One of the simplest ways to make money on the stock exchange is to invest in world dominating businesses. Companies that are the worlds strongest and safest. Companies that are generally the largest and most powerful company in its industry. Company’s like Wal-Mart, the largest retailer, or Nestle the largest packaged food company or Nike the largest sports apparel company. And although this strategy might sound too simple and straightforward, it is important to remember that some of the world’s greatest investors like Warren Buffet (owning shares in Coca Cola and American Express for instance) made close to 20% p.a. returns for decades using this method. As I have mentioned before, simple is normally always best.
To see how using this simple strategy of investing in World Dominating Dividend Paying (WDDP) stocks plays out over time, let’s use the example of Becton Dickinson (NYSE: BDX) – a global leader in needles and syringes for the medical industry. If you’ve been for any kind of medical test before, odds are you’ve come into contact with the company’s products but have never realised it.
Like many WDDPs, Becton Dickinson was the driving force in creating the needles and syringes market 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.
Becton Dickinson has an extraordinary reputable brand that has allowed it to become a market leader and allow it to sell billions of its products worldwide. This is one of the clues that help you identify a WDDP company.
One of the hallmarks of a WDDP is consistently high profit margins. As a refresh, profit margins basically show what amount of money a company earns from each dollar of sales. A great business should have consistent profit margins so you are able to value it correctly and so that it can also 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. In this case, the competitive advantage of Becton Dickinson is its brand as well as its patented products.
Becton Dickinson’s gross margins – the margin earned before deducting the basic costs of doing business – are consistently above 40% which is fantastic. 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 average businesses only earn net margins of 5% or 10%.
Another hallmark of a WDDP is its ability to produce 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. The Free Cash Flow a business produces is used to reward shareholders in the form of dividends and share buybacks. BDX produces copious amounts of free cash flow and it has rewarded it share holders handsomely over the years. It has gone from paying dividends of $0.36 in 2000 to $2.78 over the past year – a compounded increase of over 13.5% per annum! This dividend growth history is a a third sign of a WDDP
A forth major sign of a WDDP 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 $1.5 billion in cash and short-term investments and less than $11.6 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!
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. The band and dominant position in the industry are vital as it allows the business to raise prices to stay ahead of inflation and often these companies are the lowest cost producers in the industry thus giving them every opportunity to increase margins and profits over the years.