Seeking Alpha
Profile| Send Message|
( followers)  

Coca-Cola (NYSE:KO) and Altria Group (NYSE:MO) have long been "go to" companies for retirement portfolios, tuition plans, and risk averse investors of all stripes. Both are mature companies with enviable dividend track records. Warren Buffett, for example, holds 200 million shares of Coca-Cola valued at nearly $16 billion in his Berkshire Hathaway (NYSE:BRK.A) portfolio. This is a strong endorsement indeed! Conspicuous in its absence from the Berkshire Hathaway family of holdings is Altria Group and I will explain why see why later in this article.

My objective in this article is to provide the reader with two companies to consider for long-term investment that also pay a handsome dividend yield. Using Altria as an example of a questionable investment for sustainable dividend growth, I will show you why the outlook for Coca-Cola continues to be positive and why you should also consider buying Gannett (NYSE:GCI) and Cliffs Natural Resources (NYSE:CLF) for your long-term portfolio.

First let's look at Coca-Cola's fundamentals. The stock currently trades around $40 with a market capitalization of $178 billion. The price to earnings ratio is higher than you would think Buffett would be comfortable with, at 20.93. The same can be said of the price to earnings growth ratio of 2.68. Price to book is relatively high at 5.52, but so is return on equity at 25.8%. Each of its 146,200 employees contributes an average of $59,576 to net earnings. Quarterly year-over-year revenue growth came in at 2.7%, while quarterly year-over-year earnings growth fell short of positive territory at -0.4%. Coca-Cola has a debt to equity ratio of 99.55 and a current ratio of 1.11. Coca-Cola's quarterly dividend of $0.255 per share (split adjusted) translates to a yield of 2.5%. Coca-Cola's payout ratio is 52%. On a discounted cash flow basis, the stock is overvalued by about 13%.

I chose to contrast Coca-Cola with Altria because both are in the same sector, both enjoy a reputation for providing shareholders consistent dividends and both are mature corporations. Altria trades at $35 and has a market cap of $72 billion. It has a superior price to earnings ratio and price to earnings growth ratio of 16.36 and 2.58, respectively. Price to book is stratospheric compared to Coca-Cola, reported at 16.79, but Altria 's return on equity of 98.75% almost quadruples Coca-Cola. Each of its 9,900 employees contributes an average of $445,455 to net earnings. Altria stacks up well against Coca-Cola with quarterly year-over-year revenue and earnings of 14.4% and 175.9% respectively. Altria's debt to income ratio is a shocking threefold that of Coca-Cola reported at 317.76 and the current ratio is an acceptable 1.34. Altria's robust dividend yield of 4.6% comes at the price of a payout ratio of 80% which does not compare favorably to Coca-Cola's relatively modest 52%. Altria is also overvalued on a discounted cash flow basis, but by almost 77% compared to Coca-Cola, overvalued by 13%.

What the fundamentals do not show is the fact that from 2007 through 2011, Altria's average revenue growth was -7% compared to Coca-Cola's +13% in the same period. In my view, Altria's dismal revenue history in concert with its inflated debt to equity position and high payout ratio combine to negate this stock as a reliable dividend producer long term.

Now I will look at Gannett, another Buffett holding. It trades at $16 and has a market cap of around $4 billion. Gannett's price to earnings and price to earnings growth ratio stand at 9.28 and 0.94 respectively. Price to book is at 1.52 and return on equity is 17.24%. Each of its 31,000 employees contributes an average of $13,059 to net earnings. Quarterly year-over-year revenue and earnings growth are -2.1 and -20.9 respectively. Gannett's debt to equity and current ratios are 64.63 and 1.14 respectively. The $0.20 quarterly dividend translates to an annual yield of 3.6% supported by a payout ratio of 33%. Based on discounted cash flow, the stock is undervalued by almost 63%.

Now to my personal favorite, Cliff's Natural Resources. It trades at about $42 and has a market capitalization of around $6 billion. Trailing 12 month price to earnings and price to earnings growth ratios are 4.26 and 0.97 respectively. From a price to earnings perspective, Cliff's Natural Resources is roughly half the cost of Gannett. Price to book is a fractional 0.96 and the most favorable we examine here today. The 23.29% return on equity is almost at par with Coca-Cola superior to Gannett. Each of its 7,407 employees contributes an average of $194,411 to net earnings, also blowing out Gannett and Coca-Cola. Quarterly year-over-year revenue and earnings growth failed to reach positive territory, reporting at -10% and -36.9% respectively. However, the average revenue growth for 2007 through 2011 was a positive 42% and is a much more relevant figure to consider when investing for the long term. Cliff's Natural Resources' debt to equity and current ratios are 56.40 and 1.14 respectively, comparing favorably to both Coca-Cola and Gannett. Cliff's Natural Resources pays a quarterly dividend of $0.625, which translates to a yield of 4.3% against the most modest and most sustainable payout ratio of the day; 15%.

It is easy to understand Buffett's fondness for Coca-Cola and Gannett ... I will be watching the next 13F to see if he has moved on Cliff's Natural Resources.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Dividend Kings That Should Be In Your Portfolio Now