What are we looking for?
U.S. companies in defensive sectors with a history of consistent dividend payments. Sectors are considered defensive if they tend to remain stable regardless of economic conditions (e.g., health care, utilities and consumer non-cyclicals).
The screen
On Aug. 5, the S&P 500 index dropped by 3 per cent, with major stocks such as Nvidia Corp., Apple Inc. and Tesla Inc. experiencing one-day declines of from 4 to 6 per cent. That same day, the CBOE Volatility Index (VIX) surged to 38.57, marking a 65-per-cent increase from its previous close. The VIX is calculated based on the prices of options on the S&P 500. A higher price for options generally indicates that investors are expecting a greater probability of significant price movements, as they are willing to pay a higher premium to protect against this anticipated volatility. Consequently, this recent spike in the VIX reflects rising investor concerns about a potential market downturn.
Investors seeking to limit volatility in their portfolios could consider companies in sectors that tend to be less sensitive to economic cycles. Dividend-paying companies provide an added layer of stability by delivering consistent cash flows to investors in an uncertain market. We identify dividend-payers that could withstand market turbulence by using FactSet’s universal screening tool and applying the following parameters:
- Traded on a U.S. exchange
- Market capitalization greater than US$1-billion
- Classified in the health care, utilities or consumer non-cyclicals sector, according to FactSet
- Dividend yield greater than 4 per cent
- Consistent year-over-year dividend increases since 2020
- Projected dividend increases in 2024 and 2025 according to analysts’ estimates
- Positive working capital (the difference between a firm’s current assets and liabilities)
- Positive interest coverage ratio, a measure of a firm’s capacity to pay interest on outstanding debt
We ranked the seven remaining companies using a multifactor analysis of leverage and liquidity metrics. A low ratio of net-debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) is considered ideal as it indicates a company with a lower debt burden in proportion to its earnings, demonstrating a greater capacity to increase dividends in the future. Additionally, to maintain sustainable dividend payments, a company must possess high liquidity. This ensures the company can meet short-term obligations during difficult market conditions such as the current high-interest-rate environment, without cutting dividends. Thus, dividend-payers with a high interest coverage ratio and a greater proportion of cash as a percentage of total debt, are ranked more favourably.
More about factset
FactSet is a leading global financial data and technology company. FactSet’s superior suite of content, analytics and workflow services covers the entire portfolio lifecycle and offers actionable insights for asset managers and investment professionals around the world.
What we found
Of the seven companies passing our screen, three are in the health care sector, three are in the utilities sector and one is in the consumer non-cyclical sector. The top two dividend-payers in our screen are highlighted below:
Gilead Sciences Inc. GILD-Q, a biopharmaceutical company, ranked first in our screen with the highest interest coverage ratio of 10.3 and the lowest net-debt-to-EBITDA ratio of 1.4. From 2020 to 2023, Gilead increased its dividend per share by 10 per cent from US$2.72 to US$3. During last week’s second-quarter earnings call, Gilead’s chief executive announced an increase in earnings-per-share guidance for the year – a positive signal that the company is confident about their future performance.
Bristol-Myers Squibb Co. BMY-N, a pharmaceutical company, ranked second in our screen, with the highest cash as a percentage of total debt at 33.4 per cent. Between 2020 to 2023, the firm’s dividend per share grew by about 26 per cent from US$1.84 to US$2.31. During their second-quarter earnings call last month, the firm’s CFO assured investors that the company continues to be committed to their dividend.
The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.