There are thousands of listed companies, but the stock market is rooted in large, established businesses. They can anchor your portfolio, too. Many of these businesses have reliable sources of income and control the factors within reach. This allows them to return the value of the shareholders through short-term share buy-backs or long-term dividend flows. And it can go a long way towards helping you build wealth.
We recently asked three Motley Fool contributors for a leading Dividend Aristocrat on their radars. Here is why they chose energy major Air Products & Chemicals (NYSE: APD) water and hygiene conglomerate Ecolab (NYSE: ECL) and spice and Taste House McCormick (NYSE: MKC) .
Hydrogen, helium and cash flow
Maxx Chat shoes (Air Products & Chemicals): They are easy to overlook, but industrial gases drive much of the goods and services that make everyday life possible, from scientific research at universities to massive silicon wafer factories. . Extracting, treating, compressing and carrying all of these gases – either carbon dioxide and oxygen or more exotic gases such as xenon and krypton – requires a special type of expertise. Air Products & Chemicals is too happy to serve that niche.
$ 50 billion supplier of gases and equipment has been on an impressive line lately. In the third quarter of 2019, the company delivered record-breaking earnings per share. In the nine months ended June 30, it reported flat income over the previous year, but managed to increase revenues above 7% to $ 1.54 billion over that period. It enjoyed a significant increase in gross margin and managed to reduce sales and administration costs. In fact, profits could be even higher if not for $ 54 million in one-off costs related to plant closure and cost reductions.
While headwinds and a strong US dollar have been burdening the business on a regular basis over the past few years, investors have been happy with the overall path. It has aggressively pursued and won new contracts without jeopardizing its long-term financial goals, benefiting from the ongoing global helium deficiency and gaining new production capacity to meet customer needs.
The company increased its research and development investments almost 14% in the past year. It is also aggressively pursuing hydrogen infrastructure to fill fuel on ground vehicles, which may not pan, but you cannot delay the business to try.
Most important of all, investors will find comfort in the company's long-term results beating the return on S&P 500 when dividends are included. Shares of air products and chemicals can yield only 2%, but as dividends Aristocrat has increased payout annually for over 25 years in a row. Investors with a long-term mindset may want to see it closer.
Slow and steady wins the race
Brian Feroldi (Ecolab): Ecolab is a steady business that I have long admired. The company sells a number of sanitary and cleaning solutions to a diverse customer base. This may not be an exciting business, but it is very predictable since customers must always maintain basic cleanliness requirements to keep their employees and customers healthy. This fact allows Ecolab to generate a steady revenue and profit growth, which Wall Street has rewarded with an ever-increasing share price.
So how can Ecolab keep these trends intact? The management has many levers that they can pull to ensure that everything continues to move in the right direction.
First, the company has a long history of investing in research and development to help launch new products. Second, management uses its financial strength to buy complementary businesses. Third, Ecolab pushes through modest price increases. Fourth, management deletes operational efficiency to improve margins. Finally, steady stock repurchase helps lower the number over time.
Wall Street believes these low-risk strategies will enable profitable growth of over 13% annually over the next five years. It is an impressive figure for a mature business. Net income growth should allow it to continue its long history of raising dividends as well. The payout has grown every year since 1986, which easily qualifies it as a dividend aristocrat.
The stock is not an incredibly good buy right now – stocks are trading about 30 times next year's earnings estimates – but I think Ecolab is such a high quality business that investors can still earn good returns from them even though they have to pay a premium to get in.
Seasoned but Stable
Demitri Kalogeropoulos (McCormick): Thanks to a long period of growing income, Americans now spend more on food at restaurants than they are at food that they preparing for home. The long-term trend has hurt many specialized food packers, but not the spice and flavoring giant McCormick. In fact, the company had double-digit sales growth and increasing profitability in the last fiscal year.
Sure, most of these gains came from McCormick's recent acquisition of new brands such as French spices and Frank's hot sauces. But the yield giant, which owns dozens of spices, herbs, spices and flavorings, still grows the industry with its core brands.
McCormick is aiming for organic sales growth of around 5% each year, and is in pace of modest underperformance with that target in 2019. However, managers are predicting faster gains ahead, partly to aggressive marketing spending this year.
Meanwhile, income investors can expect greater dividend increases given McCormick's growing profit margin and falling debt burden. These financial gains put the company up for many more dividend increases in the period beyond 2018, which marked this dividend Aristokrats 33th year in a row with annual raises.