Although I am pretty bearish on the (US) stock market right now, we still can search for companies which could be good long-term investments.
The following article presents 10 stocks that can be a good investment for the next decade, but not necessarily at current prices.
The ten stocks on the list are companies with a moderate dividend yield, but often a long history of dividend increases and especially high dividend growth last decade.
About five weeks ago, I published an article in which I selected 10 stocks one could buy now and hold at least for the next 10 years. In this last article, I focused on stocks with a high dividend yield and on stocks that could be interesting for dividend investors. In the following article, I will once again focus on stocks that are paying a dividend, but this time, I will not look at high dividend yields, but rather on companies that could be interesting for dividend growth investors as they reported high dividend growth rates in the past and have the potential to continue to grow the dividend with a high pace.
While, in the last article, I predominantly included stocks which were valued attractively and could be bought despite the overall stock market being overvalued and not offering many good buying opportunities, this article has rather the character of a watchlist.
The reason why the following article rather has to be seen as watchlist is the overvalued stock market, which is – in my opinion – teetering on the brink of the abyss and offers only a few good bargains. For the last 18 months, the major indices were able to keep the high levels, and although we saw some heavy fluctuations (including an almost 20% drawdown which bottomed at Christmas Eve last year), the market was able to avoid a major decline so far. But I really don’t see the potential for further increases (I would assign such a scenario a probability of 10%) but rather expect a stock market crash bringing us down at least 40-50% from the all-time highs.
The news from last week, that the United States and China might finally reach an agreement and the trade war might be paused, doesn’t change my opinion as the trade war between those two countries is only part of the problem the global economy is facing right now (and as I am writing this on Sunday, we really don’t know what the agreement might be). Other problems are the economic stagnation in Europe (including the Brexit), growth slowdown in China, huge debt levels in many different countries, companies that didn’t invest enough but rather bought back shares, and many more.
And many of the stocks presented in this article are trading at valuation levels, where I would not buy any of them. As I said many times before and will repeat once again: This is not the time to invest big in the (US) stock market. But all these companies are high-quality companies, which should be a great investment for the next decades (probably, I don’t have a crystal ball either). We all know, that investing is not only about finding great companies, but also buying these companies at an attractive price, and for most companies on that list, I don’t see the attractive prices right now, so we can rather use the following list as a watchlist and not so much as a list of companies to invest in right now.
(Source: Own work; numbers as from October 15, 2019)
Fresenius is a global health care group that operates in more than 100 countries around the globe, but most of the company’s revenue is generated in Europe (43%) and North America (42%). Fresenius is operating in four different business segments, and most of the company’s revenue is generated by Fresenius Medical Care (FMS), which is trading on the New York Stock Exchange as well as Frankfurt Stock Exchange since 1996, and Fresenius SE owns 31% of the company. Fresenius Medical Care is the world leader in treating people with chronic kidney failure. Fresenius Kabi is specialized in lifesaving medicines and technologies for infusion, transfusion and clinical nutrition. Fresenius Helios is Europe’s largest private hospital operator, and Fresenius Vamed manages projects and provides services for hospitals and other healthcare facilities worldwide.
(Source: Fresenius Investor Presentation)
Fresenius has not really a high dividend yield, but when considering the company’s dividend policy to pay out 20% to 25% of the company’s earnings as dividend, the next annual dividend could be €0.90 in an optimistic scenario, which would lead to a current dividend yield of 2.2%. This is not extremely high, but a solid dividend yield. Fresenius is the only dividend aristocrat listed in the German DAX-30 and since 1993, when the company started paying a dividend, it increased its dividend more than 16% on average every single year. In the last ten years, the dividend increased about 14% on average.
(Source: Fresenius Investor Presentation)
Fresenius definitely seems to be fairly valued right now and is one of the stocks on this list that can be bought. And considering the low payout ratio, which gives the company room to increase in combination with at least mid-to-high-single digit growth for earnings per share should enable management to raise the dividend at least 10% annually in the years to come.
Apple probably doesn’t need much of an introduction, as almost everybody (doesn’t have to be an investor) is familiar with the tech company from Cupertino. Thanks to highly successful products like the iPod, the iPad and especially the iPhone, Apple was not only the most valuable company for a long time (right now, it is a neck-and-neck race between Apple and Microsoft (NASDAQ:MSFT)) but was also one of the best investments over the last 10 to 15 years.
Apple is covered with such high intensity, there is not much for me to say about Apple that hasn’t been said before. We all know that Apple has to innovate and find new ways to generate revenue as revenue from the iPhone might decline in the years to come. We also know that Apple increased revenue from its “services” segment and that the company is still reporting growth rates way above average.
