I looked at five stocks and assessed their ability to continue their policy of dividend payments. In an economy where interest rates may remain low for some time, investors seeking income may wish to hold such stocks forever:
Johnson and Johnson (JNJ): A giant in the world of healthcare, Johnson and Johnson operates in three segments: consumer, pharmaceutical, and medical devices and diagnostics. Founded in 1886, the Brunswick, New Jersey based company has a market capitalization of $182.34 billion, and is expected to show revenues of $65.07 billion this year, and $68.49 billion in 2012. Shares are currently trading at $66.72, toward the upper end of their 52-week range of $56.99 to $68.05. With earnings per share estimated to rise from last year’s $4.41 to this year’s estimated $4.95 to $5.26 in 2012, analysts estimates of an average 12 month target for the share price of $71.82 seem conservative. Johnson and Johnson’s dividend of $2.28 for the last financial year produces a dividend yield of 3.40%, with a coverage ratio of 1.93. Its long term history of dividend growth, which has seen annual dividends rise from $0.1638 in 1990, seems set to continue from this giant in a sector that is also likely to see continued growth.
McDonald’s Corporation (MCD): McDonald’s has increased its dividend each year since paying its first cash dividend in 1976, and started paying quarterly dividends in 2008 due to the substantial increase in the value of its dividends over the last few years. It recently declared a dividend for the latest quarter $0.61 per share, making a total of $2.44 on a dividend yield of 2.80%. The coverage ratio is similar to that of Johnson and Johnson at 1.94. The shares trade at $88.56 on the day of writing, with a 52-week range of $68.59 to $89.57, and a current market capitalization of $90.05 billion. Analysts expect earnings per share to rise from this year’s $4.73 to $5.12 next year, and revenue to move ahead to $27.84 billion from $26.36billion. Since its founding in 1948, MacDonald’s has increased its size and scope to be one of today’s major world brands. It operates in 117 countries, and franchises out 26,216 of its 32,478 restaurants. With such a global brand, and customer loyalty built from an early age, we expect dividend growth to continue unabated in the future. MCD should be able to stay ahead of competition from Wendy's (WEN) and Yum! Brands (YUM).
Pepsico (PEP): A company best known for the natural rival to Coca-Cola (KO), Pepsico is a manufacturer and seller of foods, snacks, and beverages around the world. In addition to Pepsi, it operates other leading brand names such as Lay’s, Doritos, Quaker, Gatorade, and Mountain Dew. It has increased its dividend for 39 straight quarters, and has a market capitalization of $102.87 billion at its current share price of $65.08, a little below the mid of its 52-week range of $62.05 to $71.89. Its current annual dividend of $2.06 is paid from its earnings of $3.74 per share. Yielding 3.00%, with a coverage ratio of 1.82, dividend growth, which has seen the dividend more than triple in the last ten years, is likely to carry through the next few years as analysts expect earnings to rise strongly through the next two years to $4.91 per share. Though reporting this week that earnings this year are likely to come in weaker than expected, and seeing a downward movement in share price in reaction to this news, the stock now trades at a forward PE of 13.9, which is in line with the broader market. Founded in 1898, Pepsico has weathered earnings storms before and I think it will maintain its ethos of increasing value to shareholders through increasing dividends in the future. Pepsi should be able to maintain its market advantages relative to Coca-Cola for a long time to come.
Alcoa Inc. (AA): Alcoa Inc. was formed in 1888 and has its base in New York. The company produces aluminum, fabricated aluminum, and alumina, with interests around the world, and the alumina segment engages in the mining of bauxite, which is then refined into alumina. It serves industries from aircraft to automobiles, transportation to defense and industrial applications. In the last couple of years it has faced earnings problems, and slashed its dividend from $0.17 per share to just $0.03 per share in 2009. At the same time it turned to shareholders for cash. Consequently, at $15.66 on the day of writing, the shares trade on a historical price earnings ratio of 17.87 and give a market capitalization of $16.66 billion. This share price, toward the upper end of its 52-week trading range of $9.92 to $18.47, may be indicative of a return to favor among investors. The dividend yield is a lowly 0.80%, and on the face of it seems inconsequential. However, with current dividend coverage of 7.87, and analysts’ expectations for EPS to rise over the next 2 years to $1.44, there is plenty of room for the company to revert to stronger dividends in the future.
Altria Group Inc. (MO): Altria Group Inc. (formerly Philip Morris), was formed in 1919 and is a manufacturer and seller of tobacco, cigarettes, smokeless products , and wine, internationally. Its cigarette brands include the giants Marlboro, Benson and Hedges, and L&M. It also produces and sells blended table wines, and distributes Antinori and Villa Maria Estate wines, and Champagen Nicholas Feuillatte in the USA. On top of these main activities, the company maintains a portfolio of leveraged and direct finance leases in rail and surface transport, aircraft, electric power, real estate and manufacturing. The company is known as a cigarette manufacturer, and for this reason some more ethical investors would give it a wide berth. It may also be for this reason that it has one of the most generous dividends available. At 5.7%, the return is way above the return on cash held in a deposit account. It has tremendous cash flow, and though the dividend cover is only 1.27, with revenues expected to grow to $17.53bn next year (up from an estimated $17.13 in the current fiscal year), and EPS estimates centering around $2.18 for the same period, Altria Group has plenty of room to maintain its dividend. It is also increasing it exposure to other areas, and has a 27% stake in SABMiller (OTC:SBMRY, OTC:SBMRF), one of the world’s largest brewers and from which it receives a dividend of approximately $300mn (2010). With a forward price earnings ratio of just 11.98, the dividend yield should be maintained, whilst the absolute dividend should continue to grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.