(Source: imgflip)

I’m breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

To minimize reader confusion, I will be providing portfolio updates on a rotating tri-weekly schedule. This means an update every three weeks on:

I’ve also broken out the “Why Valuation ALWAYS Matters” intro to this series.

I’ve Updated All The Dividend Aristocrats For 2020

I’m in the process of updating the entire Dividend Kings Master List of dividend growth stocks worth owning at the right price.

In a Tuesday 15-hour marathon session I updated all 57 for

  • quality
  • dividend safety
  • growth profiles
  • 2020 fair value
  • good buy prices
  • potential trim/sell prices
  • 5-year CAGR total return potential ranges
  • dividend growth streaks
  • 5-year CAGR dividend growth rates
  • long-term analyst consensus growth rates
  • forward P/E ratios
  • PEG ratios

Here are the results.

Fundamental Stats

  • Average quality score: 9.7/11 (basically SWAN level) – three companies got quality upgrades
  • Average dividend safety: 4.7/5 (very safe)
  • Average yield: 2.4% vs. 1.8% S&P 500 and 2% most dividend growth ETFs
  • Average valuation: 10% overvalued (vs. 18% overvalued for 2019) vs. 14% to 19% for S&P 500
  • Average dividend growth streak: 43 years
  • Average 5-year dividend growth rate: 9% CAGR
  • Average long-term FactSet consensus growth rate: 7.2% CAGR vs. 8.5% S&P 500
  • Average Forward P/E: 19.8 vs. 18.5 S&P 500
  • Average PEG ratio: 2.74 vs. S&P 500 2.18

The dividend aristocrats are now slightly less overvalued than the broader market, based on consensus fundamentals for this year. Their collective PEG ratio appears higher but that’s because FactSet’s (NYSE:FDS) long-term EPS growth forecast for the S&P 500 is 8.5%.

The S&P 500’s future EPS growth range is 4.7% to 8.5% CAGR. The high end of the range is FactSet’s long-term consensus. The low end is consensus minus the 3.8% that FactSet’s John Butters reports analysts have overestimated EPS growth over the past 20 years (including recessionary years).

The S&P 500’s historical blended P/E ratio is 16.5 to 18.0 outside of bear markets and bubbles. Applying that realistic growth range to its historical blended P/E ratios means we can estimate what kind of returns index investors can expect from the broader market over the next five years with about a 20% margin of error.

(Source: F.A.S.T. Graphs, FactSet Research)

Most likely stock market returns will land somewhere in the middle, in a margin of error-adjusted 2.4% to 9.6% CAGR range.

(Source: Ploutos)

The base case for stocks is about 6% CAGR or roughly half what investors have seen over the past decade. That was the first time in US history without a recession or bear market.

In contrast, here’s what buying an equal weighting of all the aristocrats will likely achieve.

  • 2.4% yield
  • 7.2% long-term EPS/cash flow/dividend growth
  • -2% CAGR valuation drag
  • 7.6% CAGR total return (6.1% to 9.1% CAGR including 20% margin of error)

In other words, the S&P 500 is most likely to deliver about 6% CAGR total returns over the next five years, due to high valuations and slower-than-expected (though historically normal) EPS growth.

The aristocrats are likely to outperform by a small amount. That’s in keeping with these legendary blue chips’ track record of superior returns with slightly lower volatility.

Dividend Aristocrats’ Total Returns Since 1993 (Annual Rebalancing)

(Source: Portfolio Visualizer) portfolio 1 = dividend aristocrats

In terms of reward/risk ratio (excess total returns/downside volatility) the aristocrats have outperformed the broader market by 75% over the last 26 years. Their average collective (equally weighted) rolling returns are also far superior in every time period.

And of course, we can’t forget about the long-term power of steady dividend growth in every time period.

  • 2.8% yield in 1993
  • 56.2% yield on cost today

Inflation-Adjusted Portfolio If You Had Bought $10,000 In 1993 And Invested $1,000 Per Month

(Source: Portfolio Visualizer) portfolio 1 = dividend aristocrats

Anyone who steadily bought the aristocrats since 1993, in all market conditions, including the 2000 and 2008 crashes, would have seen even better results, 16.3% CAGR vs. the market’s 12.8%. That means a portfolio that is now almost $600,000 in size and throwing off $14,300 per year in dividends. For context, the average Social Security payment is $1,470 per month or $17,640 per year.

