We took a look at a few names likely to trade higher as we head towards 2012. Here is our opinion:
Procter and Gamble (PG): PG is a powerhouse on the “dividend champion” scene, having increased its payouts for 54 straight years. The 3.1% current yield is reasonable, but might get even better in the next month. PG looks to mirror IBM with an expected 10% increase to yield on cost. In the last four years, increase announcements have come on either the second Tuesday or the third Monday of April. Let’s call it April 18, the third Monday of April. The 53% payout ratio appears to be in line for this consistent consumer goods company. A near 12% average five-year dividend growth rate, coupled with the expected upcoming dividend increase announcement, make PG a play that everyone can see. Shares should trade for $80 in 2012 using a 9.5% discount rate.
Zimmer (ZMH): Shares of ZMH appear cheap considering the company's market share and demographic trends on the horizon. The company leads the hip and knee implant industry, an industry which should see solid growth as the baby boomers keep getting older. Zimmer's 2010 sales were $4.2 billion, a number we expect to grow steadily. The company's first quarter conference call for quarter 1 is April 28, 2011. Shares should trade for $80 in 2012 using a 10% discount rate.
Stryker (SYK): Stryker revenues exceeded $7 billion for the first time in 2010 on the backs of aging boomers needing hip replacements. The company acquired the neurovascular business of Boston Scientific (BSX), smartly leveraging its patent portfolio to expand into this less mature market. A commitment to its employees has earned Stryker a place among the 100 Best Places to Work. We think shares should fetch around $80 apiece in 2012 using a 10% discount rate to arrive at this estimate.
Fastenal (FAST): Fastenal has grown its dividend payouts by an average of 45% over each of the last 10 years. OK, so it might be cheating a little bit when you start with a split corrected annualized payout of $.0025, but then again, it also demonstrates the power of growth. In recent years the growth rate has slowed a touch, but the 12 years of consecutive payout increases add stability.
The current yield is just 1.5%, but if FAST can keep up the dividend growth rates there shouldn’t be too much concern for future yield on cost. A spot-on 1.00 beta and 55% payout ratio leave solid opportunities for the future. The company has turned selling fasteners into an ultra-profitable business. We value shares at $80 apiece in 2012 using a 10% cost of equity.
Johnson & Johnson (JNJ): This leading healthcare company holds a PSR of 2.7, not much higher than its 10-year low of 2.14, and sports a P/E ratio of 12.6. While recent product recalls could hurt the JNJ brand and cost millions of dollars, the firm is too diverse, too financially healthy, and too well run to not overcome the setback. And considering that the firm holds the #1 or #2 spot in 70% of its products, a product recall would have to cause major damage to the brand in order to significantly affect such strong control of the market.
Shares trade for around $60, below our fair value of $81 for 2011. Shares also yield 3.6% at the current price. Due to the high yield and high business predictability predictability, JNJ also makes a great retirement buy, as we wrote here.
Coca-Cola (KO): This Buffett friendly beverage giant has steadily increased dividends for 49 straight years. The 37% payout ratio is widely sustainable as well. Perhaps a word of caution to those investing today, KO hit its 52-week high Friday, and as a result its current yield has stumbled down to 2.83%. We model shares using a 10% cost of equity and arrive at an $80 per share value in 2012.
PepsiCo (PEP): Recently, Pepsi has been in the news for taking a back seat in sales to both Coca-Cola and Diet Coke. However, don’t let this trend fool you, as the whole soda market has steadily been decreasing. Pepsi has increased its dividend for 38 straight years and is well diversified in a plethora of other beverages and snacks. Paying about half of its profits, Pepsi is well-suited to keep growing in emerging markets.
A dividend increase announcement has been made the last three years on the first Tuesday or Wednesday of May, with increases marking 7%, 6% and 13%. Even a three-cent increase on the quarterly dividend to $0.51 would allow for a 6% increase in your yield to cost. We model shares at $82 apiece in 2012 using a 9.5% cost of equity. We expect a dividend increase announcement on May 3.
Current dividend: $1.92 (0.48/quarter); current yield: 2.97%.
Increased dividend: 38 straight years.
1-year growth rate: 6.3%.
5-year growth rate: 13.7%.
Payout ratio: 49%.
Morningstar (MORN): Morningstar issued its second dividend Wednesday (ex-dividend April 13, to be paid April 29). The company has a stellar, deep management bench in our opinion, and it is only a matter of time before the company takes over a substantial portion of the lucrative investment information and investment management markets. The company has $365 million in cash and no debt on its books which opens up numerous possibilities for bolt-on acquisitions as the company grows. We model Morningstar at $80 per share in 2012 on a discounted cash flow basis using a 10% cost of equity.
Range Resources (RRC): Range Resources Corporation explores and produces natural gas in the U.S. RRC owns 2 million net acres across the U.S., including positions in the Permian Basin, Mid-Continent region, gas fields in southwestern Virginia, and 800,000 fairway acres in the Marcellus, one of the premier shale gas plays in North America. Like GMX, the biggest issue for Range in the future will be depressed gas prices.
However, Range’s position in the Marcellus, which has superior conditions for drilling and close proximity to the Northeast, gives it an edge over many of its competitors. If there is movement in the U.S. toward natural gas, don’t be surprised to see Range rocket skyward. Range currently trades at $58.53. We estimate its fair value at $80 for 2012 using a 10.5% discount rate.
Monsanto (MON): Monsanto, with a market cap of $36.41B, is one of the largest agricultural product companies in the world. The firm offers chemicals and genetically-modified seeds to boost farm production across a wide variety of crops. Although the stock is currently trading at a somewhat expensive P/E ratio of 32.95, the company has top-notch profitability, with an operating margin of 16.01%. The company also has a ROE of 11.28%, and offers a $1.12 (1.70%) dividend.
In addition to rising food prices, there are a few factors that appear to be in Monsanto’s favor. First of all, Monsanto has a global presence, and should benefit from increased food demand in emerging markets, especially Latin America, where Monsanto has already experienced significant growth. Second, low investment in agriculture over the last decade means that products like Monsanto’s will become more important to improve farm productivity. Finally, Monsanto has always been at the forefront of agricultural breakthroughs, and currently has nine products in the developmental pipeline. We value shares at $80 apiece in 2012 using a 10% discount rate.
Novartis (NVS): Novartis has a solid 4.3% current yield. This Switzerland-based health care company is a “dividend contender” having increased its payouts for the last 10 years. Dividend growth has been ramped up considerably in recent years as the 10 year average growth rate of 6% makes way for the much more impressive 23% 3 year average growth rate. Factor in the 39% payout ratio and growth in 2012 looks promising.
The company does not face the relative "patent cliff" shared by its peers and has significant exposure to generic drug production. Novartis recently got the green light in a decision from an FDA panel on Afinitor, which treats various cancers. These panel decisions guide final approval of new drug applications. We model shares at $82 apiece in 2012 using a 9.5% discount rate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.