Despite the European debt crisis, emerging market slowdown, and uncertainties over a so-called "fiscal cliff" in the U.S., the S&P returned 13.7% in 2012 (through Dec. 22). With continued improvement in economic conditions, the currently extremely low interest rates, and the Fed's easing policies poised to fuel inflation in the future, the stock market is well positioned to continue its bull run in 2013. In this article, I offer 10 dividend stocks for a conservative portfolio for 2013 and beyond. Although I expect the bull market to continue in 2013, the stock market in general is fairly valued, not undervalued, right now, and is not without downside risk. Hence, my stock picks will focus on defensive names that are large and prominent in their industries, conservatively financed, currently selling at low valuations, and expected to continue to generate predictable, satisfactory returns for many years to come. I chose these 10 stocks from 10 different sectors, so that investors who buy only these stocks will own a well-diversified portfolio.
Before I offer my picks, I shall first review my picks for 2012. My 10 stock picks returned 14.5% in 2012 (through Dec. 22), including dividends, slightly outperforming the S&P 500. My best pick was Harris Corp. (NYSE:HRS), returning 42.3% for the year. My worst pick was Exelon (NYSE:EXC), returning -27% for the year. Thankfully, that turned out to be my only losing pick. The other eight had returns ranging from 1.7 to 28%. The full result is shown below.
Performance Details, Jan 2012 to Dec 2012
|Symbol||Name||Annual Return||Volatility||Avg Correl||Period||Price Change|
|AZN||Astrazeneca PLC C||9.0%||16.3%||0.46||12/31/11 - 12/22/12||$43.56 to $47.47|
|WMT||Wal-Mart Stores||17.7%||18.3%||0.18||12/31/11 - 12/22/12||$58.32 to $68.65|
|TOT||Total S.A.||7.1%||20.4%||0.34||12/31/11 - 12/22/12||$48.16 to $51.6|
|AFL||AFLAC Incorporate||28.0%||19.9%||0.48||12/31/11 - 12/22/12||$42.03 to $53.81|
|HRS||Harris Corporation||42.3%||27.8%||0.42||12/31/11 - 12/22/12||$34.91 to $49.67|
|ESLT||Elbit Systems Ltd||1.7%||23.3%||0.06||12/31/11 - 12/22/12||$39.51 to $40.2|
|CHL||China Mobile Limited||24.2%||16.5%||0.35||12/31/11 - 12/22/12||$46.56 to $57.82|
|EXC||Exelon Corporation||-27.0%||17.1%||-0.55||12/31/11 - 12/22/12||$40.95 to $29.88|
|HAS||Hasbro||18.6%||18.1%||0.33||12/31/11 - 12/22/12||$30.39 to $36.04|
|BBL||BHP Billiton plc||23.0%||30.2%||0.42||12/31/11 - 12/22/12||$56.3 to $69.26|
This result is typical of stock investing: you win some, you lose some, but the overall return for a diversified portfolio should be satisfactory compared to the market. I believe the fundamentals for all my 10 picks for 2012 are still intact, so I would recommend holding onto them for the long term. Therefore, my new picks are intended only for new money to invest in the market for long term growth. Here are my new picks:
|Stock||Price||Current PE*||Normalized PE*||Yield (%)|
|Public Service Enterprise Group (NYSE:PEG)||$31||11||17||4.6|
|Nippon Telegraph and Telephone (NYSE:NTT)||$22||9.7||10||4.3|
|Norfolk Southern (NYSE:NSC)||$62||11||19||3.2|
|General Dynamics (NYSE:GD)||$70||10||13||2.9|
*Current PE is calculated using last fiscal year earnings. Normalized PE is calculated using average (median) earnings over past 10 years.
1. AstraZeneca (AZN): a leading global pharmaceutical company with operations in over 100 countries, increasing presence in emerging markets, and a diversified product portfolio, AstraZeneca remains a safe long-term bet on the ballooning healthcare demands from an aging population worldwide. With the company's recent performance adversely impacted by patent expirations and pricing pressure, investors' expectations remain low, giving this out-of-favor stock one of the lowest valuations both in its history as well as compared to its peers. The balance sheet is relatively clean with a debt-to-equity (D/E) ratio of only 42%, and the company has a solid track record of profitability, with return on equity ROE] consistently above 15% over the past decade. Although the current PE may rise in the short term as earnings decrease, the normalized PE of 12, which is low compared to the company's annual earnings growth rate of 21% over the past 10 years, indicates significant value. The downside should be limited by the stock's currently low valuations and its high dividend yield of 6%, while the upside is tremendous, as the company boosts its pipelines and the stock returns to favor.
2. Total (TOT): another one of my very favorite stocks, and also a repeat of my picks from last year, Total remains significantly undervalued, with both current and normalized PE in the single digits. Although not as safe as Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX), Total's financials are still impeccable, with D/E only 34% and a high interest coverage of 35. Total stands out with a high dividend yield of 5.7%, and a normalized PE of 8, which is much cheaper compared to 15 for both XOM and CVX. TOT is a great value play and should continue to benefit from incessant worldwide demand for oil and a recovery in Europe.