Apple had been paying a dividend before – in the years 1987 until 1995 – and started paying a dividend again in 2012. In those past seven years, the company increased the dividend about 35% every single year, and with a payout ratio of 25%, there is plenty of room to increase the dividend in the years to come. Additionally, Apple has huge amounts of cash on its balance sheet and COULD pay out special dividends to shareholders. This will depend on what other investment opportunities or ways to use the generated cash management sees in the next few years. But if management will decide to pay out a bigger part of its generated earnings (and a payout ratio of 50% seems likely in such a scenario), management could easily hike the dividend 10% or more in the years to come. And although Apple might not see high double-digit revenue growth rates in the next years, EPS growth in the mid-single digits seems very realistic as Apple is still growing at a healthy pace, which will also enable management to increase the dividend in the years to come.
McKesson is an internationally operating industry leader in pharmaceutical distribution and has 78,000 employees all over the world. Despite being active in many European countries and Canada, $170 billion of the $208 billion in revenue were generated in the United States, and McKesson is therefore quite focused on its home country. The company delivers pharmaceutical and medical products as well as business services to retail pharmacies and institutional providers like hospitals and health systems throughout North America (and internationally). McKesson also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers as well as practice management, technology and clinical support to oncology and other specialty practices. It is also an industry leader in medical-surgical distribution to alternate care sites and for healthcare technology solutions. McKesson is delivering one-third of all prescription medicine in North America and is serving 700 million customers across Europe annually and is also providing medical-surgical supplies to over 200,000 medical practices in the United States.
(Source: McKesson Investor Presentation)
One can discuss if McKesson is valued attractively or not. In my opinion, it is among the cheapest stocks one can find in the market right now. But the cheap valuation has a very simple reason – the company is in the crosshairs of several state attorneys and is facing several lawsuits due to its role in the opioid crisis. According to latest news, the company could face fines as high as $8 billion. Other companies already agreed on different settlements, but in case of McKesson, we are still faced with a high level of uncertainty. This high level of uncertainty, as well as potential high fines, has however already been priced into the stock, and it is valued attractively.
The company’s dividend probably isn’t within the main focus of management. Last time, management increased the dividend only 5% from $0.39 to $0.41, which leads to a dividend yield of 1.22%. For McKesson, it is rather difficult to calculate a reasonable payout ratio when using GAAP numbers as these numbers fluctuated quite heavily in the last few years (being as high as $22.73 in 2017 and only a few cents in 2018 and 2019). I usually don’t like to calculate with non-GAAP numbers, but in this case, we might have to use these numbers in order to describe the business and dividend in a reasonable way, and we get a payout ratio of only 11%. Management could therefore easily increase the dividend by increasing the payout ratio. Additionally, McKesson should have the potential to grow in the mid-to-high single digits over the long run (due to its wide economic moat), and an annual dividend increase of 10% or more seems realistic.
Medtronic is the world’s largest medical device company, and although it generates a majority of its sales in the United States, it can be described as a very diversified company and is operating in many different segments. Revenue is generated by inventing, manufacturing and selling medical devices for the treatment of many different diseases.
The company reports in four different segments, and the biggest part of revenue stems from the Cardiac and Vascular group, which is focused on the diagnosis, treatment and management of heart rhythm disorders and heart failures as well as coronary artery disease and heart valve disorders. The Minimally Invasive Therapies Group is operating in the emerging fields of minimally invasive gastrointestinal diagnostics and therapies, respiratory monitoring, airway management and ventilation therapies. The third largest segment is the Restorative Therapies Group, which is developing, manufacturing and marketing a comprehensive line of medical devices used in the treatment of the spine and musculoskeletal system. The fourth segment (with an annual revenue of only $2.1 billion) is the Diabetes Group, which is developing products and services for the management of Type I and Type II diabetes (including products and services like insulin pumps, CGM systems and therapy management software).
(Source: Medtronic Investor Presentation)
Medtronic can report 42 years of consecutive dividend increases and is paying a dividend since 1978. While it could increase its dividend 17% annually on average for the last four decades, dividend growth slowed down in the last decade, and Medtronic could increase its dividend only 10% on average. Medtronic also has the highest payout ratio of all the ten stocks in this list (58% right now), and due to the high payout ratio, we have to be a little skeptical how much Medtronic can increase its dividend in the next few years. But Medtronic is operating in a sector that should see rising demand in the coming years and EPS growth in the high single digits as well as raising the dividend about 10% annually seems possible.
