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3 Dividend Growth Stocks for Your Radar

Gilead, Intel, and Citigroup look to maintain consistent growth and steady futures.

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Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar.com. There's a lot to like about stocks with growing dividends. Not only do dividend growth stocks pay out income on a regular basis, but they also tend to be highly profitable, financially healthy businesses. Today, we're taking a look at three stocks that were recently added to the Morningstar Dividend Growth Index, which consists of U.S. stocks with a history of consistently growing their dividends and a significant margin to continue to do so in the future.

Karen Andersen: Gilead is a wide moat biotech we cover at Morningstar. It's trading at about a 20% discount our $84 fair value estimate. It's best known for its dominant HIV franchise as well as hepatitis C treatments and cancer therapies. I think investors right now are concerned about where sales growth is going to be coming from in the future, as well as its late stage pipeline. If you look at our forecast, we've got very stable, growing HIV sales going forward through 2033. And this is really because of a new HIV drug they have, Biktarvy, that's just been launched and had a tremendous growth profile so far. We also think their pipeline, even though it is thinner than some other companies, it has very strong prospects for an arthritis drug that's going to be launching this year. So, that's a multibillion-dollar franchise.

Overall, looking at free cash flows, Gilead is able to churn out about $8 billion a year in our forecast period. And I think that's going to be putting them in a really good position to pay strong dividends going forward, and also make the acquisitions that they need to encourage a stronger growth profile. They've been paying a dividend since about 2015. Dividends have been increasing every year, most recently an 8% increase. And I think the size of those increases is going to be varying a little bit depending on how large your acquisitions are, but management looks very committed to increasing in the future.

Abhinav Davuluri: Wide-moat Intel has a strong track record of cash flow generation and is in solid financial shape. Although the firm is in a net debt position of $16 billion, primarily stemming from large acquisitions such as Altera and Mobileye, we expect the firm to meet its financial obligations. Although the firm will face some pressure from AMD in the near term, we don't expect significant damage to Intel's cash flow prospects. We expect the firm's PC business to decline in the low single digits in the near term, mostly offset by strength in the cloud computing, artificial intelligence trends as well as adjacencies such as Mobileye and the Internet of Things group. From a CAPEX perspective, Intel has massive CAPEX outlays for its manufacturing footprint, which we expect to average $16 billion over the next five years. From a dividend perspective, Intel has grown its dividend an average of 7% over the last five years. And we expect it to grow it at 5% in the coming five years based on our expectations of mid-single-digit revenue and earnings growth.

Eric Compton: Citigroup has a below-average dividend yield compared to the rest of our traditional U.S. banking coverage. Citigroup's dividend yield is roughly 2.6% compared to an average of 3.2% for the rest of our banking coverage. However, Citigroup is comparable to a few of its money center banking peers. JPMorgan, for example is right around Citigroup's level. Bank of America is even slightly below. Either way, dividend yields aside, Citigroup has a dividend payout ratio of roughly 25%. And we think the bank can slowly ease its way up to roughly a 30% payout ratio. This, combined with 5% to 10% EPS growth over the next several years, should give the bank ample room to increase its dividend over time. You combine a gradually increasing dividend payout ratio with 5% to 10% EPS growth, and it's not unrealistic to assume that Citigroup could grow its dividend in the high-single-digit to low-double-digit range over the next several years. Concerning sustainability with a payout ratio that low, we have no concerns about the sustainability of Citigroup's dividend. The bank could easily rein in share repurchases to absorb any hit to earnings. Also, with regards to valuation, shares look roughly fairly valued to us at this time.

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.