3. Tesco (OTCPK:TSCDY): While most consumer staple stocks have become dear [Procter & Gamble (NYSE:PG), for example, sells at a current PE of 22 and a normalized PE of 23] and no longer reasonably priced for me to recommend, Tesco remains attractively priced, with single digit current PE and normalized PE of 14. Tesco is one of the world's largest retailers, with a solid record of consistent growth. It has maintained consistently satisfactory margins around 6% and high ROE around 16% for the past decade. Impressively, Tesco has seen its earnings increase every year for the past 10 years, without exception. It is one of the best defensive stocks and should hold up well even if we should slip into a recession. It currently offers an attractive 5.6% yield.
4. Public Service Enterprise Group (PEG): with average ROE of 16% over the past 5 years, and current and normalized PE of 11 and 17, respectively, this is one of the most profitable and attractively priced stocks in the utility sector. With a D/E of only 0.79, it is also one of the most conservatively financed. Although I still believe Exelon to be significantly undervalued, Exelon is more risky, with a higher debt and its dividend yield of 7% is at risk. Although more expensive compared to EXC, PEG is a safer value play with limited downside risk.
5. Nippon Telegraph and Telephone (NTT): With most telecom stocks, such as AT&T (NYSE:T) and Verizon (NYSE:VZ), selling at lofty valuations, NTT remains inexpensive, with normalized PE of only 10, half that of the general market. NTT is conservatively financed with relatively low D/E of 0.55 and high interest coverage of 22. While not quite a growth stock (its earnings have been essentially unchanged for the past 10 years), NTT is very attractively priced compared to its peers, and is a relatively safe dividend stock with limited downside risk that can have significant upside should Japanese equities return to favor.
6. Microsoft (MSFT): with its current PE of 15, Microsoft appears more expensive compared to Apple (NASDAQ:AAPL) with a current PE of 12. However, one must go deeper than current PE, which is likely artificially low for AAPL with earnings at a cyclical high. In contrast to the high flyer Apple, which posted earnings deficit only 10 years ago, Microsoft is more consistently profitable, with a diversified product portfolio that can help mitigate against downside risk in the high risk but highly lucrative technology sector. Compared to AAPL's ROE which ranged from a low of 1.6 to a current high of 36% over the past decade, MSFT is more steady, with ROE consistently above 10%. The most important financial ratio to measure value, originally proposed by Graham and Dodd but recently popularized by Robert Shiller, is normalized PE using average earnings over past 10 years. For MSFT, normalized PE is 18, much safer compared to 97 for AAPL. MSFT is currently out-of-favor with low investor expectation, and it would not take much upside surprise to boost the stock.
7. Norfolk Southern (NSC): No portfolio would be complete without a railroad stock, and NSC is one of the more attractively priced among the leading railroad companies. Its normalized PE of 19, while seemingly high, is low compared to 22 for CSX and 38 for Union Pacific (NYSE:UNP). Considering that NSC had a compound EPS growth of 19% over the past 10 years, it is quite attractively priced. With high gas prices likely to persist, railroad remains the best bulk transport option, likely for many years to come.
8. Walgreen (WAG): The recent feud with Express Scripts has hurt WAG's profits and depressed the stock price of this dividend aristocrat. While it might take some time to recover from this recent blip, the stock is currently attractively priced, with current PE near decade low and dividend yield of 3% near decade high for the stock. WAG will almost certainly recover from the recent mishap, and the current price offers a relatively low entry point for a great company with a consistently strong track record for many years.
9. General Dynamics (GD): the aerospace and defense industry is relatively cheap compared to market due to pending defense budget cuts and uncertainty around a fiscal cliff. GD is a leader in this industry, and relatively safe, with interest coverage of 25 and D/E only 0.3. Given a compounded annual growth rate of 12% over the past 10 years, GD's current PE of 10 and normalized PE of 13 remains very attractive. If history is any indication, the federal budget is unlikely to get cut severely, and any cuts will probably prove temporary, as GD's products will remain in demand.
10. Aflac (AFL): Aflac has performed well in 2012, with a 28% total return. Despite the rally, it remains cheap, with single digit PE and a reasonable normalized PE of 18. This dividend aristocrat, a leader in the supplemental health and life insurance business, has a long solid track record of profitability with average ROE of 18% over the past 5 years, compounded annual EPS growth of 12% over the past decade, and a very strong balance sheet with D/E of 0.24, much better compared to many of its peers in the financial sector. I continued to believe that AFL is one of the very best in the financial sector.
Disclaimer: As much as I try to be as objective as possible, these stock picks are my personal opinion only. While these stock picks represent my best ideas, and I fully expect them to beat the market in 2013 and beyond, they may lose money. The author and Seeking Alpha specifically disclaim responsibility for any losses incurred from application of the information contained in this article. Investors are well advised to do due diligence before investing in any stock. These stocks are intended to be held for the long term and may lose money, especially over the short term. For the foreign stocks mentioned, I recommend holding them in taxable account, so that any foreign tax withheld can be refunded when filing annual tax returns. All data on these stocks are obtained from google.com/finance and money.msn.com. For further guidance on picking stocks, please read Security Analysis, by Graham and Dodd.
Disclosure: I am long AZN, TOT, AFL, MSFT, NTT, PEG, EXC, WAG, NSC, XOM, T, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.