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In my previous article entitled Top Five Quality Dividend Paying Companies, I asked the questions:

  1. Which companies survived relatively well in the last 3 years with good profit margins, reasonable levels of debt, ROA, ROE, and pay dividends?
  2. What volatility did these companies experience in their share price over the last 52 weeks?
  3. What sort of returns could I potentially gain holding these companies medium to long term?

We found Johnson & Johnson (NYSE:JNJ), Coca-cola (NYSE:KO), Southern Copper Corp. (NYSE:SCCO), Altria Group (NYSE:MO) and Abbot Labs (NYSE:ABT) using the following screening criteria:

  • Mid to Large cap;
  • Dividend yield above 3%;
  • Profit margin above 10%;
  • ROA above 10%;
  • ROE above 20% and
  • Total Debt to Total Capital ratio below 50% (Total Capital = Total LT Debt + Shareholders Equity).

How did these companies fare seven months later? The S&P 500 moved from 1,113 (Jue 21, 2010) to 1,329 (February 11, 2011) or 19%, did we perform well comparatively?

Table 1: Top 5 Quality Dividend Paying Companies (June 21, 2010)

Company

Ann. Div

DY%

Profit Margin %

ROA %

ROE %

Debt/ Cap%

52W H %

52W L %

Ratio

JNJ

2.16

3.65

21

12

27

19

12

8

3.72

KO

1.76

3.36

23

12

31

32

14

10

2.59

SCCO

1.80

5.93

23

21

34

25

22

39

0.83

MO

1.40

7.00

20

10

97

74

10

19

1.33

ABT

1.76

3.62

16

9

27

45

17

11

2.90

Table 2: Top 5 Quality Dividend Paying Companies Updated (February 11, 2011)

Company

Ann. Div

DY%

Profit Margin %

ROA %

ROE %

Debt/ Cap%

52W H %

52W L %

Ratio

JNJ

2.16

3.56

22

12

25

24

9

6

4.56

KO

1.76

2.78

24

12

29

32

4

22

0.35

SCCO

2.32

5.23

30

23

40

42

13

42

0.50

MO

1.52

6.22

23

11

84

70

7

21

0.89

ABT

1.76

3.86

13

9

21

47

22

2

14.87

In the tables, you will notices that Profit Margins are mostly increasing with SCCO standing out due to the increase in copper prices, and ABT being the only one to suffering some margin pressure due to increased R&D spending and costs.

As a result there has been noticeable changes in ROA and ROE notably in ROE. With ROE falling, it means that Net Income added to Shareholders Equity is (obviously) less than in the comparative period, or you could say earnings are ‘slowing’. You would need to dig in further to discern what is contributing to the decline - taxes, unusals; whether seasonality is involved; and overall whether this observation is ‘good’ or ‘bad’. At this point, we can only say that it is ‘slowing’ for all the companies except for SCCO.

We also observe increases in the Debt/ Total Capital % for JNJ where there is a slight jump; and SCCO where there is quite a large jump. This would also be something to look into and determine if these companies are taking advantage of low interest rates to restructure their balance sheet to get cheap funding for operations, or for expansion to fund future growth, the latter being the preferable reason.

Lastly, we observe that the Ratio has fallen for KO and SCCO as their share prices get closer to their 52 week highs and increases for ABT as its share price nears its 52 week low. MO has been the most stable out of all of the companies. This is in line with the broader market moves and within the 52 week H-L range. What we do not want to see are crazy moves to either extremes.

If you had invested $1,000 in each of these stocks last year, you would have returned approximately 13% from capital appreciation and 2% in dividends (assuming you invested prior to any ex-dividend dates) on an absolute return basis (i.e. not annualized return) for a total return of 15% verses the S&P 500 of 19% as a rough benchmark. Not a bad return and less effort than investing in all 500 stocks (granted that there are ETFs alternatives available).

Disclaimers:

  1. Tax considerations have not been included in this analysis. You should consult with your tax professional or financial advisor before investing.
  2. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.

Disclosure: I am long JNJ, MO, ABT and none of the other stocks mentioned as of Feb 11, 2011.

Source: Top 5 Quality Dividend Paying Companies: A Performance Assessment