2023-05-08 18:00:00 ET
Summary
- Investing in dividend growth companies that have strong competitive advantages and an enormous financial health, can provide you with excellent investment results over the long term.
- In today’s article, I will introduce you to two dividend growth companies that I consider to be appealing for investors due to a wide variety of factors.
- Both picks have shown high Dividend Growth Rates over recent years, and I expect them both to continue their growth story.
Investment Thesis
From my point of view, companies that provide you with an attractive Dividend Growth Rate are of high importance for any investment portfolio. This is because they can contribute to significantly increasing the additional amount of extra income you receive via Dividends.
In order to enjoy the enormous benefits that dividend growth companies can provide your investment portfolio with, you should carefully select the companies: only those with strong competitive advantages will survive over the long term and contribute to help you benefit from the complete potential of dividend enhancements in the long run.
In order to help you identify attractive dividend growth companies, in today’s article, I have selected two companies that have strong competitive advantages and an enormous financial health. In addition, they have also shown an attractive Dividend Growth Rate within the past years.
To be part of a pre-selection of attractive dividend growth stocks, the companies need to meet the following requirements:
- Market Capitalization > $10B
- Dividend Yield [FWD] > 0%
- Average Dividend Growth Rate over the past 5 years > 5%
- Payout Ratio < 60%
- P/E [FWD] Ratio < 50
- EBIT Margin [TTM] or Net Income Margin [TTM] > 5%
- Return on Equity > 5%
These are the two dividend growth companies that I consider to be particularly attractive at this moment in time:
Visa
Based in San Francisco, Visa is a worldwide operating payments technology company. The company was founded in 1958 and has 26,500 employees.
Among Visa’s competitive advantages are its strong brand image, its broad network within the Transaction & Payment Processing Services Industry, and its continuous focus on innovation. In addition to that, it can be highlighted that its globally accepted credit and debit cards contribute to the company having an economic moat over competitors.
In recent years, Visa has shown impressive results when it comes to Dividend Growth: the company’s Dividend Growth Rate 5Y [CAGR] stands at 17.55%, which lies 120.51% above the Sector Median. Its Dividend Growth Rate [CAGR] over the past 10 years is at 19.62%, being 141.84% above the Sector Median.
I believe that Visa’s strong competitive advantages and its enormous financial health will contribute to the company continuing to show excellent results in terms of Dividend Growth in the years ahead. The company’s EPS Diluted Growth Rate [FWD] of 18.21% underlines my theory.
Projection Of Visa’s Dividend And Yield On Cost
Visa has shown a Dividend Growth Rate [CAGR] of 14.47% over the past 3 years. The graphic below illustrates a projection of the company’s Dividend and Yield on Cost when assuming that it was able to raise its Dividend by 12% over the next 30 years.
If you were to invest in the company at its current stock price of $225.98, you could potentially achieve a Yield on Cost of 2.47% in 2033, 7.68% in 2043, and 23.86% in 2053.
Visa’s Current Valuation
I believe that Visa currently has an appealing Valuation. My opinion is based on the fact that the company’s P/E [FWD] Ratio of 27.39 stands 15.37% below its Average from over the past 5 years (32.37). Furthermore, its Price / Sales [FWD] Ratio of 14.28 currently stands 13.07% below its Average over the same time period (16.43). This helps to reinforce my theory that Visa is undervalued at its current price level.
This is also confirmed when considering the company’s Price / Cash Flow [FWD] Ratio of 24.71, which lies 15.85% below its Average over the past 5 years.
When comparing Visa to its peer group, it can further be stated that the company’s Valuation is below competitors such as Mastercard ( MA ) (P/E [FWD] Ratio of 31.18) or Adyen N.V. ( ADYEY ) ( ADYYF ) (70.71).
Visa’s Valuation is above the one of competitors such as PayPal ( PYPL ) (P/E [FWD] Ratio of 21.48) or Fiserv ( FISV ) (25.41). However, I believe that Visa should be rated with a significant premium when compared to competitors such as PayPal, Fiserv or Adyen, due to the company’s higher Profitability, its significantly higher brand value and its broad network effects. Therefore, I consider Visa’s current Valuation to be particularly attractive at this moment in time.
This is also confirmed when comparing the company’s Valuation to Apple ( AAPL ), as Visa competes to some degree with Apple Pay within the Mobile Payment area: Visa’s P/E [FWD] Ratio of 27.39 stands slightly below the one of Apple (P/E [FWD] Ratio of 28.24), providing us with further evidence that Visa’s Valuation is appealing for investors at this moment in time.
Visa’s Valuation in comparison to Apple is even more attractive when considering that its growth rates are above the one of Apple: while Visa has a Revenue Growth Rate [FWD] of 14.03%, Apple’s is 4.13%.
