But as we all know, expectations of future growth are only guesses, at best. The only real comfort a DGI has is the expectation that a company that has increased revenues, earnings and dividends in the past will continue to do so in the future. And that may or may not happen. That's why DGIs tend to invest in companies on the lists of Dividend Aristocrats and Dividend Champions.
So why do dividend growth investors often put restrictions on their stock selections like yield and P/E ratios? If the only thing that matters to a DGI is dividend growth and the increasing stream of income it produces, why not just look for any company that increases its revenues, earnings and dividends over time? That would seem obvious to me. I've found a lot of companies that fall into this category of increasing dividends, and one of these companies is Tractor Supply Co. It's one of middle America's favorite stores, but if you live in a large city you may have never heard of it.
Tractor Supply Company is to rural farmers and small town gardeners as Home Depot and Lowe's are to builders and Walmart and Target are to shoppers. It's where rural shoppers do a lot of their shopping simply because they have what the rural shoppers need. So today I decided to take a look at TSC's numbers and charts.
Tractor Supply Company operates rural lifestyle retail stores in the United States. It offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. As of March 28, 2015, the company operated 1,422 stores in 49 states. It operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and HomeTown Pet names. The company also operates an e-commerce Website at TractorSupply.com. It sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is based in Brentwood, Tennessee.
(Summary) (Company) (Chart)
13 December 2015
1yr Target $102.43
Payout Ratio 26.66%
1yr Cap Gain 16.53%
1yr Tot Return 17.44%
EPS (ttm) $3.00
EPS next yr $3.58
EPS next 5yr 15.26%
1yr Price Support $54.63
Market Cap $11.81 Bil
Revenues $6.16 Bil
Earnings $410.70 Mil
Profit Margin 6.65%
1yr EarnGR 14.65%
3yr EarnGR 20.54%
5yr EarnGR 26.69%
1yr DivGR 25.00%
3yr DivGR 25.70%
5yr DivGR 41.70%
Quick Ratio 0.20
Current Ratio 2.10
Looking at the forward estimates from 21 analysts, revenues are expected to be up 10.50% in 2015 and another 11.00% in 2016. That may look like a slowdown from the recent past but it's still a very nice increase. And if history is a precursor of the future, just look at the chart of the company's revenues below for the last 15 years. I think it would be difficult to find a prettier chart than that. If Dividend Growth Investors are primarily concerned with increasing dividends, it all begins with a company's increasing revenues.
But it doesn't stop there. Increasing revenues have to translate into increasing earnings. And those earnings need to increase faster than inflation if a DGI wants his dividends to increase faster than inflation (and that's important if an investor doesn't want his income to fall relative to inflation!). For TSC the earnings picture was growing nicely until the recession of 2008-2009 (see below) when earnings stagnated for about 2 years. But since then they have really taken off. And taken off significantly.
Yield vs Growth
So here's the conundrum that almost every dividend growth investor is confronted with at some point in his investing career. Does he go after yield or does he go after dividend growth. The easy answer is he goes after growth since that's what defines a true dividend growth investor. But often investors demand a minimum yield that they'll accept. And that can eliminate some of the best dividend growth companies listed on the exchanges. Tractor Supply Company just happens to be one of these companies that would be overlooked.
Personally I think a dividend of less than 1% is a difficult yield to accept. That's approaching the kind of yield that any investor can easily get by investing in CDs at a local bank. And CDs come without all the risks associated with investing in the stock market. But the interest rate on CDs won't increase over the length of the CD. Common stock can, and often does. In the case of Tractor Supply Company, its dividend is expected to increase. And increase at a very fast rate.
With estimated revenues increasing at a rate above 10% per year in the next few years, I expect earnings to increase in the mid-teens. This should allow the dividend to grow in the mid-teens also. And that's without increasing the payout ratio which is relatively low at 26%.
Those types of increases will swell an investor's income very quickly. In a few short years that stream of income will produce a tremendous amount of money. And that's what a dividend growth investor should be most interested in.
I am, by my own confession, a dividend growth investor that invests in companies that increase their revenues, earnings and dividends over a relatively long period of time. I'm also an investor that likes to buy securities as cheaply as possible. So I've also had to become a patient investor too. I also use put and call options at times to enter and exit positions and to allow me to get the prices I need, want or expect.
In the next couple of weeks I intend to start a position in this stock. I intend to buy TSCO shares with my own money, with dividends I receive from other companies, and with income I receive from selling options in other companies. This has been my strategy and it's how I leverage my portfolio to accumulate additional shares of companies I both own or want to own. It's how an investor builds wealth.