| Management
Teams that are Delivering Stellar Returns Via Dividends and Share
Buybacks |
Published: February 17, 2004
During the great bull market of the mid-
to late-1990s, firms that paid rich dividends or used their extra cash
to buy back stock were generally viewed on Wall Street as stodgy,
so-called "old economy" entities whose top managers were
simply behind the times. After all, their counterparts -- the
hyper-growth tech giants that everyone absolutely adored at that time --
were racking up tremendous gains by reinvesting their excess cash into
existing business lines, making aggressive acquisitions and purchasing
new technology. Even though much of this behavior turned out to be
overly aggressive in the long run, Wall Street simply couldn't get
enough of it back then. And with their share prices soaring 10-30% on a
seemingly daily basis, these growth-hungry managers saw little need to
return funds to shareholders.
My how things have changed...
The relentless bear market we saw from
2000 to early 2003 has completely changed Wall Street's predominant
thinking on share buybacks and dividends. For many battered and weary
investors, "stodgy" has turned into something of a
complimentary term. And in the interest of reducing their exposure to
further downside risk, millions of investors have been actively seeking
out the very same steady, "old economy" stocks that they once
shunned in the go-go 1990s. In the process, conservative management
teams that have consistently made an effort to return funds to
shareholders are finally beginning to receive their just appreciation on
Wall Street. Moreover, recent government tax cuts have led to a dramatic
decrease in taxes on many dividend payments, and investors with taxable
accounts have responded by seeking out dividend-rich stocks.
Companies generally return funds to
shareholders in two ways: by paying dividends and by buying back stock
(thus boosting existing shareholder ownership in the firm). In addition
to their obvious near-term benefits (in the case of dividends -- cash in
hand, and in the case of buybacks -- increased shareholder % ownership),
Wall Street usually views both of these events as positive signals from
top management. After all, management teams do not usually pay out
dividends unless they are supremely confident in their company's ability
to continue to pay them in the future. Meanwhile, stock buybacks often
indicate management's belief that their shares are undervalued in the
marketplace.
Many of these dividend-paying,
buyback-heavy firms have held up well over the past several years. And
thanks to solid management and an emphasis on creating shareholder value
through a steady return of capital, many will continue to post steady
gains in the years ahead regardless of which direction the overall
market moves from here. With this analysis as a backdrop, this week I
searched through our universe of 10,000 stocks to find consistent
performers that met the following criteria:
1. Share price of above $2.00
2. Market capitalization of greater than
$100 million
3. Positive free cash flow (FCF) in each of
the last five years
4. Positive dividend payments in each of the
last five years
5. Annual dividend growth of at least +10%
over the past five years
6. Stable (zero change) or declining number
of shares outstanding in each of the last five years (meaning that the
firm has consistently bought back stock)
7. Annual revenue growth of at least +5%
over the past three years
8. Projected annual earnings growth of at
least +10% over the next five years
My goal was to come up with a list of
firms that are fairly large with strong projected growth and managerial
teams that are dedicated to returning capital to shareholders. After
running this data through StreetAuthority's advanced screening software,
I came up with the following list of companies:
| Company
(Symbol) |
Price |
Mkt
Cap |
| Applebee's Intl. (APPB) |
$38.00 |
2.1B |
| First Data
(FDC) |
39.87 |
29.1B |
| H&R Block (HRB) |
59.70 |
10.6B |
| Nucor (NUE) |
61.08 |
4.5B |
| Ross Stores (ROST) |
30.10 |
4.6B |
| Talbots (TLB) |
33.43 |
1.9B |
| Telecom New Zealand (NZT) |
31.59 |
7.8B |
| TJX Co. (TJX) |
23.08 |
11.6B |
| UnitedHealth Group (UNH) |
59.67 |
35.0B |
After having my research staff take a
closer fundamental look at each of the above firms, we came to the
conclusion that Applebee's International (APPB), First Data (FDC),
H&R Block (HRB), Ross Stores (ROST), TJX Co. (TJX) and UnitedHealth
Group (UNH) are all worth a closer look. As always, however, please make
sure to do your own due diligence on each of these firms to decide if
they are right for your portfolio. Any and all final investing decisions
for your own account are entirely up to you.
|
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