Cash is king, and companies making big cash distributions tend to outperform the market in the long term. Apple (NASDAQ:AAPL), PepsiCo (NASDAQ:PEP), and CVS Caremark (NYSE:CVS) offer solid fundamentals while rewarding shareholders with generous dividends and stock buybacks, and this means they are well positioned for superior returns in the years ahead.
The iPhone is still growing
The smartphone and tablet markets may be maturing in developed countries, but that doesn't mean Apple is out of growth opportunities. The company is still the undisputed quality leader in the industry, and brand differentiation provides a key source of competitive strength for Apple in the war against cheaper alternatives.
Apple reported better-than-expected sales and earnings figures for the quarter ended on March 29, and the iPhone was the big growth driver for the company during the quarter, with 43.7 million units in sales, a 17% increase versus the same quarter in 2013.
According to CEO Tim Cook, Apple is gaining market share in smartphones, not only in developed countries, but also in high-growth emerging markets: "We gained smartphone share in many developed and emerging markets including the U.S., the UK, Japan, Canada, Germany, France, Vietnam, and Greater China, just to mention a few. In fact, we established a new all-time record for total iPhone sales in the BRIC countries."
Cook believes Apple is undervalued at current prices, which sounds quite likely considering that the company trades at a P/E ratio around 14.3, versus an average multiple in the area of 18 times earnings for companies in the S&P 500 index.
The company is putting its big pockets to good use by capitalizing on the opportunity to repurchase stock at attractive valuation levels. Apple returned almost $21 billion in cash via dividends and share repurchases during the last quarter, and it expanded its capital return program to more than $130 billion until the end of 2015.
PepsiCo tastes good
PepsiCo is a global juggernaut in the soda and snacks business. The company owns 22 brands generating more than $1 billion in annual revenues around the world, and it has successfully expanded into healthier product alternatives with brands such as Tropicana, Quaker, and Gatorade, among others.
This means that PepsiCo is well positioned to adapt and thrive over the coming years as consumers continue paying increased attention to the nutritional qualities of the food and drinks they consume.
PepsiCo has an immaculate track record of dividend growth; the company has raised distributions for the past 42 consecutive years in a row, including a big 15% increase announced in February. The dividend yield currently stands at more than 3%, which is quite an attractive return for a solid dividend powerhouse such as PepsiCo.
In addition, management is planning to return approximately $5 billion in share repurchases during 2014, bringing the capital distribution program to $8.7 billion when including both dividends and buybacks, a huge 35% increase versus 2013.
Healthy returns from CVS Caremark
CVS Caremark benefits from a smart business model, as the company is a major pharmacy retailer and also a leadiing pharmacy benefit manager. This means economies of scale, negotiating power with suppliers, and a rock-solid competitive position for a market leader operating in such a stable and dependable industry.
Favorable demographic trends, broadening health care insurance coverage, and technological advancements in the industry should mean growing health care demand in the years ahead, and CVS Caremark is in a position of strength to benefit from those tailwinds.
The dividend yield is not very impressive at 1.5%, but the company has delivered remarkable dividend growth over the past decade: What was a quarterly payment of less than $0.029 per share in 2003 has now multiplied into $0.275. This includes a big increase of 22% announced in December of last year. Besides, the payout ratio of only 24% of earnings leaves a lot of room for further dividend growth in the years ahead.
CVS Caremark expects to complete approximately $4 billion in share repurchases during 2014, and the company has recently raised its repurchase authorization to up to $6.0 billion.
Dividends and buybacks are powerful return factors, but they don't come out of thin air. A company needs to have the fundamental strength to produce growing cash flows over time to make sustained capital distributions. Apple, PepsiCo, and CVS Caremark are three rock-solid businesses generating dependable cash flows, and this means they are well positioned to deliver market-beating returns over time.
Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple, CVS Caremark, and PepsiCo and owns shares of Apple and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.