Seeking Alpha
, Optionity (1 click)
Long/short equity, value, options trading, options investing
Profile| Send Message|
( followers)  

Altria Group (NYSE:MO) and The Procter & Gamble (NYSE:PG) are two companies that offer strong cash flow with low betas. Both companies have a healthy balance sheet with steady sales growth and have been increasing their dividend consistently since 2009. Both stocks will be analyzed fundamentally in this article. Investing strategies will also be reviewed.

Altria Group Inc.

MO was up 0.12% and closed at $34.00 on March 8, 2013. MO had been trading in the range of $29.76-$36.29 in the past 52 weeks. MO has a $68.86B market cap with a very low beta of 0.47.

Analysts currently have a mean target price of $36.82 and a median target price of $36.00 for MO. Analysts, on average, are estimating an EPS of $0.53 with revenue of $4.04B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.39 with revenue of $17.65B, which is 0.90% higher than 2012.

MO is currently offering an annual dividend yield of 5.18%. Since mid-2009, MO had been increasing its dividend consistently. The dividend yield had been stabilizing around 5% since 2012, as seen from the chart below.

(click to enlarge)

Source: YCharts.com

There are a few positive factors for MO:

  • Higher revenue growth (3-year average) of 1.3 (vs. the industry average of -1.9)
  • Higher operating margin of 41.4% and net margin of 23.9% (vs. the averages of 23.4% and 21.3%)
  • Stronger ROE of 122.1 (vs. the industry average of 108.8)
  • Lower P/E of 16.5 and P/B of 21.6 (vs. the industry averages of 17.0 and 58.1)
  • Lower Forward P/E of 13.2 (vs. the S&P 500's average of 13.9)
  • MO generates an operating cash flow of $3.90B with a levered free cash flow of $5.33B

How to Invest

MO remains a solid long-term holding for investors seeking cash flow and dividend income. At the current 5.18% annual dividend yield and Forward P/E of 13.2, MO is still reasonably valued. For bullish investors, a credit put option spread of June 22, 2013 $30/$32 put can be reviewed to gain some upside credit premium or to buy MO stock at a price below $32 upon options expiration. Investors can also review the following ETFs to gain exposure to MO:

  • Consumer Staples ETF (NYSEARCA:VDC), 4.35% weighting
  • Consumer Staples ETF (NYSEARCA:XLP), 4.28% weighting
  • Dow Jones U.S. Consumer Goods Index Fund (NYSEARCA:IYK), 4.08% weighting

The Procter & Gamble Company

PG was up 0.36% and closed at $77.18 on March 8, 2013. PG had been trading in the range of $59.07-$77.76 in the past 52 weeks. PG has a market cap of $210.83B with a very low beta of 0.46.

Analysts have a mean target price of $79.44 and a median target price of $80.00 for PG. Analysts, on average, are estimating an EPS of $0.96 with revenue of $20.81B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $4.06 with revenue of $84.73B, which is 1.30% higher than 2012.

PG is currently offering an annual dividend yield of 2.91%. Since late 2009, PG had been increasing its dividend consistently. Although the current dividend yield is not as high as in mid-2012, the current dividend yield is still attractive based on PG's reasonable valuation, as seen from the chart below.

(click to enlarge)

Source: YCharts.com

There are a few positive factors for PG:

  • Higher revenue growth (3-year average) of 3.0 (vs. the industry average of 1.4)
  • Higher operating margin of 17.8% and net margin of 15.5% (vs. the industry averages of 14.6% and 9.9%)
  • Lower debt/equity of 0.4 (vs. the industry average of 0.5)
  • Lower P/E and P/B of 19.8 and 3.2 (vs. the industry average of 20.2 and 4.4)
  • PG generates an operating cash flow of $14.41B with a levered free cash flow of $11.04B.

How to Invest

With a solid balance sheet, strong cash generation ability, and solid growth, PG is still a great buy based on current valuation. For bullish investors, a credit put option spread of July 20, 2013, $70/$72.5 can be reviewed, which will allow investors to gain some upside credit premium or allow investors to acquire PG stock at a price below $72.5 upon options expiration. Investors can also review the following ETFs to gain exposure to PG:

  • Consumer Staples Select Sector SPDR , 14.24% weighting
  • Dow Jones Industrial Average ETF (NYSEARCA:DIA), 4.12% weighting

Note: All prices are quoted from the closing of March 8, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: 2 Growing Cash Cow Stocks To Fight Market Volatility