In the dog-eat-dog world of investing, companies that can sustain strong levels of growth for long periods of time give their shareholders some of the best investment returns you'll ever find. When you look back at the top performers of the past decade, you'll inevitably find companies that have defied expectations by growing leaps and bounds, going from unknown niche players to major and sometimes dominant companies in an industry.
On the other hand, the Dow Jones Industrial Average
But that doesn't mean you won't find companies in the Dow that are growing. Let's take a closer look at the Dow's growth stars to see just how important growth is to a Dow stock's prospects.
Sales or earnings?
The first thing you have to decide on is exactly which type of growth you're looking for. Early in a company's existence, looking at revenue growth makes sense because start-up companies often don't have any net income. Their primary goal is to build up business. Later on, though, revenue growth is worthless if it doesn't enhance a company's profits. So looking at net income growth becomes more compelling, giving you a better picture of how a company's stock is likely to grow over time.
That idea is borne out by the Dow's performance. When you look at revenue growth over the past five years, the two companies that rise to the top are Merck
It's easy to put those figures into context at each of those companies. For AT&T, the iPhone has greatly enhanced revenue but at the cost of AT&T's margins. Even when you consider the impact of the T-Mobile merger breakup, the impact on net margins is fairly clear.
For Merck, you can see the same lower-margin trend. As Merck and its peers partner up with companies to serve emerging-market countries like India and China, they increase their revenues substantially. But because they can't earn anything close to the profits they get in the U.S., those revenues result in far less profit than you'd expect.
By contrast, the top growers of net income have seen much better stock performance. Intel
Stick with growth
Growth doesn't always produce good returns. Microsoft, for instance, enjoyed 9% sales growth and 14.5% earnings growth over the past five years, but its stock is up only about 20% during the same period. Sometimes, that just means investors haven't recognized the value in a stock, but it can also indicate a lack of confidence that those growth rates are sustainable.
Even with blue-chip stocks, though, it makes sense to pay attention to growth. Companies that can produce increasing sales and earnings constantly prove to their shareholders that there's potential left in them, and nothing's more important than that in coming up with new, lucrative opportunities.
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