At the end of every trading session on Wall Street, average investors, like you and I hear the performance of the Dow Jones, S&P 500, and Nasdaq. These are the common 3 indexes and exchanges used to show how the market is doing. I want to focus on one and more particularly the top 3 performing stocks in it.
As I write this the Dow Jones sits above 23,000 and about 9 months ago it broke 20,000. (Side note, when it broke 20,000 I asked my girlfriend out. I have a bit of an obsession).
For the past 10 years, the Dow has been rocketing, back in 2007, it was sitting around 13,000. Great, but why has it done so well? Well, a simple analysis will tell you the underlying companies must have done pretty well too. The question I wanted to have the answer to was what were the top performing Dow stocks over the past 10 years. Out of the Dow 30, which have been the ones who have performed the best.
Well, I now have my answer and why they have been able to do what they have done.
Home Depot, McDonald’s, and Disney have been the top 3 performers in the Dow over the past 10 years. All of them averaging an annual return higher than 10%.
Now, let’s just get this out of the way. Just because they have averaged 12% annually now doesn’t mean they did 102% every year. It could have been a bad 5 years then an amazing 5 years. We are just taking the total return overall and dividing it by 10. Don’t think these shareholders had a yellow-brick road of returns for 10 years straight.
Unless you have lived under a rock, I am sure you have heard these names before. They have been household names for years.
You could say they are all well-seasoned companies. Just because they are old, however, doesn’t mean they are incapable of producing solid returns.
As investors its nice seeing companies produce some serious returns, but we are more concerned with the why.
Why have they been able to produce such great returns? It is with great confidence I can say I have been able to uncover some of the solid reasons as to why they have been so successful.
These reasons also could be the factors that deliver the returns for the next 10 years, so make sure you keep them in mind.
Related: Basic Guide to The Stock Market
Home Depot (HD)
Home Depot came in as the top performer for the past 10 years; averaging a return of 14.28%. The big orange giant has been able to take advantage of an Amazon ridden space and capitalize on their own strengths to grow into a powerhouse in the home improvement space.
I was able to identify 3 main reasons why they have been so successful. They call it their 3 legged stool approach. These reasons came directly from their most recent letter to shareholders. The 3 legged stool is made up of customer experience, product authority, and capital allocation. All of these combined have been able to drive Home Depot’s performance but each of them deserves a deeper look.
I want to do an experiment with you, I want you to close your eyes and imagine what it is like when you walk into a Home Depot location. Does a certain smell come to mind? I don’t know about you but every time I have walked into a Home Depot I instantly become happier.
When you walk in you are not just shopping they are focused on giving you an experience every time. With you in mind they have tailored their efforts, making it easy for you as a customer to always have a good time, every time.
With the online revolution upon us, they have made it easier for customers to shop whenever and wherever they desire. Moving to a world driven by the “Buy online and pick up in store” customers. Online sales right now make up 5.9% of total sales which gives them more room to grow their online space. The good thing about this is they are not threatened by the big bad monster of online retailer Amazon (AMZN).
If customers are not buying online, then they are buying in the store (I know, a real Sherlock Holmes). A frequent practice is looking up materials online, then going to the store to buy the items. They also come into the store to ask questions with the knowledgeable staff.
This is another large factor in Home Depot’s success. They have over 400,000 knowledgeable associates helping customers for years tackle home improvement projects every day. It isn’t just about selling products, they take the time and put in the effort to empower each customer. Providing them with the knowledge to do any home project. The incredible efforts have been a huge reason why Home Depots average ticket price has been rising for 3 years straight.
When you think about the term product authority you probably think they have the ability to set the price for a product, trying to create the lowest cost possible. Yes, this is a key for them but it isn’t the main focus when they use the term authority.
The main concern is creating the best possible mix of sourcing exclusive brands along with driving innovation. So far they have been the main force in the improving of many products. For example, they have helped lead the way in the innovation with LED technology along with lithium-ion technology for power tools.
A close relationship with suppliers is needed in order for this success to occur. As you can probably tell, Home Depot has a very close relationship with their suppliers. They have been able to supply helpful knowledge to the companies in need of it most, in order to improve products.
