10 Expected Big Dividend Growth Picks For 2010

10 Expected Big Dividend Growth Picks For 2010 (DPS, JPM, GE, MO, VZ, T, CSCO, DOW, WMT, KMB)

By Jon C. Ogg, 24/7WallSt | 8 February 2010

Over what we saw during the recession, 2009 was the year that dividends were cut down to effect cash conservation to get through the recession. In fact, the dividend cuts may have saved many more thousands of jobs at large companies had the cash not been conserved. But we are seeing a return of the dividend in many large companies so far in the first six weeks of 2010. We wanted to look at other large and widely held stocks and make some dividend growth predictions of our own.

Among the companies we have pegged for large dividend growth in 2010 are Dr. Pepper Snapple Group, Inc. (NYSE: DPS) in food and beverages, J.P.Morgan Chase & Co. (NYSE: JPM) in financials, General Electric Co. (NYSE: GE) in conglomerates, Altria Group Inc. (NYSE: MO) in tobacco, Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) in telecom, Cisco Systems, Inc. (NASDAQ: CSCO) in tech, The Dow Chemical Company (NYSE: DOW) in industrials, Wal-Mart Stores Inc. (NYSE: WMT) in retail, and Kimberly-Clark Corporation (NYSE: KMB) in consumer products.

In each case we have shown what the earnings expectations are (from Thomson Reuters in 2010 or 2011) and shown the current dividend for the dividend coverage. We have also given some added color on what is behind the cut and then the return. Lastly, we looked at peers to make simple determinations of how high these payouts could rise in 2010.

Dr. Pepper Snapple Group, Inc. (NYSE: DPS) has just begun its dividend payments, so this may seem premature to many dividend watchers for how high the dividend can go. It is not. The current annualized $0.60 per year yields 2.2% versus 2010 expectations of $2.24 EPS. Coca-Cola (NYSE: KO) and Pepsico (NYSE: PEP) both yield over 3%. Coke's $1.64 payout compares to $3.41 EPS expected in 2010, so the dividend coverage is more than ample. With $2.24 EPS expected for Dr. Pepper in 2010, Dr. Pepper could juice its dividend up to almost $1.08.

There is one issue holding the company back, and maybe a second issue. It is still young and growing, but the big issue here is that the company wants to pay down more debt so that it can get its debt ratings higher. At $27.10, the stock's range over the last year is $11.83 to $30.65. Dr. Pepper seems a very easy dividend raising target for later in 2010.

J.P.Morgan Chase & Co. (NYSE: JPM) has already repaid its TARP money. It did not suspend its preferred dividend payments, and many of its preferred shares are trading back above the PAR values rather than the huge discounts seen in early 2009. Before thinking this may come very soon, Jamie Dimon has already punted this one for a 'review later' status. But here is the issue, JPMorgan is profitable and even if all the new bank taxes go through, the company has room to play here. Dimon is in the driver's seat and can effectively dictate the payout policy without having to stand against public scrutiny.

You can forget all about the old $0.38 dividend at first, but taking the nickel to $0.20 per quarter would not even be one-third of the bank's $3.04 expected 2010 EPS. Our opinion is that even if a break-up of major banks gets proposed and even if the banks have to get a double-dip tax that JPMorgan will again prove that it is the safest and best bank in America. An $0.80 annualized dividend would garner a yield of just over 2%. That might reinvigorate its share base as well, and its $38.30 price compares to a 52-week range of $14.96 to $47.47.

General Electric Co. (NYSE: GE) cut its dividend last year. At first it was a choice, but then it was a necessity. As I opined on CNBC a year ago, this dividend cut was the equivalent of 50,000 jobs with $100K in annual salary and total benefits. GE still has many of the issues as banks, but 3M Co. (NYSE: MMM) gave GE a slap in the face with a dividend hike. Jeff Immelt and Keith Sherin kicked the can down the road on when the dividend would be restored at the last earnings date. We do not have any high hopes that the $0.10 dividend will rise back up to the old $0.31 quarterly payout.

But as soon as GE gets a couple more earnings reports behind it and as soon as the company is rather certain that it won't be at deep earnings risk even in a double-dip recession, then we expect Jeff Immelt to be back on track to raise the dividend by perhaps as soon as summer. A $0.15 quarterly pay would currently yield 3.8% if the price remains static; a $0.20 quarterly payout would yield about 5% for holders. We'd look for $0.15 first, then $0.20 in 2011 if the stock price is higher.

Altria Group Inc. (NYSE: MO) is the guts of what is left of the old Phillip Morris. It has spun-out Phillip Morris International and Kraft, and about all it has left outside of tobacco is its 28.7% stake in SABMiller. Smoking turned out at least to be recession-proof as far as its dividend was concerned as Altria raised the payout in 2009 to $0.34 from $0.32 per quarter. At $1.36 per year, that would compare to estimates of $1.87 EPS for 2010. That still leaves ample dividend coverage for the company when you consider that Altria is an unlikely acquirer of any major domestic company and an international acquisition would go to Phillip Morris International (NYSE: PM).

