Two Companies with Outstanding Dividend Growth
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dividend growth stocks are gaining a lot of interest from investors lately. There is nothing new about investing in companies with a successful track record of increasing dividend payments; Wall Street pros have been using this method for ever, but many individual investors seem to be rediscovering the power of dividend growth stocks in the last years.
And there are good reasons for it, dividends are harder to manipulate than earnings. In order for a company to be able to constantly increase payments for a long time, it needs to have recurring and growing cash flows which provide the financing for those dividends. In a time in which investors feel burdened with uncertainty, dividend growth stocks provide a much appreciated quantitative tool to evaluate investment decisions.
Even when the dividend yields that some of these companies provide may be lower than the yields available by investing in more conservative positions, investors who don´t need much current income from their portfolio may find a very attractive possibility in dividend growth stocks. When you are saving for retirement many years down the road, dividend growth stocks can provide capital appreciation while prices move in line with the rising dividend for long periods of time.
Companies with high growth dividends don´t usually provide the highest dividend yield, but they give shareholders an opportunity to benefit from those growing dividends via capital gains, since the stock price tends to adjust over time in order to reflect the expected value of those dividends in the future. Those investors looking for growth opportunities while at the same time valuing the transparency provided by dividends could find many attractive possibilities among those companies with better dividend growth prospects.
Accenture (NYSE: ACN) has been rewarding its investors with rapidly growing dividends in the last years, and this global consulting firm is in a very strong position to sustain that dividend growth policy for a long time. Since the company started paying dividends in 2005, those payments have increased by 26% annually, and even during the 2008/2009 recession, when many companies had to reduce or cancel their dividends, Accenture managed to increase those payments.
Accenture has been reporting excellent earnings in the last years, powered by growing demand from its global customer base in consulting, off shoring and outsourcing services. In the last quarter Accenture increased its semiannual dividend by an extraordinary 50%, which shows that management is both committed to its dividend growth policy and confident about Accenture´s future.
Accenture pays a 2.1% dividend yield, which may not sound so exciting when we look at it from a current income perspective, however once we factor in the prospects for higher dividends in the future the company looks much more interesting. The company has a payout ratio around 31% of earnings which leaves ample room for increases. As earnings keep expanding in the future the payout ratio could also continue rising, providing two powerful drivers for dividend growth in the following years.
Walgreen's (NYSE: WAG) can be considered a more defensive alternative than Accenture, but it certainly doesn´t lack potential when looking at the company´s dividend growth and valuation levels. This retailer of drugs, health products and general merchandise has increased dividends by 23% annually over the last five years, and last quarter was even better with a 28% increase. Walgreen's has paid dividends for 79 consecutive years and has increased those dividends in each of the last 36 ones, so the company is quite committed to raising dividend payments over time.
Walgreen's has been able to increase its free cash flows through very difficult periods like the last recession, and profit margins showed only a moderate contraction during that period. It seems fair to state that Walgreen's is well positioned to keep growing through difficult economic conditions, and over the long term an aging population seems like a nice tail wind for the sale of drugs and other health related products.
The company has a dividend payout ratio below 28.5%, leaving a wide margin for increases in the future. When compared to its main competitor CVS Caremark, Walgreen's also looks quite cheap from a valuation standpoint. Walgreen's pays a 2.5% dividend yield and trades at a P/E ratio of 12, while CVS pays a 1.7% in dividends and ha a P/E ratio of 16.8.
Dividend growth companies can be one of the most effective alternatives to capitalize on capital appreciation while at the same time controlling for risks via the stability and certainty that dividends provide. These two companies have the fundamentals, and the managerial commitment, to keep increasing dividends in the long term.
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