The aristocrats outperforming the S&P 500 overtime isn’t a surprise given that they incorporate up to five of the proven seven alpha-factor strategies.

7 Proven Ways To Beat The Market Over Time (Source: Ploutos)

Basically, buying aristocrats and kings is one of the best low-risk/high probability ways for income investors to exponentially grow both their income and wealth over time and thus achieve a prosperous retirement.

The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is an equally weighted ETF that tracks all the aristocrats. It’s a great default way for passive investors to gain exposure to the bluest of blue chips.

But if you want to outperform the legendary aristocrats over the coming decade, then you need to know which of these companies to buy, either right now, or have on a watchlist for future market pullbacks/corrections.

My Approach To Valuing And Recommending Stocks

See this article for an in-depth explanation of how and why the Dividend Kings value companies and estimate realistic 5-year CAGR total return potentials.

In summary, here is what our valuation model is built on:

  • 5-year average yield
  • 13-year median yield
  • 25-year average yield
  • P/E ratio
  • P/Owner Earnings (Buffett’s version of FCF)
  • price/operating cash flow (FFO for REITs)
  • price/free cash flow
  • price/EBITDA
  • price/EBIT

These metrics represent pretty much every company fundamental on which intrinsic value is based. Not every company can be usefully analyzed by each one (for example, EPS is meaningless for REITs, MLPs, yieldCos, and most LPs). But the idea is that each industry appropriate metric will give you an objective idea of what people have been willing to pay for a company.

I line up the expected and realistic growth rates of companies with time horizons of similar growth, thus minimizing the risk of “this time being different” and overestimating the intrinsic value of a company.

I maintain 10 total valuation lists, covering:

  • 53 level 11/11 quality Super SWANs (the best dividend stocks in America)
  • All the Dividend Kings
  • All the Dividend Aristocrats
  • All safe (level 8+ quality) midstream MLPs and C-corps
  • All safe monthly dividend stocks
  • All DK model portfolio holdings
  • Our Top Weekly Buy List
  • Our Master Valuation/Total Return Potential List (351 companies and counting)

It’s from these lists that I present the best aristocrats and kings to buy for the next five to 10 years.

The Top 5 Dividend Aristocrats By 5-Year Return Potential You Can Buy Today

(Sources: F.A.S.T. Graphs, FactSet Research, Reuters’, Gurufocus, YieldChart, YCharts, Morningstar, Gordon Dividend Growth Model)

Caterpillar (CAT), Nucor (NUE), Lowe’s (LOW), T. Rowe Price (TROW), and Cardinal Health (CAH) are the five aristocrats with the highest long-term total return potential from today’s valuations.

Not all of them are actually undervalued, and Cardinal Health’s lower quality means that I recommend a higher margin of safety for that company.

Cardinal Health

Classification Margin Of Safety For 8/11 Above-Average Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 0% $71 5% to 12%
Good Buy 15% $60 8% to 15%
Strong Buy 25% $53 10% to 17%
Very Strong Buy 35% $46 12% to 19%
Current Price 26% $52.45 10% to 17%

Cardinal Health is a turnaround stock as you can see by its current 2020, 2021 and 2022 growth consensus.

  • 2020 consensus EPS growth: -5% (18 analysts)
  • 2021 consensus EPS growth: 5%
  • 2022 consensus EPS growth: 7%
  • 2023 consensus EPS growth: 12% (just 2 analysts)

The company has a good track record over the last 20 years of meeting 12- and 24-month EPS consensus targets, within 10% and 20% margins of error, respectively.

  • Realistic Growth Range: 2% to 6% CAGR
  • Historical Fair Value when growing at 3% to 4% CAGR: 12.5 to 14 P/E

Cardinal’s inclusion in this article isn’t because it’s expected to grow at its historical 6.3% CAGR rate over the last 20 years. Rather I and most analysts expect about half the historical growth rate (3.2% CAGR FactSet Consensus).

But Cardinal’s market-determined average P/E ratio during periods of 3% growth is 13.5 and today the forward P/E is 10.7. That means that the medium-term consensus total return potential for this stock is impressive indeed.

