Today we shall be discussing the financials of two of the hottest blue-chip dividend stocks that recently came into the spotlight due to their fresh induction into the S&P 500 Dividend Aristocrats Index. So without further ado, let’s dive right into them!
Brown & Brown (NYSE: BRO)
Brown & Brown, Inc. along with its multiple subsidiaries provides a range of services revolving around insurance & reinsurance. Their main divisions include retail, national programs, and wholesale brokerage. The firm also provides risk management and managed health care consultancy services.
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Headquartered in Daytona Beach, Florida the company has offices in more than 300 locations across the entire country. As one of the largest independent insurance brokerages in America, the company has deep roots in the industry and is definitely among the most stable and reliable companies in America.
Albeit the company provides its services to a large customer base ranging from large-scale businesses to small households, the company is best known for providing customized packages of insurance policies to specific small-scale businesses.
Since the company is part of the Dividend Aristocrats list it goes without saying that the firm has a stellar history of rising dividends over the recent few decades. Like most firms they distribute quarterly dividends, so let’s take a look at their historical dividend history.
As shown by the graph in the middle, the firm has had overall rising dividend payouts over the past two decades. In the past decade alone, the firm has raised its dividends from $0.156 in 2010 to $0.38 in 2021, more than a 100% increase. It is noteworthy to mention that the firm also underwent a stock split in 2018.
As a potential investor you may be skeptical about the fluctuating dividend yields of the stock as shown in the chart at the bottom. The graph shows a declining yield especially during the most recent five years. That may seem like a big red flag, but let’s not jump to conclusions.
The company has been undergoing constant expansion and has been on somewhat of an acquisition spree lately. They recently entered into an agreement to acquire Global Risk Partners Limited which is scheduled to be executed by the third quarter of this year.
This news came just two weeks after announcing their acquisition of Orchid Insurance. As per the agreement, the transaction shall include the entire Managing General Underwriter (MGU), the wholesaling business, including its High-Net-Worth segment as well as Cross Cover Insurance Services.
Although the exact financials of these transactions have not been publicized yet, moves such as these reflect a strong balance sheet, a positive cash flow and a stable company health. And what’s more? This acquisition spree explains the declining dividend yield discussed above.
The profit a firm makes from its operations or the ‘Free Cash Flow (FCF)’ can essentially be utilized in one of two ways, either by giving out dividends to its common shareholders or by using that money for capital expenditures such as expansions or acquisitions. In this scenario, Brown & Brown is utilizing the major chunk of their FCF on the latter.
What that primarily does is leave behind crumbs for dividend payouts whereas the pie is used for making those expensive acquisitions. As a result the firm cannot increase its dividend payouts from a certain level whereas the stock price keeps soaring due to the constant good news of acquisitions essentially driving down the dividend yield of the stock.
Balance Sheet Health
Now let’s take a look at the balance sheet health of the stock.
The firm’s total assets have been rising steadily over the years and have risen considerably from $2.4B in 2010 to $9.629B in the last quarter of 2021.
In 2020 the total assets were $8.966B, a 17.63% increase from 2019.
In 2019 they were $7.623B, a 13.97% increase from 2018.
In 2018 they were $6.689B, a 16.37% increase from 2017.
Year by year the rise in revenues has been quite exemplary which supports the firm’s continuing ability of raising its dividends and its expansionary adventures.
When looking at total assets it’s imperative to take a look at the flip side: the total debt.
Brown & Brown’s total debt for the last quarter of 2021 was $5.522B, an 8.41% increase over the previous year. Albeit the total debt for the firm has been rising for many years, this 8.41% increase is actually a flattening of the curve as in the previous years the firm had been raising its total liabilities by much greater percentages (21.99% in 2020 & 15.85% in 2019, respectively).
Insurance brokerage firms in general take on a lot of debt. Hence, to better assess the total debt of Brown & Brown, let’s take a look at their Debt ratio. Brown & Brown’s debt ratio is currently about 0.58. The value seems high but when compared with the industry average of 0.72, it’s quite acceptable.
Cash on Hand
The firm’s cash on hand has seen a general upward trend over the years and has risen from about $0.4B in 2010 to $1.426B in the last quarter of 2021. There have been periods where cash at hand has fallen slightly but the consequent rises which have always been way higher have offset those losses by a stretch.
