NEW YORK ( TheStreet) -- Warren Buffett is arguably the most famous investor of all time, and Thursday morning he showed us again why. The chairman of Berkshire Hathaway (BRK.A) has orchestrated a deal that allows the conglomerate to cash in its P&G holdings without paying capital gains by swapping its stake for Duracell.
While Duracell is a great addition to Buffett's roster of consumer products that allows him to indirectly benefit from tech growth, why did he decide it was time to part ways with Procter & Gamble (PG) ? An analysis comparing P&G with the other three dividend aristocrats in his top seven holdings shows that P&G was the one with the lowest growth over the last decade.
Before the sale, the Oracle of Omaha held four dividend aristocrats stocks, stocks with 25-plus years of rising dividends, in his top seven holdings:
- Coca-Cola (KO) : 16% of portfolio
- Wal-Mart (WMT) : 4% of portfolio
- Procter & Gamble (PG) : 4% of portfolio (pre-sale)
- ExxonMobil (XOM) : 4% of portfolio
These four comprised more than 25% of Warren Buffett's holdings. Buffett is known to hold stocks for decades at a time. Just because Coca-Cola is his largest holding, however, doesn't necessarily mean it's the best dividend stock buy in his portfolio. There are 8 Rules of Dividend Investing that we will use to compare how these four businesses compare with each other.
Rule 1: Dividend History
- Procter & Gamble has increased its dividend payments for 58 consecutive years
- Coca-Cola has increased its dividend payments for 52 consecutive years
- Wal-Mart has increased its dividend payments for 41 consecutive years
- ExxonMobil has increased its dividend payments for 32 consecutive years
All of the businesses above have extremely long histories of dividend growth year after year. Procter & Gamble has the longest history of dividend increases, followed by Coca-Cola. Interestingly, 3 of the 4 were founded in the 1800's. Procter & Gamble was founded in 1837. ExxonMobil's parent company Standard Oil (of Rockefeller fame) was founded in 1870, and Coca-Cola was founded in 1892. Wal-Mart is the 'baby' of the bunch; it was founded in 1962.
The extremely long operating histories of these businesses show how successful they have been over a long period of time. So much in the world has changed since the 1800's, yet these businesses continue to grow year after year. Investing in businesses with such long histories helps to reduce uncertainty about future dividend growth.
Why it matters: The Dividend Aristocrats have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Rule 2: Dividend Yield
- Coca-Cola has a dividend yield of 2.9%
- Procter & Gamble has a dividend yield of 2.9%
- ExxonMobil has a dividend yield of 2.9%
- Wal-Mart has a dividend yield of 2.5%
Interestingly, 3 out of 4 of these businesses have the same dividend yield (rounded to the nearest tenth of a percent). Once again, Wal-Mart is the odd duck out with a slightly lower dividend yield than the other three businesses.
All of Warren Buffett's Dividend Aristocrats have a dividend yield well in excess of the S&P 500. The S&P 500's dividend yield is currently about 1.9%.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Rule 3: Payout Ratio
- Coca-Cola has a payout ratio of 63%
- Procter & Gamble has a payout ratio of 53%
- Wal-Mart has a payout ratio of 38%
- ExxonMobil has a payout ratio of 37%
ExxonMobil and Wal-Mart both have payout ratios -- the proportion of earnings a company pays shareholders as a dividend -- under 40%. Interestingly, these two businesses also have the most capital expenditure needs required for growth. Coca-Cola and Procter and Gamble have significantly higher payout ratios, reflecting their lower capital-intense businesses. These two businesses simply have more cash flows available to return to shareholders without impeding growth.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Rule 4: Growth Rate
- Coca-Cola has a 10 year growth rate of 9% per year
- Wal-Mart has a 10 year growth rate of 8.2% per year
- ExxonMobil has a 10 year growth rate of 6.2% per year
- Procter & Gamble has a 10 year growth rate of 4.0% per year
The growth rates above are calculated using the lower of dividend per share growth or revenue per share growth over the last decade. Using per share growth captures net share issuances and repurchases as well as company growth to give a clearer picture of underlying business growth.
Coca-Cola and Wal-Mart have managed solid growth over the last decade. ExxonMobil's 6% growth rate is acceptable, while Procter & Gamble's growth rate is mediocre at best. For companies that have been growing profitably for decades, historical growth is a good way to manage expectations for future company growth.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Rule 5: Volatility
- Procter & Gamble has a price standard deviation of 17.8%
- Coca-Cola has a price standard deviation of 18.7%
- Wal-Mart has a price standard deviation of 19.1%
- ExxonMobil has a price standard deviation of 25.3%
Coca-Cola, Wal-Mart, and Procter & Gamble have extremely low price standard deviations. Standard deviation was calculated over the last 10 years to show volatility over a wide range of market phases. ExxonMobil has significantly higher price volatility than the other 3 companies above due to its exposure to fluctuating oil prices.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending
Sept. 30, 2011.
All of the 4 stocks above are ranked in the Top 30 based on The 8 Rules of Dividend Investing. Procter & Gamble is the lowest ranked of the 4, coming in at 27 out of 30. The company's low growth rate over the last decade is what keeps it from ranking higher.
Wal-Mart, Coca-Cola, and ExxonMobil all rank in the Top 10. These businesses are an excellent combination of solid growth, strong yield, sensible payout ratios, and low volatility. Of the 3, Wal-Mart ranks the highest, followed by Coca-Cola, then ExxonMobil. All four of Warren Buffett's Dividend Aristocrats make excellent long-term holdings for dividend growth investors.
At the time of publication, the author held a long position in Wal-Mart.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Michelle Rama-Poccia contributed to this story.
TheStreet Ratings team rates PROCTER & GAMBLE CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate PROCTER & GAMBLE CO (PG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, expanding profit margins, increase in stock price during the past year, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: PG Ratings Report