Companies that consistently increase their dividends offer investors the best of both worlds. Not only do they provide shareholders with growing dividend payouts, but they also tend to experience rising share prices that reflect their increased business value, leading to capital gains.
A company that can sustain and increase its dividend payments even in challenging economic conditions is a strong indicator of a resilient and high-quality business.
This category of stocks, referred to as "dividend aristocrats," comprises companies that have consecutively raised their dividends for 25 years or more. Some well-known examples of these firms include Coca-Cola and Proctor & Gamble.
Currently, there are 66 dividend aristocrats, and I aimed to identify those that may be undervalued relative to their peers. Numerous metrics can be utilized for this purpose, but I opted for the PEG ratio as it aligns well with the expectation that aristocrats should grow their earnings to sustain dividend growth.
I selected three prominent dividend aristocrats with PEG ratios below 1 and ranked them in descending order based on their PEG ratios, with the highest PEG ratio at the top of the list.
#1 McDonald's (MCD)
McDonald's has consistently increased its dividends for an impressive 48 years. Despite numerous market crashes, the iconic golden arches have maintained their ability to generate earnings and provide higher dividends to their shareholders.
This is a multi-generational enterprise that remains relevant because parents continue to introduce their children to the restaurants, creating a cycle where the next generation, in turn, brings their children. This enduring appeal explains the remarkable longevity of the business.
MCD's PEG ratio stands at 0.7, calculated based on the trailing 12 months' EPS growth. It's worth noting that different websites may present varying data due to differences in their definitions and methodologies.
Year-to-date, MCD's stock price has experienced a 5% decline, possibly in reaction to the introduction of effective weight-loss medications. Some investors anticipate that these drugs may lead to decreased appetites, potentially reducing the demand for MCD. The impact of these weight-loss drugs on the food and beverage industry is still uncertain and requires further observation.