(Source: Medtronic Investor Relations)
The business model for Visa and Mastercard is quite similar, and therefore, I will describe both companies in one segment. Both companies provide transaction processing services (authorizing, clearing, settlement) to financial institution clients (of Visa or Mastercard) as well as the merchant clients. Both companies are also providing value-added services like fraud and risk management or consulting and analytics, and both companies operate almost all over the world.
Visa’s and Mastercard’s network is a four-party model consisting of account holder (individuals using the credit cards to shop and buy items), issuers (the financial institution that issued the credit cards to account holders), acquirers (financial institutions that contract with the merchants) and merchants (retailers, billers and others who accept electronic payment). It is important to point out that neither Visa nor Mastercard are financial institutions, and both companies don’t issue the cards or extend any credits or set rates. Both companies are therefore facing no credit risk as both companies are only providing the network and technology for all four parties to authorize, clear and settle transactions.
(Source: Visa Annual Report)
Visa and Mastercard share not only an extremely successful business model that saw impressive growth rates for many years, but the development of the company’s dividend is also quite similar. Mastercard’s dividend yield is currently 0.48%, while Visa’s dividend yield is a little higher (0.56%), but both stocks have a rather low dividend yield, and the dividend is probably not the reason any investor buys those two stocks. But as both companies also have a rather low payout ratio (about 20% right now), there is a lot of room to increase the dividend (theoretically) and at least in the past decade, the dividend was raised 25% annually for Visa and 36% for Mastercard (on average). And we can also be confident that both companies will be able to increase the dividend at least 10% annually going forward for two different reasons. Both companies can increase the payout ratio, which will lead to a higher dividend yield, and both companies should see at least organic growth in the high single digits for many years to come.
The company was originally founded in 1964 by Phil Knight as “Blue Ribbon Sports” and changed its name to Nike in 1971. Today, the company is the largest seller of athletic footwear in the world – ahead of competitors adidas (OTCQX:ADDYY), Puma (OTCPK:PMMAF) or Under Armour (UAA). The main business activity of Nike is the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. Although most of Nike’s revenue is generated in North America (43% of total revenue) and the EMEA region (27% of total revenue), the company is selling its products in virtually all countries in the world. And especially, China has become an important market for Nike in the recent past. In 2018, the company generated $5.1 billion in revenue in China and could grow sales 21% compared to 2017.
Nike could also increase its dividend for 17 straight years, and over the last 10 years, the dividend increased 13.3% on average annually. Nike has a dividend yield of 0.93% right now, and we can be pretty confident that the company will be able to increase its dividend at least 10% annually in the years to come. Nike has a wide economic moat around its business, which is stemming from two different sources – the brand name on the one side (Nike’s brand name is among the 20 most valuable brand names in the world) and cost advantages created by efficient scale on the other side – and that moat will ensure at least mid-to-high-single digit growth in the years to come, and with the payout ratio being about 35% right now, management also has room to increase the dividend.
Novo Nordisk (NVO)
One company we already included in the last article is Novo Nordisk. While Novo Nordisk was kind of an outsider in the last article, it perfectly fits into this one. Although the payout ratio of 50% is rather high, Novo Nordisk could grow its annual dividend more than 20% every single year during the last decade. And while Novo Nordisk had the lowest dividend yield in the last article, it has almost the highest dividend yield in this list, and we can also be pretty confident Novo Nordisk can continue increasing its dividend more than 10% annually for the foreseeable future.
While many of the above-mentioned companies could increase the dividend by just increasing the payout ratio, this is not really an option for Novo Nordisk (maybe management could go as high as 60% payout ratio). However, Novo Nordisk will be able to grow its business organically at least in the high single digits, and combined with share buybacks, I am pretty confident we will also see dividend hikes of 10% or more in the foreseeable future.
(Source: Novo Nordisk Investor Presentation)
When looking at the past few years, one might get skeptic if Novo Nordisk can really grow earnings per share more than 10% annually as Novo Nordisk certainly had some troubles which led to stagnating revenue for quite some time (earnings per share could still increase due to some other factors like share buybacks). Especially, in the United States, the (political) pressure to lower drug prices and pressure from competitors, as well as the loss of patent protection for some of its major products while new potential blockbuster hadn’t been launched yet, led to stagnating sales. But the last quarterly results show signs of improvement, and especially, 9% revenue growth and 12% operating profit growth compared to the first half of 2018 should make us optimistic that Novo Nordisk can return on its path of growth. And the unique combination of patent-protected products, high levels of innovation, and growing demand for its products due to an increasing number of diabetics and obese people should lead to growth for many more decades and strengthen the wide moat Novo Nordisk already has.
