Sometimes the best investment opportunities are the simplest ones, and the five stocks below are investments that almost everyone knows. Even more, their products, from soda and chips to hamburgers, french fries and cigarettes, are consumer by most of us in our daily lives. Three of these companies are members of the Standard & Poor's 500 Dividend Aristocrat Index which comprises of companies that have been increasing dividends for at least 25 consecutive years and three are also members of the Dow Jones Industrial Index which includes 30 major U.S. companies and is the second oldest stock market index in the U.S. All five of these companies pay a stable dividend and are solid investments regardless of the market environment. They are here to stay and reward their shareholders.
PepsiCo (PEP) trades around $63 per share at the time of this writing, has 1.6 billion shares outstanding for a market capitalization of about $100 billion, and pays a quarterly dividend of $0.5375 per share for an annual yield of 3.4%. PepsiCo has 22 brands and is divided into six reportable segments: Frito-Lay North America, Quaker Foods North America, Latin America Foods, PepsiCo Beverages North America, PepsiCo Beverages Latin America, and PepsiCo International which together generated $66.5 billion in revenues during 2011.
In its recent outlook released on February 9, 2012, the company announced that it would save $1.5 billion of costs through 2014 by restructuring, including a reduction in its workforce of about 8,700 employees. It targets high-single digit growth in earnings per share for 2013 and beyond after an earnings per share decrease by 5% in 2012 due to the restructuring efforts. Also, PepsiCo will repurchase about $3 billion worth of company stock this year thus returning cash to shareholders and increasing its results per share (net of stock options). With a global reach in both emerging and developed markets, shareholder friendly management team, and a 3%+ dividend yield, PepsiCo is an attractive investment that can be held indefinitely with a minimum risk.
Johnson & Johnson (JNJ) recently traded around $65 per share (its 52-week range is between $57.50 and $68.05 per share), has 2.7 billion shares outstanding for a market capitalization of about $177 billion, and it pays a quarterly dividend of $0.57 per share for an annualized yield of 3.5%. In 2011, Johnson & Johnson had revenues of $65 billion (of which 55% were from outside the U.S.) and had $3.49 earnings per share for a price to earnings ratio of 18.6 while its guidance for 2012 is about $5.10 per share for a forward price to earnings ratio of 12.7, significantly lower than its current price to earnings ratio. In addition to geographically diverse customers JNJ also operates in three major product categories (pharmaceutical - 37% of sales, medical devices - 40%, and consumer - 23%) which allows the company to sustain its growth in various economic conditions.
All this together with solid financial resources and a decentralized operations provide Johnson & Johnson with flexibility to innovate and grow organically despite its size. An interesting fact is that JNJ has returned over 10.5% annually for the past 20 years (from 1/1/92 through 1/1/12) compared to about 7.8% for the S&P 500 Index. In other words, an investment of $1,000 in each JNJ and the S&P 500 made on 1/1/92 would be worth about $7,366 and $4,491, respectively, at the beginning of 2012, a 64% difference. At current depressed forward looking price to earnings ratio the stock is a buy and keep for the longer term.
McDonald's (MCD) is currently trading around $100 per share (a share can get you 100 McDouble burgers from its dollar menu) close to the high end of its 52-week trading range between $72.89 and $102.22 per share and the company has about 1 billion shares outstanding for a market capitalization of $100 billion. It pays a quarterly dividend of $0.70 per share for an annualized yield of about 2.8%. McDonald's has one of the best known brands in the world, operates in over 100 countries, and generated $86 billion in sales in 2011 or a rise of about 12% from 2010 sales. Compared to its peers, McDonald's price to earnings ratio of 19.1 is below the industry average of 22.4 and its earnings before interest tax and depreciation margin is 35%, significantly better than the industry's average of 21%.
Operationally, McDonald's is well managed and its recent introduction of espresso drinks and frappes was well received. The average Wall Street analyst's estimate for McDonald's is to earn about $5.75 and $6.34 per share in 2012 and 2013, respectively. Part of this increase will be due to a share repurchase programs which the company is executing currently as well as to improved sales and margins. Assuming a price to earnings ratio of 20, in about 12 months and 24 months from now, based on these estimates, the stock would be trading at $115 and $127 per share, respectively. The relatively inexpensive stock together with the stable dividend and business model make McDonald's a tasty long-term investment choice.
From the largest fast-food restaurant I will move on to the leading producer of aluminum, alumina, and bauxite in the world. Alcoa (AA) is currently trading around $10 per share with a 52-week range between $8.45 and $18.47, has about 1.1 billion shares outstanding for a market capitalization of about $11 billion and pays a quarterly dividend of $0.03 per share for an annualized yield of 1.2%. Alcoa is a good cash generator as its cash from operating activities was $2.2 billion in 2011 (for the past four years the total is $7 billion or 64% of its market capitalization). Its price to earnings ratio of 19 is well above the industry average of 9 but its price to book ratio is only 0.8 (under one signifies an undervalued company).
Its disappointing earnings in 2011 were mostly due to restructuring charges and lower aluminum prices. However, by the end of 2013, I project its earnings per share to reach $1 due to a global economic recovery, increase in the demand for aluminum, efficiencies, cost savings, and Alcoa's global leading position in the aluminum market. Alcoa is well positioned to benefit in the decades ahead from secular increase in demand for autos and housing around the world. Assuming that the world population continues to drive cars, build housing and trade, Alcoa is a good long-term investment with a significant upside potential.
The last stock in the five stocks to hold forever group is Altria Group (MO) which trades around $29 per share at the time of this writing, has 2.1 billion shares outstanding for a market capitalization of $61 billion and an enterprise value of $70 billion (including $3.3 billion in cash and $13 billion in long-term debt), and pays a $0.41 dividend per share per quarter for an annualized yield of 5.6%. In a recent press release Altria announced that it expects 2012 earnings per share of about $2.15 thus having an estimated forward looking price to earnings ratio of 13.5 compared to a current price to earnings ratio of 17.1 and 14.7 for the industry and the S&P 500, respectively. The dividend alone makes Altria a great buy and hold investment but there is a real potential for capital appreciation if the price to earnings ratio comes in line with the industry average.
Altria has five reporting segments (cigarettes, smokeless products, cigars, wine, and financial products) which generated revenue of $23.8 billion in 2011, a 2.3% decline compared to 2010. Altria derives 90% of its revenue from cigarettes whose sales declined in 2011 by 1% but its other three consumer product categories are growing nicely with wine sales up 12.4%, smokeless products up 4.8%, and cigars up 1.3% in 2011 compared to 2010. Also, Altria has a 27% share in SABMiller which has not been profitable in the last two years but should be beneficial to shareholders of Altria in the longer-term as it provides exposure to the international beer market. Therefore, Altria is another company to buy-and-hold in the long-term.
In conclusion, the five stocks discussed above are a great alternative to many financial products which have actually underperformed the long-term returns of these individual stocks. PepsiCo, Johnson&Johnson, McDonald's, Alcoa, and Altria have been rewarding their patient shareholders for decades under different market conditions. There is no reason to expect anything less than a solid performance from them in the future.