An investor can achieve very attractive returns over the long term by investing in a diverse group of companies that are components of the dividend achievers index.
Dividend achievers for the long haul
In this article, I am highlighting three diverse components of the dividend achievers index that I consider to be among the “best of the best.”
Walgreen Company (NYSE:WAG), operates a network of over 8,500 drugstores located throughout the U.S, consisting of its pharmacy operations and its retail operations, which provide grocery, personal care, household, and beauty products. It also sells products online through drugstore.com, beauty.com, and VisionDirect.com.
Over the last decade, Walgreen Company (NYSE:WAG) has doubled its number of stores. Its current plans are to begin a more moderate level of store growth and to achieve growth in other ways, such as its Take Care Clinic, which offers quality family healthcare at 350 locations across the nation.
A major development in 2012 was a strategic partnership with Alliance Boots. Walgreen Company (NYSE:WAG) acquired a 45% stake in the Swiss-based company, which operates more than 3,000 health and beauty stores in Europe in addition to a growing presence in emerging markets. Alliance Boots also operates a successful pharmaceutical wholesale and distribution division. This partnership should help Walgreen Company (NYSE:WAG) in its efforts to expand globally, particularly if it decides to purchase the remainder of Alliance Boots.
Illinois Tool Works Inc. (NYSE:ITW) is a diversified manufacturing company with global operations that consist of over 800 business units. These business units are divided into eight operating segments, with none of the operating segments contributing more than 14% of total revenue.
Its main form of growth has been through successful acquisitions. It recently acquired Vesta, a Chinese manufacturer of cooking equipment that operates in both developed and emerging markets. Vesta’s products include fryers, griddles, and convection ovens.
Vesta is a great addition to Illinois Tool Works Inc. (NYSE:ITW)’s food-equipment business segment. This segment includes a large number of successful brands such as Hobart, which consists of a wide variety of equipment for the commercial food industry. These items include cooking products, food preparation products, commercial dishwashers, freezers, and pre-pack wrapping systems.
Illinois Tool Works Inc. (NYSE:ITW) has a successful business principal known as the 80/20 business process. This concept has consisted of the company focusing its efforts and innovation on the 20% of customers that provide 80% of revenue. This has been the driving force behind the company’s long-term success.
However, Illinois Tool Works Inc. (NYSE:ITW) has plans to go a step beyond by carefully allocating its future capital expenditures on business segments that are well positioned to deliver significant growth, and to sell the businesses that do not meet its long-term objectives.
A. O. Smith Corporation (NYSE:AOS) is a leading global water technology company that sells a wide variety of residential and commercial water heaters and boilers. In 2011, A. O. Smith Corporation (NYSE:AOS) decided to focus exclusively on its water technology business by selling its electric motor business and making strategic acquisitions to enhance its water technology business.
These acquisitions included Lochinvar, a well-known provider of water heating products, and the North American operations of Takagi’s tank-less water heaters. Tank-less water heaters instantaneously heat water on demand, resulting in energy savings by avoiding the need to constantly heat the volume of water stored in a tank. Takagi’s products have a much smaller footprint than standard water heaters, resulting in much-needed space savings.
The rest of the story
Although there have been some speed bumps along the way, such as the great recession, all three of these companies have a long history of delivering earnings growth. This is vital in order to provide significant, long-term annual dividend increases. The following chart illustrates their financial results over the last decade:
| 2012 revenue | 10-yr share price growth | 10-yr revenue growth | 10-yr earnings growth | 10-yr dividend growth | Dividend yield | Current P/E | Payout ratio | |
| WAG | $71.6billion | 74% | 120% | 81% | 350% | 2.5% | 22.4 | 48% |
| ITW | $17.9 billion | 128% | 89% | 181% | 245% | 2.1% | 13.8 | 28% |
| AOS | $1.94 billion | 311% | 27% | 204% | 140% | 1.2% | 24.9 | 24% |
A decade ago, Walgreen Company (NYSE:WAG)’s dividend yield was 0.6%, Illinois Tool Works Inc. (NYSE:ITW)’s was 1.4%, and A. O. Smith Corporation (NYSE:AOS)’s was 1.9%. However, if an investor would have purchased shares of these companies 10 years ago and held them until today, their effective yield based on the initial purchase price would have been 3.7% for Walgreen, 4.5% for Illinois Tool Works, and 4.6% for A. O. Smith Corporation (NYSE:AOS). This is an example of how your effective yield will grow over time when investing in dividend achiever companies. All four of these companies have relatively low payout ratios, and I anticipate strong future dividend growth from them.
Walgreen Company (NYSE:WAG)’s dividend growth has been excellent, but its 2012 earnings were adversely affected by costs related to its efforts to expand globally. However, these efforts should pay off substantially in upcoming years and as a result, I believe that Walgreen is well positioned for the future.
Illinois Tool Works Inc. (NYSE:ITW) has performed nicely over the last decade and this outstanding performance should continue due to its strategy to focus on its best performing business segments and sell the others. In addition, its stock price is attractive now with a P/E of only 13.8.
A. O. Smith Corporation (NYSE:AOS) is a much smaller company than Walgreen and Illinois Tool Works. As a result it has the potential for higher growth, which is indicated by its higher P/E. Its decision to focus only on water technologies should pay off substantially in the future.
The Foolish summary
Components of the dividend achiever index are growing and reliable shareholder friendly businesses that can significantly reward patient investors over the long term. Walgreen, Illinois Tool Works, and A. O. Smith Corporation (NYSE:AOS) are three excellent dividend achievers that are worthy of being included as part of a diverse, well-managed portfolio.
The article Dividend Achievers for the Long Haul, Part 3 originally appeared on Fool.com and is written by Greg Williamson.
Greg Williamson owns shares of Walgreen Company and Illinois Tool Works. The Motley Fool recommends Illinois Tool Works. Greg is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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