A good metric for looking at how a company has done over the past few years is to look at their compound annual growth rate, or CAGR for short. Recently I have been looking at this figure a lot more when I research great dividend paying stocks for investments. I use the number that the CAGR formula pumps out in conjunction with the yield and the yield growth to check if a company is worth a further look.
Before we jump in, it’s probably best to make sure that you know exactly what CAGR is and how you can calculate it. What you’re going to need is a start value, an end value, and a time frame. My time frame is typically five years. From there, you’ll end up with a formula that looks like this and can be used in Excel for efficiency in calculation:
So, let’s say we’re going to use this formula with the profits over the last five years on Intel Corporation (NASDAQ:INTC). Well, we already have the time frame: five years. The next thing you’ll have to do is seek out some historical values, and I typically pull mine from MSN Money. Looking up Intel on that website, I can see their 2007 net income came in at $6.98 billion and their 2012 net income was $11.01 billion. If we take our three figures and plug them all in we get something looking like this:
That equation above comes out to 9.45%, which represents Intel Corporation (NASDAQ:INTC)’s yearly growth in net income per year over the last five years. You can use this formula on any value that you can find in the income statement or balance sheet of any public company, and it actually can give you some very valuable information.
How I Use It
I take that formula above and use it in conjunction with some high dividend paying stocks (they’re my favorite kind). Let’s take a look at another stock, one that I own, and one that pays a pretty high dividend: Altria Group Inc (NYSE:MO). Altria is a tobacco products company that has one of the strongest dividends available. It is, of course, a sin stock, but that hasn’t stopped their share price from growing over the decades to the levels it is at today.
Let’s once again use the five year figure from the Intel Corporation (NASDAQ:INTC) example and head on out to find our historical data on Altria Group Inc (NYSE:MO). Net income at the company was $3.13 billion in 2007 and was $4.18 billion when FY 2012 rolled to a close. There’s some growth there, but how much? My Excel calculation tells me that the CAGR (by the way: we typically use CAGR on invested amounts. It’s the same calculation, so I’m giving it the same name) is 5.96%. Now that I have that value, I add on top of it the dividend yield, which for Altria Group Inc (NYSE:MO) is 5.19%. Adding those two numbers gives me 11.15%, above the 10% threshold that I typically look for.