Top 5 Dividend Aristocrats with Low Debt to Equity Ratios

Recently, we saw the ugly side of debt.  As we all watched Kinder Morgan’s stock fall and wait for the final, inevitable sword of a dividend increase, there was one thing that became evident…KMI’s debt level was too high and the results were unsustainable in the current market environment (See Lanny’s awesome write up/analysis about KMI from earlier in the week).  The pressures mounted and management plus the Board of Directors decided to slash their dividend to preserve cash flow for capital expenditures and cover interest/dividend payments.   While debt isn’t a bad thing, I don’t want you leaving this intro thinking that’s my conclusion, runaway/uncontrolled debt can present many problems.  The name of our game on this website is investing in stocks with a growing dividend income stream, so we try to avoid companies and stocks that take us off of this course.  Which is very ironic considering that Lanny and I purchased shares in KMI just under a month ago (here and here) With the wound from KMI still fresh, I wanted to run a stock screener and identify several Dividend Aristocrats with low debt levels.  Check out our newest installment of our Top 5 list series (foundation stocks and low dividend yield/high dividend growth rate stocks)….the Top 5 Dividend Aristocrats with Low Debt to Equity Levels.

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About the Debt to Equity Ratio

Before I dive any further into the screener that I ran this morning, let’s take a quick look and get to know the debt to equity level.   The equation is as simple as the name sounds, the debt to equity metric analyzes a company’s total debt owned compare to the company’s equity.   A debt to equity ratio greater than 1X means that the company has more debt/financing from borrowers than shareholders and vice versa.    This is a quick metric that can show you the structure of the balance sheet and help us identify if a company’s debt load has suddenly grown recently, which could trigger further analysis by you to determine if you believe the debt load is sustainable give the company’s current dividend, expected cash flows, ability to cover interest, etc.

I must say, if you leave this article thinking debt is a terrible thing and company’s should avoid using debt to fund/finance operations, then I have performed a disservice.  In fact, there are many companies that operate in industries that high debt levels are the norm and debt is the engine that keeps the company rolling (such as Realty Income or other REITs).   Debt is a great tool for companies and can often be a cheaper source of capital than raising cash through the equity market because of the tax benefits and the current low-cost of capital in the marketplace. Companies have been adding to their debt load while interest rates remain at low  (at least for the time being) to avoid having to lock in debt at a higher interest rate in the future.   Many companies have used debt to fund their dividend, share buyback programs, dividend increases, acquisitions, or other operational projects and it has turned out very well for shareholders.   As with everything, debt is great as long as it is managed properly and controlled.  Running a quick Debt to Equity analysis for a company’s recent history will help you identify whether a company consistently maintains a certain debt level or if the company has been taking on a lot of debt over the few years, prompting the “Is it safe” question that I should have asked myself as I watched KMI continue to grow its dividend, make moves, and increase their debt outstanding.  

The Screener

I was determined to find a listing of companies with low debt to equity ratios in light of recent events.   This may be extreme given that debt is not  always a bad thing.  However, I don’t mind going jumping to the complete other end of the spectrum as long as I am investing in a great company.  To develop our listing of Dividend Aristocrats with low debt to equity ratios, I used the following metrics.  My focus was less on current pricing multiples such as P/E ratio (The first step in our stock screener), so I have left this metric out for the purposes of our stock screener.   Here were the filters I ran this morning.

  • The Company is a Dividend Aristocrat – One of the other side effects of a company slashing its dividend is that I am really getting tired of seeing my dividend income head in the wrong direction.  We do our best to identify great companies, but as we all know (and sometimes forget), a dividend is not guaranteed, let alone a dividend increase.  The year is full of surprises and one of the interesting nuggets has been that some of the large companies that have experienced high dividend increases in recent history suddenly announced lower than usual increases, a product of the current economic environment I am sure.  Investing in Dividend Aristocrats, which may be boring to many outside of our community,  puts us in the best position to receive increases annually because their management team has demonstrated their commitment and ability to deliver a growing dividend income stream over a long period of time.  Considering I am coming off of a dividend cut for the third time in two years, investing in a company with over 25+ years of consecutive dividend increases would be welcomed.
  • Debt to Equity Ratio of .5X or Less –  I mentioned that I was being extreme here, but I wanted to find the Dividend Aristocrats with the LOWEST debt ratios possible for the purposes of this listing.   Shockingly there were a lot more companies than I expected that met this ratio!
  • Current Ratio Over 1–   In short, this is another variation of a debt metric.  Current ratio compares a companies current assets to current liabilities.  If the ratio is greater than 1, current assets exceeds current liabilities.   I like this metric because it demonstrates that in a company can pay off their current debt in a true crunch without having to take on long-term debt or reduce their outflows (which could include their dividend)
  • Payout Ratio Under 60% –  One of our three metrics in our stock screener, we believe a 60% payout ratio or less is the sweet spot for companies.  Once payout starts to creep towards 100%, then we have to start worrying about the dividend safety as a company cannot sustain paying out over 100% of its earnings for an extended period of time.  60% provides a nice cushion and after all, I don’t want to review stocks with low debt for the sake of finding companies with low debt if they do not have a sustainable dividend. 

