Dividends and Growth: Can They Coexist?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot of people love dividends as much as I do, which I can tell because people seem to like posts about these glorious cash payouts. But there's usually a pretty heavy price to pay for good dividends -- the loss of solid growth prospects. At least that's what a lot of people think. How can a company pay its investors and have anything left to finance the hardcore growth levels necessary to become a multi-bagger? It's like trying to go out and stay home at the same time. I want to test this theory because I sometimes wonder about the groupthink in this world. Are there companies that pay a dividend and still have solid growth potential?
Empresa Nacional Electricidad (NYSE: EOC) is a power company, and extreme growth prospects are the first things most people think of when they hear about a utility. No, not really. With its 2.9% yield, I'd never call this an income superstar, and with a $12 billion market cap it's hard to imagine impressive growth coming out of it. However, Empresa does pull a 16.25% profit margin and boasts a 16.63% ROE, which give it plenty of cash and efficiency to grow on. And having grown by 62.78% over the past 5 years, Empresa just might be a rule-breaker. There's still a lot of growth potential in South America, particularly as Rio gears up for the 2016 Olympics.
BBVA Banco Frances (NYSE: BFR) is a bank with plenty of history. Working since 1886, the oldest private bank in Argentina is no hot young startup. With a market cap of $665 million, it has room to grow. But it pays an 8.1% dividend. On the other hand, it's only grown 29.92% over the past 5 years. But on the magical third hand, BBVA is rocking an ROE of 30.71%, which is a pretty high caliber of efficiency. With its 26.72% profit margins, this bank has room to get bigger. I like this company, and I may end up checking it out in more depth when my window for acquiring shares reopens.
Schweitzer-Mauduit International (NYSE: SWM) makes paper. But not just any paper, mind you -- really good paper. As an art major, I can honestly say there's a difference, although I'll have to take their word for it on the cigarette paper. Usually a strong brand and a 1.1% dividend put together mean your growth rate is destined to be tortoise-like. But I like Schweitzer's chances, and not just because I like saying "Schweitzer." I also noticed that the profit margin is a reasonable 11%, the ROE is just over 18% and the past five years have watched Schweitzer grow 78.57%. While the dividend isn't great, right now it's better than my savings account and potentially taxed better (consult an expert before you take my word for that; I can just see my accountant rolling his eyes). Overall, this is a company that still has room to ... roll onward. Get it, rolls of -- okay, nevermind. Moving on.
Yanzhou Coal Mining (NYSE: YZC) mines coal in mainland China. Considering coal's usefulness as a source of carbon for producing steel, and the fact that much of the world still uses coal for heat and power, I like this company as a solid holding. Doing a quick check under the hood, I like the 10.68 forward P/E and the 16.32% profit margin. I'm not super keen on the 1.6% dividend, but it's reasonable. I really like the 20.72% ROE, but at the same time I'm nervous about the reporting standards that Chinese companies are held to. I've made mistakes in the past because I was too trusting -- not cool. But the fact that Yanzhou has grown 75% in the past 5 years is pretty indisputable.
I'm tempted to say that there's a very real connection between dividend payments and growth stagnancy, but I don't know. I think there is a possibility of the two walking hand-in-hand, and that's a match made in heaven in my opinion.
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