Investment Underground anticipates two scenarios for Q2 2011. Investors will head for the exits amid choppy markets, congressional debt grappling and QE2 curtailment, or investors will scoop up bargains paying dividends, often paying yields in excess of company bonds. Either way, these names should stand out from market peers:
Johnson & Jonson (JNJ): The healthcare giant is making moves to buy device maker, Synthes, and looks like a leader in earnings season. The company holds a price/sales ratio 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 $75, and yield a nice 3.6%. Due to the high yield and five-star predictability, JNJ also makes a great retirement buy, as we wrote here.
American Express (AXP): Amex's yield at 1.6% is decent but still a far cry from many income investors ideal rate. But this credit card giant has been paying and increasing dividends since 1977. Recently there has been a stall at $.18 a quarter, as has been the case for the last 14 quarters. Some think that AXP needs to haul in more members to continue competing with the likes of Visa (V), Mastercard (MA) and Discover (DFS), but current debit card legislation might be pushing consumers towards credit cards. With a 21% payout ratio there appears to be room for future increases.
First American Financial (FAF): This financial services company, specifically insurance and real estate, currently yields 1.5%. If you believe in a real estate come back, FAF could be a great place to see growth as it is the second largest title insurance provider in the U.S. Additionally, if things go well, FAF appears well positioned to increase dividend payments as the payout ratio stands at just 15%.
Like what you just heard about FAF, but want a higher current yield? Look no further than the largest U.S. title insurance provider Fidelity National Financial (FNF). FNF took over then third ranked LandAmerica to become the largest provider in 2009. The 3.3% current yield is above average and FNF has been paying dividends since 2005. But, dividends have been slowly declining as of late moving from a quarterly high of $.30 in 2008 to today’s $.12. Add in the 43% payout ratio and future growth could lead to more stabilized dividend increases. Whether it’s FAF or FNF, a real estate pickup could do wonders for increased dividend payouts.
Intel Corp. (INTC): Intel ups the ante with its 3.6% current yield. Intel's latest earnings report was stellar. This technology giant has been deemed a “dividend challenger” (David Fish) having increased its dividend for 8 consecutive years. For the last 5 years dividends have increased by an average of about 15% and if they do the same for the next 5 your yield on cost could double. Many investors are screaming bargain with INTC’s current Price to Earnings ratio around 10, very close to its historical low. Competition should be a concern, but the 35% payout ratio appears encouraging for both increasing dividends and reinvesting in the business.
Abbott Labs (ABT): is no stranger to the dividend arena. Long deemed a “dividend champion” having not only paid but also increased its payouts for 39 straight years. The 3.8% current yield is well above average and the 65% payout ratio suggests future sustainability. In recent years the dividend growth rate has slowly been increasing, from an 8.8% average increase in the 10 year average to the 10.6% average increase in the 3 year average. It might not be poised for huge growth, but ABT does allow for a strong combination of a high current yield and steadily increasing payouts. If you believe the heath care sector has been left behind, it could be an opportune buy.
Wells Fargo (WFC): From the interesting years of 1984 to 2008, Wells enjoyed a stable history of increasing dividends. Then 2009 happened and its dividends have been frozen at $0.05 for the last eight quarters. But confidence is up and payouts are on the rise. This banking giant makes up nearly 18% of Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) portfolio, and Buffett himself predicted a substantial dividend increase this year. True to form, WFC issued a special dividend of $0.07 this March in addition to its $0.05 quarterly payout. It still lags greatly from the pre-recession $0.34 a quarter, but a tiny 9% payout ratio suggest returning more value to shareholders is on the way.