A company's ability to maintain a competitive advantage, and therefore profitability, over the long term is an important consideration for income investors. We took a look at the investment landscape to find companies that can maintain dividend payments over the next decade. What follows are four "must-own" stocks that fit that criteria:
AT&T, Inc. (T) – T has lost some of its recent luster in the last few weeks, and not just because of the stock market’s volatility. T’s announced acquisition of T-Mobile is now the subject of a Department of Justice lawsuit to stop the acquisition. Some investors have taken the opportunity to play the other carriers such as Sprint (S) that would stand to benefit, and others are sizing up the odds of who will win the fight between T and the Justice Department. The predominate view is that T will not prevail in this fight, as it and the second largest carrier Verizon (VZ) would end up controlling 90% of the wireless market’s profit. T has a $3 billion termination fee in its acquisition agreement with T-Mobile’s parent company Deutche Telecom (OTCQX:DTEGY), plus is required to hand over an additional $3 billion worth of wireless spectrum to T-Mobile should the deal fail. While the merger news dominates the stock right now, the other important story that investors need to consider are T’s services that it provides to customers of Apple (AAPL). While T is no longer its exclusive carrier, AAPL continues to roll out popular products at a fast pace. The iPad2 is a recent example of the success. This tablet personal computing device has built-in 3G wireless capability that is resulting in increased wireless subscriptions for T. And the iPhone 5 is coming out in October, which is anticipated to be yet another blockbuster product. As of now, T trades at roughly 8.5 times trailing 12-month earnings and yields almost 6.2%. These statistics are attractive, but T also has a PEG (P/E to Growth) ratio of 2.2 which reflects its minimal growth and the fact that more than 70% of its earnings are paid out as the dividend. Given the low growth and significance of the T-Mobile transaction, we are inclined to stay on the sidelines and watch T for now.
General Electric (GE) – GE has under-performed the stock market the last month, and is down just over 6% in the last 12 months compared to the S&P 500 Index that is up just over 4.5% during the same period. In fact, GE is trading near the bottom of its 52-week range. One would think that, in a market downturn, investors would turn to a quality company like GE rather than sell it. With the stock weakness and the steadily growing dividend the last few years after it was cut in 2009, GE’s dividend yield is now 4%. This is double the dividend yield of the S&P 500 Index, and it is getting investors’ attention. The reason why the yield is so high, and the stock is under-performing, is the same challenge facing global equity markets - debt. Like the countries such as Greece and Spain that are making headlines, GE has a lot of debt due to its financing division. Investors are concerned that dividends can’t be sustained by leveraged companies in slow growth environments. GE needs to show earnings growth to cover its debts and dividend. As the economy continues to disappoint, and shows little growth and disappointing job creation, the 4% dividend comes under increased scrutiny. The company pays out 41% of its earnings as dividends, which is normally OK, but it’s high for a company with a leveraged balance sheet. GE’s earnings are growing, thanks to great products and crafty management. However, because of the debt, the economy and economic growth plays a larger role for a leveraged company like GE, and the stock reflects it. The good news is that the leverage effect works both ways, and GE should outperform when the economy turns back around. With its 4% yield, GE investors can get paid to wait for better economic times that should eventually come. Just remember that this is a more aggressive GE today than its long blue-chip reputation leads one to believe.
Intel (INTC) – INTC is yet another large and established blue chip company facing significant change in its industry. Long a darling of Wall Street, INTC has struggled with generating growth the past few years as computer processing has evolved dramatically. INTC was recently trading in the middle of its long-established sideways trading range of $17 to $24 per share. While always an innovator, INTC’s personal computer processing power has continued to improve with technology advancements, but competition from smart phones and, more recently, tablet PCs, has prevented INTC from maintaining stronger pricing power. However, cloud computing is a new and positive trend that holds longer-term promise for increased demand for INTC chips that is likely to help off-set the other personal computer trends. With a dividend yield of close to 4% and a P/E ratio around 10, INTC is getting noticed by value investors that see an opportunity in the stock. The company continues to be well managed, with the most recent example being its recent bond issuance in this historically low interest rate environment. The prevailing analyst opinion is that INTC is attractive at these levels and it remains a better bet than Advanced Micro (AMD). We agree, and think longer-term investors should consider accumulating the stock.
Merck (MRK) – While MRK is down about 12% over the last year and has under-performed the S&P 500 Index, it has outperformed the same market index for the trailing six month period. This turn-around reflects a few things that may well continue to the advantage of MRK. First, as uncertainty about economic growth has set in recently and caused market volatility to increase, investors have sought out quality companies in economically defensive industries. MRK, a large, diversified pharmaceutical company in the healthcare sector, has benefited from this trend. Second, MRK’s quality management, research and products continue to showcase the company within the industry. While the product line-up is strong, the pipeline for new drugs is not as attractive as it has been in previous periods, and the patent expiration on its number one selling asthma drug Singular will likely cause some uncertainty and volatility in the stock. The company’s management continues to seek ways to grow, and has been cutting costs, seeking research partnerships, and looking for geographic expansion. Along this line, MRK has been deepening its marketing efforts in China to bring more of its products to that country’s huge population. MRK currently has an attractive dividend of 4.7%, and an equally attractive dividend payout ratio of 40%. Combining these characteristics with a forward P/E ratio of 9 makes MRK attractive in our opinion. We believe longer-term investors are well compensated to wait for a resumption of growth from this market leader.