Sustainability Pays: 3 Green Companies Making Money

Photo: Flickr user Kevin Dooley.

We often imagine that for companies, there's a trade-off between being profitable and being green. We assume that maximum profitability is achieved by ignoring the environment and that green companies have to settle for mediocre performance while doing right. That's all wrong, though. A glance at Newsweek's 2014 list of the greenest companies includes plenty of strong performers, suggesting that sustainability pays.

Check out the top 10:

Source: Newsweek, Morningstar. 

All 10 green companies had 10-year performances that topped the S&P 500. Clearly, they're not suffering too much while engaging in environmentally friendly practices. Their track records certainly support the notion that sustainability pays.

Let's take a closer look at a handful of these companies to get an idea of what makes them green and to roughly assess their attractiveness as investments.

Cardinal Health
Cardinal Health (CAH 0.16%) offers pharmaceutical and medical products and services to healthcare companies around the world, helping them improve efficiency and profitability. It has been growing its own profit margins in recent years, along with its free cash flow, which tops $2.2 billion annually. In its own words, "Cardinal Health sustainability initiatives focus on pollution prevention, energy efficiency, waste reduction, and designing products, packaging and services to be environmentally friendly." Its surgical gloves, for example, are sold in half-fold packaging: The dispenser boxes require at least 15% less cardboard and take up at least 30% less room, and the individual pouches are at least 48% smaller than alternatives. About 95% of the glove-wrapping material is made from recyclable and renewable sources.

Cardinal's stock valuation is appealing, with both its recent and forward-looking P/E ratios (22 and 18, respectively) below the five-year average of 23. One potential business catalyst, however grim, is the Ebola outbreak, which is requiring lots of protective gear. Cardinal is also partnering with CVS Health to boost both companies' positions in generic drugs.

Biogen Idec
Biogen Idec (BIIB 4.56%) is also intriguing, with a P/E ratio of 32 well above its five-year average of 23 and a forward P/E of 19 well below the average. The discrepancy is due to expectations of rapid growth -- to the tune of 40% over the next year. Its past growth has been impressive, with revenue doubling over the past six years and net income growing almost 10-fold over the past eight years. The company is a leader in treating multiple sclerosis, with drugs such as Avonex, Tecfidera, and Tysabri. Its free cash flow of more than $2.3 billion gives it the flexibility to add to its pipeline.

Regarding sustainability, the company itself explains:

Our strategic approach to environmental sustainability focuses on three key areas: water, energy and materials. In 2009, we set a long-term goal of reducing our overall environmental footprint by 15 percent by 2015, compared to 2006 levels. We reached our 2015 goals in 2012, reducing our environmental footprint by 18 percent, and have established bold new goals for 2020. 

Allergan
Allergan (NYSE: AGN) is yet another green company in the broad healthcare arena. This specialty pharmaceutical company, whose product stable includes Botox, is currently the subject of much activist-investor attention, with some demanding that it merge with Valeant Pharmaceuticals to create a large company specializing in eye- and skin-care drugs. As my colleague George Budwell has pointed out, buyout speculation has sent the shares skyrocketing, but Allergan itself isn't in favor of a combination, as it expects to grow plenty fast on its own.

Sustainability-wise, like many companies, Allergan posts a lot of goals and results on its website, noting, for example, that between 2012 and 2013, it reduced energy use by 2.3% and reduced hazardous waste by 12%. In addition, "Allergan increased its recycling rate from 29% in 1995 to 76% in 2013." Not every metric measured was positive, but the company is clearly paying attention to its performance and aiming to improve.