My screening process for potential investments basically looks at the size of the dividend I'll receive five years from now (among other factors of course). This process makes the rate at which each of the firms on the radar have grown their dividend payouts to shareholders over the last couple of years the main driving force. During the research for my last article, which consisted of the usual work with David Fish's Dividend Champions, Contenders and Challengers list I stumbled upon a very intriguing fact regarding the mentioned dividend growth rate.
Eliminating all firms, which have increased their dividends for less than 10 years truncated the list to 307 names; 170 of these 307 firms increased their 2008 over 2007 dividends by more than 10% while 61 of them increased by more than 20%. The same numbers for the following years look like this (I included the 2008 figures to make more visible what I'm talking about):
# of firms increasing 10+%
# of firms increasing 20+%
In total the average dividend increase among these corporations was 14% in 2008 and 8% in 2009 and 2010 respectively. Business leaders were unsurprisingly reluctant to pay out the melting earnings to their shareholders and instead kept them on the books during the world-wide recession we've seen those days. Experts say that the global economies started to get back into gear during 2010 so let's have a look at the dividend development from there:
# of firms increasing 10+%
# of firms increasing 20+%
In 2011 and 2012 the increases in dividend payouts stood at 10.5% for each year. Please mind that we're still talking about the 307 firms which have kept on increasing their dividends during the Great Recession. The underlying business models of the corporations had not changed, just their face value, i.e. their share price. This is what makes dividend growth investing so overwhelmingly appealing to me. Let me give you three examples of what I mean (all financial data taken from Morningstar, dividend data from the CCC list).
1. Stryker Corporation (SYK), Kalamazoo, Mich.
Stryker has been developing and producing medical implants, surgical and imaging technologies, as well as patient handling and emergency medical equipment since 1941. The firm's revenue grew steadily at an average rate of 13.2% per year from 2003 through 2008. Then in 2009 this extraordinary streak took a cosmetic hit by growing only 0.1% ($5 M). Heading out of the crisis, Stryker came back to an annualized growth rate of 8.9% 2010 through 2012.
Similar things can be said about the earnings per share, which used to grow at an annualized clip of 20.8% from 2003 to 2008. In 2009 this metric took a dent by declining 0.4% ($0.01). The respective 2010-2012 growth stands at an average 7.2% with another slight decline of 1.7% ($0.06) in 2012, which was due to operating problems and vacant key positions in Europe according to CEO Kevin Lobo's fourth-quarter statement.
When you look at the dividend it becomes clear why this company is to be loved by shareholders. Stryker has managed to increase its payouts for 20 years in a row no matter what the price of a single share used to be worth or what the general market did. If you see charts like this with a dividend decline in 2009/2010 please keep in mind that the company switched from one annual to four quarterly payouts that year (it's like a 4:1 split so to say). From 2008 to 2012 the payout has been increased by an annualized rate of 32%. 2008 and 2009 saw an increase of 50% each year, 2010 and 2011 saw 20% each. In 2012 the management raised payout by another 18% and the current 2013 dividend stands 25% over its predecessor.
2. Airgas Inc. (ARG), Radnor, Penn.
Airgas is a distributor of industrial, medical and specialty gases, welding and safety products. The company was founded in 1982, went public in 1986 and "graduated" by becoming a S&P 500 listed firm in 2009. In its rather short history Airgas managed to become a U.S. leader in producing or supplying industrial and medical gases, welding equipment, atmospheric gases, carbon dioxide, dry ice (frozen CO2), nitrous oxide, refrigerants, ammonia products and process chemicals. From 2003 to 2009 Airgas' revenue climbed at a pace of 16.8% year over year. The only hit had to be taken in 2010 when the growth was stopped out by a 11.2% ($485 M) decline. When the recession slowed down and the economy began its rehabilitation, the Airgas revenues came back flowing into the company like liquid nitrogen. 2011 saw a 10% increase and 2012 reported another 11.6% incline.
Earnings per share rose at 22.5% annually from 2003 through 2009, declined by 25% in 2010 and doubled back at 25.2% in 2011 and 36.5% in 2012.
Guess what happened to the dividend payouts! You probably already know the answer. The Airgas Inc. has raised dividends for 10 consecutive years starting in 2003. Including the announcement May 2, of the 2013 increase, the average annual raise amounts to 33.8% since 2008.
3. Cracker Barrel Old Country Store Inc. (CBRL), Lebanon, Tenn.
The restaurant/gift store chain was founded in 1969 by then Shell Oil salesman Dan Evins to help increase gasoline sales from bypassing truckers and travelers on the highways. Today there are about 70,000 people generating almost $2.6 B in revenue as of FY 2012. Unfortunately I cannot tell first hand since there are no Cracker Barrel stores in California, but it seems that the chain's Southern country style themed restaurants are very appealing to patrons in the 42 states they do cover. However charming a restaurant may be, it will always be a highly cyclical business model. Looking at sales revenues it is unsurprising that Cracker Barrel was one of the first businesses that felt the looming recession. As early as 2007 sales went down 11% ($291 M) against 2006 after a slow but steady annualized growth of 6.4% since 2003. 2008 saw a mediocre 1.4% ($33 M) rise in sales, which then went back down in 2009 by 0.8% ($18 M). 2012 marked the return to the formerly usual 6% p.a. range.
Concerning the earnings per share data, the only dent on Cracker Barrel's otherwise spotless body came with the 2008 decline of almost 50% ($2.43). To be fair, this drop came after the 2007 spike of plus 109% ($2.73) when the chain cashed out on its subsidiary Logan's Roadhouse restaurants for almost $500 M.
I think the picture is clear on what my thinking of the dividend looks like. The Cracker Barrel management returned increasing amounts of money to shareholders each and every year throughout the Great Recession with an annualized average of 19.8%. While the growth in payouts was understandably lagging during the depressing years (8.1% in 2009, 2.5% in 2010), it came back big time right after with 11% in 2011, 53.8% in 2012 and another 42.9% for current 2013.
Today I have picked three arbitrary examples of a working dividend growth strategy. But similar things can be said about all the 307 corporations on the CCC list, which have sent their investors a growing dividend check each and every year for the last decade. We're talking about mature corporations with a commitment to their shareholders, not only to grow their businesses but also that shouldn't be afraid of inevitable economic downturns. There's no rule without exception of course so the business model we choose to invest in is the key. No matter if you're young or old, want to accumulate wealth or need current income (or both for that matter), these business are there for you. Complaining about rising gasoline prices? Make money with Exxon (XOM) or ConocoPhillips (COP)! Grocery price increase? Guess which direction Wal-Mart (WMT) and Target (TGT) shares will take! You can find a ton of excuses not to put your money to work for you, especially when the DOW is tanking. Instead, turn off the TV, throw away the WSJ and embrace a tanking DOW by buying up more shares of your favorite market leaders. They'll be there and earn you money for a long time to come, no matter what their price of the day might be.