BlackRock
BlackRock was founded in 1988 and is based in New York. As the world’s largest asset manager (the company currently has $9.1T in total assets under management ((AUM))), BlackRock disposes of strong competitive advantages over its competitors: among these competitive advantages are its broad and diversified product portfolio, the company’s strong brand image and its global presence as well as its broad distribution network.
What makes BlackRock extremely attractive for investors from my point of view is its ability to pay shareholders a relatively high Dividend Yield while providing them with Dividend Growth. At this moment in time, the company pays a Dividend Yield [FWD] of 3.07% while it has shown a Dividend Growth Rate [CAGR] of 13.60% over the past 5 years.
These metrics not only show that BlackRock is attractive for dividend income and dividend growth investors; they also indicate that the company is attractive for investors seeking companies that pay a relatively high and reliable Dividend, while being able to increase this amount annually to a significant amount.
Projection Of BlackRock’s Dividend And Yield On Cost
BlackRock’s Dividend Growth Rate [CAGR] over the past 3 years has been 13.23%. The graphic that you can find below, demonstrates a projection of the company’s Dividend and Yield on Cost when assuming that it was able to raise its Dividend by 8% on Average over the following 30 years.
Investing in the company at its current stock price of $642.41 means that you could potentially reach a Yield on Cost of 6.72% in 2033, 14.51% in 2043, and 31.33% in 2053. At the same time, it implies that you could reach an Accumulated Yield on Cost of 105.07% in 2039. This signifies that you could receive your initial investment back in the form of dividends by 2039 (no withholding taxes have been included in this calculation).
BlackRock’s Profitability
BlackRock stands out for its enormous Profitability: its EBIT Margin [TTM] is 35.32%, which lies 59.68% above the Sector Median of 22.12%. The company’s Return on Equity of 13.02% stands 17.53% above the Sector Median, further demonstrating its strength when it comes to Profitability.
In addition to that, it can be highlighted that BlackRock’s Return on Capital [TTM] of 8.06% is 60.92% higher than the Sector Median, which, once again, confirms the company’s enormous financial health.
In terms of Profitability, I see BlackRock as being in front of most of its competitors: my opinion is confirmed when comparing the company’s Return on Equity of 12.86% with the one of competitors such as Northern Trust Corporation ( NTRS ) (Return on Equity of 11.14%), State Street Corporation ( STT ) (10.67%), and Gladstone Investment ( GAIN ) (10.70%). However, Charles Schwab’s ( SCHW ) Return on Equity of 17.50% is slightly above that of BlackRock.
In addition to the company’s strong Profitability, I see BlackRock as being on track in terms of Growth: my statement is underlined by its Average EPS Diluted Growth Rate [FWD] of 9.57% over the past 5 years.
BlackRock’s Total Return Within The Past 12-Month Period
BlackRock’s solid position within its industry and its resistant to crisis is also reflected in the Total Return the company has delivered within the past 12-month period: while BlackRock has shown a Total Return of 4.76% in the past 12 months, Charles Schwab’s Total Return has been -30.01% over the same time period, Northern Trust Corporation’s -28.38%, State Street Corporation’s 2.17% and Gladstone Investment’s -5.75%.
BlackRock’s Current Valuation
I consider BlackRock to be currently fairly valued. My opinion is based on the fact that the company’s P/E [FWD] Ratio of 18.96 stands 1.15% below its Average over the past 5 years (19.18). The company’s Price / Sales [FWD] Ratio of 5.37 also lies slightly below its Average over the past 5 years (5.64), thus strengthening my theory that BlackRock is at least fairly valued.
Another indicator that suggests the company is at least fairly valued is the fact that its current Dividend Yield [TTM] of 3.01% stands 21.82% above its Average over the past 5 years (which is 2.47%).
Conclusion
Dividend growth companies can help you to achieve excellent investment results when investing with a long-time horizon: you can benefit enormously from significantly growing dividends over the long term.
In this article, I have introduced you to two dividend growth companies that I believe are excellent choices to invest in while having a long-investment horizon: both Visa and BlackRock have strong competitive advantages, are financially extremely healthy, and have shown significant Dividend Growth within the past years.
BlackRock has shown a Dividend Growth Rate [CAGR] of 13.60% over the past 5 years, while Visa’s is at 17.55%.
In addition to that, both companies have a relatively low Payout Ratio: while BlackRock’s Payout Ratio is at 58.16%, Visa’s is 21.09%. Furthermore, both companies have demonstrated a long history of Dividend Growth: BlackRock has shown 13 Consecutive Years of Dividend Growth, and Visa has shown 14.
Investing in dividend growth companies such as Visa and BlackRock can help you to achieve outstanding investment results over the long term and avoid the risks of short-term speculations.
Author’s Note: I would appreciate your opinion on this article! If you could only choose two dividend growth companies for this month of May, which would you select?
For further details see:
If I Could Only Buy 2 Dividend Growth Companies In May 2023