(Source: F.A.S.T. Graphs, FactSet Research)

If you apply the company’s historical 13.5 P/E to the 2023 consensus EPS estimates, and the company achieves that expected growth and returns to fair value, then investors could see 18% CAGR total returns over the next 3.5 years.

Such is the power of a deeply undervalued dividend aristocrat growing at a modest rate.

Nucor is the only steel stock I’d ever consider recommending due to its 46-year dividend growth streak and 11/11 Super SWAN quality.

But due to the high uncertainty surrounding its growth potential (0% to 7% CAGR over the next five years), I’d recommend waiting to buy it until it is at a deep value discount of 20%.


Classification Margin Of Safety For 11/11 Super SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 4% $62 8% to 20%
Good Buy 0% $60 9% to 21%
Strong Buy 10% $53 11% to 23%
Very Strong Buy 20% $46 13% to 25%
Current Price 11% $53.7 11% to 23%

  • 2019 EBITDA consensus: -37% (12 analysts)
  • 2020 EBITDA consensus: -1%
  • 2021 EBITDA consensus: 1%
  • 2022 EBITDA consensus: 11% (2 analysts)

The trade conflict has been brutal on Nucor and it will likely take a few years for management’s growth initiatives to start paying off.

  • 0% to 7% CAGR growth range
  • fair value range: 7 to 8 EBITDA

Nucor is trading at 6.6 times forward EBTIDA which means that its three-year return potential is modest, but still double-digits.

(Source: F.A.S.T. Graphs, FactSet Research)

However, you can see why I would personally wait for a 9% better price on Nucor or better. It’s a very high uncertainty stock due to the cyclical nature of its industry, which means that analyst estimates are often off by more than 10% in any given year.

T. Rowe Price

Classification Margin Of Safety For 11/11 Super SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 4% $147 7-15%
Good Buy 0% $141 8-16%
Strong Buy 10% $53 11-19%
Very Strong Buy 20% $46 13-21%
Current Price 7% $130.2 10-18%

T.Rowe Price is the king of active management for the reasons Morningstar’s Greggory Warren outlines.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is the best positioned among the U.S.-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees… At the end of September 2019, 68%, 75%, and 81% of the company’s funds were beating peers on a three-, five-, and 10-year basis, respectively, with 79% of funds rated 4 or 5 stars by Morningstar during the past five years, better than just about every other U.S.-based asset manager.”- Morningstar emphasis added

Analysts expect 1% to 3% organic growth (net inflows) for TROW in the future, which is head and shoulders above its peers, who are lucky to avoid net outflows.

  • 2019 EPS consensus growth: 16%
  • 2020 consensus: 2%
  • 2021 consensus: 6%
  • long-term FactSet growth consensus: 10.4% CAGR

TROW, whose 33-year dividend growth streak is also marked by 12% CAGR payout growth over the last five years, has a realistic growth range of 7% to 12% and historically trades at 18 to 20 earnings.

10% to 18% CAGR long-term returns could be expected if it achieved that growth range and returned to its historical P/E.

(Source: F.A.S.T. Graphs, FactSet Research)

Over the next two years (2023 single analyst estimate is an outlier in my opinion), TROW growing as expected and returning to its historical 19.1 P/E could deliver 40% total returns or nearly 20% CAGR.

How realistic are those growth forecasts over the next two years? Pretty good, given that TROW has met or exceeded 2-year growth consensus 90% of the time over the past 20 years.

Such is the power of a modestly undervalued but fast-growing Super SWAN dividend aristocrat, one that we’re proud to own in our Fortress portfolio.

Caterpillar is one of my favorite Super SWAN aristocrats to recommend right now.

CAT has been raising its dividend 26 straight years, at 8% CAGR over the last five and 7% to 9% is management’s dividend growth guidance for the next four years.


Classification Margin Of Safety For 11/11 Super SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 4% $158 11-21%
Good Buy 0% $152 12-22%
Strong Buy 10% $137 13-24%
Very Strong Buy 20% $122 15-26%
Current Price 4% $146.36 13-23%

Caterpillar, like many industrials, has been hurt by the trade conflict, as you can see in its consensus forecasts from FactSet.

