The best predictor of a big dividend increase is robust earnings growth.
With that in mind, let's take a look at a few dividend payers -- Nucor (NUE +1.30%), Carnival (CCL +3.64%), and Waste Management (WM +0.97%) -- enjoying unusually strong profit growth right now that could fund sharp payout growth for shareholders in 2018 and beyond.
Steel is on a cyclical upturn
Nucor's profits are surging thanks mainly to a sharp rebound in steel prices. In fact, net earnings have more than doubled over the past six months to $680 million. The improvement has pushed the steel specialist's payout ratio back into comfortable territory, with the dividend taking up less than 50% of earnings.
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Yes, Nucor raised its dividend by just 1% in 2016. But that meager boost had a lot to do with the aggressive capital moves it made during the year as it spent a combined $1.2 billion on acquisitions aimed at expanding into the pipe and tube market and upgrading existing mills.
Those initiatives put the company in a stronger market position and are already accelerating sales and profit growth. Countering those positive trends, though, is the fact that steel imports are adding pricing pressure. They're up significantly during the first half of 2017, compared to a 15% decline for the full 2016 year. Still, consensus estimates peg Nucor's profit growth at over 80% in 2017, which should give the Dividend Aristocrat plenty of room to boost its payout next year.
Cruising toward higher dividends
It's a good time to be in the cruise business. In late June, Carnival raised its 2017 growth outlook for the second straight time and now sees sales rising 3.5%, up significantly from the 2.5% target it had initially forecast. In addition, vacationers are paying higher prices for their tickets while also spending more while on board. Those wins are a testament to the company's success at managing inventory while delivering the type of cruise experiences that generate profitable repeat business.
Image source: Getty Images.
Fuel costs are rising, and Carnival is also exposed to foreign currency moves. Together, these items should shave a bit off profits this year. Still, the company generated nearly $3 billion of operating cash over the past six months to easily cover the $507 million it paid out in dividends. That financial strength, and the healthy booking trends that extend out over the next few quarters should put the business in a position to reward shareholders with another double-digit dividend boost in 2018.
Turning trash into cash
Waste Management is on track to boost earnings by double digits this year thanks to sharply improving operating trends. Revenue jumped 7% in the second quarter as the company benefited from rising prices and healthy volume growth. The increases helped Waste Management achieve record free cash flow and its best performance yet in adjusted earnings. "We are hitting on all cylinders right now," CEO Jim Fish told investors in late July, "with the cash generating strength of our business shining brightly in 2017."
Fish and his team expect free cash flow to stop at between $1.5 billion and $1.6 billion for the full year, which is on par with the prior year. Profit will likely be at the top of their target, at about $3.18 per share.
Waste Management tends to return about half of its free cash flow to shareholders in dividends, so improvements in that metric will determine just how quickly its payout rises in the years ahead. Given the steady annual cash generation outlook, I'd expect a smaller but still solid raise from the company next year -- something closer to the 4% boost it gave investors in 2016 than the double-digit spike that Nucor and Carnival should be able to afford.
