From Nike to UnitedHealth: Top Dividend-Growth Stocks for High Returns
These growth stocks have lower yields now but could generate high dividends for investors over the long run.
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While many dividend investors rightly focus on owning high-yield stocks, we feel that investors shouldn’t ignore dividend growth stocks.
Focusing only on high-dividend stocks could cause investors to miss out on high total return potential in terms of growth and dividends.
This article will examine three of our favorite dividend growth stocks, which have lower starting yields at the time of writing, but could generate higher dividends over the long run due to their high dividend growth.
1. Nike Inc. (NKE)
Nike NKE is the world’s largest athletic footwear, apparel and equipment maker, with a market cap of $126 billion. The namesake is one of the most valuable brands in the world. Nike’s offerings focus on six categories: running, basketball, the Jordan brand, football (soccer), training and sportswear. Nike also owns Converse.
In late June, Nike released results for the fourth quarter of fiscal year 2024 (Nike’s fiscal year ends on May 31). Sales and direct sales decreased -2% and -8%, respectively, versus the prior year’s quarter. Digital sales declined -10%. Gross margin expanded from 43.6% to 44.7% thanks to price hikes and lower freight costs and earnings-per-share grew 53%, from $0.66 to $1.01, exceeding the analysts’ consensus by $0.17, but only thanks to depressed earnings in the prior year’s period.
Nike provided daunting guidance for fiscal 2025. While it had previously provided guidance for essentially flat sales in the upcoming quarters, it now expects a mid-single digit decrease in revenues in fiscal 2025 due to challenging macroeconomic conditions. Nike is severely hurt by the impact of inflation on consumer spending. Due to the disappointing guidance, the stock plunged -12% after the earnings release.
Sustained margin improvement may be challenging due to inflation, but there is still ample room for revenue gains and share buybacks. China is likely to be the backbone of Nike’s growth story, as it posted gains even in 2020, despite the extremely adverse business environment. Moreover, the relatively recent direct-to-consumer push of Nike is likely to prove a significant growth driver thanks to the shift of consumers towards online shopping.
While the current dividend yield is unimpressive, this component ought to grow nicely over time as well. Nike raised its dividend by 9% last year. It has thus grown its dividend for the past 22 years, with an average annual growth rate of 12.3% during the last decade. We expect 11% average annual growth of earnings-per-share over the next five years.
2. UnitedHealth Group (UNH)
UnitedHealth UNH offers global healthcare services to tens of millions of people via a wide array of products. The company has two major reporting segments: UnitedHealth and Optum. The former provides global healthcare benefits to individuals, employers and Medicare/Medicaid beneficiaries. The Optum segment is a services business that seeks to lower healthcare costs and optimize outcomes for its customers. UnitedHealth produces about $400 billion in revenue annually, making it one of the largest companies in America by either measure.
UnitedHealth posted second quarter earnings on July 16, 2024, and results were better than expected on the top line. Adjusted earnings-per-share came to $6.80, which was 17 cents ahead of estimates. Revenue was up 6.4% year over year at $98.9 billion. UnitedHealthcare revenue was up 5% year over year, while Optum once again led the way with 12% growth.
UnitedHealth noted that cash flow from operations were $6.7 billion, or a staggering 1.5 times net income, implying outstanding free cash flow conversion. The company’s medical care ratio was 85.1%, which was worse than the 83.2% a year ago and 84.3% from the first quarter. This was primarily due to the ongoing impact of the Change Healthcare cyberattack. The company has provided $9 billion in interest-free loans to those impacted.
We see the payout ratio rising over time, as UnitedHealth’s dividend is ultra-safe today. At only 30% of earnings, UnitedHealth has tremendous flexibility in terms of returning capital to shareholders. Its outstanding earnings growth should only strengthen this over time. UnitedHealth’s competitive advantage is in its gargantuan scale as well as its deeply-entrenched customers with high switching costs.
Like a utility, health and wellness providers have high switching costs, accruing significant benefits to incumbents like UnitedHealth. It is also quite resistant to recessions as its services are necessities in most cases. Optum remains an outstanding growth engine as well as it continues to outperform UnitedHealthcare.
UNH has increased its dividend for 15 consecutive years.
3. CSX Corp. (CSX)
CSX can trace its roots all the way back to 1827 when the B&O Railroad was first chartered. From just 13 miles of track, CSX has grown to cover 23 states and more than 20,000 route miles. CSX provides rail, rail-to-truck and intermodal transport services. The company’s market capitalization is $66 billion, and it should produce nearly $15 billion in revenue in 2024.
CSX posted second quarter earnings on August 5, 2024, and results were better than expected for the most part. Earnings-per-share came to 49 cents, which was a penny ahead of estimates. Revenue was flat year over year at $3.7 billion, and met expectations. Merchandise pricing gains and growth in intermodal volume were offset by declines in export coal prices, and lower fuel surcharges.
Total volumes were up 2.1%, 50 basis points ahead of estimates, while pricing power was down 2%. Operating margin was 39.1% of revenue, off 50 basis points from a year ago. However, this was a 280 basis-point improvement from the first quarter. Gross margin was up 150 basis points to 52.3% of revenue, while adjusted EBITDA margin was unchanged at 50% of revenue.
CSX’s earnings-per-share has grown somewhat unpredictably over the past decade as its fortunes are tied to rail volumes and pricing strength, both of which are heavily dependent upon particular industries and economic conditions. CSX stands to gain in the form of modest revenue increases in the coming years, helping to fuel our estimate of 8% earnings-per-share growth annually.
We see the dividend increasing at roughly the rate of earnings growth going forward. CSX has put buybacks first in recent years but with a much-reduced capex budget as part of its operational efficiency initiatives, more cash should be freed up for dividend increases. With the payout ratio still very low, CSX has plenty of room to continue its streak of dividend increases while still affording it the ability to buy back stock.
At the time of publication, Ciura had no positions in any securities mentioned.