By Ahmed Ishtiaq
Dividend growth stocks are one of my favorite stocks out there. Studies have shown that the stocks with growing dividends outperform the stocks with no dividend or stable dividends. These companies may not have high dividend yields; however, the long-term returns on these stocks far exceed the stocks with no dividends. The motive is to pick the stocks which have a history of increasing dividends on a regular basis. Usually, cash rich and strong companies are able to increase their dividend payouts on a regular basis. As a result, the stock price shows a normal upward trend. The combined return from the dividend growth and price appreciation goes considerably higher than the stocks which do not make any dividend payments.
Instead of choosing the stocks with blockbuster dividend yields, I have decided to choose stocks with normal dividend yields. However, these picks have a strong history of increasing dividend. I believe these stocks will continue to raise dividends in the future, and will provide stable growth to investors.
At the moment, restaurant operators are facing a challenging environment. However, McDonald's (NYSE:MCD) has been able to achieve substantial growth. The restaurant chain has posted some incredibly impressive growth in its margins over the years. Although it may be difficult for the company to replicate the same numbers in the future, we believe the firm can still achieve solid growth.
- Revenues have been growing at an exceptional rate for the company over the years. At the end of the last year, McDonald's reported revenue of $27 billion, up from $24 billion from the year-ago levels. Furthermore, the company has generated $27.4 billion in revenues during the trailing twelve months.
- McDonald's has a solid history of increasing dividends over the years. Recently, the company increased its dividends by 10%, and currently, it pays an annual dividend of $3.08 per share. On current price levels, dividend yield for the stock stands at 3.40%.
- While choosing dividend growth stocks, I always look at the free cash flows of the company. I believe for any company to grow its dividends, there should be enough cushion in free cash flows to support the growth. McDonald's passes this test with flying colors. At the end of 2011, the company generated $4.4 billion in free cash flows and paid $2.6 billion in cash dividends. Trailing twelve months free cash flows for McDonald's stand at $3.9 billion, and cash dividends at $2.84 billion. Payout based on free cash flows for the company is around 73%, which should give the company some room to grow its dividends.
- I remain confident about the future growth of the company because of its strong brand, scale of its operations and healthy growth opportunities in the international markets. Its massive operations give it economies of scale and bring the costs down. McDonald's brand is one of the most recognizable brands on the planet. Moreover, there are many international markets where McDonald's can go and exploit these untapped markets. In addition, its franchising network is one of the best in the world, which has helped it grow and become a global brand.
3M (NYSE:MMM) manufactures an array of industrial products. Some of the popular consumer products of the company are Scotch Tape and Post-It Notes. The company's portfolio also offers liquid crystal display films, health-care technology, heavy-duty adhesives, and more than 40 other technology platforms. 3M is known for its innovation and research and development. The company has invested some of the greatest products.
- Revenue growth for 3M has been remarkable over the past three years. At the end of 2011, the company reported revenues of $29.6 billion, up from $26.6 billion from the last year. Furthermore, trailing twelve months revenues for 3M stand at $29.6 billion.
- 3M has a long history of increasing its dividends on a regular basis. At the moment, the company pays an annual dividend of $2.36, yielding 2.5%.
- Free cash flows for 3M are extremely impressive. Over the past twelve months, the company generated $3.8 billion in free cash flows and paid $1.6 billion in cash dividends. Payout ratio for the company based on free cash flows is 42%. The payout ratio for 3M is remarkably low, and the company should not have any trouble growing its dividends in the future.
- I believe the innovative culture at the company will play a vital role in the future growth of the company. In addition, the company has low cost structure, which allows it improve its profitability. Recent acquisitions and investments in global markets will bring significant growth opportunities for the company. The company has recently expanded into Africa and Asia, and it expects to generate approximately $1 billion in annual revenues from these markets.
Walgreen Company (WAG) is the largest retail pharmacy in the U.S., with about 7,900 drugstores located throughout the country. Prescription drugs account for about two thirds of sales, with most of the rest attributable to nonprescription drugs and convenience items such as packaged foods and household and personal care products. The company also operates in-store and work-site health clinics.
- Walgreen has increased its dividend payments for thirty seven consecutive years. In June, the company raised its dividend payment by 22.20%. Currently, the stock offers annual dividend of $1.10 per share, yielding 3.10%.
- The company has shown solid growth in its cash flows over the years. At the end of fiscal year 2011, Walgreen generated $3.6 billion in cash flows from operations. However, for the fiscal year 2012, the company generated $4.43 billion in operating cash flows.
- Cash dividends and free cash flows have increased for the company during the last year. At the end of 2011, Walgreen paid $647 million in cash dividends and generated $2.43 billion in free cash flows. However, at the end of the fiscal year 2012, the company paid $787 million in cash dividends and generated $2.881 billion in free cash flows. Dividends of the company are adequately covered with free cash flows. Strong growth in free cash flows and solid coverage allows the company to increase its dividend payments substantially.
- During the current year, Walgreen has suffered due to the loss of contract with Express Scripts (NASDAQ:ESRX). The company has been trying to fill that gap and increase sales. Recently, the company has entered into a $6.7 billion potential merger with Alliance Boots and acquired a regional drug pharmacy chain. The partnership gives Walgreen a significant ownership stake in Cystic Fibrosis Foundation Pharmacy LLC, the parent company of Cystic Fibrosis Services. It is a specialty pharmacy providing medications and treatment for cystic fibrosis, a severe genetic disease. This disease causes acute lung infections and premature death. According to recent data, 30,000 adults and children in the U.S. and 70,000 people globally are suffering from cystic fibrosis. Furthermore, 10 million people in the U.S. (one in 30) carry the defective cystic fibrosis gene. This will create a huge growth opportunity in the future as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.