This is a guest contribution by Bob Ciura with Sure Dividend. Sure Dividend helps individual investors build and maintain their high quality dividend growth portfolios rising passive income over the long run.
There is no exact definition of what constitutes a “blue-chip” stock, but at Sure Dividend we generally define a blue chip as a stock that belongs to one of three lists. In our view, a blue chip is a dividend stock that is either a Dividend Achiever (10+ consecutive years of dividend increases); Dividend Aristocrat (25+ years); or Dividend King (50+ years).
We have compiled a list of companies that currently qualify as blue chip stocks, as well as our top-ranked blue chip stocks. The following 3 stocks are among our favorite blue chip stocks for dividend growth investors interested in rising dividend income over the long term. These 3 stocks combine strong business models with future growth potential, as well as high current yields.
Blue Chip Stock #3: Exxon Mobil (XOM)
Exxon Mobil is an integrated oil and gas super-major. It is the largest U.S. energy company, with a market capitalization above $300 billion. It has also increased its dividend for over 30 years in a row, making it a member of the Dividend Aristocrats. The stock has a current yield of 4.9%, which is significantly above the ~2% dividend yield of the broader S&P 500 Index.
Exxon Mobil continues to struggle with weak oil prices, but thanks to its diversified business model, the company still generates impressive cash flows. In the most recent quarter, Exxon Mobil grew its upstream liquids production by 5% over last year’s quarter mostly thanks to impressive growth in the Permian Basin, where output grew 4% for the quarter. Exxon Mobil generated over $9 billion in operating cash flow last quarter, as the company is highly profitable across its large upstream, downstream, and refining businesses.
Despite the difficult short-term conditions, investors should remain confident of Exxon Mobil’s long-term prospects. Production growth will fuel higher profits going forward, as Exxon Mobil expects production to increase 25% by 2025, to 5.0 million barrels per day. The Permian Basin will be a major growth driver, which Exxon Mobil expects to account for more than 1.0 million barrels per day of its production by 2024.
Exxon Mobil continues to generate strong cash flow, which it uses to reward shareholders with annual dividend increases, including the 6% increase in April 2019. It also has the best balance sheet of all the integrated oil and gas majors, which further boosts its dividend sustainability. With a nearly 5% dividend yield, Exxon Mobil is among the safest dividend stocks in the energy sector.
Blue Chip Stock #2: Walgreens Boots Alliance (WBA)
Next up is pharmacy retail giant Walgreens Boots Alliance, which like Exxon Mobil is on the list of Dividend Aristocrats. Walgreens has a global presence with over 18,000 stores in 11 countries, and a market capitalization of approximately $50 billion. Walgreens has increased its dividend for 44 consecutive years, which makes it a member of the Dividend Aristocrats.
Walgreens faces heightened competition, both from established retailers as well as the looming threat of Amazon (AMZN) which purchased online pharmacy PillPack for nearly $1 billion. But Walgreens continues to generate sales growth, including 2.6% comparable revenue growth in the most recent quarter. Pharmacy sales increased 5.4% on a comparable basis, primarily due to higher brand inflation, and prescription volume growth. Pharmacy sales should continue to provide growth for Walgreens, particularly because of the aging U.S. population. Walgreens is also a highly recession-resistant company, as consumers are unlikely to cut spending on prescriptions and other healthcare products even during a recession. Walgreens is one of the most recognized brands in retail, and its huge store count serves as a competitive advantage.
Walgreens is also working aggressively to cut costs to improve its profitability. The company recently raised its cost-cutting target from $1.5 billion, to over $1.8 billion by fiscal 2022. Walgreens returns a significant portion of its profits to shareholders in the form of dividends. The company has a current dividend yield of 3%, and has increased its dividend each year for more than 40 consecutive years.
Blue Chip Stock #1: Altria Group (MO)
Altria Group is a consumer staples giant. Its main product is the Marlboro cigarette brand, but Altria has a diversified product portfolio that also includes smokeless tobacco, wine, and a 10% equity stake in global beer giant Anheuser Busch Inbev (BUD).
Altria stock has performed poorly this year, with a year-to-date decline of 7% versus a 23% gain for the S&P 500 Index. The company is struggling with the persistent trend of declining smoking rates in the United States. Altria expects cigarette volumes will decline at a 4% to 6% annual rate through 2023.
In response, Altria has invested heavily in expanding its product portfolio beyond traditional cigarettes. Its most recent investments include a $1.8 billion investment for 45% of Canadian marijuana producer Cronos Group (CRON). Separately, Altria invested $12.8 billion in e-vapor manufacturer JUUL Labs for a 35% equity stake in the company. In June, Altria announced that it took control of Burger Söhne, a Swiss company that makes oral nicotine pouches. The 80% stake was purchased for $372 million.
These investments have allowed Altria to continue generating growth in its core metrics this year. In late October, Altria reported strong third-quarter earnings. Revenue (net of excise taxes) increased 2.3% year-over-year to $5.4 billion. Adjusted earnings-per-share came of $1.19 increased 10% over the year-ago period. Revenue and earnings-per-share both beat analyst expectations. Altria said it was on track to achieve $575 million in annual cost savings this year as it combats lower smoking rates in its markets.
Altria took a non-cash impairment charge of $4.5 billion related to its investment in Juul. But its investments in Juul, Cronos Group, and Burger Söhne represent major growth opportunities and the company’s best chance to diversify away from cigarettes. These investments will fuel Altria’s long-term growth. Altria expects 5% to 7% growth in adjusted earnings-per-share in 2019, as well as 5% to 8% adjusted EPS growth from 2020-2022. This growth will allow Altria to continue increasing its dividend to shareholders, as it has done for 50 consecutive years, making Altria a member of the Dividend Kings list.
Dividend growth investors are generally interested in a strong current yield that is well above the market average, and a sustainable dividend with room for growth over the long term. Blue chip stocks are a great place to look for stocks that combine both qualities. The three stocks in this article have dividend yields that significantly exceed the S&P 500 Index average. And, thanks to their steady profitability, durable competitive advantages, and future growth potential, they are likely to continue increasing their dividends each year for the foreseeable future.