August 2011 proved brutal for the global financial markets as they tumbled heavily owing to myriad factors including a historic, game-changing downgrade of United States’ sovereign credit rating from “AAA” to “AA+” by Standard & Poor’s (MHP) (at the start of the month), concerns of an economic slowdown in United States, concerns over France’s AAA rating and heightened trepidations of a financial contagion by virtue of the European debt crisis spilling over to Spain and Italy.
Even as the markets sagged substantially, different stock categories (having different attributes) showed varied movement patterns in their prices. Especially, some of the stocks not only showed tough resilience against the worsening market sentiments, they also managed to strike reasonable gains for investors. These stocks carry multiple advantages like strong fundamental prospects, long history of sustained financial performance and defensive nature of their businesses. Among these stocks, the following 5 stocks, even after their impressive performance against the market, are on offer at very attractive levels.
Altria Group Inc. (MO)
Better to be called the “cigarette” giant, Altria Group inc. (formerly Philip Morris Companies inc.) manages probably the biggest network of companies involved in the manufacturing and sale of cigarettes, smokeless products and liquor in United States and the world over. The company is recognized, apart from other things, for its stable profitability and rich dividends and these two factors have contributed extensively towards MO’s sanguine performance during the last three years.
After a trough of $15 per share at the start of December 2008 when the dividend yield was at a peak of 8.5%, the scrip managed to bounce back strongly and has clocked an outstanding 81% return till August 2011-end. However, this has not faded the glitter of MO.
As a consequence of positive momentum in its earnings and dividends, the scrip still offers an eye-catching dividend yield of around 6%. With its strategic interests in multiple industries, the striking characteristic of MO is its ability to not only milk out handsome dividends for its shareholders but also the tendency to react to any positivity in its prospects.
Merck & Co. Inc. (MRK)
Merck & Co. Inc. is one of the largest pharmaceutical companies (among top 7) in the world. The company operates in three broad operating segments i.e. pharmaceutical, animal heath and consumer care. The company’s financial figures during the last five years suggest a constant dividend policy irrespective of the profitability performance as the company has been announcing $0.38 per share dividend in every quarter since the third quarter of 2004.
While the earnings of the company have been uneven during the period due to non-recurring expenses related to mergers and restructuring, MRK’s share price has moved in lengths and breadths during the last three years, touching a trough of $22.70 in the first quarter of 2009, only to rebound notably, riding the tide of upward market recoil (strong correlation with the market).
Even with the mentioned price uprise, the scrip still offers a stirring 5% dividend yield which makes it appealing to value-savvy investors having an appetite for low risk and more than reasonable returns.
Kraft Foods Inc. (KFT)
With at least 12 of its brands earning more $1 billion annually, Kraft Foods Inc. is one of the world’s largest food and beverage conglomerates with presence in six continents and around 40 brands which are more than a century old. The company’s (adjusted) financial performance has remained almost stagnant during the last three years which has reflected in its dividend payout pattern as well. However, the future outlook of KFT looks better.
With a current dividend yield of 3.3%, average 12% earnings growth expectation during the next two years and average dividend payout ratio of 59% during the last two years, the scrip is trading at 2012E dividend yield of 4.3%.
In the backdrop of these factors, KFT’s low correlation with the market (beta: 0.45), and its recent tendency to positively react to its relatively constant mergers and acquisition activities, the scrip is worth consideration.
McDonald’s Corporation (MCD)
Since its inception in the 1940’s, McDonald’s Corporation has grown from strength to strength to become the world’s largest chain of fast food restaurants serving around 64 million customers annually with a reach of 119 countries. The supremacy of the company rests on the fact that it is one of the few global companies which have been continuously showing growth for the last many years, withstanding even the most turbulent economic circumstances.
However, the most important feather in MCD’s cap is its status as one of the “S&P 500 Dividend Aristocrats” i.e. companies that have consecutively increased their dividends during the last 25 years (an achievement in itself). Moreover, MCD currently holds the number 3 spot in this list in terms of market capitalization. Considering the trend in MCD’s (adjusted) share price during the last 5 years, it seems like the scrip only knows north direction as it has shown steady rise during the period with no major short-term blip during this period.
And, the story does not end here. With a compound annual (earnings) growth rate of above 12% expected till 2012 and a dividend payout assumption of 50%, the scrip offers a 2012E dividend yield of 3% which, along with its ability to reflect price gains independent of the market, makes MCD a solid contender for taking investment positions.
Exxon Mobil Corporation (XOM)
Being involved in the full spectrum of oil and gas business, Exxon Mobil Corporation reserves several accolades in its coffers. In addition to maintaining the no. 1 position among the Fortune 500 companies in almost every year of the last decade, it is one of the largest companies in the world by market capitalization and the largest refiner in the world.
As it would seem, the company’s fortunes are mainly tied to movements in international oil prices which is evident in its revenue and earnings patterns during the last five years. Historically, XOM has yielded less than 2% in terms of dividends.
However, 2011 is all set to witness a robust 39% rise in XOM’s bottom line which, assuming a 25% dividend payout, reflects a forward dividend yield of 3%. And the possibility of mean reversion to its historical levels of dividend yield augurs a strong possibility of capital appreciation in the stock.