For a dividend to double in five years, a company would need to raise its quarterly payments by an average of just under 15% per year. That's a fairly high rate of increase that not many companies can sustain. And that's what makes the stocks here listed so special: They have doubled their dividend payments in just a five-year span.
Thermo Fisher Scientific (TMO 0.24%) and FedEx (FDX -0.29%) are businesses with solid financials that have been making generous dividend hikes in recent years. But can income investors expect these types of increases to continue?
1. Thermo Fisher Scientific
Thermo Fisher is a top healthcare company that generates revenue from diverse revenue streams, including laboratory products, diagnostics, life sciences solutions, and analytical instruments. The business has done an excellent job of growing via acquisitions and adapting to changing situations (e.g., offering COVID-19 tests) to expand its top and bottom lines over the years.
One thing investors probably aren't all that excited about is the dividend. At 0.2%, the yield offers minimal value to income investors. You would need to invest $500,000 into the stock just to collect a $1,000 yield over the course of the year. No income investor is salivating over that kind of payout. But investors should also note that there's plenty of room for the stock to make more significant increases to its dividend in the future. Today, its payout ratio is a minuscule 6%. And that's with quarterly dividend payments doubling from $0.15 in 2017 to $0.30 this year.
Thermo Fisher's focus has been on acquisitions, and it has added multiple businesses into the fold in the past year, including clinical research services company PPD for $17.4 billion. The company's ability to balance growth while also buying back shares and issuing dividends is a testament to its financial strength and flexibility. Year to date, it has bought back $2 billion worth of shares while paying just $220 million in dividends. A growth-oriented company like Thermo Fisher likely prefers buybacks over dividends as the latter can create an expectation of a recurring payment that potentially becomes burdensome in the future. The smaller that payment is, the less of a problem it is, and the more flexibility the company has.
Investors shouldn't be discouraged by the low yield from Thermo Fisher as it's just one of the ways investors can profit from their investments in the business. Buybacks can also help boost the stock and lead to stronger gains in the long run. If and when the business stops pursuing acquisitions and slows down, the dividend may become more of a priority.
In the meantime, it still wouldn't be surprising for Thermo Fisher to make aggressive dividend hikes in the future, given its strong financials and the low payout ratio that it has today. If you're a long-term investor, this is one of the safer healthcare stocks you can add to your portfolio right now.
FedEx's dividend hasn't followed much of a consistent pattern. The reason its dividend has doubled is due, in large part, to a big hike the company made this year after coming off a strong period -- bumping up its payout by a whopping 53% to $1.15. Five years earlier, the quarterly dividend was just $0.50. And as of the end of last year, it was still just $0.75 as there were some years when FedEx didn't raise its payouts at all.
The logistics company has a modest payout ratio of 34%, which isn't high, and there could be more dividend increases in FedEx's future. However, it's unlikely the company will be able to reproduce the huge increase it made this past year to accelerate its dividend growth. FedEx recently released its earnings report a few weeks ago, where the company's first-quarter results of fiscal 2023 (for the period ended Aug. 31) badly missed expectations, with the company's adjusted earnings per share of $3.44 falling well below analyst expectations of $5.14. FedEx said it faced challenges in Asia and Europe, which limited shipping volumes and, when combined with higher expenses, chipped away at the bottom line.
CEO Raj Subramaniam also warned of a global recession in the near future, which would put more of a damper on the company's future, its profit growth, and thus, the ability for FedEx to make significant increases to its dividend. However, with FedEx stock yielding 3%, it doesn't need large increases to offer investors a high payout. So even though future dividend hikes will likely be much smaller than the one the company announced this past year, FedEx could still make for a good investment to buy as the stock is now trading at a two-year low.