The risks here are probably more on state and local tax rates increases and on local-level lawsuit rulings than compared to a double-dip recession; there are political risks, or at least governmental risks. Investors have thought at the start of each decade that smoking was not going to last, yet here we are with a 7% yield today. For the September payout, we think this will be raised to $0.36.

Verizon Communications Inc. (NYSE: VZ) is likely to act as a prelude to AT&T Inc. (NYSE: T). AT&T has raised its payouts every year as far back as the system shows. Yet it was Verizon that first raised its payout in 2009, and we will be keying off of that first for 2010. Frankly, it seems that the dividend coverage is getting tight compared to earnings even if the companies still have room to raise dividends.

The good news for the use of cash is that neither Verizon nor AT&T would be allowed to make any huge acquisitions here inside the United States. Both are relegated to almost utility-status, and one concern we have now is the wireless pricing plan war that has begun. Still, the $0.475 Verizon dividend could go up to $0.49 ($1.96 annualized) versus earnings expectations of $2.35 EPS for 2010 and $2.52 EPS expectations for 2011.

Cisco Systems, Inc. (NASDAQ: CSCO) has been the big holdout on income over growth in the technology leadership companies. Both Intel Corp. (NASDAQ: INTC) and Microsoft Corp. (NASDAQ: MSFT) have dividend payouts, as do dozens of other key technology companies. Cisco has been a serial acquirer of companies. CEO John Chambers has always been more for growth and share buybacks rather than dividend payments, but he has always kept the option open to begin making quarterly dividend payouts even though he has been putting that off and off. The 1990's were full of stock splits, but if you draw a line in the middle of the share price ranges since 2002 this has been dead money as you have seen with many tech stocks despite the revenue growth at Cisco.

The networking giant ended with $39.6 billion in cash with 64.5% margins in the last quarter. Cisco could write a check for over $7.00 as a one-time dividend and start all over. But as we are looking for steady dividends, it is time for Chambers to begin this payout in the year that taxes on dividends are still low. A $0.25 per quarter or $1.00 per year dividend would compare to estimates of $1.54 for July-2010 EPS and $1.72 for July-2011 estimates. That $1.00 per year is probably asking for way too much for a first-timer, but Chambers really needs to get with the program on the dividend front.

The Dow Chemical Company (NYSE: DOW) is going to be one to watch for its dividend policies in 2010. Admittedly, this may be one of the names which may be more of a 2011 story rather than a 2010 story, at least for any sudden return; and Dow would be very at-risk to a double-dip recession as chemical giants are very tied to the broader economy. It also is partially at the mercy of commodity prices and chemical companies have an inability to pass on higher costs to customers.

But Andrew Liveris did not want to cut the dividend in the first place, particularly after he had to cut the dividend after saying the dividend was safe. It is unlikely that the $0.15 quarterly current payout would get anywhere close to the $0.42 payout from 2007 to 2008. But the current 2.25% yield is sub-par. Earnings estimates are $1.47 EPS for 2010 and $2.49 EPS for 2011, and the company is back to profitability. $0.60 per year could easily go back up to $1.00 per year, but it seems that this might be a couple more quarters down the road.

Wal-Mart Stores Inc. (NYSE: WMT) was supposed to be the great retail winner of the recession. At $53.45 and a 52-week range of $46.48 to $55.20, Wal-Mart stock has been dead money with a $40 to $60 trading range for a whole decade. The big issue is whether Wal-Mart wants to use its capital for share buybacks or for dividends, and everyone has figured out that retail stocks are just not known for being the greatest dividend payers. The $1.09 annualized dividend today compares to earnings estimates of $3.61 EPS for Jan-2010 and $3.97 EPS for Jan-2011. The company has more than ample dividend coverage even if it decides to pick its capital spending up further.

It is possible that cash deployment might go toward debt pay-downs, but the company has more than ample dividend coverage and frankly it seems that the company can only grow via organic store openings. If Wal-Mart wants to change its dead money status, that $1.09 annual dividend yield of 2% needs to be brought up massively. That will also create added pressure for its retailer rivals to raise their payouts as well. It seems an outside shot here, but this dividend needs to go up to $0.35 or even $0.40 per quarter rather than the dinky amount it pays now versus its earnings.

Kimberly-Clark Corporation (NYSE: KMB) is becoming perhaps the greatest raised dividend 'leak' out there. At $58.96, its 52-week trading range is $43.05 to $67.03 and the company's yield is already north of 4%. But its dividend growth rate over the last five years has lagged many consumer staples per a Better Investing table with 8% dividend growth. The company has already told shareholders to expect the $0.60 dividend to see "healthy increases this year" as it gave a forecast of $4.80 to $5.00 for 2010 EPS.

If the company juices its payout ratio, then that $0.60 dividend may rise to $0.70 or $0.75. Analyzing much more here is only needed if you just do not believe the company. It has promised a healthy payout hike, and we think the $0.60 payout will jump to $0.70 or even $0.75 per quarter. The $0.70 payout per quarter would generate an annual dividend yield of 4.75% versus a 4.1% yield today.