Consistency is hard to find these days. Corporate profits as a whole are fairly strong, but due to macroeconomic and worldwide sovereign debt burdens, there is a continual sense of malaise in the markets. Even some stalwarts like Johnson and Johnson and Procter and Gamble have been rather unimpressive for long term investors in the past few years, with their sideways revenue performance due to product recalls or divestitures.
The good thing about investing for the long term in shareholder friendly companies that pay dividends is that it really doesn’t take much top line growth to get solid returns on your investment. For some, investing is thought of almost purely as “grow grow grow!”, which is key for certain businesses, but not all of them. For companies that pay dividends (or less enthusiastically, perform share buybacks), it’s all about “total shareholder returns!” as far as investors are concerned.
Total shareholder returns come from a combination of core growth and returning cash to shareholders in one way or another. If a company achieves, say, 2% actual volume growth and 2% pricing growth on that volume to keep up with inflation, then they’re looking at approximately 4% core revenue growth. If their profit margins stay static, that implies net income growth also at 4% or so. Then if they have net share repurchases of 2% of market cap per year, total EPS could grow by 6% or more per year. If the company is paying a 4% dividend yield, and the dividends are reinvested, then the investor could be looking at 10% annual returns over the long haul.
The valuation of the stock for this particular example needs to allow a free cash flow yield of 6% or higher to do this, and of the 10% annual growth, a solid 6% of the returns would be internal from the company (dividends and buybacks), with only the remaining 4% relying on actual growth (with most of that consisting of inflation and population expansion anyway). For a reasonably priced shareholder friendly company, this sets the bar pretty low for success.
Still, since a reasonable chunk of those returns is indeed tied to growth, here’s a list of seven companies that have at least 10 consecutive years of revenue growth, and strong EPS and dividend growth. Some of them may have their own issues, and sometimes restated earnings can makes things murky, but for this set, revenue growth is rather consistent.
Wal-Mart Stores (WMT)
Walmart grew its revenue at a rate of over 6% per year on average over this period, and averaged EPS growth of almost 10% per year while paying a moderately sized dividend along the way. The big retailer may have some pressure from Target, Costco, and online retailers like Amazon, but the streak of revenue and EPS growth remains intact so far in 2012. The company currently yields 2.21%, which is a bit low due to the valuation increase over the last year.
For more information, check the recently published full Walmart stock analysis.
Walgreen Company (WAG)
Walgreen Company grew revenue by almost 10% per year over the last ten years. EPS growth for the business wasn’t quite as consistent as Walmart’s, but nonetheless, they averaged over 11% annual EPS growth over the past decade. The dividend yield is a decent 3.17% as of this writing. Walgreens is one of the country’s largest pharmacies, but has had a long dispute with Express Scripts and recently a new deal was formed between the companies.
Aflac Incorporated (AFL)
Aflac enjoys a strong position offering insurance in the U.S. and Japan, and results from operations have been substantially better over the last few years than most other insurers. Revenue grew by over 8% per year on average over the past decade, while EPS grew at an average rate of more than 12% while paying a dividend. The stock has traded at a rather deep value lately, which has boosted the yield to 3.20%. However, the primary reason for the low valuation is that the company has quite a bit of exposure to European debt. I consider Aflac to be one of the stronger investments on this list right now, but also among the most uncertain.
Medtronic is a leading medical device company, and has enjoyed revenue growth of almost 9% over the last decade, as well as double digit EPS growth. With a modest dividend yield of 2.77%, and strong dividend growth, the company makes for a decent dividend growth investment. A downside here is that with the Patient Protection and Affordable Care Act, Medtronic will be struck with the 2.3% excise tax on medical devices without getting much in return. And as part of the global budget problems across many developed countries, health care costs are being increasingly scrutinized.
General Mills (GIS)
At 3.48%, General Mills offers one of the larger dividend yields on this list, but also has the shortest streak of dividend increases, with 9 years of consecutive increases on the record. Revenue growth has been in the mid single digits while EPS growth has been in the mid-to-high single digits. The downside for GIS right now is that they’re facing pressure on both sides: increasing food commodity costs are a headwind for the company, but pricing pressure from less expensive private label brands makes it a bit harder to pass the price differences onto customers.
An analysis of General Mills can be found here.
Becton Dickinson (BDX)
Becton Dickinson is another medical device manufacturer with some of the same pressures as Medtronic, and offers a history of 7% average annual revenue growth and almost 12% annual EPS growth over this period. One thing I’ve been paying particular attention to is their changing balance sheet. Over the last few years, the company has leveraged itself a bit by accumulating more debt, and using this debt to buy back shares. The financial condition remains solid, and the low interest rate environment potentially justifies this decision, but it is worth watching for future developments, in my view.
The Becton Dickinson analysis provides more information.
Enterprise Products Partners LP (EPD)
Enterprise is a Master Limited Partnership and currently offers a 4.76% distribution yield, which is the highest on this list but on the low side for a MLP. EPD, which is one of the largest publicly traded partnerships, operates tens of thousands of miles of pipelines. A key advantage that they have is that they have no incentive distribution rights to pay, because they merged with their general partner. This frees up capital and removes an anchor from distribution growth.
Full Disclosure: As of this writing, I am long MDT and BDX.
You can see my dividend portfolio here.
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