Back at the end of 2010, several investment bloggers invited me to a stock picking competition. Each one had to select four stock picks which they expect to perform well in 2011. The four picks that I selected were all dividend growth stocks. The companies I selected include Philip Morris International (PM), Johnson & Johnson (JNJ), Procter & Gamble (PG) and PepsiCo (PEP). You could read the reasoning behind selecting these stocks in this article.
Below is a brief overview of each of the four stock picks:
Philip Morris International Inc. (PM) engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company generates all of its revenues outside the US, which shields it from potential negative legislation here. In addition, by focusing on the growth in emerging economies, it could achieve high earnings and dividend growth while paying an above average dividend to investors. While the EU market is mature like the US one, the positive for PMI is that it has a growth kick. If you add in strategic acquisitions and cost initiatives, there is no wonder investors increasingly favor PMI over Altria Group (MO).
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. In addition, Johnson & Johnson is expanding into new long-the term opportunities such as the vaccines business of Crucell NV. As usual, growth in emerging markets and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run. Sales in drugs like Simponi, Stelara and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. Most importantly this dividend aristocrat has raised distributions for 48 consecutive years.
The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company operates in three global business units [GBUs]: Beauty and Grooming, Health and Well-Being, and Household Care. Procter & Gamble is an example of the perfect dividend growth stock. It has strong brand recognition, solid competitive advantages as well as a diverse portfolio of products sold throughout the world. The company strives to generate cost savings, tries to grow through innovation and through acquisitions, while carefully managing the cash flow in order to pay dividends and buy back stock consistently. The company has the benefit of its large scale and sells a diverse number of products that have a broad geographic reach. The company has a consistent revenue stream and is targeting earnings per share growth in the high single to low double digits. Most importantly, the Dividend Aristocrat Index has raised distributions for 54 consecutive years.
PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. The company has recognized that carbonated drink sales are not going to grow significantly in the future, which is why it has focused on fast growing non-carbonated soft drinks. The company’s innovation in the area has been successful with the introduction of Aquafina, Gatorade and Propel, Lipton teas and Tropicana.
Pepsi has also started to emphasize on health and wellness, and has worked to minimize the amount of trans fats in its snack foods. Future earnings growth could also come from synergies associated with the acquisitions of its bottlers, streamlining of operations and cost cutting. The distribution networks of the bottlers acquired could be used to push some of PepsiCo’s non-beverage products such as snacks and other foods.
Earnings growth could also come from strategic acquisitions, as well as product innovations in health and wellness food and beverage section. The company has recently announced its plans to acquire the leading Russian food and beverage company Wimm-Bill-Dann (WBD), in an effort to position itself in the growing emerging market in Russia and to build its nutrition business. PepsiCo is another member of the S&P Dividend Aristocrat Index, and has consistently raised distributions for 38 years in a row.
My performance year to date trails the market and several of the bloggers. It is important to note that as a long term investor, I don’t judge my performance based off monthly or quarterly fluctuations. I try to select solid dividend spaying companies with strong competitive advantages, which would allow the firms to generate rising earnings and pay higher dividends over time.
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In summary, investors should be cautioned that in order to be successful in dividend investing, one has to have many more than four dividend stocks in their portfolio. I believe in diversification, meaning having at least 30 dividend stocks in your portfolio. These stocks should be representative of as many sectors as possible. In addition, having some international exposure could be an added bonus.