The Results

The anticipation has been mounting, I know.   I’m sure you all are sick of hearing me talk and just want to know the freaking results!  Below are our Top 5 Dividend Aristocrats with a Low Debt to Equity Ratio……drumroll please!

  1. Archer-Danieals Midland (ADM) – Debt to Equity = .38X – Talk about timing, Lanny just purchased this stock last week and had no clue that ADM was going to be included on this list…foreshadowing maybe?   ADM has been one of my favorite companies since I performed a stock analysis and initiated a position earlier in the year.  I’m still shocked I haven’t added more…honestly. ADM has increased their dividend for 39 consecutive periods and is now yielding ~3.2%.  Even better, their 3 year average dividend growth rate is 17.18%!
  2. Abbott Labs (ABT) – Debt to Equity = .37X – Neither of us hold a position in this stock or have actively included it on our watch lists, most likely because of this medical company’s lower dividend yield of  2.16%.  However, ABT has increased their dividend for 42 consecutive years and just announced a fresh 8.4% dividend increase.  Maybe I’ll have to start keeping an eye on this company after all!
  3. Genuine Parts Company (GPC) – Debt to Equity = .2X-  Another stock that I performed a stock analysis over earlier in the year.  I love many aspects about the company, the fact the company dominates the industry in which it operates, the secondary auto part market (which has been on my radar over the last few weeks given my recent fender bender), and their history of increasing their dividend.  They were just too expensive at the time of the analysis, so I passed.  GPC has increased their dividend for 58 consecutive years and has a 3 year average dividend growth rate of 7.5%.
  4. Hormel Foods Company (HRL) – Debt to Equity = .11X –  Similar to ABT above, Hormel has typically been off of our radar because of the low dividend yield, which is currently 1.5%.  In addition, it didn’t make the cut for Lanny’s listing of Top 5 low dividend yield, high dividend growth rate stocks.  But that doesn’t mean it shouldn’t be considered by investors seeking companies with a low debt level.  HRL has increased their dividend for 48 consecutive years and is one of those consumer good companies that can be found in nearly everyone’s household.  Those are the company’s that I LOVE to include in my portfolio.
  5. Johnson & Johnson (JNJ) – Debt to Equity = .28X –  Man, how is it possible that JNJ always finds a way onto lists focused on finding great dividend stocks!  This company is amazing and has increased their dividend for 52 consecutive years.  I don’t need to say too much more about this stock, other than there is a reason we consider it one of our foundation stocks for a dividend portfolio and that I have included this stock on my list of five “Always Buy” companies.  This company truly continues to amaze me.

What are your thoughts on the listing?  How many of the stocks do you own?  What impact does debt or the debt to equity ratio play in your decision-making process?  Do you have a threshold?  If so, what is it?  Is .5X way too small of a ratio in your opinion?  Please let me know your thoughts on this analysis and stock screener!

Bert

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER or ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING
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25 thoughts on “Top 5 Dividend Aristocrats with Low Debt to Equity Ratios

    • D4s,

      The great thing about reviewing Aristocrats is that you know you are buying a solid company. Can’t go wrong with any of the companies from this list. I usually passed on ABT because of their low yield; however, I am starting to consider whether I need to balance some of the high yield, lower growth stocks in my portfolio with some low yielders. A new wrinkle I am considering adding in 2016. Although, I must say, I love ADM at these valuations and may not be able to hold out too much longer.

      As always, thanks for stopping by. Much appreciated.

      Bert

  1. Usa Today had an article a couple of days ago with a similar theme but used ‘no debt’ as its’ basis. Three (TROW – 2.9%, PAYX – 3.17% and EXPD – 1.55%) are in several DGI portfolios. My question then is: Does your screen place a greater emphasis on DG rate versus Debt Ratio?

      • Great find Charlie! I appreciate you bringing it up. TROW has grown their dividend for 28 consecutive years based on dividend.com. So yes, TROW should have been included on this list considering their D/E is below 0.

        To answer your question, this specific used both metrics but with a greater emphasis on debt to equity. The nature of the article was to identify low debt companies and filtering out companies that are not Dividend Aristocrats limits the pool to companies that have only increased their dividend for an extended period of time. So the easy answer is both. However, I typically in the past have focused on dividend growth and I think that is one of the reasons the KMI situation caught me off guard. If I would have considered both factors equally, I would have been less optimistic about KMI and may not have averaged down my position in November. The beauty of this game is that you are always learning and what matters is that you are always trying to learn something new/evolve your investing strategy.

        Again, thanks for pointing out TROW to me and our readers!

        Bert

    • ADM still looks attractive these days but with the market swoon recently other names are coming into the forefront in terms of offering better value and yield. CAT and EMR are just two to name a couple.

