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Recently, Morgan Stanley (MS) ran a screen to identify stocks with "attractive and sustainable dividends" that carry a strong buy (overweight) rating by the investment bank. It isolated dividend companies that have a consensus 2012 dividend yield above the median bond yield on their outstanding debt. According to Morgan Stanley, low bond yields suggest that the company will have a sufficient capacity to finance operations internally or, if needed, it will be able to tap the credit market at low nominal rates, without the need to touch the dividend.

At the same time, the investment bank supplemented the initial screen with another one that filtered out those dividend plays that boast dividend yields between 2.25% and 6.0%, and have less ominous payout ratios (below 75%), solid balance sheets with net debt/capitalization below 15%, and free cash flow yields in excess of 5%. All stocks have projected future dividend growth. They are all companies with market capitalizations above $2 billion.

From the attractiveness and sustainability standpoint, six dividend stocks were identified that matched the aforementioned criteria. The resulting dividend stocks offer the highest degree of security for the level of dividends they pay. Risk-averse investors who seek prudent investment choices can enrich their portfolios with these "attractive and sustainable" dividend plays.

General Electric (GE) is a $208 billion diversified industrial conglomerate providing a range of products and services, including aircraft engines, power turbines, household appliances, and financial services. Its dividend yields 3.4% on a payout ratio of 56%. The company's peers 3M Company (MMM), Honeywell (HON) and Siemens AG (SI) pay dividend yields of 2.7%, 2.7%, and 3.5%, respectively. GE's dividend yield is 105 basis points above the yield on the company's median bond yield. Even though the company's dividend and the EPS shrank over the past five years, the dividend is safe at the current level and will increase in the foreseeable future. In the forthcoming period, the EPS is forecast to grow at a robust 12.4% rate for the next five years. The stock is trading at $19.60 a share, up 5.2% over the past year. The stock has a forward P/E on par with that of its industry. Billionaire George Soros is bullish about the stock (see George Soros' top stock picks).

Pfizer (PFE) is a $167 billion is a U.S.-based multinational pharmaceutical company. It currently pays a dividend yield of 3.9% on a payout ratio of 72%. The company's peers Johnson & Johnson (JNJ) and Merck & Co. (MRK) currently yield 3.6% and 4.0%, respectively. Pfizer's dividend yield is some 174 basis points above the company's median yield on outstanding bonds. Despite its "attractive and sustainable dividend status," the pharma giant's EPS contracted over the past five years and its dividend was reduced in 2009. The company's EPS is now expected to grow at a low average rate of 2.3% per year for the next half decade. Pfizer's Alzheimer's disease drugs portfolio is promising and could prove lucrative if late-stage trials prove effective. Some results are due within a month or so. The stock is trading at $22.28 a share, up 11% over the past year. As regards its valuation, PFE trades on a forward P/E below the company's own historical metrics. Among fund managers, billionaires Ken Fisher and D.E. Shaw hold the largest stakes in the company.

Philip Morris International (PM) is a $154 billion producer of tobacco and cigarettes, selling popular brands such as Marlboro, Parliament, Merit, and Virginia Slims. The company's dividend yield is 3.4% and its payout ratio is 61%. Philip Morris' peers Altria Group (MO), Reynolds American (RAI), and Lorillard (LO) pay dividend yields of 4.7%, 5.2%, and 4.6%, respectively. The dividend yield of Philip Morris International is 134 basis points above the median yield on the company's outstanding bonds. Philip Morris' EPS and dividends grew at annual rates of 10.8% over the past five years and 19.8% over the past four years, respectively. Analysts forecast that the EPS will expand at 9.6% a year for the next five years. The company's outlook is bullish on the revenue growth in the Middle East, Asia, and Africa regions, from which Philip Morris derives a majority of its revenues and profits. The company's stock is trading on a forward P/E above that of its industry. The stock is changing hands at $90.46 a share, up nearly 32% over the past year. The stock is popular with billionaires Jim Simons and Cliff Asness.

Colgate-Palmolive (CL) is a $50 billion personal goods company producing a range of household, health care, and personal products. Colgate-Palmolive has been boosting dividends each year since 1964. The company currently pays a dividend yield of 2.5% on a payout ratio of 50%. Its competitors Procter & Gamble (PG) and Kimberly-Clark Corporation (KMB) pay dividends yielding 3.7% and 3.5%, respectively. Colgate-Palmolive's dividend yield is 132 basis points higher than the medium yield on its outstanding bonds. Over the past five years, the company saw its EPS grow at an average rate of 15% per year, while its dividend grew at a 12.3% annual rate. In the next five years, analysts expect that the firm's EPS will rise at a 9.5% average annual rate. The stock is trading on a forward P/E that is at a slight premium to the personal products industry. The company's shares are trading at $103.83 a share, up 17.4% over the past year. Fund manager Jean-Marie Eveillard (First Eagle Investment Management-check its top holdings), and billionaires Jim Simons and Ken Griffin hold large positions in the company.

Emerson Electric Company (EMR) is a $32.4 billion diversified multinational corporation that manufactures and sells a wide range of manufacturing industry equipment and services. Its products include equipment for paper and pharmaceutical processing companies, air conditioning, refrigerators, and motors for both consumer and industrial uses. The company's dividend is yielding 3.6% on a payout ratio of 51%. Its competitors General Electric , Caterpillar (CAT), and ABB Ltd. (ABB) pay yields of 3.4%, 2.5%, and 4.4%, respectively. The company's dividend yield is 135 basis points higher than the median yield on its outstanding bond issues. Emerson Electric boosted its EPS at a rate of 7.9% per year over the past five years and its dividends at a rate of 8.9% per year. In the next five years, the company's EPS is expected to increase at a rate of 11.4% per year. In terms of its forward valuation, the stock is trading almost on par with its electrical components and equipment industry. The stock is changing hands at $44.5 a share, down 21% over the past year. Fund managers John A. Levin and Phill Gross are bullish about the stock.

Nucor Corporation (NUE) is a $12 billion steel producer. Its dividend is yielding 3.8% on a payout ratio of 61%. The company's peers U.S. Steel (X) and Steel Dynamics Inc. (STLD) pay yields of 1.0% and 3.2%, respectively. Nucor's dividend yield is 157 basis points above the median yield on the company's bonds. Its EPS and dividend contracted over the past five years. Still, Morgan Stanley holds that the dividend is not only sustainable at the current level, but is also expected to grow. Analysts forecast that the steel maker's EPS will rise at an average rate of 12.5% per year for the next five years (this looks like an overly optimistic scenario that will hardly materialize). In terms of forward valuation, the stock is trading on a forward P/E that is well above that for the iron and steel industry on average. Nucor's shares are changing hands at $37.85 a share, down 5% over the past year. Fund managers Phill Gross and billionaires Cliff Asness and Paul Tudor Jones are big investors in the stock.

Source: Morgan Stanley's Favorite Dividend Stocks