As the market volatility continues, this is as good a time as any to invest in high quality businesses selling at a quality price. One of the best indicators is a company that has been paying a consistent dividend for many years through every business cycle, as that can assure us it will keep paying us a nice income many years into the future. Moreover, when we can buy them cheap, like when our favorite stores have those clearance sales, why should it be any different than with our favorite stocks?
The four companies left with the coveted AAA rating - Automatic Data Processing, (ADP) Exxon Mobil (XOM), Johnson & Johnson (JNJ) and Microsoft (MSFT) - average a fantastic yield of 2.9%, while the S&P 500 (SPY) as a whole only yields about 2.2%. Let's look at each of these:
Automatic Data Processing dates back to 1949 and has since become one of the world's largest business outsourcing solutions. It does a lot of the back-office work people don't notice (such as payroll processing, tax and benefits administration solutions, and a wide range of other human resource services) and its great competitive moat is that once it has a company on board, the switching costs are huge and so it continues to reap the rewards. The company is trading at a reasonable 20x trailing P/E, 17x forward P/E, strong FCF this past year in excess of $1.5B, and consistently growing 3% dividend.
Exxon Mobil dates back to 1870 and since that time has become the world's most profitable company, as its annual profit is approximately $40 billion. High oil prices have definitely helped its cause, but so has an excellent management team. The current yield is a respectable 2.3%, trailing and forward 10x P/E, just .9x P/S and EV/S, and very strong FCF this past year in excess of $21B. Its big competitors, Chevron (CVX) and BP, look just as enticing. Chevron sports a 3.1% yield and is trading at about 8x price/earnings, while BP, still recovering politically from the huge oil spill, yields 3.9% and trades under a 6x price/earnings. I think a basket of these three would work nicely for the long-term dividend investor as they all three have payout ratios under 30%, which means not only a safe dividend, but very likely more raises coming in the near future.
Johnson & Johnson dates back to 1886 and has simply become a behemoth in the healthcare field, since that time churning out almost $65 billion in trailing twelve month revenue. The company has a very nice 3.5% yield, and is trading under 16x trailing P/E, 12x forward P/E. Moreover, it has a very healthy $11 billion in net cash and a payout ratio of almost 50%, which again has to give you confidence that not only is their dividend safe, but there's good reason to believe that it will continue to grow as the company has done for the last 49 consecutive years. This is a solid buy here.
Microsoft was at one point the world's most valuable company, but since that time over the last decade has pretty much just had a stagnant share price. However, the company still performed relatively well and has churned out big profits during that time. It currently has a trailing 9x P/E, 8x forward P/E, 1x PEG, 3.1% dividend yield, over $38 billion in net cash, and a payout ratio below 25%, leading me to believe that the respectable dividend increases since the company starting paying dividends in 2003 will continue. Moreover, another fellow technology giant, Intel (INTC), looks enticing as well with its almost 3.5% dividend yield, 11x trailing P/E, 10x forward P/E, approximately $8 billion in net cash, and a very healthy payout ratio right near 30%. One should reasonably expect this well-run company to continue its dividend raises since it started paying one in 1995.