Investing in dividend growth companies is not about simply extrapolating past dividend growth into the future. Investors need to understand the fundamentals behind each business in order to select companies that can effectively increase distributions in the long term. Tiffany (TIF), Ralph Lauren (RL 2.21%) and Coach (TPR -0.76%) are three high-end brands with superior pricing power generating strong cash flow for shareholders.
Tiffany's shining dividends
Tiffany stands out as arguably the most respected and well regarded jewelry and accessories brand in the world. Brand recognition, retail locations, and exclusive designs provide superior pricing power for Tiffany in a fragmented industry in which most of its competitors are smaller and don't have the same level of differentiation.
The company has expanded its store base internationally over the last several years, and strong comparable-store sales are proving that store growth is not cannibalizing sales at previously existing locations. This is a healthy sign when it comes to evaluating demand and potential for growth.
Asia is looking like a particularly promising market for the company: Sales in the Asia-Pacific region increased by a whopping 27% year over year to $238 million during the last quarter. A big increase of 22% in comparable-store sales in the region was the main reason for the jump.
Tiffany has increased its dividends 12 times in the last 11 years and distributions have doubled though the last five years. This high-end jeweler pays a 1.5% dividend yield and the payout ratio of 36% provides plenty of room for further increases, especially if the company can sustain momentum in emerging markets.
Ralph Lauren is not wasting any time
Ralph Lauren has built a global portfolio of recognized high-end clothing and accessories brands centered on its founder, chairman, and CEO Ralph Lauren. The company's pricing power allows it to generate operating margins in the area of 15% at the operating level versus an industry average near 9.8%, according to data from Morningstar.
The company has recently taken direct control of its operations in Asia from its licensee in order to better capitalize opportunities for growth in countries like China and India. With a relatively small store base of 416 directly operated stores and 523 concession shops across the globe, the company still has plenty of room for expansion.
Ralph Lauren was paying a $0.05-per-share dividend in the third quarter of 2009, but the company did not waste any time in distributing its growing cash flows to shareholders through the years. After several increases, including a 12.5% dividend hike announced in the last earnings report, the company has now multiplied its dividends to $0.45 quarterly per share.
The company has a conservative payout ratio in the area of 20% of earnings and a pristine balance sheet with nearly $830 million in net cash. It pays a 1% dividend.
Coach for bargain hunters
Coach has been a remarkably successful brand operating in the "affordable luxury" pricing point in the handbags and accessories business. However, growth has slowed down in North America recently, so the stock has been basically flat through the bull market during the last 12 months.
During the last quarter, total sales in North America decreased by 1% versus the prior year, but international revenues increased by 9% when measured in constant currency. China remains particularly strong for the company, with total sales up more than 35% and comparable-store sales rising "at a double-digit rate" in the third quarter of 2013.
The company is implementing managerial changes in order to reinvigorate the brand and accelerate growth. Victor Luis, former head of international operations, is taking the reins as CEO, and Stuart Vevers -- who has had a successful career at Loewe, Mulberry and Calvin Klein, among others -- was appointed as new creative director in June of this year.
Coach remains a widely profitable company with operating margins near 30% of sales and generating over $1.1 billion in free cash flow over the last 12 months. The company has multiplied its dividends from $0.075 per share in 2009 to $0.3374 per share in 2013; this represents a 12.5% increase versus 2012 levels. Coach has a safe payout ratio of 35% and pays a juicy dividend of 2.5%.
Bottom line
Dividend growth investing is one of the most proven long-term strategies for superior returns. Tiffany, Ralph Lauren, and Coach are generating the cash flows for growing distributions thanks to their differentiated brands and superior pricing power. The three companies have what it takes to continue raising dividends for years to come.
