Beating the S&P 500 index by 30% and 19% year to date, respectively, Kroger (KR -0.43%) and Union Pacific (UNP 4.99%) 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.
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Kroger
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:
KR Shares Outstanding data by YCharts.
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.
Union Pacific
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.
UNP Return on Invested Capital (10y Median) data by YCharts.
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.
UNP Shares Outstanding data by YCharts.
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.
