There’s no secret that Warren Buffett’s company Berkshire Hathaway (BRK.A) never paid a dividend to its shareholders. Ironically, he usually buys companies with a long history of dividend payments. This is the reason he does not mind if there’s pessimism in the market. His insurance is the dividend he receives from these companies. Here is my analysis of solid companies with a good track record of dividend increases:
Wal-Mart Stores, Inc. (WMT)
WMT is the kind of stock to hold during a recession. The demand for discount retailers will be higher as consumers would prefer buying inexpensive items. The company is also a hedge against a falling dollar as more than 40% of its sales are outside the US. This figure will most likely continue in the future. It is currently looking to expand its international presence via acquisitions and store openings. Its earnings are expected to grow 9.60% this year organically. This growth figures appear modest relative to its competitors.
The stock is trading near its 52-week high. This may appear expensive at first glance but if you look at valuations, you’ll know the real story. The market is valuing the stock at 10.64 times next year’s earnings and a dividend yield of 2.80%. This may not seem the valuation you get for a giant in the retail industry. In contrast, retailer Target Corporation (TGT) sports slightly higher valuation. It is trading at 11.42 next year’s earnings and a 2.40% dividend yield. Even Costco Wholesale Corporation (COST) has higher valuations at 19.43 times next year’s earnings and a 1.30% dividend yield. The international growth story of WMT is intact. Its modest dividend yield makes it more attractive than other retail stocks.
Exxon Mobil Corp. (XOM)
There is a big correlation between stock prices of oil producers and oil prices. With oil prices below $90, it will take a while before energy stocks outperform the market. Since there are valid reasons to be bullish about the long-term prospects of oil, investors can buy energy stocks at a discount. In this kind of environment, investors should look up to the biggest name in the industry. This is where the thesis for Exxon Mobil Corp. (XOM) comes in.
The current price of XOM implies a value 7.77 times next year’s earnings and a dividend yield of 2.70%. This is higher than other big name energy stocks. Chevron Corporation (CVX) trades at 6.99 times next year’s earnings and 3.30% dividend yield, and BP Plc (BP) is valued at 7.40 times next year’s earnings and 4.40% dividend yield. It seems that a 2% dividend yield is not spectacular, but dividends are expected to be higher in the future. The company has solid cash flows and a comfortable cash position with little debt. The track record of earnings growth appears solid. There’s no reason to doubt the sustainability of dividends in the future. Analysts have mixed ratings of the stock. The target price is pegged at $92.72.
Diageo Plc (DEO)
The company is a beverage alcohol maker with solid brand names. The collection includes Smirnoff, Johnnie Walker and Baileys. The company’s moat is grounded on these brands, as habits are hard to break. This definitely makes the company recession-proof. However, shares of DEO have declined by 10% for the last 3 months. The reason is that US and Europe businesses have posted flat growth, below expectations of investors. The silver lining is that emerging market businesses have grown by double-digits.
At the current price of $73.83, the stock is trading at 13.25 times next year’s earnings and 2.80% dividend yield. Although valuation seems reasonable, this is lower than the valuations of peer companies such as Heineken N.V. (OTC:HINKY), which trades at 25 times next year’s earnings and Brown-Forman Corp. (BF.B, BF.A) at 17 times next year’s earnings with a 1.92% dividend yield. The company has also increased its dividend distribution over the past decade. Management is doing its best to contain costs through restructuring and cost-effective measures. Even with a steady pay-out ratio, there is a bigger chance that dividends will be higher in the future. Deustche Bank has upgraded DEO to buy rating, citing better margins and bottom line.
PepsiCo, Inc. (PEP)
PepsiCo, Inc. is a solid global snacks, food and beverage company. The company is also a global dominant company across markets where it competes. It reported revenue of $58 billion in fiscal year 2010, with net profit of $6.38 billion. For the year, analysts are expecting a growth of 7.70%, higher than the 5-year earnings growth of 5.87%. The company also sports a return on equity of 15.38%, lower than Coca-Cola’s (KO)’s 26.80% but higher than Dr. Pepper Snapple Group (DPS)’s of 6.83%. Around 34% of the company’s earnings come from emerging markets, so there’s a solid earnings growth down the road.
The stock is trading at 12.92 times next year’s earnings and has a good dividend yield of 3.30%. In contrast, KO has 15 times next year’s earnings and 2.20% dividend yield and DPS at 12.20 times next year’s earnings and 3.60% dividend yield. The problem with the market is that it is valued based as a beverage maker and not as a food and snacks company. The latter usually carries better earnings multiples than beverage maker due to competition and saturation in some markets where it operates. The company will most likely maintain its dividends moving forward, even as it plans to invest through product acquisitions and introductions.
Johnson & Johnson (JNJ)
Johnson & Johnson is a solid long-term play in the healthcare space. The company has registered steady revenue growth of 4.04% over the past 5 years, as well as earnings per share growth of 7.35% for the same period. This may seem unimpressive with the sector’s 5-year average revenue growth of 11.26% and earnings per share growth of 10.91%. The reason is not due to bad management or deteriorating economic prospects of the company, but rather from the law of large numbers. For a mega-company like JNJ with a revenue base of $64 billion, it’s not easy to post a high double-digit growth unless it acquired a similar company with the same base. So, the investment appeal of JNJ is actually its steady dividends.
At the current price of $64.97, the stock is trading at 12.28 times forward earnings and has a 3.60% dividend yield. This is slightly higher than other notable healthcare stocks. Abbott Laboratories (ABT) is valued at 10.12 times earnings with a 3.90% dividend yield, while Pfizer, Inc. (PFE) is trading at only 8 times earnings and a 4.50% dividend yield. For the past 5 years, dividends grew an average of 10.60% a year. . JNJ is valued higher given its diversity of revenue sources, which allows it to maintain a higher dividend pay-out.
Procter & Gamble Co. (PG)
PG is one of those stocks that should be included in a long-term and conservative portfolio. Earnings appear to be predictable with fewer earnings surprises. Revenue has increased by 5.09% a year, while earnings per share have also grown by 9.95% for the past 5 years. Investors should give management an A+ for capital allocation. The 5-year average return on equity looks good at 16.74%. Like Johnson & Johnson (JNJ), earnings growth does not look spectacular and the selling point is its dividends. PG’s dividends have also increased by 11.37% over a 5-year period. Dividend pay-out is also high at 47%.
The stock is trading at 13.67 times next year’s earnings with a dividend yield of 3.90%. In contrast, another consumer stock, Colgate-Palmolive Co. (CL), trades at 15.62 times next year’s earnings and has a 2.70% dividend yield, while Church & Dwight Co. (CHD) is valued at 17 times earnings with a1.70% dividend yield. PG has a wide distribution network globally and poised to capture markets that have strong potential for growth. With the 10-year government bonds at 2%, conservative investors should be buying PG rather than its fixed income counterpart.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.