In 2018 the cash on hand for the firm was $0.778B, a 5.64% decline from 2017. However, in the consequent two years the firm’s cash on hand rose a staggering 23.84% and 32.08%, in 2019 & 2020, respectively.
Combined these metrics indicate a healthy balance sheet, which reflect a continuing ability for the firm to meet the demand for rising dividend payments in the near future.
Church & Dwight (NYSE: CHD)
Headquartered in New Jersey, Church & Dwight Co. is one of the leading manufacturers of household products in America. The company makes a range of household and personal care products which are divided into two main segments: Consumer Domestic and Consumer International.
The company operates through 12 of its key brands which include Arm & Hammer, Trojan and other renowned brands in the household and personal care niche. They rely on these brands to such an extent that 80% of their revenues are generated from the sale of products under these brands.
Similar to BRO, as part of the Dividend Aristocrats list Church & Dwight has been giving out dividends that have been consistently rising over the past few decades. Let’s take a look at their graph below:
As shown by the graph in the middle, the firm has generally increased its dividend payouts over the past two decades. In the past decade alone, the firm has raised its dividends from $0.48 in 2012 to $1.01 in 2021, more than a 100% increase over the holding period. Similar to BRO the firm also underwent a stock split in 2017.
Balance Sheet Health
The firm’s total assets have been rising steadily over the years and have risen considerably from $2.9B in 2010 to $7.9B in 2021.
In 2020 the total assets were $7.415B, an 11.37% increase from 2019.
In 2019 they were $6.657B, a 9.69% increase from 2018.
Year by year the firm has raised its revenues to an extent that has made giving out those rising dividend payments possible.
Church & Dwight’s total debt for the last quarter of 2021 was $3.868B, a 0.04% increase over the previous year. Albeit the total debt for the firm has been rising for many years, this 0.04% increase is actually a positive sign as it indicates successful efforts by the firm to reduce their uptake of debt.
In the previous years the firm had been raising its total liabilities at a greater rate (8.4% in 2020, 10.14% in 2019 & 10.35% in 2018, respectively).
Cash on Hand
The firm’s cash on hand has been quite volatile in the last decade, rising from $189M in 2010 to $497M in 2013 and after many fluctuations of similar extent it closed at $241M in 2021.
As you can see above, the cash and cash equivalents aspect of Church & Dwight’s balance sheet does not help us understand the rising dividends due to their volatile nature.
How These Stocks Could Be Appropriate For Income Investing Strategies
The main crux of income investing strategies is to create a stable regular passive income. Owing to basic human nature every investor strives to maximize this return but this goal and the success of this goal varies depending on the risk appetite of each investor.
Stable dividend paying stocks are a popular investment instrument utilized by investors indulged in income investing strategies as firstly they provide a nice risk to reward ratio that we’ve seen is acceptable to investors of differing levels of risk-averseness.
And secondly, as Simeon Hyman, global investment strategist at ProShares says: “Companies that consistently raise their dividend are likely to continue to do so. That’s the starting point.” The rising dividend payouts allows investors to obtain a return that competes with inflation.
What’s more is that dividend paying stocks help investors survive the turbulent waters caused by volatile and uncertain phases of the market when capital gains are negligible and short-selling too risky. So no matter the type of investor you are, having dividend stocks in your portfolio is almost always worth it.
Moving on to the stocks of our interest, Brown & Brown and Church & Dwight are companies that have relatively stable business operations, belong to industries that shall remain relevant for the foreseeable future and provide decent dividend returns. Both companies judged objectively seem appropriate for income investing strategies.
When compared with each other Brown & Brown seems like a more stable and healthy company than Church & Dwight. As despite the declining dividend yields, the amount of investments/ acquisitions the company has been making is bound to pay up in terms of both higher dividends and capital gains in the near future.
To conclude, being listed in the S&P 500 Dividend Aristocrats Index is a symbol of well-deserved distinction that both of these mature companies value dearly. This is especially true in this case as newly listed firms always strive hard to maintain this prestige.
So as an investor if you’re interested in income investing strategies, adding shares of Brown & Brown and Church & Dwight in your portfolio using the Dollar Cost Averaging (DCA) method could be a sensible decision.