5 Companies That Aren't Takeover Candidates

by: Pey Shadzi

Here's the moment of truth: How many times have you purchased shares of a company that was touted to be a "takeover candidate" and was just waiting to be "scooped by a large corporation"? I hate to break it to you, but more than 90% of the time these mergers and acquisitions just never materialize.

I learned the hard way a few times over that picking up shares of companies hoping they would be bought out by a wealthy acquirer can certainly lead to lost time and lots of upset. Take, for example, the time I bought shares of Smart Balance, Inc. (SMBL), the makers of a healthy butter alternative, enhanced milk, peanut butter, cooking oil, mayonnaise and popcorn. Who could blame a young investor when others kept hinting Kraft Foods Inc (KFT) would definitely buy them out, sending my shares to the moon. Three years later I found out I paid a premium for a stock that went nowhere for 36 months. Ouch.

The stark reality is that buying a stock with high hopes the company will be bought out rarely ever happens. In fact, I'd go as far to argue that this method of speculation -- unless, of course, you possess intimate intelligence about a company and are legally allowed to act -- is a complete waste of time. Rather, I've found sticking with my tried and true, faithful and reliable dividend-paying stocks has allowed me to build considerable wealth over the last few years. Without hesitation, I feel confident trusting in low beta dividend-paying stocks with consistent histories of raising dividends in order to capitalize on those sweet little quarterly gifts.

So, rather than speculate on stocks that have little chance of being acquired, perhaps it may be more worthwhile to focus on dividend-payers that have been increasing dividends for many, many years in a row. With our recent market weakness, I'd argue this may indeed be a good time to build positions in these stable companies.

Here are five I own that have a special place in my heart:

Despite the fact ExxonMobil (NYSE:XOM) has had a relatively nice run over the last few years, and now sits at the higher end of its 52-week range. I believe the shares still look quite attractive. XOM's revenue growth, good cash flow, solid financial situation and reasonable debt levels put it in a great position to prosper. According to the company, demand for oil is expected to grow roughly 40% over the next 20 years. To me, that suggests XOM will have a strong propensity to stay in this game for years to come. XOM is sporting a forward P/E ratio just above 9.0, a dividend yield of 2.8% and a payout ratio of 23%.

Aflac Incorporated (NYSE:AFL) is my largest holding and one I would consider a very strong buy at the moment. AFL's impressive revenue growth, well-controlled cash flow, debt levels and attractive valuation place the stock high up in my book. Though the stock price has taken a beating recently -- losing nearly 20% over the last three months -- I believe this is a great time to begin building a position in this solid company. AFL currently offers a forward P/E ratio under 6, a dividend yield of 3.3% and a payout ratio of 25%.

Johnson & Johnson (NYSE:JNJ) is a great example of a company with staying power that has been successfully paying and raising dividends for about five decades. Though JNJ has fallen out of favor with many investors over the last few years, I gladly take the opposing point of view and have been slowly adding to my position on weakness. JNJ has been able to raise its net income, expand profit margins, keep a good flow of cash and carry a reasonable level of debt. I think it's safe to assume JNJ will continue to increase EPS while faithfully paying out solid dividend payments for years to come. Currently, JNJ sports a forward P/E ratio of 11.5, a dividend yield of 3.8% and a payout ratio of 62%.

Though I don't yet have any children, I can certainly recognize opportunities out there for toymakers like Hasbro, Inc. (NASDAQ:HAS). I snatched up more shares of HAS a few weeks back after earnings that seemed to disappoint investors. Not me though; I recognize HAS has great potential to increase EPS in the upcoming quarters and is reasonably priced at the moment while keeping its cash flow in check. HAS currently sports a forward P/E of 11.0, a dividend yield of 4.1% and a payout ratio of 44%. One day when I have children, I'll likely stop buying the stock and start buying some toys, but I'm not quite there yet; for now I'll stick with this undervalued stock.

Lastly, no review of quality companies would be complete without first looking at The Procter & Gamble Company (NYSE:PG). PG has been able to grow its revenues and expand its profits while keeping a fairly reasonable valuation and continuing to grow its dividend. That's not always an easy feat in the household products industry where growth is often painstakingly slow and growing sales depends highly on product innovation and a sound marketing strategy. PG currently sports a forward P/E of 15.5, a dividend yield of 3.5% and a payout ratio of 64%. PG has been able to grow its dividend faithfully each year for roughly 56 years. That's truly amazing when you think about it.

The bottom line

Based on my experiences and from the teachings of super investors like Peter Lynch, I believe it's a great idea to steer clear of companies touted as "buyout candidates" and stick to the tried and true companies who have been building wealth for shareholders for many, many years. I'm still waiting for the Smart Balance, Inc. buyout (but I'm certainly not holding my breath and I don't think you should either).

Disclosure: I am long (XOM), (HAS), (PG), (JNJ), (AFL), (KFT).