New Dividend Growth Stock Buy: A. O. Smith Corporation (AOS)

Of all the investment opportunities out there, I have a special place in my heart for dividend growth stocks. As a subset of those, I like the ones on the list of Dividends Champions, Contenders and Challengers even better.

Recently I added another one of these Dividend Champions to my portfolio.

On August 29 I bought 25 shares of A.O. Smith Corporation (AOS) for a total of $1,483.

On that same day I also bought 15 more shares of Dominion Energy (D).

Since I wrote about my initial reasons for adding D to my portfolio back in March - and the stock price hasn’t budged much since - this post will focus on the A.O. Smith purchase.

I go over the reasons for making this A.O. Smith Corporation addition to my portfolio and what both purchases mean for my forward dividend income. 

A. O. Smith Corporation manufactures and markets residential and commercial gas and electric water heaters, boilers, and water treatment products in North America, China, Europe, and India.

The company offers water heaters for residences, restaurants, hotels and motels, office buildings, laundries, car washes, and small businesses; residential and commercial boilers for use in space heating applications for hospitals, schools, hotels, and other large commercial buildings; and water treatment products, including on-the-go filtration bottles, point-of-use carbon and reverse osmosis products, point-of-entry water softeners, and whole-home water filtrations products for residences, restaurants, hotels, and offices.

It also provides food and beverage filtration products; expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, and related products and parts; and heat pump and combi boilers, solar units, and air purification products.

The company distributes its products through independent wholesale plumbing distributors, as well as through retail channels consisting of hardware and home center chains, and manufacturer representative firms.

A. O. Smith Corporation is headquartered in Milwaukee, Wisconsin and was founded in 1874.

AOS‘s current dividend yield is 1.22% – far below the average 3.5% yield I strive for in building my portfolio.

However, I believe that the company’s other dividend features are more redeeming.

To start, the company is featured on David Fish’s list of Dividends Champions, Contenders and Challengers - with an impressive 25 year streak of growing dividend pay-outs.

The 5 year dividend growth is a nice double digit 24.57%, with the 1 year dividend growth coming in slightly above that - 28.57%.

The Current Trailing Dividend Payout Ratio is also at an attractive level, and sits at just 38%. So providing ample room for continued dividend growth.

AOS’s Earnings per Share (EPS) over the last five years shows an 14.27%  increase. Projected EPS growth for the next 3-5 years is +11.30%.

The Cash Flow Growth Rate over the last 5 years is +11.04%.

While all of that looks pretty attractive, the trailing 12 months Price/Earnings (P/E) is 31.17, which is higher than it’s 5 year average of 26.90. It is slightly lower though than the industry’s 5 year average of 33.34.

ISS-EVA Dimensions (an equity research firm) states in their August 29 report that AOS’s Performance Risk Valuation score is at the 86th percentile of all firms in its industry, which leads to a recommendation to Buy.

Ford Equity Research projects that AOS will perform in line with the market over the next 6 to 12 months. Ford’s 52-Week Price Range is between $53.90 - $67.84.

Jefferson Research states that contends that AOS is showing strong Earnings Quality, Operating Efficiency, Balance Sheet Quality and Cash Flow Quality, but Valuation suggests a higher amount of price risk. When combined, AOS deserves a BUY rating.

Given AOS’s annual dividend of $0.72  per share, this new purchase increased my forward annual dividend income by $18.00.

The additional 15 shares of D boosted my forward annual dividend income by $50.10.

What do you think about AOS and D right now? Are you buying other dividend growth stocks? Leave a comment/reply to share your thoughts!

My Dividend Growth Stock Watch List for September

Fresh political drama and trade war woes rattle markets once again.

Given my investment strategy, I am much less concerned about day to day gyrations of the stock market.

Moreover, I am always looking to benefit from them in my search for new companies to add to my portfolio.

I therefore regularly compose watch lists with stocks to research further, and with the potential to become this or next month’s new dividend growth stock purchases.

There are currently two candidates on my September watch list:

Intel Corporation (INTC) and A. O. Smith Corporation (AOS).

Looking at the chart above, INTC’s stock price has declined significantly after their June peak .

I currently own 25 shares of INTC in my portfolio - and I added those at a price of $48.93. With the current price even below that level, I am interested in potentially doubling my position.

INTC provides a decent yield of 2.52%, and is a near  Dividend Challenger with years of growing dividend pay-outs.

It’s current P/E ratio is ~17 - still slightly above it’s 5 year average.

For a dividend investor like myself, the recent acceleration in dividend growth is quite appealing. Last year’s dividend growth was 10.09% versus it’s 5 year average of just 5.92%.

The second stock on my watch list is A. O. Smith Corporation (AOS).

Like INTC, this company’s 1 year price trajectory (above) is rather bearish.

It’s dividend features look appealing though. AOS boasts 25 (!) years of growing dividends, albeit with a modest current yield of 1.22%. 

It’s current P/E ratio is around 31.13, above the 5 year average of 26.9.

The dividend growth rate is he most encouraging - with a 5 year average of 24.57% and last year coming in at 28.57%.

Both INTC and AOS are close to 52 week lows and have quite attractive dividend features. More research is required but they are serious contenders for near future purchases for my portfolio next month.

What do you think about these two companies? What is your watch list for this month? Leave a comment/reply to share your thoughts!