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  • David Levy

Food And Beverages Stocks Dividend Comparison

Updated: May 11

Summary


  • Consumer Staples are among favorites for defensive Dividend Investors even if they may have different profiles and time horizon.

  • Consumer Staples stocks offer a stable dividend for retirees who need the income and a growing dividend for younger investors who want to take full advantage of compounding.

  • I will compare the dividend of four Consumer Staples in the Food and Beverages Sectors: Coca-Cola (KO), Pepsi (PEP), Archer Daniels Midland (ADM) and Hormel Foods (HRL).

  • I will compare several parameters as dividend Compounded Annual Growth Rate (CAGR), Payout Ratio, Yield, etc.

  • Summing up several of the parameters, I will come up with Dividend Scores for each stock. There will be several dividend scores, that take into consideration the investor profile.


Dividend Investor Profiles


There are different types of dividend investors. The retirees prefer a secure dividend with a decent yield. They need the income and cannot afford a dividend cut. For them the Dividend growth is nice, but an increase of just 2% per year is sufficient to cover the inflation. On the other side of the investor profile spectrum, we can find the contrarian investor, who is willing to wait with cash on the side until a good opportunity to buy appears. He tries to lock in a higher yield.

The Dividend growth Investor prioritizes the dividend growth. He is counting on the compounding effect over many years to reach a nice yield on cost.

The risk avert investor is looking for the most secure dividend with the lowest risk of dividend cut.

Obviously there are other types of investors who may have other priorities. Some may prefer higher yield stocks than the consumer staples yield.


Long dividend increase history


All the companies selected have increased dividends for many years. The table below gives the number of consecutive years the dividend was increased for each company.



Although, the dividend increase is a good sign of company stability, and a good indication that the chance of a dividend cut is extremely low, still, the dividend growth investor would like quantification of the increase.

I use two different methods to visualize the dividend increase over the last 10 years. The first method is the classic relative growth of the dividend. This comparison is shown in the table below.

Source: Dividend Comparison


We can see that in the last 10 years, HRL quadrupled its dividend, while the three other companies have doubled their dividend.

A better method to measure the dividend growth is the dividend Compounded Annual Growth Rate. It provides a percentage that would be the yearly dividend increase, if the dividend was increased by exactly this percentage over all the years. Obviously, this is rarely the case. A chart showing the YoY dividend growth is a better way to visualize the trend of the dividend increase.


Source: Dividend Comparison


This chart confirms that HRL has indeed relatively increased its dividend much more than the other companies. But we can see that the increase has widely varied over the years for HRL. The common trend for all four companies is a "deceleration" of the dividend increase in recent years.

The CAGR is shown above the chart. As mentioned in the previous paragraph, the CAGR has the same limitation as an average: it smooths all sharp variations. ADM has a greater CAGR than PEP, but this was achieved mostly between 2013 and 2016. Someone who bought ADM in 2016 for example, would experience a lower CAGR for ADM than PEP.

The CAGR should be used in conjunction with the chart to qualify it as a valid parameter. Alternatively, the CAGR can be calculated for different periods of time and then averaged with weights. The choice of relative weights depends on the investor profile. Long term investors would not worry about short term wild variations in the dividend increase.


The table quantifies what was intuitively visible on the chart: when giving more weight to the more recent years, the ADM weighted CAGR is lower than the one of PEP.


Yield Comparison


The Yield of the last 10 years is compared on the chart below.


Source: Dividend Comparison


We can see that recently the yield of ADM has peaked to almost twice its average over the last 10 years. It reached a value unseen in the last 10 years. For KO and PEP, the current yield is above its average of the last 10 years, but not by much. Also the current yield of these two companies occurred a few times in the last 10 years. We note the stability of the yield of HRL: there was no possibility for an opportunistic investor to lock in a great yield for this company, in the last 10 years.

The opportunistic investor, armed with this chart in March, would have noticed the huge yield of ADM compared to its average. If he/she bought then, he would have locked in a great yield. Note, that still now, from the yield perspective, ADM is still a great buy.


Payout Ratio Comparison


The ability for a company to continue to pay its dividend and increase it, can be measured by the payout ratio. If the payout ratio is too high, it means that the company is using most of its earnings to pay the shareholders. It has too little space to increase the dividend or to invest in the company (acquisitions, research and development).

A lower payout ratio is therefore better. The payout ratio of the last quarters are shown in the chart below.


Source: Dividend Comparison


It should be noted here that the Payout Ratio of KO was not 0 for Q2 2019. The company had a negative EPS that translated to 0 in the chart.

We can see that although KO and PEP will not cut their dividend, the remaining money left after paying the shareholders, is very small. This limits the capability of these companies to make big acquisitions or develop new products. Note that they can still do that at the cost of borrowing money (issuing preferred stocks, bonds or notes), or, issuing new stocks at the detriment of the previous shareholders.

On the other hand HRL has a very stable, rather low, payout ratio. ADM has managed to reduce its payout ratio to acceptable similar levels. We may see more dividend increase from these two companies, because they may use the available money for this purpose of for other purposes that may increase the value of the company and its share price.


Total Return Comparison


Income investors are only interested in the dividend, because, as long as the dividend is not cut, they will never sell. But other types of investors who plan to sell in the future, would like to know how well the company fared in the past.

