Topic: Dividend Stocks

Two U.S. stocks that deserve our ‘Highest’ rating


Verizon LISTEN:  

Verizon and McDonald’s—two U.S. companies that carry our “Highest” Dividend Sustainability Rating. That scoring reflects not only their long-term commitment to regular dividend increases, but their improving profitability.

VERIZON COMMUNICATIONS INC. $47 (New York symbol VZ; Income-Growth Dividend Portfolio, Utilities sector, Shares outstanding: 4.1 billion; Market cap: $192.7 billion; Dividend yield: 5.0%; Dividend Sustainability Rating: Highest; www.verizon.com) has 116.3 million wireless users, 12.8 million traditional phone customers and 15.5 million Internet and TV subscribers.

Starting November 2017, the company increased its quarterly dividend by 2.2%, to $0.59 a share from $0.5775. The new annual rate of $2.36 yields a high 5.0%.

In the quarter ended December 31, 2017, Verizon earned $3.51 billion, or $0.86 a share. That’s unchanged from a year earlier. Revenue increased 5.0%, to $34.0 billion from $32.3 billion a year earlier.

Verizon added 1.2 million subscribers under long-term contracts in the fourth quarter (net of cancellations). As well, over 90% of those customers use smartphones. Their devices generate higher profits for Verizon than regular cellphones.

Oath, the name of Verizon’s media business following the combination of AOL and Yahoo, contributed $2.2 billion to overall revenue in the fourth quarter. That’s up 10% from a year earlier, mostly due to higher ad sales.

Verizon will probably earn $4.50 a share in 2018. It trades at a low 10.4 times this year’s earnings forecast.

Verizon is a buy.

MCDONALD’S CORP. $157 (New York symbol MCD; Income-Growth Dividend Portfolio, Consumer sector, Shares outstanding: 794.5 million; Market cap: $124.7 billion; Dividend yield: 2.6%; Dividend Sustainability Rating: Highest; www.mcdonalds.com) is the world’s largest operator of fast-food restaurants, with 37,241 outlets in 120 countries. It serves a wide variety of food, but is best known for its hamburgers and french fries.

Starting with the December 2017 payment, the company raised its quarterly dividend by 7.4%, to $1.01 a share from $0.94. The new annual rate of $4.04 yields 2.6%.

In the quarter ended December 31, 2017, McDonald’s revenue fell 11.4%, to $5.3 billion from $6.0 billion a year earlier. That’s mainly because the company continues to transfer outlets to its franchisees. Its aim is to have those partners operate 95% of locations, up from today’s 90%, globally, and 94% for the U.S., in particular. That market accounts for 38% of all McDonald’s locations.

As part of its re-franchising plan, the company recently sold 80% of its 2,700-plus restaurants in China to a group led by a state-owned firm. McDonald’s recorded an $850 million pre-tax gain on that transaction.

Overall earnings in the quarter rose 16.7%, to $1.4 billion from $1.2 billion. Due to fewer shares outstanding, per-share earnings rose 18.8%, to $1.71 from $1.44.

As a result of a cut in the U.S. corporate tax rate, McDonald’s expects to lower its tax expenses by $500 million annually.

The company spent $1.9 billion in 2017 on new restaurants and the upgrade of existing locations. In 2018, it expects to spend $2.4 billion on that kind of reinvestment and on the opening of 1,000 new restaurants around the world.

Those additional outlets should push up earnings in 2018 by about 19% to $7.59 a share. The stock trades at 20.7 times the company’s 2018 estimate. That’s an acceptable multiple in light of McDonald’s well-known brand.

McDonald’s is a buy.

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