      • Very true DivHut. The purpose of this screener wasn’t to necessarily find the cheapest stocks, but rather the stocks with the lowest debt load. I’m sure there are better values out there and you pointed out two of the greatest discounts. I may not purchase these stocks immediately (except ADM), but they are great stocks to keep on a watch list and keep an eye on in the event their price drops.

        Thanks for stopping by!

        Bert

  2. Hi Bert and Lanny,

    These look like solid companies with potential for long term growth. I have JNJ and ABT on my watchlist, will check out the rest in more detail. I did see ADM pop up on several bloggers’ radar this month. It is certainly true that dividends are not guaranteed, and neither is sustainable growth. It is important to also include debt analysis in screens so it is great to see your shortlist of very attractive dividend growth stocks with well managed debt.

    Cheers

    • Thanks Niche! That’s probably my biggest takeaway from the KMI episode is that you need to pay attention to debt levels. Dividend growth is great, but you don’t want to see a company incur unsustainable debt to fund the dividend growth and impair future dividend growth as a result. There is a nice sweet spot that companies like JNJ have thrived in for years.

      As always, thanks for stopping by!

      Bert

  3. Nice list, Bert. The KMI debacle has been painful for a lot of DGIs including us, but we can all learn lessons from this and move forward. Some very strong companies coming out from the screener – and Im glad to say that I own two – ADM and JNJ. Would love to add the others as well. The companies on this list are as strong as they come.

    Wonder if the list changes without the payout ratio – as a lot of companies esp say, REITs have high payout ratios when considering just the EPS ratios, instead of FFOs.

    Thanks for sharing your findings
    R2R

    • R2R,

      You are right, there are a lot of positive lessons that can be had from this KMI episode if we search in the right places and dig deep enough. I was very excited with the results of the screener and I could see myself investing in these five companies. They would look great in any of our portfolios as a matter of fact. You raise a great point about the payout ratio. However, I think that would be negated due to the high debt loads that most REITs carry. At least that is my assumption of course. Maybe I need to run a REIT specific screener.

      Anyway, thanks for stopping by and providing your insight. Have a great evening.

      Bert

  4. A very apt post considering the recent interest rate rise from the Fed and slow but steady increases over the year ahead too. It will be the companies who have very manageable debt who will cope well, the ones with a high debt position may struggle a bit.

    • Thanks Tristan. The debt monster seems to only rear its ugly head when times are tough. If the company is performing well and is able to grow its dividend, it is easy to ignore that a company will have massive interest/principal payments down the road. We saw the perfect storm with KMI and the long-term decrease in the price of oil took its toll and well, you know the rest of that story. While looking for companies with no debt may be too extreme, looking for companies that have their debt under control at manageable levels is key and should prevent a situation like this from happening again.

      Do you own any of these companies? Thanks for stopping by!

      Bert

      • Hi Bert,

        I am from Dividendsdownunder.com , for now I’m just buying Australian companies, so no I don’t own any of these companies yet. Perhaps one day though 🙂

        • Howdy Mate! I guess I should have figured that out when I saw your websites name on this comment. Hopefully you can grab some of these great companies soon enough. Just out of curiosity. What are your favorite Australian dividend stocks? I’ll definitely have to stop by your website more frequently and learn about that market.

          Bert

          • G’day Bert,

            There are tons of Australian ones that I want to buy first before I dip my toe into international investing (there are lots of Australian companies trading on the Australian Stock Exchange that have international earnings, so I can get exposure that way). You definitely, definitely should stop by, I hope you learn about Australian business over time from me 🙂

            What are some Australian that you might have heard of that I like? Well, resource stocks are definitely not flavour of the month. But I think you’ll have heard of Computershare – very geographically diverse earnings, very sticky/loyal customers, will be around for a very long time due to what its business is about. Large amount of capital on the balance sheet. Perhaps you’ll hear about the accounting software, XERO, someday soon too.
            Other than those, I’d suggest coming over to my site to learn about more Aussie-focussed ones 🙂

            Tristan

          • Tristan,

            I’ll definitely be over to your site taking a looking and getting to know the Australian market a little better. Resource stocks are getting slammed everywhere, so this may be a great time to add the top of the line ones if they are available!

            You’ll see me poking my head around there soon. I believe I tried leaving a comment there the other day and was restriced for some reason. But I’ll keep trying and let you know if it isn’t working for me for some reason.

            Thanks for stopping by!

            Bert

  5. Great post!
    Looks like ADM is ranking very high on most peoples screeners at these prices. I have just been doing my reading on them and am definitely considering adding it to my portfolio.
    Also as you say, it is amazing how JNJ keeps popping up on most top 5 lists. It is a wonderful company.

    • Money Grower!

      ADM is a great company and has definitely been hit with a nice decrease, which is making it increasingly more difficult to hold off from purchasing and adding to my stake. Luckily, after running into this screener I feel a lot better about their debt level. The company should be great for the long run.

      Honestly, at this point I would love to increase my stake in JNJ to $10,000 if I could. As you said, that company is amazing and I don’t think you could own enough of it.

      Thanks for stopping by!

      Bert

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