Investors are worried. Worried for many reasons, but primarily worried because the utility value of their money has been destroyed. No, we are not talking about the 'dollar weakness', which is another future factor to worry about. Instead we are talking about the yield that one can expect from one's money on a risk adjusted basis. Interest yields are so low that they render entire life savings as virtually worthless, as the purchasing power from the interest is not sufficient relative to prior expectations. Investors must choose between depletion of their savings or adding risk by buying dividend paying stocks to maintain planned cash flow needs. Either path is unsettling for many, so we offer the following insight for those who must make a choice.
Buy Deep Blue Blue-Chips
When the investment environment is shaky and doubt rules the day, focusing on companies that have history on their side will restore confidence. These companies should be the bluest of blue-chips, and be able to weather any upcoming storms. While no company is immune to disaster (think BP), true blue-chips will have solid cash, very manageable debt, and sufficient earnings strength to cover their dividends and maintain value.
Exxon Mobil (NYSE:XOM) $72.64
Market Cap $353B
2011 EPS est $8.62 PE 8x
2012 EPS est $8.92 PE 8x
Dividend Yield 2.6%
Exxon Mobil was formed when Exxon merged with Mobil in 1999, but the company's roots go back over 125 years when Rockefeller formed Standard Oil. As the clear leader in performance for more than a century, Exxon has consistently delivered results for its shareholders. Over the years, they have consistently returned weath to their shareholders with both share buybacks and dividend increases. In fact, Exxon Mobil has increased their dividend every year since 1983 (28 years and counting). Exxon annually replaces its reserves at a rate greater than it depletes them, and with a resource base of more than 84 billion barrels, each share purchased is effectively controlling more than 16 barrels of oil.
General Electric (NYSE:GE) $15.79
Market Cap $167B
2011 EPS est $1.38 PE 11x
2012 EPS est $1.59 PE 10x
Dividend Yield 4%
GE was formed in 1892, and may have the richest history of all. Founded by Thomas Edison, this company has been at the forefront of innovation for more than 100 years. Today, GE continues forward as arguably the best industrial producer in the world. From jet and train engines, to energy turbines that power our world, GE is heavily involved in producing energy and making transportation more efficient. In addition GE has a major presence in healthcare equipment, and of course lighting and appliances for consumers and businesses alike. And to further add to their strength, GE has a major worldwide financial unit that fuels their earnings and creates opportunities to make equipment sales.
While the financial unit has been a cause of concern over the past few years, GE has materially strengthened the unit by reducing assets by over $50B and increasing equity by over $10B. The company has over $90B in cash (versus a $167B market cap), and in October GE will buy back and retire the preferred stock that Berskire Hathaway (NYSE:BRK.A) bought during the 2008 crisis. For those worried about their future, the backlog for their products and services reached a record $189B last quarter. The company's CEO Jeff Immelt stated on the Q2 Conference Call, "We remain on track to generate $12 billion to $13 billion of CFOA for the year...Finally, we expect margins to expand in 2012 versus 2011"
JPMorgan (NYSE:JPM) $32.80
Market Cap $127B
2011 EPS est $4.98 PE 7x
2012 EPS est $5.54 PE 6x
Dividend Yield 3.1%
JPMorgan Chase can trace its roots back to 1799, and has been built on the foundation of more than 1200 predecessor institutions. Its major heritage firms — J.P. Morgan, Chase Manhattan, Chemical, Manufacturers Hanover, Bank One, First Chicago, and National Bank of Detroit, have combined to form a truly amazing institution. As either number 1 or 2 in almost every market they participate in, JPM is considered the best managed financial company in the world.
As the market focuses daily over who is the next "Lehman", JPMorgan is never mentioned as on the ropes. The weak financial industry in general has caused a drop in their share price, which we view as a massive buying opportunity. JPM is trading at tangible book value, giving absolutely no additional value for their rich heritage and dominant market positioning. The company has not only started raising their dividends again, but last quarter they re-started with stock repurchases. In Q2, JPM purchased $3.5B in shares and we expect much more over the coming decades.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.