  • 2019 EPS growth consensus: -3% (26 analysts)
  • 2020 EPS growth consensus: -2%
  • 2021 EPS growth consensus: 8% (17 analysts)
  • 2022 EPS growth consensus: 30% (1 analyst)

Once the trade conflict effects ameliorate, CAT’s world-class is expected to return to strong growth.

How good is CAT’s management? Take a look at its profitability relative to its peers, which has remained stable over time (accounting for industrial recessions).

  • Operating margin in the top 9% of peers
  • Net margin in the top 11%
  • Returns on equity: top 3%
  • Returns on assets: top 17%
  • Returns on capital: top 19%

And that’s during a global industrial recession.

It’s true that CAT’s cyclical nature means that it often misses expectations, at least relative to most corporations.

(Source: imgflip)

However, those misses mean that CAT experiences great long-term buying opportunities that I and the Dividend King portfolios (we own it in all four of our portfolios) use to scoop up even more undervalued shares.

CAT’s growth range is 8% to 13% CAGR over time and at those growth rates, the market values it at 15 to 17 times earnings. Today CAT’s forward P/E is 13.8, meaning that it has 13% to 23% CAGR long-term return potential and impressive medium-term return potential, even though its growth is likely to be flat this year.

(Source: F.A.S.T. Graphs, FactSet Research)

If you don’t trust that single 30% 2022 EPS growth analyst, then CAT’s 2-year consensus return potential is 18% CAGR. If CAT is able to achieve $15 EPS in 2023 then it could deliver 22% CAGR total returns over the next three years. That’s merely returning to a P/E of 17, which is the 20-year average when it grew at 10.4% CAGR.

Lowe’s is the fastest-growing aristocrat and an 11/11 quality Super SWAN I own and our Fortress portfolio (100% Super SWANs) owns as well.


Classification Margin Of Safety For 11/11 Super SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 4% $112 11-19%
Good Buy 0% $108 12-20%
Strong Buy 10% $97 14-22%
Very Strong Buy 20% $86 16-24%
Current Price -11% $119.77 10-18%

Lowe’s is currently a “hold” but one of the finest watchlist stocks on Wall Street.

  • 57-year dividend growth streak (also a dividend king)
  • 20% 5-year CAGR dividend growth rate
  • 1.35 PEG ratio (4th lowest of any aristocrat)

Lowe’s rapid growth is due to analysts having high confidence in the rockstar management team’s (top executives poached from all over corporate America in the past year) ability to deliver on its cost-cutting/omnichannel growth initiative.

  • 2020 EPS growth consensus: 12% (29 analysts)
  • 2021 EPS growth consensus: 18%
  • 2022 EPS growth consensus: 13%
  • 2023 EPS growth consensus: 27% (2 analysts)

Lowe’s has an average track record on meeting expectations for 1-year estimates and above average for two-year estimates.

10% to 18% CAGR total return potential is what the fastest-growing aristocrat and king is capable of even from today’s modestly overvalued price.

At prices Lowe’s might hit during a pullback/correction (market now 14% to 19% historically overvalued), 20% CAGR return potentials are possible from one of the safest dividend stocks on Wall Street.

(Source: F.A.S.T. Graphs, FactSet Research)

Even at today’s elevated price, LOW’s medium-term consensus return potential is 14% CAGR over two years if you exclude the 2023 EPS estimate and use 2022 consensus from 20 analysts. If you include the 2023 estimate, then Lowe’s could deliver about 70% total returns over the next three years (fiscal 2023 = 2022 calendar year).

So those are the aristocrats with the best return potentials you can buy today, with Lowe’s and Nucor being the ones investors might want to wait for better prices.

But as I explain in the PEG section of my weekly “Best Dividend Stocks To Buy Now” series, which is returning next week, growth at a reasonable price is another great way to screen blue-chip candidates.

Aristocrats With Lowest PEG Ratios

(Sources: F.A.S.T. Graphs, FactSet Research, Reuters’, YCharts)

Here are the aristocrats with the lowest PEG ratios.

Now it’s important to remember that just because a company has a low PEG ratio doesn’t necessarily mean it is an automatic strong buy.

