There has been a lot of talk of dividends in the media recently. This is quite understandable. Long term growth of the major U.S. indices has been disappointing. Income has been the main source of stock market returns. And the aging investment population needs income and growth that the bond market is simple not providing in the current market.
Investors have learned many lessons in the financial crisis of 2007-2008. Firstly, consumers have a positive savings rate for the first time in a number of years. Second, banks are less willing to extend credit to high risk borrowers. This bodes well for the consumer staples industry. Consumers are focusing on necessities. It is unlikely that there will sudden changes in demand for these products. The following companies produce necessities appealing to almost everyone and are will have solid demand in most economic situations.
The following companies, Procter & Gamble (PG), Colgate Palmolive (CL), Clorox (CLX), Campbell Soup (CPB), and Heinz (HNZ) are for conservative investors with a need for income. Given the information below, Colgate Palmolive (CL) may be the most promising of the group. While these companies are not likely to double or triple any time soon, these consumer staples companies have been solid performers for many years.
Dividend Yields and Dividend Stability
The dividend yields for the group are given below. Each of these companies provides a reasonable yield. The dividend payout ratio is also given below. Shown in the bar chart, these companies are still able to reinvest in their business. Of the group CLX and HNZ have nice yields, however their payout ratios are also the highest. When comparing the potential income stream, PG, CL and CPB seem to be better positioned. It is important to note that these companies have a record of increasing dividends for decades.
Dividend Payout Ratio
Leverage is a key determinant of financial health. It can be defined in many ways. One of the most common metric is the Debt-to-Asset ratio. This is a longer run measure of financial health than working capital which is discussed next. The ratio takes into account both long and short run assets and liabilities. By definition, a leverage ratio below 1.0 implies a positive net-worth. Currently, all of these companies have positive equity values. In the last few years this was not always the case for CLX. Also, as with the dividend yields and payout ratios, CLX and HNZ seem to be the two most highly leveraged companies of the group.
The Current Ratio depicted below is a measure of short-term health. This ratio is inverted when compared to leverage. It is defined by current assets over current liabilities. So a ratio of above 1 is more favorable than a ratio below 1. Here, for the short term, HNZ seems to be the best positioned. PG has had stable earning is likely better able to manage their short term needs. Yet it technically has the worst short term ratio level.
The Profit Margin is an important measure of competitive advantage. This metric is defined as net income over revenue. There are other metrics of profitability such as operating margin; however the profit margin is a decent measure of a company’s comparative advantage. Companies with higher profit margins tend to have brand recognition, are more productive and are able to compete favorably with their peers. Each of these companies has well established brand recognition and solid reputations. In contrast, companies with lower margins need to compete by increasing volumes. Again PG and CL lead the group while CLX, CPB, HNZ have lower margins.
Revenue and Income Growth
While profit margin can measure the current situation, measures of growth are also important. All of the companies in this article have demonstrated positive sales growth in the last year. CPB had the weakest showing in terms on revenue growth. However this has not always translated into bottom line growth. CLX had the weakest showing in terms of net income growth over the past year. Only CL and HZ had increasing sales growth and increasing net income.
P/E Multiple and Implied Volatility
The data for this article was provided by Edgar Online. The Implied Volatilities were provided by the CBOE.
Disclosure: I am long PG.