I like firms that have a history of rewarding shareholders through cash dividend payments in addition to having an attractive price appreciation potential. Given the S&P 500’s 2.1% average dividend yield, I focused on companies that offer yields above 3%. Besides this, the three companies below offer the following characteristics:
- Positive free cash flow (FCF) per share
- Positive one-year sales growth
- Sales coverage ratio of at least 100%
- Positive operating income
- Positive one- and three-year dividend growth rates
A king in the tobacco business
Even when the owner of the Malboro brand outside the US expects European Union volumes to decline around 6% year-over-year (yoy) in 2013, pricing has remained stronger than usual (+10% in the first quarter) and the company’s prospects for Asia (ex-Philippines) remain good. Philip Morris International Inc. (NYSE:PM) reported market share gains in Indonesia, Turkey and Ukraine and stable share in Russia.
Even when Philip Morris International Inc. (NYSE:PM) trades at premium to tobacco peers, the company has best-in-class fundamentals: attractive growth prospects in Asia, price-leadership in the majority of the markets where it competes and superior returns on invested capital (60%). Philip Morris International Inc. (NYSE:PM) trades at a 16.5 P/E and a price to operating cash flow ratio of 15.
The toy business is not a kid’s game
The owner of the Barbie brand has an unparalleled distribution network and is growing fast in emerging markets (Brazil just became the company’s largest market after the US) while ameliorating margins across the board thanks to its cost-cutting initiatives (Mattel, Inc. (NASDAQ:MAT) has been saving +$180 million yoy through its cost savings initiatives).
Good management can be seen at the company’s results. Earnings per share (EPS) have grown by 83% yoy while the company’s top-line grows at a 7% yoy rate.
Trading at 15 times 2013 earnings and with a 182% dividend coverage ratio, Mattel, Inc. (NASDAQ:MAT) is a company you should keep on your watchlist as disposable income grows in emerging markets and as US consumers recover from the Great Recession.
Kings of the private equity business
Generally, I do not like to own asset management businesses. That said, I think that KKR & Co. L.P. (NYSE:KKR), usually known as KKR & Co. L.P. (NYSE:KKR), is not only becoming a sustainable company, but it is also trading at a very reasonable level. Hence, you should keep it on your watchlist.
Compared to its peers, KKR & Co. L.P. (NYSE:KKR) has historically been the pure private equity (PE) company. As for last year, 75% of fee income and 96% of carry income came from PE as opposed to public market businesses (compared to 24% and 28% for The Blackstone Group L.P. (NYSE:BX) ). This makes KKR a more stable long-term cash flow generator since assets under management (AUM) are more stable at PE firms than at asset management firms that operate in public markets only.
Besides, KKR & Co. L.P. (NYSE:KKR) has $7.1 billion in capital – more than any of its peers, most of which are significantly larger in terms of total AUM and revenues. This strong balance sheet gives KKR & Co. L.P. (NYSE:KKR) shares support for difficult times as well as unparalleled flexibility to commit capital.
All of the above being said, KKR & Co. L.P. (NYSE:KKR) is diversifying itself into public markets. Since investor’s day in 2011, non-PE AUM soared from $16 billion to $32 billion and management fees went up from $61 million to $128 million.
For 2013, most analysts expect about $2 in distributable earnings and $1.47 in distributions. Moreover, I think the company has the tools to boost distributable earnings by 25% for 2014.
Trading at 7.7 times 2013 earnings and paying a 5.5% cash dividend yield, I like KKR & Co. L.P. (NYSE:KKR). The company’s substantial balance sheet should keep on growing and providing the firm with the funds to fuel both organic growth initiatives as well as income to shareholders.
Bottom line
The three companies named above are all sustainable dividend payers that have been growing their dividends at high rates for the last three years. I believe that, in most cases, growing cash dividends indicate the management’s commitment to deliver value to shareholders.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Mattel. The Motley Fool owns shares of Philip Morris International. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Top 3 Dividend Growers originally appeared on Fool.com is written by Federico Zaldua.
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