  • XOM: 29% undervalued
  • CAT: 4% undervalued
  • LOW: 11% overvalued
  • Chubb (CB): 20% overvalued
  • Target (TGT): 16% overvalued

Exxon (XOM) is one of two aristocrats in the energy industry with a 37-year growth streak to its credit. It’s one of Bank of America’s (NYSE:BAC) highest conviction ideas for 2020, and I agree this 5% yielding 10/11 quality SWAN could be one of the best-performing stocks of 2020.

2019 saw a modest drop in both oil prices, as well as refining margins, which hurt XOM’s EBITDA (the metric to use with most energy stocks).

  • 2019 EBITDA consensus: -4%
  • 2020 EBITDA consensus: 16% growth (16 analysts)
  • 2021 consensus: 4% growth
  • 2022 consensus: 13% growth (3 analysts)

XOM’s $230 billion seven-year growth plan is designed to double its cash flow by 2025, and possibly boost it by 150% depending on oil prices. Management’s guidance would mean potentially 12% CAGR long-term cash flow growth if crude is $60 by 2025, Exxon’s base case.

If oil is $40, then cash flow grows about 50%, and at $80, 150%. Right now Brent crude (global oil standard XOM is modeling in its forecasts) is $64.

5% to 10% is XOM’s realistic growth range and its fair value EBITDA is 7 to 8. Its forward EBITDA is currently 6.7. 8% to 17% CAGR long-term return potential is possible depending on oil prices and how bearish/bullish the market is on the stock.

But you don’t have to wait five years to make good money on this 5% yielding aristocrat.

(Source: F.A.S.T. Graphs, FactSet Research)

The consensus return potential on XOM is about 16% CAGR over the next three years. However, that doesn’t necessarily mean that everyone should buy this stock, even at its steep discount to fair value.


Classification Margin Of Safety For 10/11 SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 0% $98 2-11%
Good Buy 5% $93 3-12%
Strong Buy 15% $83 5-14%
Very Strong Buy 25% $74 7-16%
Current Price 29% $69.21 8-17%

Due to the unpredictable nature of its industry and cash flows tied to commodity prices, XOM has a poor track record of hitting analyst EBITDA expectations.

And it’s certainly true that owning XOM is primarily for those with a need for very safe and steadily growing income and a very long time horizon. Patience is needed to outperform the market with this aristocrat when commodity prices aren’t cooperating.

(Source: F.A.S.T. Graphs, FactSet Research)

Exxon has managed to ever so slightly beat the S&P 500 over the past 20 years, courtesy of returning 93% of investor’s cost basis through dividends. Buying this aristocrat when the yield is near a 30-year high is likely a sound decision but there is no telling when the market will finally stop hating this company.

It could happen in 2020, or it might take until 2021 or 2022.

Chubb is a good example of how an overvalued stock can still have a low PEG ratio.

The reason that overvalued (and thus a “hold”) Chubb, which has a 26-year dividend growth streak, makes this list is to highlight an important point about insurance companies.

PEG = P/E ratio/ long-term expected growth.

The realistic growth range on Chubb is 5% to 10% CAGR over time, but the market only values it at 11 to 12 times earnings growing at those growth rates.

(Source: F.A.S.T. Graphs, FactSet Research)

The blue line is the average P/E and the orange line is the Carnevale/Graham 15 rule of thumb for “sound and prudent” investments. That’s for companies growing 4-15% CAGR over time and is based on historical market returns of 7% CAGR over the past 200 years.

A 15 P/E is a 6.7% earnings yield and for most corporations, it is indeed a reasonable price to pay. Chubb’s blended P/E is now just under 15, and so you might think it’s a good buy.

However, the market is never wrong over the long term, always correctly “weighing the substance of a company,” including its competitive advantages and risk profile.

(Source: imgflip)

If real investors risking real money say that a Chubb growing at about 7.5% CAGR over time is worth 11 to 12 times earnings, then it’s foolish to disagree.


Classification Margin Of Safety For 9/11 Blue Chip Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 0% $126 5-14%
Good Buy 10% $113 7-16%
Strong Buy 20% $101 9-18%
Very Strong Buy 30% $88 11-20%
Current Price -20% $151 1-9%

Chubb’s current overvaluation doesn’t necessarily mean it needs to be trimmed/sold from a diversified and prudently risk-managed portfolio. However, it does mean that very modest returns are likely over the next five years, about 5% CAGR.