The total return assumes that all distributed dividends of a given company are reinvested in the company in form of additional shared bought. Assuming that the share value is increasing or even just constant, the reinvested dividends creates a strong compound effect.

The Total Return Comparison chart is presented below.


Source: Dividend Comparison


The chart assumes that $100 was invested in each company in 2010. We can see that KO and PEP have very similar evolution, with PEP current total return slightly better than KO ($200 vs. $180). Although ADM followed the same path as KO and PEP, since last year, its total return started to stagnate and stays very weak.

The clear winner for this comparison parameter is HRL: $100 invested in 2010 in this company with dividend reinvested, reaches almost $600 in May 2020!


Dividend Score for each Investor Profile


KO has the longest streak of dividend increase. HRL has the highest Weighted dividend CAGR, a low payout ratio and a very high total return, but a very low yield. ADM has the highest yield and also the biggest difference between the current yield and its average yield of the last 10 years, but it reached a low payout ratio only recently, and its dividend CAGR is far from the best. The reviewed dividend parameters above give contradicting signals as to which stock has the most attractive dividend.

One way to make a decision is to calculate a dividend score that takes all the parameters into consideration. This is done by many websites. They provide a single dividend score per stock. Some websites explain how they calculated this score, others do not.

There are two major problems with this approach:

  1. If the way the calculated dividend score is not detailed, you have to trust the website that they used all the parameters that are of relevance to you and that they gave more or less importance to each of them exactly as you would.

  2. Even if they do give a detailed description of the dividend score calculation, chances are good that they used some parameters you do not care about or that you disagree with the importance given to one or more parameters.

There are different types of investors who give different importance to each parameter. It is not possible to build a single dividend score that would satisfy all investors. 

The website Dividend Comparison (www.dividend-comparison.com) categorizes investors to four profiles. Each profile has different parameters that are used with different weights to define their importance.

The table below shows the dividend scores for four Dividend Investor Profiles.


Source: Dividend Comparison


The table quantifies what was visible from the analysis of the charts above. But done with a single look at a single table. The advantage is that the score is now adapted to the dividend investor, and is not a generic "fit-all" score.

Dividend Growth Investors should consider analyzing HRL in depth. High Yield seekers would select ADM, although its absolute score is low. This is typical for the Consumer Staples sector. This type of investors would maybe prefer another sector. Opportunistic or contrarian investors may consider ADM, at least when compared to the other three stocks. The Risk Avert investor has a larger choice, maybe just avoid PEP. In general, the Consumer Staples sector is known for its stability. Investors tend to escape to this sector in case of downturn macro-economy: people always need to eat and drink.

The details for calculation of the Dividend Growth Investor Profile HRL Score is shown below, as an example. The same details for each stock compared and other Investor Profiles are available by expanding the table on the website or running a new query, respectively.


Source: Dividend Comparison


The table quantifies what was visible from the analysis of the charts above. But done with a single look at a single table. The advantage is that the score is now adapted to the dividend investor, and is not a generic "fit-all" score.

Dividend Growth Investors should consider analyzing HRL in depth. High Yield seekers would select ADM, although its absolute score is low. This is typical for the Consumer Staples sector. This type of investors would maybe prefer another sector. Opportunistic or contrarian investors may consider ADM, at least when compared to the other three stocks. The Risk Avert investor has a larger choice, maybe just avoid PEP. In general, the Consumer Staples sector is known for its stability. Investors tend to escape to this sector in case of downturn macro-economy: people always need to eat and drink.

The details for calculation of the Dividend Growth Investor Profile HRL Score is shown below, as an example. The same details for each stock compared and other Investor Profiles are available by expanding the table on the website or running a new query, respectively.

The way to read the table is that on top, the score of 78.8 for HRL was calculated by the 6 parameter scores immediately below it. For example, the first parameter score of 73 is the score for the CAGR over a period of 2 years, and its weight in the overall score calculation is 14%.

So how are the two major problems cited above solved?

  1. When selecting an Investor Profile, the exact dividend parameters used are shown. This includes the period span (for averaging) and the weight given to each parameter.

  2. You may be a Dividend Growth Investor, but you may still disagree with the choice of the website for the parameters or the weights. The website offers you to select by yourself the dividend parameters and the weights that form a dividend score. You can modify any Investor Profile to your needs. This means that you can build your own personalized Investor Profile, and derive from it your own personalized Dividend Score.


Conclusions


  • I compared four different stocks in the Consumer Staples Food and Beverages sector to evaluate the attractiveness of their dividend. I used several dividend parameters: years of dividend increase, dividend growth, yield, payout ratio and total return. Although for each parameter there was a stock that was better than the others, there was no stock that was the best in all dividend parameters.

  • I explained the current solution offered to this problem in the form of calculation of a dividend score. I gave the weaknesses of this solution: no clarity on the calculation method and/or no way to fit this calculation to the investor needs.

  • I claimed that there should be as many dividend scores per stock as there are investor profiles. Each investor should be able to decide which parameters are important for him/her and obtain his/her own dividend score.

  • By doing so for four different Investor Profiles, I can see that for each, a different stock may be more attractive.

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