SAP is not only the company with the biggest market capitalization in Germany and therefore the most valuable German company; it is also one of the very few big tech companies Germany has right now and definitely a company with a strong competitive advantage. The company is headquartered in Germany, but has 180 regional offices all over the world and has over 425,000 customers in those 180 countries. SAP is the market leader in enterprise application software, helping companies of all sizes and in all industries to optimize their business. SAP has more than 425,000 businesses and public customers, which use the end-to-end suites of applications and services.
In 2018, SAP generated $5.0 billion in revenue from cloud subscriptions and support revenue and $15.6 billion from software licenses and support revenue. In the past ten years, SAP could increase revenue as well as earnings per share almost 10% annually. While EPS fluctuated a little over time, SAP could increase revenue every single year.
(Source: SAP Investor Relations)
We already mentioned above that Fresenius is the only German dividend aristocrat, and as management of German companies usually doesn’t focus as much on increasing its dividend every single year, SAP can only report annual dividend increases since 2013, while management is paying a dividend since the company’s IPO in 1988. Currently, the dividend yield is 1.3%, but the payout ratio is about 43% right now, and while management could target a payout ratio between 50% and 55%, it shouldn’t go higher for the dividend to be healthy and sustainable. But we can assume that SAP can increase its earnings per share in the mid-to-high-single digits, and dividend hikes of at least 10% annually should be realistic.
Home Depot (HD)
Home Depot is the world’s largest home improvement retailer, and the company is offering a wide assortment of building materials, home improvement products, lawn and garden products as well as décor products. It also provides a number of services, including home improvement installation services and tool and equipment rental. In its about 2,300 stores, Home Depot services two different customer groups – the DIY customers (typically home owners) and professional customers (primarily renovators/remodelers, general contractors, handymen, property managers, building service contractors and specialty tradesmen like electricians, plumbers and painters).
Home Depot is interesting and deserves a spot in this list as the company is one of the few retailers that had been extremely successful in a very challenging environment during the last few years. During the last decade, Home Depot could increase revenue 5.6% every single year, and while gross margin was “only” stable, operating margin could be increased constantly, while the company also decreased the number of outstanding shares in the same time frame. As an end result, earnings per share increased 22.5% annually on average. Although free cash flow could not grow at a similar level as earnings per share, 11% growth on average per year is still impressive.
(Source: Home Depot Investor Presentation)
And as the business performed quite well, Home Depot could also increase its dividend for 10 straight years and could report an average 16.4% annual increase. Right now, we are looking at a dividend yield of 2.32% which is rather high for the companies included in this list and a payout ratio of 42.3%, which is not extremely low, but still enables management to increase the dividend by increasing the payout ratio. When looking at the next few years, Home Depot might very well be able to raise the dividend at least 10% annually as the combination of revenue grows and share buybacks should lead to EPS growth in the high single digits. And aside from organic growth, management still has the option to increase the payout ratio to about 50-55%.
All ten stocks presented above are great companies that should perform quite well over the long term, but not all the stocks mentioned in this article are a good investment at this point. It might pay off to wait another few months before making a purchase as many of these stocks are rather overvalued and when assuming that the stock market might head south over the next few months and quarters, the ten stocks presented above are a really good watchlist. And a decline of 20-30% would make most of these stocks at least fairly valued.
All ten stocks should have the potential to increase the dividend at least 10% annually on average and in most cases, this could be a combination of organic growth as well as the potential to increase the payout ratio. And to be clear: when I state that many of these companies could theoretically increase the payout ratio to about 50%, this doesn’t mean that I expect management to increase the payout ratio at any cost. As long as companies like Mastercard, Visa or Fresenius (for example) see other ways to use the generated cash it absolutely makes sense to keep the payout ratio as low as it is right now. Increasing the payout ratio is just another possibility if growth slows down and a payout ratio of about 50% would probably still be healthy for most of these companies (as capital expenditures are often very low).
If you had to pick some stocks to invest – although I would be very cautious about any major investments right now – it probably would be Fresenius SE or McKesson Corporation as both stocks are trading at very low valuation metrics (in my opinion). Novo Nordisk could also be a good investment even if the stock is not trading as low as it has during the last few years. But it seems like Novo Nordisk is on its way to move higher again, and the risk for a huge drawdown is limited.
A few of the above-mentioned companies - i.e. Novo Nordisk, McKesson - are also among the stocks with a superior business model and a wide economic moat, that I cover in my marketplace service : Moats & Long-Term Investing.
If you want a watch list of wide-moat companies, extensive background information on wide-moats and a chatroom where members can ask questions and exchange opinions, please check out my marketplace.
Disclosure: I am/we are long NVO. 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.