, generating a current dividend yield of 0.6%. When it raised its latest payout it said, “FedEx remains committed to paying higher dividends to shareowners in years to come.” Our understanding is that some of the dividend issues of the past have been tied to labor pacts. How long can that last, if that is even still an issue? FedEx is worth about $31 billion, and the new higher payout of $0.60 per year compares to expected earnings of $6.05 per share. Shipping rival UPS pays a dividend yield of about 2.9%, versus the 0.6% for FedEx. UPS also pays out about half of its normalized earnings per share as dividends, versus almost 10% for FedEx. FedEx could double its dividend and then double it again, and it would still lag against its much larger rival.

MasterCard Inc. (NYSE: MA) is one that investors may question, but it is still a valid call, and it is a call that the company has done before. The payment processor recently doubled its dividend, and it doubled that dividend the year before. The problem here is that MasterCard’s $0.60 quarterly or $2.40 annualized payout comes to a yield of only 0.4%. Warren Buffett’s new portfolio managers at Berkshire Hathaway have small positions in both MasterCard and in rival Visa. Visa also could stand to raise its dividend from the 0.7% yield, although perhaps a double there might be asking for too much when you consider peers. Still, MasterCard is expected to earn more than $25 per share, with its shares being well over $600, so the company is not even paying out 10% of normalized income. With a $70 billion market cap, MasterCard is also sitting on more than $6.5 billion in cash. Its 0.4% is paltry compared to industry peers: American Express yields 1.3%, Discover Financial yields 1.7% and Capital One yields about 2%.

Oracle Corp. (NASDAQ: ORCL) greatly lags its peers in the realm of technology dividend payers. The yield is only 0.7%, and Larry Ellison is still probably a year or so away from deciding to make another large acquisition. Oracle is worth more than $160 billion in market cap. Its cash balance is more than $33 billion. The last dividend paid looked big because it rushed out its payments ahead of a possible dividend tax hike. RBC pointed out that dividends were only about 9% of free cash flow, versus about 27% for the industry average. RBC also pointed out that Oracle could easily double its dividend. We agree here, and then some. With a current $0.24 annualized payout, that compares to Thomson Reuters estimates of $2.68 earnings per share (EPS), and that is not even quite 10% of normalized EPS being paid out. Rival dividend yields are almost 1.4% from SAP and about 2.7% from Microsoft.

Textron Inc. (NYSE: TXT) greatly lags in the aircraft, defense and industrial sector. After slashing its dividend during the Great Recession, it has maintained its paltry $0.02 per quarter dividend, and its current yield is only 0.3%. Thomson Reuters has a consensus earnings estimate of $2.01 per share, so Textron is somehow not even paying out 5% of its normalized EPS to holders. Shares have never regained their former glory above $60, and the dividend used to be about 10 times as large on a nominal quarterly payout basis. Rival dividend yields are 1.9% from Boeing, 2.9% from Northrop Grumman, 3.3% from Raytheon and 4.3% from Lockheed Martin. Textron has a market value of only $7.5 billion and its cash balance is almost $1 billion.

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