The definition of an awesome income stock can change over time. What does it take to build a truly impressive income stock here in the early days of the 21st century?
We posed that question to a handful of investors here at The Motley Fool, and they came up with some intriguing ideas. Read on to see why Outfront Media (OUT -3.04%), Steelcase (SCS -1.96%), and Anheuser-Busch InBev (BUD 0.29%) make more sense to dividend investors today than ever before.
A beer kingdom built to last
Keith Noonan (Anheuser-Busch InBev): The 21st century is set to play host to an incredible array of changes that will have far-reaching effects on business and day-to-day life, but some things can be counted on to remain the same. The sun will rise in the east and set in the west. Water will freeze below 32 degrees Fahrenheit. People will still drink beer.
Even if reality flips on its head and those first two points somehow change, AB InBev should be in good shape as long as the last one remains constant. Given that people have been drinking beer for thousands of years, the company shouldn't have too much to worry about, and its stranglehold on the industry puts it in position to deliver strong performance over the next century.
Following its merger with SAB Miller last year, AB InBev is estimated to soak up roughly 46% of global beer profits, and the company's long-term outlook looks very promising. While sales volumes have faced headwinds recently due to competition from microbreweries and weakness in some key international markets, the company is likely to see the expansion of the global middle class pave the way to sustainable earnings growth.
The beer giant's stock also offers an attractive returned income component. With a chunky 3.6% yield, a seven-year history of annual dividend increases, and a commitment from management to continue boosting its payout, shares purchased today will likely have an even greater yield down the line.
Bet on billboards
Jordan Wathen (Outfront Media): Outdoor advertising may change in the future, but it isn't going away, and I suspect the business will only get better for the companies who have the best assets. Outfront Media strikes me as a particularly good, high-yield way to play the industry.
Outfront Media operates billboards and transit advertising displays primarily in top-tier cities that include New York, Los Angeles, and Miami. The displays generate revenue on a recurring basis and give Outfront a scale advantage in winning over advertising clients who want to roll out a national advertising campaign.
Long-term contracts are the name of the game. Recently, Outfront announced a 10-year extension with the New York Metropolitan Transit Authority, a deal which cements it as the manager of billboard and display advertising on the city's subway, commuter rail, and bus network. New York City made up nearly 25% of Outfront's total revenue, and 53% of its transit-related revenue, according to a company presentation.
Because Outfront mostly leases its displays, it should be viewed more as an advertising agency than an asset owner. It can expand with little investment capital, and it benefits from a network effect of having the best locations, and therefore, the best clients.
There are risks to the business. Advertising spending declines in recessionary periods. Some outdoor advertising is subject to disruption risk, should cars eventually drive themselves. But Outfront's focus on top-tier assets in congested cities makes it a better bet than peers, and its 6% yield is adequate compensation for the risk, in my view.
Office furniture, cloud computing, and great dividends -- oh, my!
Anders Bylund (Steelcase): The world's largest office furniture manufacturer has all the hallmarks of a terrific dividend stock. Quarterly payouts per share have increased by 42% over the last five years, the dividend policy is fully financed by free cash flows with comfortable headroom for further growth, and the company's dividend history stretches all the way back to 1998. Steelcase's yield is also a generous 3.5% today. This is the stuff that an income investor's dreams are made of.
Furthermore, Steelcase is an innovator with a bright future. The company is building a business for the long haul, and this dividend should stay healthy for decades to come. That's what makes it a great dividend pick today, and more than just a generally rewarding income generator.
There is more to Steelcase than meets the eye. Beyond standard office chairs and adjustable desks, the company also makes scheduling software for the modern workplace, noise-canceling speaker systems, advanced raised floor panels, and meeting room sets specifically designed for video conferencing. Steelcase also offers cloud-based data analysis tools for human resource management. The company collaborates closely with Microsoft to enable "the future of work," and Steelcase is an active member of the Santa Fe Institute's Applied Complexity Network, an elite group of about 30 companies with a deep interest in deep data analysis.
So you get a proven innovator with a fantastic dividend policy, all at a reasonable valuation, as the stock trades at 15 times trailing earnings and 2.3 times the company's book value. And Steelcase is nowhere near as boring as its office furniture focus might suggest.