5 Dividend Producing Stocks To Guard Against A Downturn

|
 |  Includes: AAPL, ABT, EXC, JNJ, LO, MCD, MO, MSFT, PEG, YUM
by: Pragmatic Bear

The leaders of the European Union have officially underwhelmed the financial markets expectations of a comprehensive fiscal solution. This inadequacy has put downward pressure on the financial markets as well as the euro. They have also pushed Italian bond yields back into unsustainable territory. Italy has 320 billion euros worth of debt to roll over next year. The majority of analysts believe that they will not be able to do this unless their interest rates drop down toward 5%, a far cry from 6-7% rates of today. 26 of the 27 countries agreed to a pact has no legal enforceability this fact is disconcerting. The United Kingdom’s decision to abstain from the pact stops it from becoming part of the EU’s treaty. The eurozone’s refusal to deal with this crisis in a more direct and comprehensive way has persuaded me to become more negative for the first quarter of 2012. I do not like the path that Europe is on or the precedent that they are setting. They are trying to piecemeal their way through this crisis and it doesn’t seem like it will work.

I am not a proponent of trying to time the markets. However, since every bit of bad news from Europe tends to shock the markets lower I believe it may be time to lighten our growth oriented stocks and focus on value investments. The 6 stocks that I chose to analyze pay significant yields, have large market caps, and our leaders in their respective industries. Also it is not a coincidence that the majority of these choices are found in traditionally defensive sectors of the economy. The protection of these sectors and the generous yields that these companies provide could be useful in a slow growth environment. With no further ado let’s now take a look the six companies on my list.

Microsoft (NASDAQ:MSFT)

Overview: McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of September, there were 33,100 locations in 117 countries, including 26,800 franchisees/affiliates units and 6,400 company units.

Fundamentals:

§ Yield = 3.11

§ Price/ Cash Flow = 8.0

§ Price to Earnings (F-TTM) = 8.4

§ Debt to Equity vs. Industry Avg. = .2 to 10

§ Market Cap = 215.3 Billion

§ Sector = Technology

Opinion: Microsoft is one of the few value dividend plays in the technology sector. It is also one of my favorite choices for 2012. Microsoft’s stock price has been range bound for a very long time. However, with the highly anticipated Windows 8 being premiered in October 2012, this could be the year that it breaks out. Many analysts have expressed this view and look for 2012 to be a big year for MSFT.

Microsoft has all the solid fundamentals I look for in a company. It has very little debt compared to the industry, while having over $50 billion in cash and short-term investments on the books. It also pays a respectable yield that has been growing since it was issued in 2003. With its large hoard of cash Microsoft should have no problem increasing this payout for years to come. MSFT has also increased their dividend for 7 consecutive years.

Some Alternatives in the Sector: Apple (NASDAQ:AAPL)

Johnson & Johnson (NYSE:JNJ)

Overview: Johnson & Johnson ranks as the world's largest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents close to 36% of total sales, we expect patent losses and the Synthes acquisition to reduce this proportion to approximately 27% during the next 10 years, with the device segment picking up the majority of the share.

Fundamentals:

§ Yield = 3.60%

§ Price/ Cash Flow = 12.0

§ Price to Earnings (F-TTM) = 12.1

§ Debt to Equity vs. Industry Avg. = .2 to .8

§ Market Cap = 172.5 Billion

§ Sector = Healthcare

Opinion: The largest healthcare company in the world is a great place to look for investment opportunities. Healthcare as a sector is extremely defensive as consumers will cut almost everywhere else before slashing healthcare expenses. This makes it a very interesting place to look for solid dividend stocks. That is exactly what we have in JNJ. It provides its investors with a strong 3.60% and has been increasing this payout for 49 straight years. Also I think that Obama’s healthcare reform has been priced into the share price. So if the Supreme Court does decide to overturn it next year there could be some upward momentum for the entire sector.

Some Alternatives in the Sector: Abbot Laboratories (NYSE:ABT)

Lorillard (NYSE:LO)

Overview: With annual sales topping $4 billion in 2010, Lorillard is the third-largest cigarette manufacturer in the United States. Its flagship brand, Newport, claims a 13% share of the total cigarette industry and a 36% share of the menthol category. The firm also competes in the non-menthol premium category with much smaller brands Kent, True, and Satin and in the discount segment with Old Gold and Maverick.

