3 Dividend Kings Trading Below Fair Value

These discounted dividend growth stocks have increased their dividend payouts every year for at least 50 years.
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The Dividend Kings are companies that have increased their dividend payouts for at least 50 consecutive years, through economic recessions, market crashes, technological revolutions, and shifting consumer tastes. Membership of this impressive list of companies is very exclusive, with only 34 companies presently included.

For this article, I decided to use Dividend Radar as my source. Dividend Radar is a weekly automatically generated spreadsheet listing stocks with dividend streaks of five years or more. In compiling Dividend Radar, we determine the dividend streak using up to 10 different bases, retaining the longest. The bases include the ex-dividend date (Ex-Date), the Fiscal Year Ex-Date, the Payment Date, the Declaration Date, and the Adjusted Ex-Date, plus variations that include Special Dividends.

As a dividend growth investor, I look to invest in high-quality and safe dividend growth stocks trading at reasonable valuations. I use DVK Quality Snapshots to assess the quality of dividend stocks and systematically determine fair value estimates for all the dividend growth stocks in Dividend Radar.

This article presents three Dividend Kings trading well below my fair value estimates. Based on their closing prices on Friday, June 11th, each of these stocks is trading at a discount of at least 5%.

Dividend Kings

Below is a ranking chart of the Dividend Kings showing quality scores I obtained using DVK Quality Snapshots. I’m only showing quality scores whose ratings I consider to be Investment Grade (quality scores ≥ 15):

Dividend Kings Quality Scores

Dividend Kings Quality Scores

Now consider the fair value discounts of the Dividend Kings considered Investment Grade:

Screen Shot 2021-06-14 at 11.41.45 AM

The tickers of the stocks discounted most are Natural Fuel Gas Company (NFG), Black Hills Corporation (BKH), and Lowe's (LOW).

To estimate fair value, I collect fair values and price targets from reliable online sources like Morningstar and Finbox.com. Additionally, I estimate the fair value of dividend growth stocks in Dividend Radar by dividing each stock’s annualized dividend by its historical 5-year average dividend yield.

With up to 11 available estimates per stock, I ignore the lowest and highest and average the mean and median of the remaining values to arrive at my fair value estimate for a stock. Averaging the mean (average) and median (middle value) helps to adjust for skewness in the surveyed estimates.

Dividend safety is another vital factor to consider. Here is a ranking chart showing the dividend safety scores of the Dividend Kings considered Investment Grade:

Dividend Safety Scores

Dividend Safety Scores

The discounted tickers I mentioned earlier are considered Very Safe (NFG, LOW) and Safe (BKH) by Simply Safe Dividends.

Let’s consider each of these stocks in turn:

Black Hills Corporation (BKH)

Founded in 1941 and headquartered in Rapid City, South Dakota, BKH is a diversified energy company with operations in the United States. BKH's regulated utilities segments provide electricity to South Dakota, Wyoming, Colorado, and Montana, and natural gas to customers in Colorado, Nebraska, Iowa, and Kansas.

Market Cap: 4.38 B
Sector: Utilities
P/E: 18.11
Yield (TTM Q1 2021): 3.30%
5Y Average Yield: 3.03%
Annualized Dividend: $2.26
Basic EPS: 3.69
Basic Payout Ratio: 60%
Beta: 0.35

BKH is rated Decent (quality score range 15-18) with a quality score of 18.

BKH has a dividend increase streak of 51 years and a 5-year dividend growth rate [DGR] of 6.12%.

The stock’s current yield of 3.24% (at $69.67 per share) is 6.9% higher than its trailing 5-year average yield, confirming my assessment that BKH is trading at a discounted valuation.

Over the past ten years, BKH has underperformed the S&P 500, with total returns (including dividends) of 225%, compared with the 300% returned by S&P 500:

Performance Comparison of BKH and S&P 500 (SPY) (Source: Portfolio-Insight.com)

Performance Comparison of BKH and S&P 500 (SPY) (Source: Portfolio-Insight.com)

The underperformance is due mainly to a slower recovery after the market crash in February/March 2020, when COVID-19 pandemic first created panic in the markets.

BKH’s dividend growth history is a model of consistency:

Dividend Growth History of BKH (Source: Portfolio-Insight.com)

Dividend Growth History of BKH (Source: Portfolio-Insight.com)

Note BKH’s dividend growth is accelerating, with higher recent annual increases than in prior years. We can see this by dividing the stock’s 10-year DGR of 4.19% by its 5-year DGR of 6.02%, resulting in an acceleration factor of 1.44. A value above 1.0 means the stock’s dividend growth rate is accelerating.

When looking at candidates for possible investment, I also consider a stock’s earnings history to see if and how it might support future dividend increases:

Earnings Growth History of BKH (Source: Portfolio-Insight.com)

Earnings Growth History of BKH (Source: Portfolio-Insight.com)

BKH’s earning growth is relatively steady, and with an earnings payout ratio of 60%, considered low for utilities according to Simply Safe Dividends, the stock has ample room to continue growing its dividend in the future.

Earnings Payout Ratio of BKH (Source: Simply Safe Dividends)

Earnings Payout Ratio of BKH (Source: Simply Safe Dividends)

My fair value [FV] estimate of BKH is $73, so I think the stock is trading at a discount of about 5%. For reference, Morningstar’s FV is $65, Finbox.com’s FV is $67, and CFRA’s FV is $71.

Lowe's Companies, Inc (LOW)

LOW is a home improvement retailer. The company offers a complete line of products for maintenance, repair, remodeling, and home decorating. It also provides installation services through independent contractors, as well as extended protection plans and repair services. LOW was founded in 1946 and is based in Mooresville, North Carolina.

