Beating the S&P 500 index by 30% and 19% year to date, respectively, Kroger (KR 0.11%) and Union Pacific (UNP -0.36%) prove that boring businesses can generate strong outperformance, especially in more volatile times.
Furthermore, a $1,000 allocation between these two stocks would earn you around $16 annually -- and the likelihood of growth beyond that amount. With at least 15 consecutive years of dividend increases and double-digit dividend growth rates, these two companies offer valuable shelter in economic storms.
While supermarket chain Kroger may not immediately elicit thoughts of market-smashing returns, its track record over the past decade speaks for itself.
Even recently, despite the S&P 500's drop of roughly 7% to start 2022, Kroger's stock price jumped 10% thanks to robust results. For the fourth quarter (ended January 29, 2022), same-store sales -- not including fuel sales -- rose 4%, leading to free cash flow of $1.5 billion compared to $540 million in the year-ago period. For the year, the grocer generated nearly $3.9 billion in free cash flow, down slightly from $4.2 billion in 2020.
Kroger's digital, pickup, and delivery options continue to fire on all cylinders despite tough comparisons to the year-ago period which was filled with various lockdowns. While digital sales declined 3% from 2020 to 2021, customer retention has remained solid, considering life has returned to a somewhat normal state. Moreover, the latter of half of 2021 showed renewed strength with pickup and delivery services rising 25% from Q3 to Q4.
Perhaps most importantly for investors, Kroger is masterful at returning cash to shareholders. Consider the following two charts:
By cutting its total shares outstanding by nearly one-third over the past decade, Kroger has grown free cash flow per share to almost $5 -- a healthy figure considering its roughly $55 stock price and $40 billion market capitalization.
And thanks to this immense cash generation, the company is able to fund a 1.5% dividend yield with a payout ratio of only 22%. (That's the the portion of net income a firm pays to its stockholders in dividends.) Anytime a dividend-paying company can keep its payout ratio below 50%, it catches my attention as it highlights its ability to continue increasing payments in the future.
Today, Kroger trades at a modest 12 times free cash flow while offering inflation protection through its essential products. And thanks to its consistency of shareholder return, 15-year streak of dividend increases, and a budding digital ecosystem, Kroger is not just a prime all-weather stock for inflationary times but a candidate to continue outpacing the market.
Like Kroger, U.S. railroad behemoth Union Pacific continues to shine in times of high inflation and supply-chain disruptions. Consider that even with volume dropping by 4% year over year in the fourth quarter of 2021, Union Pacific posted 10% revenue growth -- highlighting its truly enviable pricing power.
Operating in three key freight categories -- bulk, industrial, and premium -- Union Pacific generated over $20 billion in revenue in 2021, with all three units accounting for no less than $6 billion each, demonstrating a beautiful blend of diversification.
Thanks to this stability in trying times, the 23-state-strong railway operation has seen its shares outperform the S&P 500 index by nearly 20% year to date.
Best for investors, these impressive quarterly results come on top of a decades-long trend of gradual and steady improvement across the company's overall profitability.
Measuring a company's ability to generate profits from its capital is a great metric to study when considering an investment. Historically, stocks with a return on invested capital (ROIC) of 10% and above tend to outperform the broader market, thanks to their higher levels of relative profitability. Union Pacific meets that standard with a 16% ROIC in 2021. And its diverse business mix are an intriguing combo poised to beat the market over the next decade.
Led by this strong ROIC and a profit margin of 30%, Union Pacific returned over $10 billion in cash to shareholders through dividends and share repurchases in 2021.
What's more, over the past decade the company has reduced its outstanding shares by over 30% while at the same time nearly quadrupling its dividend. With a dividend yield today of 1.8%, Union Pacific maintains a payout ratio of only 43% -- highlighting that it may just be starting its long-term dividend growth story.
All told, Union Pacific's diverse business mix, high-grade profitability metrics, and massive shareholder returns (including a 16-year dividend increase streak) make it a prime all-weather candidate to consider holding for decades to come.