5 Companies With A Long History Of Strong ROE And Dividend Increases

by: Valuematters

Many people have key metrics they look for when investing in companies. For me, I generally prefer companies that have strong returns on equity, continually increase their dividends, and don't over extend themselves (i.e. use too much leverage). My primary tactic is to continually find good companies that I can research to determine if they are a good investment (and if not at what price I might consider them to be). In fact, in the current environment I need this tactic more than ever as I am not overwhelmed with the values in today's market, so I am left to basically be ready for a fall. Based on this concept I have included stocks that meet the following criteria (as well as a few others that just missed the mark, including the reason why):

  1. Return on Equity (ROE) greater than 20% for 10 straight years
  2. Debt to Equity ratio of less than 33%
  3. Increased dividend annually for the last 10 years


Before getting into the actual names it is probably worth explaining why I chose these specific criteria. In general, as an equity holder I am primarily interested in the returns the company can generate on that equity. For the market as a whole (S&P) according to Reuters for the last 5 years the ROE has averaged over 14% and according to another source, what I believe is the trailing twelve month ROE through Jan 2013 was almost 13% (it isn't clear in the data source). Based on those data points 20% ROE would be terrific and having it every year for 10 years straight would be equally as good.

Now, I am not only concerned that a company can generate a good return on equity as a company could lever up and if things go well the returns to the equity holders would be humongous. However, in that case, you are potentially just taking on more risk, and I would prefer to gather the high returns on equity that come from increasing sales, profits, margins, or some combination of these. Thus, I have kept a somewhat arbitrary criterion to include companies with only a debt to equity of less than 33%. That is not to say that companies with debt-to-equity ratios above 33% are all particularly dangerous, as there are certainly many companies that generate stable cash flows that can easily cover debt payments at a level well above 33%. In this instance, it was just a level I was comfortable with as a starting point.

Finally, I am a strong believer of companies paying dividends. I believe a commitment to a dividend helps require a company to focus on capital allocation as well as helps shareholders get value out of a company's earnings and cash flow even when the market isn't appreciating them. In this case, I focused on companies that have increased their dividends for the last 10 years, in each consecutive year (going backwards from the last posted month of dividends on yahoo finance). I did not focus on any particular amount of the increase, so this is not to mean that these companies grew the dividend at any enormous rate over that time frame. I just wanted to see a steady rise and a demonstrated commitment by the company.


While this list may or may not appear to be of value, it is important to remember that it is just a list. Any investment should involve a more detailed analysis to the related companies. As well, this list is not necessarily all inclusive. I used a combination of Yahoo! Finance and Morningstar to screen these and as such there could be faults in the screening process.

As one of the key criteria is debt to equity it is important to understand the definition of debt. In the context of this screen debt includes only debt to financial institutions that is on the balance sheet (both long and short term). However, this doesn't include potentially large off-balance sheet items such as operating leases, purchase obligations, letters of credit, etc. As well, this doesn't include hybrid securities such as preferred stocks. Additionally, the debt to equity criteria is just one data point (more recent debt to equity measure) and not a historical average or a measure to cover multiple periods. These are just other reasons why the screening process is always just a starting point and not an end destination.

The Companies

The following names met the criteria noted above.

Factset Research Systems Inc (NYSE:FDS) - Factset provides integrated financial information to the investment community. Basically, they provide information which is the basis for research and analysis to be performed on various investments. The company generally operates under a subscription model and hey had sales of around $800M USD for 2012. At the current price the company is yielding around 1.30% at $97 per share.

Raven Technologies (NASDAQ:RAVN) - Raven is an industrial manufacturer that operates in four segments:

  1. Applied Technology, which focuses on precision agriculture equipment.
  2. Engineered Films, which focuses on reinforced plastic sheeting for various applications.
  3. Aerostar, which sells research balloons and tethered aerostats for research purposes.
  4. Electronic Systems, which manufactures various electronic systems with end customers in the avionics, communications, and environmental controls businesses, among others.

