It's logical, really. Companies can't pay a dividend unless they're profitable; they can't increase the dividend unless profits are growing; and they can't grow profits unless the company has some kind of edge that keeps competitors at bay.
Boring can be beautiful
Fastenal has been in business for over 50 years selling a range of industrial supply products to large and small businesses, contractors, and individuals, primarily in the U.S. The company got its name selling fasteners, but today those products make up only about 35% of annual sales.
The company operates a vast network of 2,290 retail branches, 761 onsite business locations, and 76,000 vending machines scattered throughout the country in medium-sized cities to rural areas. Through these channels, Fastenal makes the majority of its revenue selling the most unexciting but crucial stuff -- bolts, screws, rivets, saw blades, ladders, brooms, tape, glue, and much more.
Sometimes boring makes the best investment. Just feast your eyes on this chart:
Fastenal is one of the most consistently performing companies you'll find, and it still offers a lot of growth potential for investors. Net sales have grown from just $511 million in 1998 to $4.7 billion over the trailing-12-month period. Net income has grown even faster, from $53 million to $681 million over the same period. That's a compound growth rate of 11.4% for sales and 13.3% for net income.
In the second quarter of this year, Fastenal posted impressive growth of 13.1% in sales and 36% in earnings. And there's room for growth as the company estimates North American demand for its products at more than $140 billion.
The steady, predictable nature of its business has allowed Fastenal to increase its dividend 224% over the last 10 years, and it just recently increased its payout 25% to an annual run rate of $1.60 per share, which is a 2.8% dividend yield at the time of this writing.
Fastenal's dividend payout ratio has historically been above 50% of earnings per share, which means there will have to be earnings growth for the dividend to continue increasing. Growth shouldn't be a problem, given that Fastenal has been growing consistently for decades and still has a tiny market share compared to its $140 billion addressable market. It will likely grow for many more years, and that should lead to continued growth in dividends.
An iconic brand that won't be stopped
Historically, Nike has been very good at marketing its brand by signing up top sports stars to wear its products, as well as making deals with universities and professional teams to supply uniforms and other gear. This ability to effectively market its brand has made the swoosh one of the most iconic logos in history.
Nike's powerful brand has consistently cranked out steady growth in revenue and profits over the years. Even as one of the largest retail companies in the world, Nike has managed to double its annual revenue over the last 10 years to $36.4 billion through fiscal 2018 (which ended in May). Over the last five years, earnings per share have grown 78% to $2.39 (adjusted for one-time items).
Nike also regularly increases its dividend, usually every year. The dividend has doubled over the last five years to a current annual payout of $0.80 per share, giving the stock about a 1% yield at current prices. That's only about a third of annual earnings per share, which gives the company plenty of room to keep increasing the payout in the future.
With a huge market that is constantly expanding, particularly in the Greater China region, where Nike just reported 35% year-over-year growth, the athletic-apparel giant should keep pumping out steady growth in revenue and profits, allowing it to steadily grow the dividend for years to come.
A global restaurant empire in the making
Restaurant Brands International (RBI) is a holding company that is gradually assembling a worldwide empire in the fast-food market. RBI is the parent owner of Burger King, Tim Hortons, and Popeye's Louisiana Kitchen, and there will likely be other restaurants added to the roster given that RBI's largest shareholder, 3G Capital, likes to do deals in order to deliver growth for shareholders.
And it's certainly delivering so far. Over the last few years, restaurant-level comparable-store sales growth remained mostly positive even with a recessionary environment in the restaurant industry.
And growth is starting to heat up. In the first quarter, Burger King and Popeye's experienced a surge in comparable sales of 11.3% and 10.9%, respectively -- a much better showing than the year-ago quarter's 6% growth for each restaurant.
The stock is up 80% since the end of 2014. Driving these gains has been a surge of 104% in non-GAAP earnings per share since 2015. The annual dividend has more than quadrupled to $1.80 per share, providing a generous yield of 2.8%.
Like Fastenal, future dividend increases will have to come from earnings growth, since RBI's current payout is about 65% of trailing-12-month net income. Analysts currently expect the company to grow earnings 19% per year over the next five years, or more than double, which could also lead to a proportionate increase in the dividend.
Management sees the global market opportunity for its three restaurant chains several times the company's current size, and they are committed to increasing the dividend over time as earnings grow.
Both income and growth investors should find this payout very appealing, considering the growth RBI has already delivered and the huge growth opportunity management sees in expanding all of its restaurant chains internationally.