3 Double-Digit Dividend Growers to Add to Your Wishlist

These companies offer a great combination of stability, growth and rising dividends.
Author:
Publish date:

As the market keeps reaching new highs almost every month, it’s getting harder to find the “hidden gem.” Finding a company that nobody wants now probably means that its business model is flawed, and you should not consider it either. We all know it; the best deals are found during market crashes.

In the meantime, I’d like to suggest three companies showing annualized double-digit dividend growth rates over the past five years. I could have put Broadcom (AVGO) in this list, but we already covered it last week!

Those companies offer a combination of stability, dividend, and growth.

HOME DEPOT (HD)

Source: Investors presentation May 2021

Source: Investors presentation May 2021

The Company in a Nutshell

  • HD entered the maintenance, repair, and operations sector through its acquisition of Interline Brands.
  • Home Depot is a perfect fit for a dividend growth portfolio.
  • The company has built a semi-bulletproof business model against Amazon and the like.

Business Model

Home Depot is the world's largest home improvement specialty retailer, operating nearly 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which recently expanded through the acquisition of HD Supply. The tie-up with Company Store brought textile exposure to Home Depot's lineup.

Investment Thesis

HD has an impressive sales book with over $140 billion. The company benefited from the past strength in the home improvement market with a high-single digit annualized revenue growth rate over the past 5 years. Interesting enough, it also enjoyed the “stay-at-home” tailwind created by the pandemic. One of the key elements is its online success with double-digit growth over the past 5 years. Its website is amongst the largest e-commerce platforms in the world. In the past decade, HD focused on creating seamless renovation services to invite more homeowners to renovate their houses. The company focused on improving its distribution network, improving profitability at the same time.

Potential Risks

HD seems to have limited space to grow on its own playground with a limited number of new stores opening each year. Interesting enough, the company does the trick each year and still posts continuous revenue growth. One day, it may have to look to the international market for future growth. So far, the pandemic hasn’t affected its sales (quite the opposite), but a long-term economic slowdown will eventually affect their results. The hype around both HD and LOW is propelling their share prices to higher levels. Be careful if HD is a large part of your portfolio. Finally, Amazon is growing fast across several segments. The e-commerce behemoth could affect HD’s sales in some areas.

Dividend Growth Perspective

HD has been successfully increasing its payout since 2010. While it is still a “recent” player in its market, HD should seriously hit dividend growth investors radar considering its “pandemic proof” nature. With low payout and cash payout ratios, HD can go through several challenges and keep a dividend growth policy alive. The latest dividend increase (from $1.36 to $1.50) proves that HD is committed to rewarding its shareholders. Just don’t expect the same thing each year. Going forward, we expect a mid-single digit dividend growth rate with a few more generous surprises along the way.

A.O. SMITH (AOS)

Source: Analysts presentation April 2021

Source: Analysts presentation April 2021

The Company in a Nutshell

  • AOS dominates the market for water heaters in both the U.S. and Chinese markets.
  • The company shows several growth vectors going forward.
  • The stock looks expensive, but the potential is still there.

Business Model

A.O. Smith Corporation manufactures and markets comprehensive lines of residential and commercial gas, gas tankless, and electric water heaters. Supplementary products include water heating equipment, condensing and noncondensing boilers, and water system tanks. The company's two operating segments are by geographic region: North America (majority of total revenue) and the Rest of the World. A material portion of sales in North America derive from replacing existing products, and the company utilizes a wholesale distribution channel and multiple selling locations. The Rest of the World segment sells primarily to Asian countries and operates sales offices to expand distribution and market its product portfolio.

Investment Thesis

Besides being a leader in its market, AOS shows several growth vectors. The company has used its strong North American position to expand through emerging markets where water heaters & boilers have a growing demand. AOS also sells reverse osmosis water treatment products. As technology evolves, reverse osmosis seems like the most efficient and preferred way to treat heavy metals in water. China, India, and other water treatment segments represent 36% of sales and are their fastest growing opportunities. AOS is also seeing additional growth from stimulus checks and renovation incentives in North America. The housing market is healthy, and demand should remain robust with low interest rates. Finally, we like how AOS keeps growing while paying down its long-term debt (from $450M in 2017 to $106M in 2021).

