Editor's note: We're continuing this week's series of investment lessons from our colleague Dan Ferris. Yesterday, he showed readers the key to success for some of the world's greatest investors. Today, he explains how to identify World Dominating stocks…
If I could teach investors just one thing, it would be how to identify and value a World Dominating Dividend Grower (WDDG) business.
It's the single best way to get rich in stocks…
Remember, these are the world's strongest, safest companies. These companies dominate their industries. They have the best brand names, the biggest competitive advantages, and the biggest profit margins, plus they pay the safest dividends.
In other words, these stocks are different from typical stocks. They are different from "the market." WDDGs are vastly better.
And today, I'll show you exactly how to identify one…
Let's use Becton Dickinson (BDX) as a "case study."
Becton Dickinson is the World Dominator of needles and syringes for the medical industry. Odds are you've come into contact with the company's products dozens of times in your life and never realized it.
Like many WDDGs, BDX was the driving force in creating the industry it dominates today. In 1906, it built the first plant in the United States for making needles and syringes. And in 1925, BDX began offering the BD Yale Luer-Lok Syringe, which created a secure way to attach and remove a needle from a syringe. These connectors remain an industry standard today. BDX is also the top maker of safety devices to prevent needle-stick injuries.
BDX has an extraordinary brand, and it is No. 1 in its industry. Those are "on the surface" clues to finding these stocks. But we also need to look inside the company… to find the financial clues of a WDDG business.
To say Becton Dickinson has all the financial clues of a World Dominating Dividend Grower is the understatement of the year…
One of the hallmarks of a WDDG is consistent profit margins. This is the amount of money a company earns from each dollar of sales. A great business should have consistent profit margins so it can pay you a consistent stream of dividends… But that company should also have a sustainable, long-term competitive advantage so it can consistently earn those profit margins.
Becton Dickinson's gross margins (the margin earned before deducting the basic costs of doing business) are consistently above 40%. Its net margins (the margin earned after deducting all expenses and income taxes) have consistently been between 10% and 17% for the last 10 years.
That's huge. Most businesses are ecstatic to earn net margins of 5% or 10%.
Another hallmark of a WDDG is huge free cash flow. Free cash flow is the final "cash in hand" number that a business owner has after deducting expenses. It's a vital number for investors.
BDX gushes free cash flow. On sales of $12.2 billion, BDX generated more than $1.6 billion in free cash flow the last four quarters.
A third sign of a WDDG stock is a strong balance sheet. As shareholders of a business, we want to see lots of valuable assets and low debt. We want a strong balance sheet so we don't have to worry about tough times causing a bankruptcy.
Becton Dickinson has an excellent balance sheet. It has $1.7 billion in cash and short-term investments and less than $11.9 billion in debt. BDX's debt is tiny compared with its earnings. Its earnings cover its interest expense nearly five times over. Just imagine earning five times your mortgage payment every month!
Finally, for a company to qualify as a WDDG, we need to see a history of dividend growth. Becton Dickinson is one of the best dividend-growth stocks in the world. BDX has relentlessly raised its dividend every year for the last 44 years. Its last increase was by 10%…
Becton Dickinson pays out nearly one-third of its earnings per share in dividends. So there's plenty of room for big dividend growth in the coming years. Right now, BDX yields 1.5%. If it maintains its 12.5% annual dividend growth, you'll be making about 14% annually over your original cost in 20 years.
To sum up, there are obvious things to look for when you're after the world's safest, best dividend-paying stocks… the kind you can hold for decades and get rich. This includes a dominant brand and the top position in an industry.
But today's essay shows you some vital "financial clues" for finding these stocks… and why Becton Dickinson is a great example.
Editor's note: Right now, many of the world's blue-chip stocks are expensive. But Dan has found a handful of World Dominators that are cheap enough to buy today. Learn about one of those opportunities – and how to get started with a risk-free trial to Extreme Value – right here.