Raven is an innovative company with a long history of rewarding its shareholders, which you could get a little more details on the sales mix and the dividend history from my article here. I like businesses that apply technology to industry where technology hasn't always played a big part and because of that I do like their Applied Technology division. As well, I think being related to the agriculture business could be a good thing in high inflation environments (assuming crop prices keep pace with inflation it could keep a strong demand for increasing crop yields).

Raven had $381M of sales in 2012 and based on the current price around $28 per share the company yields 1.5%. As I noted in the article linked above ("Getting a Special Yield With Dividends") I don't expect Raven to pay a special dividend in the near future, so I wouldn't make that the main purpose for buying. I do think they will continue to increase their regular dividend at a pace well above inflation and continue to generate reasonable returns.

Polaris (NYSE:PII) - Polaris designs and manufactures off-road vehicles (e.g ATV's), snowmobiles, and other on-road vehicles. While this isn't an industry with particularly high barriers to entry, the company has obviously managed to generate superior returns over time. I believe that is largely due to strengths in quality, brand name, and a successful strategy of acquisitions, among other things. The company had $2.7B USD in annual sales for the last reported fiscal year (2011) and based on a current price of around $85 per share the company yields about 2%.

Rollins Inc (NYSE:ROL) - Rollins is a service company that focuses on termite and pest control services internationally. One of the more recognizable brand names it operates under is Orkin. The company has been around for a long time (1948) and ended 2011 with sales of $1.2B. At the current price of almost $25 per share the company yields about 1.4%.

Nike (NYSE:NKE) - This one doesn't need a lot of explanation as almost everyone knows Nike is one of the largest makers of shoes and apparel (as well as other equipment in the world. The company dwarfs others on this list as their annual sales are over $24B as of 2011.

Ones that just missed the list

Paychex (NASDAQ:PAYX) - Paychex provides payroll, human resources, and benefits outsourcing to small and medium sized companies across the US. While the company has a pristine balance sheet and has continually earned high returns on equity, it failed making the list because there was a stretch between 2008 and 2011 where the company failed to increase the dividend. Over the last few years the lack of meaningful employment growth and the low interest rate environment (and continual movement toward direct deposit vs. check) have proven to be headwinds for Paychex. However, I do like the "stickiness" of the business and the potential to expand the service offering from payroll to HR/benefits management with existing customers. The company generates over $2B USD in annual sales and pays a dividend that is just under 4% at the current $33.75 price per share.

Coach Inc (COH) - Coach is an upscale brand offering handbags and other accessories to men and women across the world. The company has generated superior returns on equity over the last 10 years (40% to 50%, annually) and isn't significantly levered, however the company doesn't have a long enough history of paying dividends (they started in 2009). However, from the inception of the dividend the company has grown it significantly. I liked strong brands and the performance of Coach over time, but the company has had some near term struggles. Even so, the company generates $4.7B in annual sales and pays a dividend that is about 2.5%.

Ross Stores, Inc (NASDAQ:ROST) - Ross is a discount clothing retailer that operates both the Ross Dress for Less stores and dd's DISCOUNT stores (the overwhelming portion being the Ross stores). The company has continually generated substantial returns on equity and has an acceptable debt to equity ratio (although, this goes away if we consider off balance sheet debt), but the company missed the dividend being increased by one quarter (they held the dividend at $.03 per share for one quarter too long). From a business standpoint, Ross is the type of business I like because I think it can still do well in a down economy or slow-growth economy (in a booming economy it probably wont see the stock performance do as well as non-discount names). The company had sales of $8.6B for 2012 and currently pays a dividend of 1.10% (and has done an admirable job of dividend growth).


Obviously, it would take some time to really dig in and value these names, but from a first glance I probably wouldn't be interested in Rollins or Nike at those yields. Comparatively speaking I think we may see better dividend growth plus capital appreciation from Raven vs. Rollins and we are starting around the same yield. Additionally, for a mega-cap like Nike, I would typically want to see a higher yield before starting a position. For now, this list gives me some names to start with, knowing that at a minimum they had a history of performing well and rewarding shareholders.

Disclosure: I am long RAVN, ROST, PAYX. 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.