Companies generating significant cash flow sure have held up well the last couple years. While the S&P 500 and its tracking exchange traded fund, (SPY) have rallied over 20% since the market's 2011 summer bottom, and some stocks, such as Apple (AAPL), are up over 30%, stocks that have consistently raise the company's dividend have outperformed most of the broader indexes.
In addition to outperforming the broader indexes, most dividend stocks also yield around double what the average company in the S&P 500 pays out in dividends as well.
Obviously, dividend investing has been successful in part because investors want companies with stabile business models that can offer an inflation adjusted return.
Many leading dividend stocks, such as Altria (MO) and McDonald's (MCD), have also done well because the company's significant free cash flow has given management flexibility to invest and grow the company's businesses while also increasing the dividend even in times of uncertainty.
Still, with many leading dividend stocks at or near 52 week highs, it is worth looking at companies who are likely to generate the kind of significant cash flow that can offer strong returns in uncertain times over the longer-term
Las Vegas Sands (LVS) is a company that used to have significant leverage and debt since the company financed much of its operations with commercial real estate development projects. Since Las Vegas Sands was heavily reliant on real estate investments for financing, the company was hit harder than its competitors, MGM and Wynn Resorts.
Today, Las Vegas Sands has cleaned up its balance sheet and changed the operational funding that caused the company to be so heavily leveraged in the past. Las Vegas Sands has the strongest positioning of the three major U.S. casino operators in Macau, the company has won major new casino development contracts in countries such as Singapore, and the company is beginning to generate significant free cash flow.
Las Vegas Sand's annual cash flow has grown from around 600 million in 2009, to 2.6 billion in 2011. The company's dividend has also gone from around 30 cents a share, to nearly 2 dollars a share today. Las Vegas Sands is now paying out around 13% of the company's revenue in dividends and analysts are projecting the company to grow at between 20-35% over the next five years.
Transocean (RIG) has had its share of legal issues in the past, but the company recent won several major legal battles with BP (BP). In addition to having several major legal battles with BP, Transocean's rigs had a lot of downtime because of maintenance needs in 2011.
Transocean's recent first quarter earnings report was very strong, and the company's rig utilization rates are increasingly significantly well the company recently obtained its highest day rate for a rig in several years. Transocean was forced to cut the company's dividend and issue a secondary because of the threat of a ratings downgrade after an multi-billion dollar acquisition, but the company is well-positioned today.
While, Transocean, similar to all drilling companies is heavily dependent on the price of oil, the company's has multi-year contracts that receive fixed day rates. Transocean has a strong history of using buybacks and special dividends to maximize shareholder returns.
Courts recently upheld the indemnity contract that Transocean has with BP, insulating the company from much of the liability concerns investors previously had, the company's rig utilization rates and day rates are up significantly, and the company's cash position is strong.
Transocean was able to pay nearly 1 billion dollars a year in dividends with oil prices at around 90 dollars a barrel in 2011. While company's such as Exxon-Mobil (XOM) and Chevron (CVX) have significant capital expenditures, offshore drillers have much fewer operating costs. Transocean also several new rigs coming on-line, and drilling in the gulf is beginning to pickup.
Mastercard's (MA) earnings report this past quarter was very strong as well. While major banks such as Citigroup (C) and JP Morgan (JPM) recently reported significant growth in debit and credit card transactions, Mastercard's profits were up 25% on a 17% increase in year-over-year credit and debit card transactions.
Mastercard has no debt, 5 billion in cash, and the company is generating nearly 3 billion a year in free cash flow. Mastercard has few capital expenditures and analysts project the company to grow at around 20% a year over the next 5 years.
Mastercard is planning new mobile payment products soon, it is well-positioned in mature and emerging markets, and the company has a strong history of returning value to shareholders with buybacks.
To conclude, while dividend stocks such as Altria and McDonald's, get all the attention, companies with strong growth opportunities and significantly increase cash flow may be the best positioned stocks to return value to shareholders over the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
