Consistently growing dividends over time can be one of the clearest and more transparent signs of solid fundamentals for a business. Procter & Gamble (PG 0.68%), Nike (NKE 0.66%) and Starbucks (SBUX 1.00%) represent compelling investment alternatives due to strong dividend growth prospects supported by powerful brands.
Procter & Gamble: defensive yield
Procter & Gamble may not be the most exciting growth name around, but the company offers unquestionable soundless and reliability. Procter was incorporated in 1890 and has successfully grown through all kinds of economic and political scenarios, including deep recessions, wars and disasters of different scales all over the world.
Procter benefits from a diversified portfolio of leading brands in areas like fabric and home care, baby care, beauty, grooming and health care. Some of the company´s billion dollar brands include names like Head & Shoulders, Duracell, Pantene, Gillette, Oral-B, Ariel and Pampers among many others.
The company sells things everyone needs in more than 180 countries. Many of those products are every day necessities, not discretionary items that people tend to cut quickly from their budget when the economic situation turns for the worse. This has important advantages when it comes to stability, even if means limited growth opportunities for a gigantic company in a mature industry.
Procter & Gamble has paid regular dividends for 123 consecutive years and has raised those dividends over the last 57 years in a row, this includes a 7% dividend increase for 2013. This defensive dividend juggernaut pays a dividend yield of 2.9% and carries a reasonable payout ratio near 56% of earnings.
Nike is running ahead of the pack
Nike has built a dominant market position in the global athletic footwear and apparel industry through decades of endorsements with the most renowned athletes in the world and creating memorable marketing campaigns. The Nike swoosh is one of the most recognizable brand logos in the world, and this has important implications for the company from both a strategic and financial point of view.
Brand differentiation, a reputation for quality and a strong focus on innovation allow Nike to benefit from superior pricing power and this, in combination with scale advantages, means higher profit margins for shareholders. Nike has an operating margin of 13.8% of sales versus an industry average of 10.9% according to data from Morningstar.
Nike operates in a discretionary consumer business and this can be a source of volatility in times of economic hurdles. But the company is still growing strongly with sales increasing by 8% in the last quarter and earnings per share jumping by a whopping 37% due to expanding margins and share count reduction via buybacks.
Nike doesn´t come close to Procter & Gamble when it comes to dividend trajectory, but the company is starting to build its own track record with 11 consecutive dividend increases. Nike raised dividends by 17% in November of last year, so there are good reasons to expect another hike before end of month. The dividend yield is a modest 1%, but the payout ratio below 28% of earnings leaves plenty of room for growing distributions in the coming years.
Caffeinated dividend growth with Starbucks
Starbucks is about much more than coffee, the company benefits from one of the most valuable brands in the industry and the Starbucks customer experience is a key differentiating factor generating strong competitive advantages for the company.
CEO Howard Shultz is leveraging the company´s attributes to expand into different areas like specialized tea, pastry and premium juice with acquisitions like Teavana, La Boulange and Evolution Fresh respectively.
Starbucks is firing on all cylinders, revenues increased by 13% in the last quarter on the back of 588 new stores and a healthy increase of 7% in global comparable store sales. The company is aggressively expanding its store count, and this is not hurting sales at existing locations, so demand remains strong and Starbucks is moving in the right direction by betting on growth.
Starbucks is not usually considered among the most popular dividend growth names, this is understandable since the company has a relatively young history of dividends: Starbucks pays a regular dividend since 2010.
On the other hand, the coffee powerhouse has not been wasting any time when it comes to dividend growth: what started as $0.1 quarterly dividend per share in 2010 has now turned into $0.26 per share, including a big increase of 24% for 2013.
Dividend yield is currently at 1.3% and the payout ratio is still quite low at 39% of earnings. Keeping the company´s growth prospects in mind, Starbucks can continue serving steaming dividend growth for years to come.
Bottom line
Procter & Gamble is a solid and resilient dividend juggernaut, while Starbucks offers a young and dynamic dividend and Nike is somewhere in the middle between the two companies when it comes to stability versus growth. In spite of their differences, the three companies offer strong dividend growth prospects sustained by their powerful brands.
