Warren Buffett is often quoted that his favorite holding period is forever. However, the statement only applies to companies that have the capacity to increase their earnings power and pay solid dividends. In this article, I have analyzed companies that have potential to be “buy and hold” dividend stocks in your portfolio:
Vodafone Group Plc. (NASDAQ:VOD)
Vodafone is a global telecom company with a market cap of $133.43 billion. It currently has an estimated $84 billion in revenues, implying a growth of 18.70% for the year. Analysts expect earnings per share of $2.78 this year, +6.51% increase year on year. At the current price of $26.31, the company’s earnings are priced at only 9.46 times. It also has a dividend yield of 7.30%. These levels suggest that the market believes that earnings growth will be flat in the coming years. This seems inexpensive compared to its peer companies. For one, Verizon Communications (NYSE:VZ) is valued at 16.39 times earnings and carries a dividend yield of 5.4%. It seems that US telecommunications are valued higher given the current situation in Europe. In fact, another European telecom like France Telecom (FTE) trades at 7.91 times earnings and has a dividend yield of 8%.
It is obvious that valuing VOD as a European telecom is a mistake. It has presence in over 30 countries and with over 40 partner markets across the globe. Investors can be assured that the management is doing its job as good capital allocators. It has exited unprofitable ventures and reinvesting its profits to regions that it has significant advantage. Over time, investors will be handsomely rewarded with modest capital gains and dividend income.
Altria Group (NYSE:MO)
Altria Group is a holding company with operating interest in smokeless tobacco, cigars, wine and financial services. The business segment, cigarettes accounts for majority of its income. The investment appeal of these businesses is its steady cash flow and lower capital spending. The company has generated around $3 billion in run rate operating cash flow. This easily covers the dividends for the year.
On a year to date basis, shares of the company have risen by 9.35%. This implies a price earnings ratio of 11.95 times. It also has a dividend yield of 6.10%. Similar companies like Lorillard, Inc. (NYSE:LO) trades at 13.03 times earnings and carries a dividend yield of 4.70% and Reynolds American Inc (NYSE:RAI) is valued at 13.28 times earnings and has a dividend yield of 5.60%. The possibility risk is that its cigarette business, Philip Morris could implement price cut. This would result in lower margins and profitability. The margin of safety comes from the fact that consumer will not stop consuming its products even in times of a recession. Despite flat earnings, the company will still manage to pay its dividends. The upside is that the management has been aggressively buying back shares. This will reduce share count and increase earnings per share in the future.
Procter and Gamble (NYSE:PG)
Procter and Gamble is a global consumer company with a market cap of $176 billion. For the past 5 years, it has grown its sales by 5.09% and earnings per share by 9.95%. This seems respectable considering that the industry growth was lower. Industry revenues grew less than 1% and earnings flat at 1.16%. In turn, it has rewarded its shareholders by increasing its dividends by 11.37% a year. The steady growth is attributed to the consumer brands that the company carries. It also has strong distribution system to complement its portfolio of brands.
For this year, analysts expect earnings per share of 4.23, an increase of 7% over the previous year. These expectations appear in line with historical growth profile of the company. This also implies that the stock is trading at 15 times earnings. It also has a dividend yield of 3.30%. This is lower than the valuations of Colgate-Palmolive Co. (NYSE:CL) but higher than Johnson and Johnson (NYSE:JNJ). CL trades at 18 times earnings and carries a dividend yield of 2.50% and JNJ is valued at 13 times and has a dividend yield of 3.50%. While growth rates are not as spectacular as other sectors, this one will give investors steady income for the long haul.
Pfizer Inc. (NYSE:PFE)
Pfizer Inc. is a $141 billion pharmaceutical company. Investors who want a defensive stock with modest dividend yield should buy this stock. The investment thesis of pharmaceutical industry is simple. As the quality of lives improves, people would want to have the best healthcare services. PFE is the largest global research based biopharmaceutical company. It is at the forefront of innovation in the industry. It has a solid drug pipeline, which gives investors assurance of a strong revenue visibility in the future.
At these levels, the stock is trading at 7.92 times next year’s earnings and carries a dividend yield of 4.40%. These valuations seem low for a global pharmaceutical leader. Historically, the stock trades at around 14 to 19 times earnings. This is also how pharmaceuticals are historically valued. Most pharmaceuticals have depressed valuations. For instance, Merck & Co. (NYSE:MRK) trades at 8.76 times earnings and has a dividend yield of 4.70% and GlaxoSmithKline Plc. (NYSE:GSK) is valued at 11 times earnings and carries a 5% dividend yield. Assuming PFE is valued at its historical price earnings multiple of 14 times, the stock could trade at $32 a share. This is double from the current price levels and in line with most analyst targets.
McDonald’s Corp. (NYSE:MCD)
This is the stock to buy if recession happens. Consumers will line up for cheaper quick service restaurants to save on money and time. Given its strong global foot print, MCD investors will be comfortable holding this stock knowing that emerging markets have strong consumer base. For the last 5 years, the company has grown its revenues by 4.72% and earnings per share by 17%. On a trailing basis, revenue growth has improved at 16% and earnings per share at 19%. This is despite lower annual capital spending growth at 5%.
Analysts expect that the company will post earnings per share of $5.72 next year. This implies a 9% growth on a year on year basis. At the current price, the stock trades at 15 times earnings and has a dividend yield of 2.80%. Similar companies trade higher. Yum! Brands Inc (NYSE:YUM) is valued at 16 times earnings and carries a 2% dividend yield and The Wendy’s Company (NYSE:WEN) trades at 19 times earnings. The stock has gone by up 15% for the year. Although MCD does not look cheap, it’s not overpriced either. It is currently trading at the lower range of its historical earnings band. Investors should wait for the share price to pull back before taking the plunge.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.