Dividend Growth Monsters That Aren't Done Growing

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Includes: CBRL, ESV, GIS, POT
by: Chris O'Donnell

In order to please shareholders, many companies commit themselves to returning cash to investors in the form of share repurchase plans or through dividends. The companies that have healthy cash flows and high quality businesses can sustain and even raise their dividends through both positive and negative economic environments.

When investors search for companies that return cash to shareholders, they look for two main qualities in a stock - a bountiful yield, especially one above the ten year treasury, and a potential for continued growth of their payout. The four names below fall into both categories - each has a yield over 3% and has an impressive track record of growing their dividend in the past. These companies combine their growing dividends with healthy and growing businesses, which pave the way for more dividend increases in the future. Investors can put their money with these names and expect not only above average income now, but even better income down the road.

Name Yield Div. Growth (5 yr) Payout Ratio
Cracker Barrel (NASDAQ:CBRL) 3% 63.3% 61
Ensco (NYSE:ESV) 3.3% 380% 38
Potash Corp. (NYSE:POT) 3.54% 192% 57
General Mills (NYSE:GIS) 3% 15.35% 54
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Cracker Barrel Old Country Store Inc. (CBRL)

Cracker Barrel is an operator of a restaurant franchise throughout the United States. The company aims to expand and grow its store base to attract new customers and drive both the top and bottom line. When Cracker Barrel reported their earnings on June 3, their outperformance in 2013 was met with an impressive quarter. Operating margins were up and comparable sales increased over 3%, which contributed to the $.08 EPS beat off a $.94 basis. Overall, performance in the quarter was stellar, and outperformed what Wall Street was expecting.

Another main positive announcement in the earnings call was a 50% increase in Cracker Barrel's quarterly dividend. This pushes the yield up to 3% at current levels. Cracker Barrel has tripled their dividend since the beginning of 2012, which has attracted many income-hungry investors and has bid prices up to all time highs. The stock trades at a current multiple of around 20, which implies that people value the company's dividend and earnings growth appropriately. Despite the rich valuation, buyers can still be excited when it comes to the dividend, specifically the potential for future payouts. Cracker Barrel currently pays about 61% of its earnings out as dividends. This means that the company can still increase their dividend if needed to continue their outperformance and popularity among investors. This, combined with organic growth of their business, means that Cracker Barrel still has room to grow and please shareholders.

Ensco (ESV)

Ensco is a large scale contractor involved in the oil drilling industry. The company uses its large fleet of over 70 rigs in partnership with the international oil and gas sector to generate income. Ensco has been praised for its commitment to quality service for its clients, and is rated #1 in customer satisfaction. In their most recent quarter on April 30, Ensco reported both revenues and earnings that surpassed Wall Street's expectations. The company announced that they had contracted two new wells for between 2 and 3 years during the quarter. These new contracts will bolster Ensco's position in the industry and will lock in cash flow for the years to come. As Ensco secures more contracts over time and grows its fleet further, both its profit and stock price will see a healthy increase.

What's more, the company also announced during their earnings call that they increased their dividend by 33% to $2.00 a share per year. This pushes the stock's yield up to 3.30%, which should catch the eye of the income investor. Ensco's current dividend is a massive jump from only 3 years ago, when it paid out only .10 a share and sported a mere .25% yield. Since then, heavy dividend increases have made it a major player in the dividend space, and it has the cash to continue its dividend growth down the road. With a payout ratio of only 38, Ensco could double its current payout and still have cash left over for its business activities. With new rigs coming online and a reputation for quality service, Ensco also has a bright earnings growth picture ahead of it. This means it should have no trouble increasing its dividend further to impress both the street and investors.

Potash Corp. (POT)

Potash is a worldwide fertilizer and industrial feed company that operates five potash mines in Saskatchewan and one in New Brunswick. The company supplies fertilizer to support the demand for farmland and agricultural production. Investors in Potash are aiming to capture the increasing long term demand for food and farm production. These farms need to get the most food from their land, and need high quality fertilizer to achieve peak production. Potash expects fertilizer shipments to increase by 27% through 2016, which should benefit their cash flows considerably as the company accounts for around 20% of total potash capacity globally. The ever increasing need for better use of land and agricultural materials means that Potash will have a growing customer base going forward.

Despite these positive growth factors for the future, Potash has had a hard time gaining any traction in the investor community, with its stock price going nowhere over the past three to five years. In an attempt to spur confidence and excitement in the stock, Potash has boosted its dividend payout considerably since 2010, growing its dividend from $.13 a year to $1.40 currently. This brings Potash's yield to 3.54% at current prices. I believe that the dividend raising isn't over yet, because Potash has a payout of 57, meaning it can raise its dividend further without an impact on its operations. I think that as long as Potash's earnings continue to grow at a steady pace, its dividend will continue to grow as management looks for new ways to bring out value from its growing business.

General Mills (GIS)

General Mills is a diversified manufacturer of a wide variety of food brands in the United States and abroad. The company aims to drive revenues through both acquisitions and organic growth through the introduction of new brands and product lines. The most recent implementation of this strategy came in the company's Investor Day on July 9th. At this event, General Mills announced the launch of 200 new products aimed at strengthening its existing brands, such as Hamburger Helper, and creating new product lines to expand their market share. These include a new breakfast shake that is marketed as having the same nutritional value as a bowl of cereal and milk. These new products, combined with acquisitions of both Yoplait in Europe and Yoki in South America, should provide many years of strong performance from the food giant.

This growth through acquisitions and new product introduction has paved the way for boosts to General Mills' dividend in the past. Over the past five years, the company has increased its dividend by an average of over 15% per year, which brings the current yield to around 3%. The company has a current payout ratio of around 54, which gives it more room to increase their dividend going forward. The new implementation of their many products should give a boost to earnings as well, which would allow General Mills to payout more than it currently is able to. In the future, look for this company to provide more cash to shareholders as its influence in the food industry grows stronger.

Conclusion

Each one of these companies has caught The Street's eye with its impressive dividend growth in the past. Whether to spark excitement in the company's prospects, or to complement a strong earnings picture, the dividends of these companies have grown impressively, and are not done growing. This is because all four of these companies have a strong financial position with which to grow their payout and still expand their businesses at a healthy pace. Investors should look to these names for not only a safe yield at current prices, but greater returns through both the dividend and price appreciation over the medium and long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.