It doesn’t stop there, they continue to push forward constantly trying to bring better products to their customers. The next step is bringing technology to power equipment like blowers, chainsaws, and even lawnmowers. Imagine how much safer these machines will be if they become more technologically advanced. Home Depot is making sure this happens sooner than later.
Product authority also means having every individual community in mind when they stock their inventory. Each store has a unique community they cater to. Constantly trying to improve each store they are going over data to make sure you have a one-stop shop to rely on every time you have a specific need.
Their capital allocation strategy comes from 3 main points:
First: Invest in the business so growth can continue to flourish. The goal is to maintain growth and productivity as well as retain a high return on invested capital (ROIC). They are currently investing in a project called Project Sync. Project Sync is a way for Home Depot to increase coordination with their supply partners.
This increased communication has reduced supply chain costs by optimizing truckloads. Project Sync also optimizes labor productivity in stores and distribution centers. This mean decreased replenish times, leading to higher in stock levels.
This disciplined capital allocation has led to an increase in ROIC for the past 3 years going from 24.9% in 2014 to 28.1% in 2015 and to most recently 31.4% in 2016. Having a growing ROIC is a good sign for a business that may seem to may as already large.
Second: They are committed to returning a meaningful percentage of net earnings to shareholders in dividends. As a shareholder, this is what you want to see.
Recently they raised their payout ratio from 50% to 55% and increased their quarterly dividend. This will become reoccurring theme because they have made it a focus to raise their dividend every year.
Third: Along with their dividend they also want you to know, they plan to return any excess cash back to shareholders through share buybacks. In 2016 they had $7 billion in buybacks and in 2017 they have a share buyback plan worth $15 billion.
Home Depot Thoughts
For years now we have seen this big orange monster of a retail continue to dominate the home improvement sectors. It comes as no surprise Home Depot has been the Dow’s biggest winner for the past 10 years.
Going forward I see a positive outlook. They will continue to create an amazing experience for customers which will continue to push up the average ticket price.
Their sheer size allows them to be the biggest source of revenue for their suppliers, maintaining communication and having it be positive back and forth will allow them to always have the best products in their stores.
Then when it comes to capital allocation, they certainly know what they are doing; compensating the shareholder in the process. With the rising ROIC and dividend, they are making moves with the shareholder always in mind. Overall, this is a solid company who has had a great 10 years. It is likely the momentum will continue for the next 10 years.
Related: SISU Money Bulletproof Portfolio
I will not lie, this one came as a bit of surprise to me. I knew over the course of the years they had a few struggles. They were at a point where growth began to stall and the golden arches brand was at a standstill. After reading through the reports and doing some deeper analysis I can see why they come in number 2 on the list. With a 13.02% annual return, McDonald’s has been a great stock to own.
With the past behind them, Mickey Ds is now focused on revitalizing the brand and strengthening business for long-term sustainable growth. The turn around began in 2015 when they brought Steve Easterbrook aboard as the new CEO. He was elected with the focus of turning the business around and turning it back into the dominant brand it has always been. So far, the plan has been successful. The turn around has been fueled by these 4 key points.
One of the big problems was they were not organized from the operations standpoint. There was no clear-cut team focusing on specific operating segments. McDonald’s has now restructured the business around 4 specific operating segments:
The United States: This is the largest segment making up 40% of operating income (2014 numbers)
International Lead Markets: These are the second largest segment also making up around 40% of operating income. These are markets such as Australia, Canada, and France.
High Growth Markets: Markets with relatively higher restaurant expansion and franchising potential. This makes up 10% of operating income.
Foundational Markets: These are the markets making up the rest of the McDonalds system. Each of these has the potential to operate under a largely franchised model. This makes up the other 10% of operating income.
Reorganizing the business around these 4 specific segments has led to better more efficient organization. Along with this reorganization, the company has elected a president for each segment and a specific operations team in order to make sure they have a focused team for each.
The Re-franchising Plan and Better G&A Savings
Points 2 and 3 are closely tied together.
