One Year Later: Five Defensive Plays

Here is a look at five defensive stocks I wrote about 1 year earlier and where they are now. The market was tanking but did not reach a bottom for another 5 months. Keep in mind that there are many fundamentals to look for when picking individual stocks, however I tried to keep it simple with just a few important ratios mentioned here.

1) The P/E ratio: All five stocks mentioned at the time had a P/E ratio of under 18. Only three currently have P/E's under 18.

2) Return On Equity or REO: All had REO's of 14% or better while four of these still do. The higher this figure the better. REO shows how well a company uses investment funds to generate earnings growth.

3) Dividend Yield: All paid dividends, and all have increased their payouts since.

4) Debt to Equity Ratio: This is a measure of a company's financial leverage. Debt/equity ratio is equal to long- term debt divided by common share holders' equity. Generally the lower this figure the better. Last year P&G had the highest D/E ratio in this group which was .52 today it stands at .33 .

These are the types of companies that the legendary investor Warren Buffett invests in. In fact Coca Cola (KO), Costco (COST), Johnson & Johnson (JNJ), and Proctor & Gamble (PG) are a part of Buffett's holding company Berkshire Hathaway. The five stocks mentioned returned a combined 11.05% before dividends. If you add on the average annual dividend yield of 2.67% for these five companies over the past year you will get a 13.72% total return. You will notice that all five issues are companies that make products we use and consume everyday, which is another trait that Buffet looks for.

One year later three out of five still look reasonably priced, those being HRL, JNJ, and PG.

Disclosure: Author still long JNJ.

Comments

[davidbdc:]

J&J's results were poor this quarter after being weak last quarter. They aren't growing in emerging markets as quickly as the competition and their Pharma business is a mess. I don't like all the 20-30% interest deals as it indicates their own R&D isn't worth the investment - better to pay someone else for their's.

If you bought J&J back when it was 20-30-40 then your pulling in nice dividends and should simply hold that stock as their porfolio of businesses contains enough strength to continue with the dividend for years........but I don't see any growth from this point forward in terms of the share price.

Oct 15 10:33 AM

[mbkelly75:]

JNJ is mature enough and has been for a long time to not worry a whole lot about growth in stock price. It will follow the growth in the dividend and that has averaged 12.04% over the last 5 years. With the difficulties that the market has seen, JNJ is not the only one buying research - it is a cost-effective way to get the job done. Their EPS was more than double the dividend payment for the entire year so I do not see a problem with that either. Of course, I have held them for a LONG time and the dividend is a good one based on my cost-basis. I am also a long-term holder of KO and PG so I agree with the writer on these also. Costco and Hormel are on my watch list.

Oct 15 11:57 AM

[FRANJUST62@...:]

TO THOSE WHO THINK COSTCO IS A GREAT COMPANY. UNDERSTAND THIS: COSTCO WILL BE GREAT AS LONG AS WALMART WANTS IT TO BE IF NOT THEY WILL THROW ALL OF SAM'S CLUBS AT THEM, AND THEN NO MORE COSCTO

Oct 15 12:12 PM

[davidbdc:]

JNJ is mature enough and has been for a long time to not worry a whole lot about growth in stock price. It will follow the growth in the dividend and that has averaged 12.04% over the last 5 years.
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problem with your statement is that the stock has gone nowhere for about 7 years. Again, if you bought several years ago your receiving a very good % dividend. But if folks are buying today they will be severely disappointed with their returns going forward. This company made a big mistake with Larsen's replacement - he has proven to be a minor leaguer in a big league uniform.....and his batting average is about .179.

Oct 16 07:57 AM

[mbkelly75:]

Well - yes and no. If you bought the stock on (for example) 8 Jan 2002, it was a $58.49 stock and today it is a (right now) $60.69 stock. If you were a straight buy-and-hold investor and have never re-invested a single dividend and used not even the simplest form of timing such as the 50 and 200 day moving averages (buying or selling when they cross up or down) - the stock has gone no where.

If you take into account that they have fully recovered from the largest drop in the general stock market in decades - in about 7 months - that performance does not look too bad at all. If you re-invested the dividends - you have done well in the stock. If you used the 50 and 200 day moving averages to buy and sell the stock - you have done well. If you did both - you have done well.

Your statement is more against buy-and-hold than against JNJ itself. If you buy today and re-invest those dividend when they come in (even most of the time- you do not have to do it all the time if you need some cash) you will do well with JNJ over the next decade or so - even without using the MAs, as long as their (currently 46 years) record of raising dividends goes unbroken.

Oct 16 11:05 AM

[davidbdc:]

Fully recovered? they were at $72 last September. Now its $60.

Hey if you like 3% on your money they I agree that J&J will be paying your 3% for a good many years. But that just basically keeps you even with inflation. And you have to ask yourself how could a company with so many "cash cows", strong brands, and huge amounts of cash accomplished.......not... but a 3% dividend for 7 years?

I have nothing against buy and hold. I have a lot against the destruction of shareholder value. And Bill Weldon has done a lot of that. The only positive strategic move I believe has been made under his watch was the consumer purchase a few years ago to vault them into the #1 position. Aside from that its been a disaster. A billion for a stent company that two weeks later has their one product rejected by the FDA? The seemingly crap shoot approach to trying to buy R&D and Pharma pipeline? Billions down the drain each year over the past 6 or 7. The alienation of 50% of the doctors that use stents with their initial pricing of Cypher? Depuy fraud and kickbacks in Europe. More and more FDA type letters, investigations, etc. They create a fourth division a year ago and now get rid of it? What type of strategic thinking is going on here? Not the kind of things we saw from J&J prior to Weldon. Not saying everything was pristine but there is simply something wrong and it starts at the top.

I wish you well with your investment - just remember folks wrote the same type of things about GE up until about 18 months ago. Assumptions in the place of facts will get your porfolio heading in the wrong direction before you know it.

Oct 17 02:46 PM