I often espouse the benefits of investing in high-quality businesses. When I talk about high quality, I’m referring to fundamentals.
Things like top-line growth, bottom-line growth, balance sheet strength, dividend metrics, margins, etc. The balance sheet in particular is what often separates the best from the rest.
Let’s imagine you have the chance to invest in one of two businesses. They’re pretty similar across the board, except one has a ton of debt and the other has no debt.
Which one is the higher-quality business in your mind? Of course, it’s the business with no debt. When I look at corporate blowups, a high debt load is something that many of them have in common.
But you can’t go bankrupt if you don’t have debt. And no long-term debt frees up much of your cash flow for, you guessed it, growing dividends to shareholders.
Today, I want to tell you about three dividend growth stocks with no long-term debt. Ready? Let’s dig in.
Debt-Free Dividend Growth Stock #1 To Consider Buying: Petmed Express (PETS)
Petmed Express is an online pet pharmacy with a market cap of $577 million.
With its market cap below $1 billion, this stock is well into small cap territory. Now, usually the small caps have more risk attached to them. That’s due to the inherent wipeout risk with such a small company. However, Petmed Express mitigates a lot of that wipeout risk by not carrying any long-term debt at all. That’s right. This tiny company has no debt. So their income isn’t burdened by interest expenses. Instead, they can reinvest back into the business and pay a big, growing dividend to shareholders.
This company has increased its dividend for the last 13 consecutive years.
The 10-year dividend growth rate is 9.4%. If you think that’s nice, it’s better than it looks. That’s because that high-single-digit dividend growth is paired with the market-smashing yield of 4.2%. That yield is more than three times higher than what the S&P 500 offers. The payout ratio, though, is high, at 88.9%. So I suspect that near-term dividend increases will not be like they were in the past. But when you’re getting a 4%+ yield, you don’t really need a ton of dividend growth to make sense of the investment.
This stock is down more than 13% YTD, and the valuation is pretty compelling.
Almost every basic valuation metric indicates undervaluation. The P/CF ratio of 11.2, for instance, is well below its five-year average of 16.1. The yield also indicates undervaluation. The stock’s five-year average yield is 3.5%, but the current yield is 70 basis points higher than that. If you’re looking for a debt-free, high-yield small cap dividend growth stock, this is a very interesting candidate.
Debt-Free Dividend Growth Stock #2 To Consider Buying: T. Rowe Price Group (TROW)
1. Rowe Price is an investment management company with a market cap of $51 billion.
This is one of the highest-quality businesses I’ve ever looked at, to be honest. It’s nearly flawless across the board. One facet of its high quality is, of course, its balance sheet. T. Rowe Price has no long-term debt. So that’s simply one less thing to worry about as a shareholder. And that also frees the company up to direct a good chunk of its profit back to shareholders in the form of a growing dividend.
2. Rowe Price has increased its dividend for 35 consecutive years.
Yep. That makes them a Dividend Aristocrat, which is a title conferred to stocks with 25 or more consecutive years of dividend increases. Basically, the creme-de-la-creme of dividend growth stocks. Not only that, this is a debt-free Dividend Aristocrat. The stock’s yield of 1.9% isn’t all that incredible, but the 10-year dividend growth rate of 12.8% is. Moreover, they most recently increased the dividend by an astounding 20%. And with a payout ratio of 50.6%, you can count on this Dividend Aristocrat to keep pumping out ever-higher dividends for years to come.
After an impressive 50% runup this year, the stock’s valuation is arguably stretched.
I highlighted this stock as an undervalued opportunity back in April when the stock was below $180. It’s now over $220. In my video, I estimated intrinsic value to be around $198/share. So it is perhaps 10% overvalued from where I’m standing. But if there ever was a stock worth paying a premium for, it might be this one.
Debt-Free Dividend Growth Stock #3 To Consider Buying: Williams-Sonoma (WSM)
Williams-Sonoma is a home products and furnishings retailer with a market cap of $14 billion.
Williams-Sonoma is known for its extremely high-quality home furnishings. These furnishings are provided across a range of branded retailers that include Pottery Barn, West Elm, and the eponymous Williams-Sonoma. Well, the business is just as high quality as its furnishings are, thanks in no small part to the fact that they carry no long-term debt whatsoever. The balance sheet is as sparkling clean as linens from West Elm. And that helps to give the company the ability to hand out sizable dividend increases to shareholders.
The dividend has been increased for 16 consecutive years.
Check this out. Their 10-year dividend growth rate is 13.6%. Solid, right? Well, it gets better. They’ve increased the dividend twice this year, with the most recent increase – announced on August 25 – coming in at 20.3%. Now, one would want to see significant dividend growth, as the stock yields only 1.5%. But with the huge growth and the low payout ratio of 25.7%, this is a very healthy, fast-growing dividend that can compound like crazy.
This stock is up 80% YTD, which is amazing, but the company’s operational performance justifies a lot of that move.
The most recent quarter showed 30.9% YOY revenue growth and 80% YOY EPS growth. Demand for their products is off the charts. I’ve highlighted this stock repeatedly on the channel, each time with a lot of comments arguing that the stock is overvalued. Well, those commenters have really missed out. The P/E ratio is now at 14.8, which isn’t extreme at all. But that’s not because the P – price – has been weak. It’s only because the E – earnings – has been so strong. I wouldn’t say the stock is outright cheap, but this is a debt-free gem that any dividend growth investor should be happy to have in their portfolio for the long run.
— Jason Fieber
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Source: DividendsAndIncome.com