Management has embarked on a long-term goal of re-franchising 4,000 restaurants by the end of 2018. This would move the needle for McDonald’s global franchise percentage from 81% to 90%. This is a move following in the footsteps of other big name food restaurants like Restaurant Brands International’s (QSR) Burger King and Wendy’s (WEN). The latter companies have seen strong earnings growth as a result of their own re-franchising efforts. McDonald’s is looking to do the same.
This re-franchising effort will trim around $500 million in annual general and administrative costs. Selling these franchises back to franchisees will relive McDonald’s from the capital expenditures previously required to rebuild and maintain the restaurants. This burden will now be taken off of McDonald’s and placed on the shoulders of the franchising partners.
Returning Value Back to shareholders
The last and most important point for shareholders as they happily announced the completion of the 3-year plan to return $30 billion back to shareholders by the end of 2016. This strong return was the exclamation point for the company showing they are back and are ready to build on the extremely successful year of 2016.
Plans for 2017 and Beyond
Now with a refocused, forward-looking, and fit for porpoise company, the momentum moving forward is strong and will be hard to stop. They are committed to sustaining operating growth.
With 2016 being a strong year, they were able to set new financial targets for the beginning of 2019. These points were 1) increasing system-wide sales to 3%-5%, 2) Grow the operating margin to the mid 40% range, 3) deliver high earnings per share growth in the high single digits, 4) raise the return on incrementally invested capital target to the mid 20% range.
These 4 bigger financial goals were made possible by the strong success Steve Easterbrook has been able to accomplish so far for the company. Along with these financial goals, they have set out on a new 3 years’ value plan for shareholders. From 2017-2019 they plan to return $22-24 billion to shareholders. This plan is building on the previous 3-year plan.
Things have been turning around for this iconic American symbol. I have to say I was very impressed when I began my deeper digging into the company. I knew they were at somewhat of a standstill, I mean, you can only get so big until it might come back to bite you.
Look forward it seems like they chose the right guy as their CEO. He has been able to accomplish much success in a short period of time. This new refocused company has much promise. They have begun to deliver and they will continue to do so. The new financial targets are promising and I would love to see them hit a 20% range on ROIC.
Showing us they have reached a point where they are not too big to make their assets worth it. Plus, the new plan to return $22-24 billion to shareholders is a bonus. I see this as a good stock for the next 10 years, not a great one. The change in consumer taste is probably going to weigh on their revenues. If they are able to make it a point that their food is also a healthier option then they could do well, it might take some time to convince others though.
On the other hand, If you’re looking for a slow growing stock continuing to return you value, this could be the company for you.
I have to say, I saved this one for last because I am a big fan of this company. I grew up a Disney kid, It is my family’s go-to spot for vacations. There is just something about the atmosphere that always draws me back in. Over the last 10 years, they have been able to return an average of 12.35%. Few companies can continue to perform year after year, while still making the right investments to continue long-term growth.
Disney has been able to capture these impressive gains through the success of their 3 main segments: Media Networks, Theme Parks, and Movies. It is the 7th most valuable brand in the world and has continued to make memories for people for over 80 years.
This is Disney’s biggest money-making segment with channels like ESPN, A&E Networks, FreeForm and of course, the Disney Channel it has created the most revenue for them over years. In recent months though, it has become one of their biggest liabilities.
The American trend of cord cutting has taken a bite out of the company’s profits but this move away from the cable cord could be one of Disney’s biggest opportunities to grow. Recently they decided to pull their content off of Netflix and have since told the public they will take their own route and stream their content on their own network.
Recently they have made a $1 billion investment in BamTech, which has been known for streaming sporting events and will pave their own path when it comes to online streaming. The plan is to begin offering an ESPN service in early 2018, and then launch a Disney branded service for all of its other offerings in 2019.
This can be seen in two ways, 1) it might take some time for this transition to take a full swing. It is highly likely the media network segment will take a little hit while this switch in consumer activity is taking place.
