We were looking at tough times coming into 2012, and the tough times are persisting. The European debt crisis/recession/Greek negotiation has yet to be resolved. Since the first of the year the IMF has downgraded the whole world, basically. World growth is slowing, Europe is going into outright recession and Chinese GDP is declining. The bright spot however is the United States. We grew at a slow 1.7% but are expected to increase some in the new year. The first round of earnings reports is good. There were some surprise misses, especially among techs like Oracle (ORCL) and Redhat (RHT). There have also been some nice surprises, like Coca Cola (KO), who managed to improve growth in Asia, especially China.
Now we have a new worry: The Fed. Bernanke has now stated twice before Congress that the Federal Reserve will protect the US economy from the European financial crisis. The chairman maintained a cautious tone, "We still have a long way to go..." when commenting on the economy. He fails to look at the success of American business, especially overseas. Foreign markets have played a significant role in the success of American-based companies. Harley Davidson (HOG), Ford (F) and Coca-Cola (KO) are only a few of the American corporations who have been achieving strong results from overseas sales. What can the Fed really do? Raise rates, lower rates? These actions would do nothing to ease European slowdown and protect the US. Many critics think that Fed intervention actually hurt our own recovery and want the agency shut down.
The mixed feelings and uncertain expectations of 2012 will create more volatility. Until the world economy stabilizes the S&P (SPY) and Dow (DIA) will continue to trade sideways. Dividends will trump all in 2012, just like they did in 2011. Consumer staples offers a wealth of shareholder returns and there are some big names are paying big yields.
Avon Products Inc (AVP) is currently trading around $18, near its 52-week low. The company has been treading water, earnings over the past year have been flat even though revenue is up. The gains in third quarter revenue were negatively impacted by challenges in Brazilian operations and costs related to restructuring. The company was able to improve cash flow and margins but not as much as expected. Management has lowered full year guidance and is planning a shareholder meeting sometime this quarter. Avon is scheduled to release fourth quarter and full year earnings February 14th. Avon has been experiencing strong growth in its foreign markets. Asia, Latin America and Europe all grew by more than 5%. The cautious stance taken by the board last year could prove a spring board for a positive surprise. The stock yields around 5.3% at the current levels and is priced for buying. Earnings and dividend will drive share price over $20.
ConAgra Foods (CAG) earned more than expected in the quarter ending November, 2011. On an as-reported basis earnings per share were down 9%, however when adjusted for comparability factors actually rose 4%. Factors included pricing factors and sales mix. The company grew sales on a commercial and consumer basis, gaining 16% and 4% respectively. ConAgra has spent over a billion dollars improving its balance sheet and share holder value. The company repaid over $300 million in debt, repurchased $95 million in outstanding shares, acquired new businesses and paid out over $90 million in dividends for the second quarter alone. The company pays $.96 and yields about 3.6% at the current share price around $26. Growth in domestic and foreign markets is expected to continue in 2012, the company reaffirmed 2012 earnings per share guidance to growth in the low/mid single digits range. Margins in food are hurting the bottom line, the cost of growing, shipping, processing and delivery are growing. The price of fuel will be a huge impact on input costs and will cut further into ConAgra's bottom line. The stock is at the top of it's range and will not break out.
Altria Group (MO), which is yielding over 5.5% at this time, will soon yield even more. The maker of tobacco products failed to impress investors with 2011 results. The company was able to increase earnings per share by over 7% but in reality, the cost of selling cigarettes wiped out any profits. The reported earnings per share is $1.64, down 12% from last year. The loss is due to restructuring charges, real estate transactions and judgments related to tobacco and health. Altria makes money, its market is addicted to its product. As long as tobacco is legal Altria will continue to make money. The problem is, can the company increase earnings when its very product puts it at risk. Its no joke, the very health risks that tobacco poses to its consumers will be what keeps Altria from increasing earnings and attracting investors. The stock is currently trading around $28, down from 2011. The positive spin put on second quarter 2012 earnings failed to convince investors. The stocks run up to $28 from $15 has come to an end. The stock has entered a range where profit takers will put pressure on the stock. I expect to see Altria trade down to the 200 day moving average where institutional money will step in for the dividend yield.