Fundamentals:

§ Yield = 4.80%

§ Price/ Cash Flow = 13.9

§ Price to Earnings (F-TTM) = 12.5

§ Debt to Equity vs. Industry Avg. = 2 to 5

§ Market Cap = 14.4 Billion

§ Sector = Tobacco

Opinion: Tobacco is generally regarded as a highly defensive industry as consumers have a hard time kicking the addiction even when their paychecksare stretched. While I am not supporter of their product personally, I appreciate the opportunity that it provides to investors. Tobacco stocks have had a fantastic year as the top 5 in the industry have returned 24.14% year to date on average. LO has growth in earnings per share, revenue growth, largely solid financial position with reasonable debt levels compared to its competitors. It also provides investors with 4.80% yield

Some Alternatives in the Sector: Altria (NYSE:MO)

McDonald’s (NYSE:MCD)

Overview: McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of September, there were 33,100 locations in 117 countries, including 26,800 franchisees/affiliates units and 6,400 company units.

Fundamentals:

§ Yield = 2.86

§ Price/ Cash Flow = 14.5

§ Price to Earnings (F-TTM) = 17.1

§ Debt to Equity vs. Industry Avg. = .8 to 3

§ Market Cap = 99.9 Billion

§ Sector = Fast Food

Opinion: McDonald’s is the leading fast food company in the world and has been performing beautifully this year. It provides cheap filling food that is highly satisfying. Analyzing this industry you would be hard pressed not to notice some interesting similarities between the Fast Food and Tobacco industries. They both have an addictive product that has potentially negative health consequences. However, fast food has one huge advantage. The stigma around cigarettes is much more intense and widespread than it is on fast food.

McDonalds has had a fantastic year as its share price has increased 27% year to date while the S&P 500 is down 3.64%. McDonalds has been steadily growing across the board. In November they posted a significant boost in same store sales. McDonald's sales at restaurants open at least 13 months surged 7.4% globally. However, analysts were expecting a rise of 4.6%. This has caused the stock price to test consistently test its 52 week highs. MCD is a fantastic company and if you have a considerable position in it, consider yourself lucky. On the other hand, I think that it is begging to become pretty expensive both from a Price to Cash Flow and Price to Earnings perspective. I would look for any significant pull back in the share price to dollar cost average my way into this stock.

From a dividend point of view MCD is also stellar. Although the recent upsurge in price has pushed the yield down below 3%. The company has still increased its dividend for 35 consecutive years with a 5 year average growth rate of 27.5%.

Some Alternatives in the Sector: YUM! Brands (NYSE:YUM)

Exelon (NYSE:EXC)

Overview: Exelon is a holding company with regulated and unregulated divisions. Its regulated division, comprising Commonwealth Edison of Illinois and PECO of Pennsylvania, distributes electricity and natural gas to 5.4 million customers. Its generation division owns base load, intermediate, and peaking plants in seven states. Exelon's 11 nuclear plants generate 80% of the fleet's total output.

Fundamentals:

§ Yield = 4.89

§ Price/ Cash Flow = 7.0

§ Price to Earnings (F-TTM) = 13.9

§ Debt to Equity vs. Industry Avg. = .9 to 1

§ Market Cap = 28.2 Billion

§ Sector = Utilities

Opinion: Few investors outside of the dividend community have much respect for utilities. The lack of high growth numbers should be a comfort to investors while there is a major global financial crisis underway. Utilities have long been considered one of the most stable dividend producing sectors in the economy.

Exelon is the largest nuclear provider in the United States. Morningstar has a very positive view on the company stating “Its ability to produce low-cost electricity with minimal greenhouse gas emissions should produce substantial, sustainable, and growing shareholder value for many years, regardless of what path power prices take.” I agree with Morningstar’s take and I feel that the future of Exelon is bright. The company also provides investors with a high yield of 4.89% and has a lower debt to equity rating than the average of its competitors.

Some Alternatives in the Sector: Public Service Enterprise Group (NYSE:PEG)

*I would like to thank Morningstar for the valuation and ratio metrics. Also I would like to thank DRiP Investing Resource Center for their list of U.S. Dividend Champions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.