Sustainable growth rate is the maximum growth rate that a firm can sustain without having to increase financial leverage. To calculate its value, we use the equation (Sustainable Growth Rate) = (Return on Equity) x (Retention Rate).
The following is a list of S&P 500 stocks with high sustainable growth rates. Details of the screen we used:
- All stocks are part of the S&P 500 index
- All stocks pay dividends
- All stocks have positive ROE and ROA values (ttm)
- To make sure these companies have enough liquidity to pay their dividends, we only focus on companies with Price / Free Cash Flow Ratios below 15, and current ratios above 1.5
Yes, this is a crude method to calculate sustainable growth rates, but this list is only meant to be a starting point for you to do your own homework on these stocks. It's also worth pointing out that the analysis is incomplete because we're using a trailing twelve month value for ROE instead of a longer-term average.
Here is an interactive chart of all the companies that showed up in our screen. More detailed analysis follows below. Dividend payout and ROE data sourced from Finviz. The list has been sorted by sustainable growth rate.
(Click to enlarge)
- Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX): Dividend payout ratio of 7.85%, which implies a retention rate of 92.15%. Trailing twelve month ROE of 48.84%, times the retention rate, equals a sustainable growth rate of 45.00%.
- National Semiconductor Corporation (NSM): Dividend payout ratio of 36.19%, which implies a retention rate of 63.81%. Trailing twelve month ROE of 69.4%, times the retention rate, equals a sustainable growth rate of 44.28%.
- The TJX Companies, Inc. (NYSE:TJX): Dividend payout ratio of 15.95%, which implies a retention rate of 84.05%. Trailing twelve month ROE of 49.71%, times the retention rate, equals a sustainable growth rate of 41.78%.
- Coach Inc. (NYSE:COH): Dividend payout ratio of 10.29%, which implies a retention rate of 89.71%. Trailing twelve month ROE of 42.75%, times the retention rate, equals a sustainable growth rate of 38.35%.
- Ross Stores Inc. (NASDAQ:ROST): Dividend payout ratio of 12.27%, which implies a retention rate of 87.73%. Trailing twelve month ROE of 43.59%, times the retention rate, equals a sustainable growth rate of 38.24%.
- Altera Corp. (NASDAQ:ALTR): Dividend payout ratio of 12.15%, which implies a retention rate of 87.85%. Trailing twelve month ROE of 39.58%, times the retention rate, equals a sustainable growth rate of 34.77%.
- Microsoft Corporation (NASDAQ:MSFT): Dividend payout ratio of 24.24%, which implies a retention rate of 75.76%. Trailing twelve month ROE of 43.76%, times the retention rate, equals a sustainable growth rate of 33.15%.
- Eli Lilly & Co. (NYSE:LLY): Dividend payout ratio of 50.65%, which implies a retention rate of 49.35%. Trailing twelve month ROE of 47.37%, times the retention rate, equals a sustainable growth rate of 23.38%.
- Nordstrom Inc. (NYSE:JWN): Dividend payout ratio of 28.99%, which implies a retention rate of 71.01%. Trailing twelve month ROE of 32.08%, times the retention rate, equals a sustainable growth rate of 22.78%.
- Gap Inc. (NYSE:GPS): Dividend payout ratio of 20.39%, which implies a retention rate of 79.61%. Trailing twelve month ROE of 25.17%, times the retention rate, equals a sustainable growth rate of 20.04%.
- Hasbro Inc. (NASDAQ:HAS): Dividend payout ratio of 30.02%, which implies a retention rate of 69.98%. Trailing twelve month ROE of 28.1%, times the retention rate, equals a sustainable growth rate of 19.66%.
- CR Bard Inc. (NYSE:BCR): Dividend payout ratio of 13.82%, which implies a retention rate of 86.18%. Trailing twelve month ROE of 22.49%, times the retention rate, equals a sustainable growth rate of 19.38%.
- Estee Lauder Companies Inc. (NYSE:EL): Dividend payout ratio of 24.99%, which implies a retention rate of 75.01%. Trailing twelve month ROE of 23.42%, times the retention rate, equals a sustainable growth rate of 17.57%.
- Quest Diagnostics Inc. (NYSE:DGX): Dividend payout ratio of 9.97%, which implies a retention rate of 90.03%. Trailing twelve month ROE of 19.03%, times the retention rate, equals a sustainable growth rate of 17.13%.
- Polo Ralph Lauren Corp. (NYSE:RL): Dividend payout ratio of 6.19%, which implies a retention rate of 93.81%. Trailing twelve month ROE of 16.39%, times the retention rate, equals a sustainable growth rate of 15.38%.
Disclosure: No positions