At a reasonable price, however, total return potential rises to about 9% CAGR, and at deep value “very strong buy levels” if Chubb grows at the rate FactSet expects (10%) and trading at the upper end of fair value (P/E of 12) would yield 20% annualized returns over the next five years.

Over two years, its track record is strong, meeting expectations 90% of the time.

  • 2019 consensus EPS growth: 10% (21 analysts)
  • 2020 consensus EPS growth: 7%
  • 2021 consensus EPS growth: 5% (15 analysts)
  • 2022 consensus EPS growth: 1% (1 analyst)

I wouldn’t worry too much about that 2022 consensus which is from one analyst out of 21 that covers this company.

(Source: F.A.S.T. Graphs, FactSet Research)

What I would worry about is the kind of weak return potential created by that high valuation. If Chubb grows as expected and returns to the 11.3 average P/E for its expected growth rate, then investors buying today could see -5% total returns over the next three years.

This is why the company is a “hold” while you wait for this relatively fast-growing aristocrat insurer to come down to a more reasonable price.

Target is one of the hottest stocks of 2019, doubling investors’ money last year.

(Source: F.A.S.T. Graphs, FactSet Research)

That’s because management has executed so well on omnichannel, driving 5% same-store sales growth in 2018 and 4% YTD 2019, that earnings growth expectations have soared from their negative expectations back in 2017.

(Source: YCharts)

That was when Amazon (AMZN) bought Whole Foods and many people thought brick and mortar was going to be ground into dust under Bezos’ heel.

The Power of “greedy when others are fearful”

(Source: F.A.S.T. Graphs, FactSet Research)

At its mid-2017 lows, TGT was about 30% undervalued, which for an 8/11 above-average quality company would represent a “strong-buy.”

From that high margin of safety (and 4.5% yield), the stock has gone on to deliver 152% total returns or 44% CAGR total returns.

But today, Target is overvalued and thus a hold.

  • realistic growth range: 7% to 12% CAGR
  • historical fair value at those growth rates: 15 to 17 P/E
  • 5-year total return potential 3% to 11% CAGR

That’s a pretty wide range of potential returns, and the double-digit end requires Target to achieve FactSet’s 11.4% long-term growth consensus.

  • 2019 EPS growth consensus: 19% (26 analysts)
  • 2020 EPS growth consensus: 9% (25 analysts)
  • 2021 growth consensus: 7% (17 analysts)
  • 2022 consensus: 6% (1 analyst)

I am personally rather skeptical of Target’s ability to deliver long-term double-digit growth on the back of digital sales which not even Walmart (WMT) is making money on ($1 billion in annual digital losses according to the WSJ).

So here are the prices at which I’d recommend potentially buying Target.


Classification Margin Of Safety For 9/11 Blue Chip Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 0% $100 6-14%
Good Buy 15% $85 9-17%
Strong Buy 25% $75 11-19%
Very Strong Buy 35% $65 13-21%
Current Price -16% $115.79 3-11%

Today target trades at a -16% margin of safety which means that any bit of bad news could send the stock plunging.

This is a company that frequently misses earnings expectations over the past 20 years.

(Source: Seeking Alpha)

Bad news like holiday same-store sales coming in at 1.4% vs. 3.8% expected, which has sent shares plunging 7% as I write this.

Dividend Aristocrats 12-Month Forward Total Returns After 10+% Single Day Crashes

Ticker Worst 1-Day Decline Since 2010 Date Of Decline

12-Month Forward Return

CAH -21.4% 5/3/2018 -1.9%
ABBV -16.3% 6/25/19 NA
SWK -15.5% 1/22/19 NA
SPGI -13.8% 2/4/13 85.4%
PNR -13.5% 4/9/19 NA
MMM -12.9% 4/25/19 NA
VFC -12.9% 10/23/15 -12.2%
WBA -12.8% 4/2/19 NA
BEN -12.5% 9/22/11 33.4%
TGT -12.2% 2/28/17 33.6%
GWW -11.9% 10/16/18 12.1%
SHW -10.9% 10/25/16 60.3%
MDT -10.8% 8/24/10 12.4%
MKC -10.5% 1/24/19 NA
AFL -10.2% 8/10/11 32.8%
WMT -10.2% 2/20/18 8.7%
LOW -10.1% 5/21/12 69.1%
PPG -10.1% 10/9/18 18.3%
JNJ -10.0% 12/14/18 9.3%
Average 27.8%
Median 18.3%

(Sources: Ploutos, YCharts)

I have a rule about always buying aristocrats after a 10% single-day crash, as long as they are reasonably priced.

