3 Dividend Champions With High ROE - Do Any Belong In Your Portfolio?

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 |  Includes: CLX, LMT, PBI
by: Black Coral Research

By Aman Jain

Return on Equity [ROE] is a parameter that reflects how much a company has generated in profits with shareholder money. It is an important valuation metric to scan the health of the company. With signs of recovery in the economy, it will be wise to choose stocks that have performed well on this parameter and at the same time have been rewarding investors with dividends.

So, to help you choose better, discussed below are three companies with high ROE and strong dividends.

Click to enlarge

*as of 5/26/2013

Source: Finviz.com

The Clorox Company (NYSE:CLX) manufactures and markets consumer products through four segments: cleaning, household, lifestyle and International. The company mainly hires grocery stores, mass merchandisers and other retail outlets to sell its products. One of the most famous products of the company is its namesake bleach.

The third quarter results from the consumer goods company were slightly above the expectations of analysts, mainly because of cost cutting and price increases. Clorox posted earnings of $134 million or $1.00 a share for the third quarter of the current fiscal, against $134 million or $1.02 a share in the corresponding quarter of the previous year.

The company has been consistent in increasing its dividends, and most recently increased its quarterly dividends by 11% or 7-cents to 71-cents per share. Prior to this, the company paid 64-cents per share. The stability that Clorox has in its dividend payments along with the regular hikes show that the company has good future prospects to grow as well as to generate positive cash flow.

Clorox shares have increased about 20% in 2013, which is more than the 16% increase for the S&P 500.

Pitney Bowes Inc. (NYSE:PBI) manufactures software and hardware, and also provides service for documents packaging, mailing and shipping.

Pitney Bowes shares have not performed very well in the current fiscal year, with its 20.20% decline underperforming the S&P 500. The company's earnings per share have come down compared to the corresponding quarter of the previous year. For 1Q 2013, the company reported a decline in both net income and revenue. The net income came in at $67.51 million or $0.33 per share compared to $158.67 million or $0.79 per share in the previous year.

Pitney Bowes has been able to improve its return on equity compared to the corresponding quarter in the previous year. The increment in the ROE can be seen as a slim improvement in the health of the company. Still, the company's ROE is significantly higher compared to that of the Commercial Services & Supplies industry and the S&P 500,

The company has declared that it would sell the management service business wing in the United Kingdom and Republic of Ireland to Swiss Post solutions. The software company came to such conclusion as the segments were failing to complement its existing line of businesses. For the second quarter, the dividend was reduced by the board to 18.75 cents per share.

Lockheed Martin Corporation (NYSE:LMT) is a global security and aerospace company, which is in the business of research, design, development, manufacture and sustainment of technology system products. The company posted impressive results for the first quarter of 2013, in which the net earnings came in at $761 million, or $2.33 per share, from $668 million, or $2.03 per share in the first quarter of 2012.

The defense company won four of 20 contracts from the Department of Defense [DOD]. Lockheed Martin's four contracts constitute 20% of the total $717.7 million of the entire awards from the DoD. The company has a length of orders in hand and its customer base is also strong, with clients like the U.S. government, foreign governments and other commercial buyers. It is possible that the company can rise further fueled by the Obama Administration's focus on unmanned systems, cyber security, Intelligence Surveillance Reconnaissance, force protection and missile defense.

The defense company has many platforms programs like C-130 Hercules & C-5 Galaxy transport aircrafts, the Littoral Combat Ship [LCS], the Global Positioning Satellite III (GPS III) system satellites, the Terminal High Altitude Area Defense [THAAD] system from which it has been deriving benefits will continue to do so in coming quarters.

The management of the company is also clear about its strategy of building confidence amongst the shareholders through share repurchase and incremental dividends. One area of concern is that Lockheed Martin Corporation is excessively dependent upon the U.S. government, which means that if the federal government reduces spending on defense, then it would heavily affect the operating segment.

Conclusion

If we have to choose a company on the basis of ROE, then Clorox Company is far ahead of the other two. However, if we consider the overall scenario, Lockheed Martin seems to be well positioned for growth and is our favorite.

Clorox is a good bet, but the industry seems to be overstretched, and there could be some decline in prices. Pitney Bowes still has yet to prove its mettle, as its stock did not perform very well in the fiscal year, and the quarter results have been unimpressive so far.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LMT over the next 72 hours.

Business relationship disclosure: Black Coral Research is a team of writers who provide unique perspective to help inspire investors. This article was written Aman Jain, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.