Can The Top 10 S&P 500 Dividend Growers Continue Their Rapid Dividend Growth?

Amgen, Inc. (NASDAQ:AMGN)

On April 28, Amgen (AMGN), the world’s largest biotech drugmaker, reported its first quarter 2016 financial results, which beat EPS expectations by a significant margin of $0.30 (11.5%). The company posted revenue of $5.53 billion in the period, also exceeding Street forecasts of $5.36 billion. The company showed earnings per share surprise in all its last eight quarters, as shown in the table below.

Data: Yahoo Finance

Amgen, Inc. (NASDAQ:AMGN) started to pay a dividend in August 2011. In February, the company increased its dividend to $1 per share, an increase of 27% of last year. The forward annual dividend yield is at 2.53%, and the payout ratio is only 34.5%. The annual rate of dividend growth over the past three years was high at 30%, and over the past five years was very high at 54.1%.

The company generated $1.8 billion of free cash flow in the first quarter of 2016 versus $1.4 billion in the first quarter of 2015 driven by higher revenues and higher operating income. During the first quarter, the company repurchased 4.7 million shares of common stock at a total cost of $690 million. At the end of the first quarter, Amgen had $4.2 billion remaining under its stock repurchase authorization.

According to the company, it has designed its capital allocation strategy to deliver value to shareholders through both an attractive return of capital and dividends and buybacks and vigorous investment for long-term growth. Amgen, Inc. (NASDAQ:AMGN) also said that this is an exciting time in the field of biology with promising clinical opportunities and breakthroughs arising in many of its areas of interest. As such, in my opinion, Amgen could continue to raise its dividend by a very high rate as it has done in the last few years.

Valero Energy Corporation (NYSE:VLO)

Image Source: Valero

On January 21, Valero (VLO), the world’s largest independent petroleum refiner and marketer, announced a 20% increase in its quarterly common stock dividend from $0.50 per share to $0.60 per share. The annual dividend yield is pretty high at 4.08% and the payout ratio only 21.2%. The annual rate of dividend growth over the past three years was very high at 37.8%, and over the past five years was also very high at 53.4%,

Valero Energy Corporation (NYSE:VLO) paid $240 million in dividends and purchased 11.1 million shares of its common stock for $767 million in the last quarter, resulting in total cash returned to stockholders of $1 billion in the fourth quarter of 2015. In 2015, Valero returned $3.7 billion to stockholders, or 80% of adjusted net income from continuing operations attributable to Valero stockholders, consisting of $848 million in dividends and $2.8 billion in stock buybacks.

The company is generating strong free cash flow; its price to free cash flow ratio is only 9.10, and it is targeting a payout ratio of 75% of net income in 2016. As such, in my opinion, Valero could continue to raise its dividend by a very high rate as it has done in the last few years.

Final Thoughts

The average annual rate of dividend increase of the ten S&P 500 companies that have raised their dividend payout by the highest rate during the last five years has been very high at about 66%.

However, as I see it, only three companies; Cisco, Amgen, and Valero among the ten dividend growers could continue to raise their dividend by a very high rate as they have done in the last few years.

The fact that a company has raised its dividend by a very high rate during the last few years does not guarantee a continuous dividend increase by the same rate. Nevertheless, in my opinion, the actual dividend payment is sustainable for all the companies in the group except Seagate Technology.

Disclosure: This article is originally published on Sure Dividend by Arie Goren.