That’s because historically that’s a great way to be opportunistic and earn strong returns over the next year. It’s how I bought Lowe’s, 3M (MMM), Walgreens (WBA), and more AbbVie (ABBV) for my retirement portfolio in 2019. If Target were to end up falling 10% it would still be 13% overvalued and thus I would not buy it.

(Source: F.A.S.T. Graphs, FactSet Research)

Even factoring in today’s 7% drop, over the next three years TGT can be expected to deliver about 3% CAGR total returns. Such is the price investors pay for not knowing the fair value of a blue chip and who mistake a 7% decline as a good buying opportunity.

Aristocrats With The Fastest Long-Term Growth Forecasts

(Sources: F.A.S.T. Graphs, FactSet Research, Reuters’, YCharts)

Here are the five fastest-growing aristocrats, at least according to FactSet’s long-term analyst consensus.

(Source: YChart)

YCharts and Reuters generally have slightly different estimates and you can see that growth forecasts can change significantly over time.

Which is why my motto is “quality first, valuation second and prudent risk management always.”

Just because a dividend aristocrat has a low PEG ratio and is expected to grow double-digits over the long term doesn’t mean you can just pay any price for it.

Sherwin-Williams (SHW) is an 11/11 quality Super SWAN dividend aristocrat with an impressive dividend profile

  • dividend growth streak: 41 years
  • 5-year dividend growth rate: 15% CAGR
  • realistic long-term growth range: 10% to 15% CAGR

Sounds awesome, right? Who can argue with buying a company that’s grown at 13% CAGR over the past 20 years, delivered double-digit dividend growth and nearly quadrupled the S&P 500’s annualized total return?

(Source: F.A.S.T. Graphs, FactSet Research)

Except for one thing. Valuation always matters.

(Source: F.A.S.T. Graphs, FactSet Research)

Sherwin is the quintessential example of a bubble stock and is 40% overvalued for 2020’s consensus results. That’s despite 15% growth expected in 2020.

This is a company that historically trades at 18 to 22 earnings depending on its growth rate (10% to 15% CAGR long-term growth range). It’s trading at 24.1 times 2020’s consensus EPS and a blended P/E of 26.9.

That’s what happens when the stock spends eight years in a steadily expanding bubble.

What is the price of such overvaluation? Even with a PEG of 1.76, low for an aristocrat, 10% to 15% growth applied to 18 to 22 P/E gives 2% to 12% CAGR total return potential over the next five years.

Is that higher multiple justified? Keep in mind that the 20-year average P/E of 18.6 already factors in a nearly decade-long bubble. In order to sustain a permanently higher P/E something would have to fundamentally and permanently change for SHW, like a much faster growth rate. SHW would need to grow 17% CAGR over time to maintain its historical 1.42 PEG ratio.

That’s rather optimistic and means that this stock has a major bear market ahead of it at some point, and likely sooner rather than later.

An earnings miss, which is rare but happens, could be one such catalyst. Another could be a recession, which is inevitable at some point.


Classification Margin Of Safety For 11/11 Super SWAN Quality Companies 2020 Price 5-Year CAGR Total Return Potential
Reasonable Buy 4% $435 9-21%
Good Buy 0% $418 10-22%
Strong Buy 10% $376 12-24%
Very Strong Buy 20% $334 14-26%
Current Price -40% $584 2-12%

$435 in 2020 is when I and Dividend Kings would start buying SHW this year. That’s a 26% bear market away. Think that’s unlikely?

SHW Peak Declines Since 1986

(Source: Portfolio Visualizer) Portfolio 1 = SHW

I guarantee you it will happen eventually. Like all stocks, SHW experiences periods of intense panic selling.

The purpose of a good watchlist is to know what companies are worth buying, what prices represent good buys, so you can prepare to take advantage of great opportunities.

(Source: AZ quotes)

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Disclosure: I am/we are long LOW, CAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns CAT, LOW, TROW and XOM in our portfolios.

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