Wednesday, July 9, 2008

Consistency Is Crucial

Last Wednesday I wrote about my dividend growth philosophy. This is my investing plan that I employ through good times and bad, no matter what the market throws at me. The first factor in the last point within my investment philosophy, and a factor that I consider crucial when selecting and analyzing investments, is consistency.

Consistency to me means steady growth of sales, earnings, and dividends over many years. It also means maintaining market share, return on equity, and a solid balance sheet as well as a stable, positive corporate culture and direction. When selecting companies (stocks) to evaluate for my watchlist, which I will later use to monitor price action and select an entry point, consistency is critical.

In order to be successful long term using a dividend growth investment strategy, I believe that selecting consistency is a must. The reason for this is that for a corporation to be a long term raiser of dividends they need to be a long term raiser of earnings. Stable, boring companies that raise their earnings and therefore their dividends year in and year out are what I am after. I am not after companies that double their earnings one year, and then go on to earn 30% less the next year. Since a dividend is actually money that is paid out in cash, some reliability and consistency must be built into a company in order for that company to raise dividends every year. The company must have the wherewithal to know that they'll be able to come up with every increasing amounts of cash to pay me each year.

Generally, cyclical, fly-by-night, sporadically growing, or companies struggling with business model issues do not have this luxury. Companies that raise their dividends every year have made a conscious decision to make consistency a priority. The reason for this is because they know they'll need to come up with an every increasing pile of cash to use for dividend payments each year, so in most years they must earn a little bit more than they earned in the previous year. Their culture as a company, their relationship with investors, and their long term performance and investor return metrics all absolutely depend on them becoming consistent.

Here is an example to clarify my point. One company that fits the consistency bill to a tee is consumer products giant Procter & Gamble (PG). Let's look at how PG gets it done:

  • Earnings Per Share: PG has increased EPS in 7 of the last 9 years
  • Sales: PG has increased sales in 8 of the last 9 years
  • Dividends: PG has increased dividends in 9 of the last 9 years (this track record goes back very far)
  • Return on Equity: PG's return on equity as been above 15% in 8 of the last 9 years
Procter makes an excellent candidate for any dividend growth investor's portfolio for several reasons. Their past consistency is one of the factors that most investor's likely consider when evaluating P&G as a potential investment.

This article was written by the moneygardener. You may email questions or comments to me at themoneygardener(at)gmail(dot)com.


Post a Comment

Recent Posts From DIV-Net Members