2 Stocks With Burly Dividends
Here's a look at Interpublic Group and Clorox, which were recently added to the Morningstar Dividend Yield Focus Index.
Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. In a low-interest-rate environment, income-producing stocks are particularly attractive. After all, dividend producers can deliver yields on par with or even better than bonds, along with the opportunity for capital appreciation. Today, we're highlighting some stocks that were recently added to the Morningstar Dividend Yield Focus Index, which consists of high-quality, high-yield U.S. stocks screened for consistent records of dividend payments and the ability to sustain them in the future.
Ali Mogharabi: Ad holding company Interpublic Group of Companies, or IPG, is now trading close to our $26 fair value estimate. As it has nicely come up 8.0% year to date, higher than S&P 500's 2.5%. While it's fairly valued at these levels, it has differentiated itself by outperforming its peers, making smart data acquisitions, maintaining organic growth in North America, strengthening the balance sheet, and increasing the dividend that's yielding over 4% at IPG's current price. IPG's one-stop-shop strategy that includes creativity, integrated with data and technology offerings, is attracting new clients and giving them reasons to spend more.
With strength from clients in the United States, IPG keeps growing organic revenue at a higher rate than most of the other major ad holding companies. All of this is accompanied by margin expansion, which we think will continue this year. The company keeps strengthening its balance sheet. It retired around $400 million in debt last year, and after the $2.3 billion acquisition of data and technology company Acxiom in 2018, it's good to see the lower leverage ratio of 2.3 down from 2018's 2.6 and comfortably below the 3.75 covenant. With that, we're comfortable that can continue to increase dividends going forward, as it did recently by 9%. We look for IPG to continue organic growth in developed and emerging markets, expand margins, and further increase dividends for shareholders.
Erin Lash: Wide-moat Clorox has long been an exemplary steward of shareholder capital. The firm has paid and increased its dividend every year for more than 40 years, growing its dividend at a mid- to high-single-digit clip over the last five to 10 years, and maintaining its payout ratio around 60% of earnings on an annual basis. And we expect the firm will continue down this path, prioritizing returning excess cash to shareholders, with our forecast calling for mid-single-digit annual dividend increases and the payout ratio hovering around its historical averages. Despite this, we don't believe the firm's valuation is attractive at present, trading at nearly a 20% premium to our $139 fair value estimate and offering investors a mere 2.5% dividend yield. For investors looking to gain exposure to the consumer product space, we'd suggest investors look to wide-moat Kellogg, which is trading at nearly a 20% discount to our $78 fair value estimate and offers a nearly 3.5% dividend yield.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.