Which brings me to the second point 2) this move to streaming could be a huge long-term play for Disney. The new streaming service will not only have all of the Disney content but much more, like content exclusive for the Disney Streaming Network, like “13 Reasons Why” on Netflix. Like I said before their media network has been their biggest winner, but right now it is where to most worry lies.
Behind the Media Networks, the Theme Parks are the second largest operating segment. They include the 4 main parks in Florida, Disneyland in California, then many resorts all over the world like Tokyo, Paris, And Shanghai. Overall visitation has grown 3% year over year, this might seem low but recently Disney had to raise their prices. It turned out better than expected. They were able to still able to retain customers and raise prices slightly increasing the profitability of this segment.
Over time this part of the company has proven to be a cash cow. Being able to bring in over 20 million people yearly is no small feat. The increasing profitability will be the main points of growth for Disney over the next few years. Hopefully making up for the bit of decline possibly in the Media segment.
This possible growth is going to primarily come from the expansions of the parks themselves. Some of the new attractions opening up are the new “Star Wars Land” in both California and Florida come 2019. There will also be the new “Toy Story Land” will be opening up in Florida during the summer of 2018. All of these expansions and additions to their already parks will likely bring in more visitors. These park expansions will be the main source of growth for the Disney theme parks over the coming years.
The Movie Industry
The 3rd largest segment of the Disney empire is their movie industry. This is also the fastest growing segment of the Disney arsenal. I am sure I can speak for everyone when I am sure someone has seen a Disney movie once in their lifetime.
Whether it was the animated movies when you were little or maybe you have been a Star Wars fanatic your entire life. They tend to cover all bases when it comes to movies. I was raised through Disney movies and I am not the only one.
For decades they have been able to successfully put out been box office hits. After acquiring Pixar in 2006, Disney has seen tremendous success in the movie industry. Movies like Frozen or Moana have been smash hits for people of all ages.
If they are not creating a new smash hit, Disney continues to grow their already successful franchises like Star Wars, Toy Story, or Cars.
For years they have constantly been a large force in the movie industry. In 2016 Disney was able to capture the top 5 spots for highest grossing films of the year.
Disney Closing Thoughts
It’s hard to argue the House of Mouse is on the decline. We should acknowledge the possible choppy waters ahead for the Media segment but the growth in the theme parks and movie industry should be able to mitigate the possible losses.
Like I said before, I have grown up a Disney kid so this company is close to my heart. When I analyze it from an investor standpoint it excites me to see all of the new growth potentials along with the strong brand history. These factors will help Disney flourish for years. It’s hard to for me to imagine a life without The Walt Disney Company.
The past 10 years have been great for shareholders and hopefully, once the ship is guided through the potentially rough waters ahead it will be smooth sailing for investors. In the short term, Disney could see some losses, in the long term, however, its hard to bet against this company.
Related: Disney is a Powerhouse
Before I completely wrap this article up I want to talk about a common theme with these companies. The brand strength.
The competitive advantage each of these companies has is their strong branding. This has been a huge driver of success and will continue to be. Every little girl loves Disney princesses when you need to fix something your first thought is to go to Home Depot, and everyone knows the golden arches of McDonald’s.
It would be foolish of me not to include that a lot of the companies’ success has to do with the fact their brand strength is at the top of their industries.
You can expect the time winners to keep winning. These companies have proven to you they are winners.
Am I recommending that you should run out and buy all 3 of these companies as of right now? Absolutely not.
Instead, I want you to keep an eye on these 3. Then If there is ever a time in the future they become a broken stock that is beaten down for no serious fundamental reason then I would take a closer look.
If the share price gives you a bargain that can not be passed up, pull the trigger. I like these companies for anyone’s portfolio; At the right price of course. Do not just buy these companies for a reason just because.
These 3 companies have been the best performing Dow stocks for the past 10 years, does that mean they will be at the top again in 10 years? Who knows, all I can be certain about is that these are awesome companies. If you can get them at a great price they are worth it.
Peace and Love,
SISU Money has a disclaimer policy
Leave me a comment below! Tell me what you think about these companies. Do you think they can be at the top of the list again in ten years?