Despite a strong start to risk markets in 2012, markets are likely to remain volatile due to a number of economic and geopolitical issues.
- Ongoing sovereign debt crisis centered in Europe
- Slowdown in China
- Tail risk to Japanese interest rates
- High unemployment and structural unemployment issues, including long-term unemployment and youth unemployment
- Presidential election
- Geopolitical issues in the Middle East
- High oil prices
- Weak and stagnant housing market.
Retirees that are seeking yield and are long-term bullish on the markets should stick with high quality equities. With interest rates in the developed world at record lows and central bankers focused on fueling inflation, I am hesitant about holding long duration bonds despite their strong performance throughout the crisis.
Retirees should combine quantitative metrics (equity screeners) with qualitative attributes when looking for equities to add to their portfolios.
While the economic environment is poor, equities are relatively cheap. The S&P500 (NYSEARCA:SPY) is trading at a modest 13.0x price to earnings ratio. The equities below have been able to increase cash flow, earnings, and dividends over the last decade. I expect the management teams to be able to increase dividends over the next decade due to the wide moats of their business models.
In terms of qualitative attributes, I look for companies with strong market share in their respective markets with business models that are recession-resilient.
Price to Earnings less than 20.0x - focused on relatively inexpensive equities.
Dividend Yields greater than 10 Year Treasury - focused on equities that will provide cash income greater than the 10 year Treasury. While the equity price (principle value) might fluctuate due to market condition, holders can count on the cash flow from dividends.
Low Debt to EBITDA ratios - focused on equities with modest debt relative to cash flow. EBITDA (earnings before interest, taxes, depreciation and amortization) is a proxy for cash flow. Banks and finance
Market Capitalization greater than $5 billion - focused on large capitalization equities which generally have better access to capital markets and have more durable business models.
Medtronic Inc. (NYSE:MDT)
Price to Earnings: 12.2x
Dividend Yield: 2.6%
Debt to EBITDA: 1.9x
Market Capitalization: $40.2 billion
Rationale: MDT is the largest medical device manufacturer in the world. The Company holds nearly 50% share in the heart device market. Aging demographics in the developed world will benefit the Company.
Johnson & Johnson (NYSE:JNJ)
Price to Earnings: 18.6x
Dividend Yield: 3.5%
Debt to EBITDA: 1.0x
Market Capitalization: $177.8 billion
Rationale: JNJ commands the #1 or #2 positions in the majority of its markets. The Company's business model is recession-resilient. Aging demographics and the increased spending on healthcare will benefit the Company.
Molson Coors Brewing Company (NYSE:TAP)
Price to Earnings: 12.1x
Dividend Yield: 2.9%
Debt to EBITDA: 2.9x
Market Capitalization: $7.8 billion
Rationale: TAP is the 2nd largest brewer in Canada and the United States. While TAP operates in a low growth end market, the beer business is relatively stable. The Company's scale provides cost benefits over other competitors.
Waste Management, Inc. (NYSE:WM)
Price to Earnings: 17.1x
Dividend Yield: 4.1%
Debt to EBITDA: 3.0x
Market Capitalization: $16.0 billion
Rationale: WM is a dominant player in the landfill and waste management business. The Company operates 300 landfills. WM operates a stable, annuity-like business and provides investors with a strong 4% dividend.
The Coca-Cola Company (NYSE:KO)
Price to Earnings: 18.9x
Dividend Yield: 2.9%
Debt to EBITDA: 2.2x
Market Capitalization: $156.5 billion
Rationale: The Company operates a global brand with an unparalleled distribution network. Coke has strong growth opportunities in the emerging markets. The Company maintains a strong balance sheet and will provide investors with strong dividends for years to come.
Pfizer, Inc. (NYSE:PFE)
Price to Earnings: 19.2x
Dividend Yield: 4.1%
Debt to EBITDA: 1.4x
Market Capitalization: $161.4 billion
Rationale: The Company has a strong pipeline of drugs and provides a strong dividend to shareholders. Pfizer will benefit from an aging global population that is seeking drugs to cure ailments. The Company's scale provides significant economies of scale. PFE has a strong balance sheet to support the development or acquisition of new drugs.
Disclosure: I am long (MDT).