Potential Risks

Some headwinds are coming. The rise of raw material costs (such as steel) is affecting AOS’s profitability. Margins are thin in the “Rest of World” segment, showing roughly a 10% difference from North American margins. This has been a recurrent problem in recent years, and AOS’s earnings might not grow as fast as they have historically. While sales are now back in growth mode in Asia, we saw how tariffs could hurt AOS’ business. Finally, while AOS enjoys strong momentum since the second half of 2020, the stock price may now look pricey. Your investment in AOS could be subject to short-term fluctuations.

Dividend Growth Perspective

AOS has increased its dividend for the past 14 consecutive years (since 2006). It shows great dividend growth but a low yield. The company is clearly focusing on R&D and growing its markets. With a payout ratio under 40%, the money is not going to shareholders currently. Management thinks it can offer stronger share value appreciation than simply paying out a generous yield. After reviewing its growth vectors, I tend to agree. Nonetheless, AOS has increased its dividend by 8% for Q3 2020. You can count on this company even during difficult times.

A.O. Smith

A.O. Smith

AIR PRODUCTS & CHEMICALS (APD)

Source: Q1 2021 presentation

Source: Q1 2021 presentation

The Company in a Nutshell

  • APD is the largest supplier of hydrogen and helium in the world. It has several on-site facilities.
  • It serves multiple customers and various industries. Switching costs are considerable for its customers.
  • While many companies in the basic materials sector are stuck selling commodities, APD sells expertise, stability and technology.

Business Model

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in several industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 2020.

Investment Thesis

APD has found an interesting way to position its business in a sector where most are stuck with commodity price fluctuations. By providing industrial gases, APD signs long-term contracts with its customers. Industrial customers are more interested in stability and reliability than costs since gases are a small part of their expenses but are vital for their business. ADP has made a smart move in acquiring Shell’s and GE’s gasification businesses in 2018. The company became a leader in this field and has opened doors to expand its business in China and India. Finally, APD as an ambitious growth plan in motion including total capital expenditure of $18B. Those investments should support APD’s internal growth for the decade to come.

Potential Risks

While the APD core business is protected with long-term contracts, the business’s growth is still linked to the economic cycle. As an industrial gas supplier, APD sales will directly be contingent on demand. It looks like we are getting away from the current recession, but keep in mind that demand will remain cyclical. APD is not the only company who made important acquisitions recently. Air Liquide bought Airgas in 2016 (market cap of $78B) and the Praxair-Linde merger in 2018 (market cap of over $130B) are two of the giants with which APD must compete. Competition will be fierce to grab market share. This usually comes with a price war leading to smaller margins. While APD has great hope of expanding its business through emerging markets, other players have the same plan. This will not be a walk in the park.

Dividend Growth Perspective

Air Products & Chemicals

Air Products & Chemicals

Air Products & Chemicals shows a stellar dividend streak that started back in 1982. While the APD price more than doubled between 2016 and 2020, its dividend increased from $0.81/share to $1.34/share (+65%). In 2021, the company rewarded shareholders with another 12% increase (to $1.50/share). That’s enough to forgive the low yield of 2%. With both payout and cash payout ratios between 50% and 60%, shareholders can expect more dividend growth in the coming years. There is no doubt APD is shooting for the Dividend King title in 11 years.

Should you care about low yield, high growth stocks?

I know this article may have disappointed you if you were looking for high-yielding stocks. Most double-digit dividend growers aren’t offering yields above 3%. There is a reason for it; investors want to add them to their portfolios. With a strong demand comes a higher price. Over the long run, strong dividend growers like HD, AOS, and APD have great chances to do well. After all, the generous dividend increase is a testimonial of management’s confidence in the future.

Cheers,

Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? Download my free DSR Recession-Proof workbook and make sure you don’t suffer during the next market crash.

Follow me on

Twitter @TheDividendGuy

Youtube

Podcast