Market Cap: 134.88 B
Sector: Consumer Discretionary
P/E: 21.35
Yield (TTM Q1 2021): 1.21%
5Y Average Yield: 1.76%
Annualized Dividend: $3.20
Basic EPS: 9.19
Basic Payout Ratio: 23%
Beta: 1.34

LOW is rated Fine (quality score range 19-22) with a quality score of 22.

LOW has a dividend increase streak of 59 years and a spectacular 5-year DGR of 16.54%.

The stock’s current yield of 1.68% (at $190.81 per share) is 5% lower than its trailing 5-year average yield, which opposes my assessment that LOW is trading at a discounted valuation. However, consider the stock’s historical fair value chart, which plots the stock’s price relative to its fair value range:

Historical Fair Value (Non-GAAP EPS) Chart of LOW indicating that the stock is undervalued (Source: Portfolio-Insight.com)

Historical Fair Value (Non-GAAP EPS) Chart of LOW indicating that the stock is undervalued (Source: Portfolio-Insight.com)

It appears that LOW may be discounted by at least 8% when accounting for earnings estimates.

Over the past ten years, LOW has outperformed the S&P 500 by a 3-to-1 margin, with total returns of 905%, compared with the 300% returned by S&P 500:

Performance Comparison of LOW and S&P 500 (SPY) (Source: Portfolio-Insight.com)

Performance Comparison of LOW and S&P 500 (SPY) (Source: Portfolio-Insight.com)

LOW’s dividend growth history is awe-inspiring and a model of consistency:

Dividend Growth History of LOW (Source: Portfolio-Insight.com)

Dividend Growth History of LOW (Source: Portfolio-Insight.com)

LOW’s acceleration factor of 0.91, indicating that the stock’s dividend growth rate is decelerating. However, the stock’s DGR is relatively high for a company with a dividend increase streak of 59 years!

Likewise, LOW’s earnings history is impressive, with solid ten growth and a significant jump in earnings in the 2021 fiscal year:

Earnings Growth History of LOW (Source: Portfolio-Insight.com)

Earnings Growth History of LOW (Source: Portfolio-Insight.com)

LOW’s earnings payout ratio of 23% is considered very low for most companies:

Earnings Payout Ratio of LOW (Source: Simply Safe Dividends)

Earnings Payout Ratio of LOW (Source: Simply Safe Dividends)

My fair value estimate of LOW is $200, so I think the stock is trading at a discount of about 5%. For reference, Morningstar’s FV is $165, Finbox.com’s FV is $215, and CFRA’s FV is $245.

Disclosure: Long LOW

National Fuel Gas Company (NFG)

Founded in 1902 and based in Williamsville, New York, NFG is engaged in the production, gathering, transportation, distribution, and marketing of natural gas. It also develops and produces oil reserves, primarily in California. As of September 30, 2020, NFG owned approximately 95,000 acres of timber property and managed an additional 2,500 acres of timber cutting rights.

Market Cap: 5.03 B
Sector: Utilities
P/E: 52.53
Yield (TTM Q1 2021): 3.57%
5Y Average Yield: 3.40%
Annualized Dividend: $1.78
Basic EPS: 0.95
Basic Payout Ratio: 187%
Beta: 0.73

NFG is rated Decent (quality score range 15-18) with a quality score of 15.

NFG has a dividend increase streak of 51 years and a modest 5-year DGR of 2.41%.

The stock’s current yield of 3.23% (at $55.18 per share) is 5% lower than its trailing 5-year average yield, which opposes my assessment that NFG is trading at a discounted valuation. However, consider the stock’s historical fair value chart, which plots the stock’s price relative to its fair value range:

Historical Fair Value (Non-GAAP EPS) Chart of NFG indicating that the stock is undervalued (Source: Portfolio-Insight.com)

Historical Fair Value (Non-GAAP EPS) Chart of NFG indicating that the stock is undervalued (Source: Portfolio-Insight.com)

It appears that NFG may be discounted by at least 10% when accounting for earnings estimates.

Over the past 10 years, NFG has significantly underperformed the S&P 500, with total returns of only 9% compared with the 300% returned by S&P 500:

Performance Comparison of NFG and S&P 500 (SPY) (Source: Portfolio-Insight.com)

Performance Comparison of NFG and S&P 500 (SPY) (Source: Portfolio-Insight.com)

NFG’s dividend growth is steady and consistent, though the DGR is relatively modest:

Dividend Growth History of NFG (Source: Portfolio-Insight.com)

Dividend Growth History of NFG (Source: Portfolio-Insight.com)

NFG’s acceleration factor of 0.94, indicating that the stock’s dividend growth rate is decelerating.

Looking at NFG’s earnings history, it appears a bit more erratic:

Earnings Growth History of NFG (Source: Portfolio-Insight.com)

Earnings Growth History of NFG (Source: Portfolio-Insight.com)

The stock’s earnings payout ratio of 23% is considered very low for utilities, according to Simply Safe Dividends:

Earnings Payout Ratio of NFG (Source: Simply Safe Dividends)

Earnings Payout Ratio of NFG (Source: Simply Safe Dividends)

My fair value estimate of NFG is $59, so I think the stock is trading at a discount of about 6%. For reference, Morningstar’s FV is $51, CFRA’s FV is $54, and Finbox.com’s FV is $59.

Concluding Remarks

This article presented three discounted Dividend Kings with safe dividends. The stocks have stellar dividend track records and trade about 5-6% below my fair value estimates. In my view, LOW is the better pick of the three unless you’re looking to invest in defensive stocks, in which case BKH would seem appropriate. NFG offers the highest yield of the three stocks, so income investors may want to look into that.

As always, I encourage readers to do their own due diligence before buying any stocks I highlight.

Thanks for reading!