Dividend stocks can be the foundation of a great retirement portfolio. Not only do the payments put money in your pocket, which can help hedge against any dips in the stock market, but they're usually a sign of a financially sound company. Dividends also give investors a painless opportunity to reinvest in a stock, thus compounding gains over time.
However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- we can get a good read on whether or not a company has room to increase its dividend. Payout ratios between 50% and 75% are ideal. Here are three income stocks with payout ratios currently below 50% that could potentially double dividend payments.
On a fundamental basis, coffee chain behemoth Starbucks (NASDAQ:SBUX) doesn't fit the traditional mold of an "attractive" stock. The company is trading at 25 times next year's estimated profits, which is well above the average for S&P 500 companies, and it's in an industry (restaurants) that traditionally grows by the low to mid-single digits and requires strong economic expansion to drive growth.
But this is Starbucks we're talking about -- a company with a number of innovative and competitive advantages that could be worth a deeper dive for income investors.
One of the biggest key growth drivers for Starbucks over the long run is its expansion into overseas markets, especially China. In January, Starbucks announced an ambitious plan to rapidly grow its store count in China, where it currently has around 2,000 stores. After adding an estimated 500 stores in 2016, Starbucks will look to add another 900 over the next two years in an effort to operate 3,400 stores by 2019. China's GDP growth rate may have slowed a bit from its historic norm, but at 7% it's still thriving and giving way to a burgeoning middle-class looking for simple luxuries, such as name-brand coffee. Starbucks CEO Howard Schultz has referred to China as Starbucks' "most important and exciting opportunity."
In addition to expansion opportunities, Starbucks is leading by example through innovation. For instance, Starbucks began rolling out a new program in recent years that allows select locations to serve beer and wine. These locations, known as "Evenings," could wind up boosting sales by an additional $1 billion by 2019, assuming Starbucks can successfully get its liquor licenses in place and has little trouble attracting beer and wine consumers. Soon, about one in every six Starbucks locations in the U.S. could be an Evenings location.
Starbucks also drives new traffic and repeat customers with its My Rewards loyalty program. Though the company has cracked down on the dollar amount needed to earn a free drink, it doesn't appear to be hurting business one iota, which is a testament to Starbucks' strong brand image and desirable menu.
With full-year EPS expected to grow from just $1.58 in 2015 to an estimated $2.87 by 2019, Starbucks' current $0.80 annual dividend payout looks ripe to double within the next five to 10 years.
Sticking with big-brand consumer goods, income investors may want to take a closer look at appliance maker Whirlpool (NYSE:WHR), after the company's stock nosedived following a disappointing third-quarter earnings report.
On Tuesday, Whirlpool announced adjusted EPS of $3.66, which was 6% higher than what it reported in Q3 2015, while net sales fell by $29 million year over year to $5.25 billion. Comparatively, Wall Street was looking for $3.85 in adjusted EPS. Furthermore, Whirlpool reduced its full-year EPS guidance to a range of $14 to $14.25 from a prior outlook of $14.25 to $14.75 and also reduced its free cash flow estimates.
On the surface, this looks bad and somewhat explains the 11% drop in Whirlpool shares on Tuesday. However, the reason behind the weakness could create the perfect buying opportunity for dividend investors. The majority of the weakness Whirlpool experienced during Q3 appears to be short-term and based on the uncertainty surrounding U.S. elections, as well as the impending exit of Britain from the European Union. Within its press release, Whirlpool clearly states that its long-term growth strategy remains unaltered despite a hiccup in consumer appliance spending habits during the third quarter.
Like Starbucks, Whirlpool is also counting on expansion to drive its long-term prospects. On the acquisition front, Whirlpool has been a busy bee over the past three years. In August 2013, it acquired a majority stake for $552 million in China's Hefei Rongshida Sanyo Electric in an effort to expand its presence in fast-growing Asia. It followed this up by completing a majority interest purchase in Italy's Indesit in Oct. 2014. Indesit should help Whirpool broaden its product reach in the EU and help further build its brand image in the region. Considering that Whirlpool is capable of generating $1.35 billion to $1.4 billion in operating cash this year, it has the ability to lean on M&A to grow its business.
The current low interest rate environment should also act as an intermediate-term catalyst for Whirlpool. Washers, dryers, and stoves aren't inexpensive appliances, meaning most American families will be looking to finance their purchases. As long as U.S. and global lending rates in developed countries remain low, the incentive for the consumer to act while lending rates are in their favor remains high.
With Whirlpool capable of generating more than $19 in EPS by 2018, but currently paying out only $4 annually, a doubling in its dividend within the next decade seems likely.
FactSet Research Systems Inc.
A final dividend stock you'd be wise to keep your eyes on is FactSet Research Systems (NYSE:FDS), a financial-services company that provides investment professionals with on-demand data analytics and content.
Recently FactSet has hit a bit of a bump in the road, which can be traced back to its fiscal fourth quarter earnings release on Sept. 27. In its press release, FactSet announced that its Q4 revenue improved nearly 10% year-over-year to $287.3 million, with adjusted EPS of $1.69, a 12% increase from the prior-year period. Comparatively, Wall Street had been expecting the company to earn $1.70 in EPS on $290.1 million in revenue. FactSet's Q1 2017 profit guidance also came in just a shade below the midpoint on the Street, with a range of $1.68 to $1.72 in EPS projected versus $1.72 in EPS as the current consensus.
Considering that FactSet had topped Wall Street's expectations in all five of its prior quarterly reports before its fourth-quarter report, it's not all too surprising why some traders headed for the exit. However, patient investors could be getting a second chance to buy into an innovative financial services company with mid-to-high single-digit long-term growth potential.
Perhaps the most intriguing aspect of FactSet Research Systems is that unlike Starbucks and Whirlpool it's doing almost everything organically. In the fourth quarter it wound up growing its organic sales by a torrid 8.8%. At the heart of this growth is the company's subscription-based model. FactSet announced a 95% customer retention rate for its annual subscriptions during Q4, and it wound up growing its user count by 2,120 to 65,655. The beauty of the subscription model is that it allows for cash flow to be quite predictable, and the niche service provided by FactSet makes it burdensome for users to switch to a different service. Including fiscal 2016, FactSet has now reported 36 consecutive years of revenue growth and 20 straight years of profit growth.
FactSet has also done a great job of using its market share gains and its steady subscription model to return money to shareholders. Between share repurchases and dividends, FactSet returned $431 million in fiscal 2016, a 33.5% increase from the previous year. Chances are, based on the company's rich history of organic sales growth, this could head higher once more in 2017 courtesy of a dividend increase. With FactSet paying out $2 annually (1.3% yield), but on track to generate nearly $9 in full-year EPS by 2020, a doubling in its dividend seems probable by 2025, or sooner.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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