Great companies earn very high returns on invested capital. Such companies are fantastic wealth creators because they can take a dollar of earnings and turn it into significantly more than a dollar over time. In fact, over many years, companies who can compound at high rates of return can turn a dollar into many hundreds of dollars. For example, a company that can earn a return of 20% annually will deliver a 6-fold return over 10 years, and a 15-fold return over 15 years. Investors can be very well served by holding shares in companies who compound earnings at high…
Great companies earn very high returns on invested capital. Such companies are fantastic wealth creators because they can take a dollar of earnings and turn it into significantly more than a dollar over time. In fact, over many years, companies who can compound at high rates of return can turn a dollar into many hundreds of dollars.
For example, a company that can earn a return of 20% annually will deliver a 6-fold return over 10 years, and a 15-fold return over 15 years.
Investors can be very well served by holding shares in companies who compound earnings at high rates over many years. However, a large proportion of companies choose to pay out a meaningful percentage of their earnings to shareholders as dividends. While this is good for shareholders in some circumstances, it can also be detrimental if shareholders are unable to redeploy that capital at higher rates of return.
If a company can earn a return of 20% per annum most shareholders would be better off if the company kept its earnings and compounded it, rather than paying it out as a dividend.
Here are four companies with high returns and that pay no dividends.
A2 Milk Company Ltd (ASX: A2M)
The A2 milk company markets, distributes, exports and sells milk and infant formula that is free of the a1 protein that is usually present in cows’ milk. The company earns a very high return on equity, and hasn’t paid a dividend since listing on the ASX three years ago. Analysts are not forecasting a dividend payment for 2018.
Bellamy’s Australia Limited (ASX: BAL)
Bellamy’s offer a range of organic food and formula products for babies, toddlers and young children. The company has consistently earned very high rates of return over the last four years. It did not pay a dividend last year, but did pay out 26% and 31% of its earnings in 2015 and 2016 respectively. Analysts have forecast a dividend of around 2 cents per share in 2018, which is a forecast payout ratio of only 5%.
Bingo Industries Ltd (ASX: BIN)
Bingo provides end-to-end environmental and waste management solutions across the waste management supply chain. The company has not paid a dividend in the two years that it has been listed on the ASX, and has compounded shareholders equity at high rates. However, analysts have forecast a dividend of 5 cents per share in 2018, with a payout ratio of around 40%.
Shareholders can benefit when companies pay no dividends and instead retain earnings to compound them at higher rates than shareholders could attain if the cash was returned to them. These four companies are reasonable options if investors are looking to benefit from compounding of their wealth over many years.
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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.