Investors seeking consistent growth in earnings and dividends should focus on quality stocks. These stocks not only provide a cushion during market downturns, but they also pay a decent premium during volatile times and during periods of steepening yield curves and widening credit spreads. The current market environment is suitable for investments in high-quality dividend stocks.
We have chosen four consumer non-cyclical stocks that are likely to perform well regardless of whether the economy is expanding or contracting. Given that the economy seems to be stuck in a soft patch, non-cyclical stocks may be in a better position than cyclical stocks for the time being. While some of our picks have already rallied to new multi-year highs, there is still some room for further gains in the medium term. Our picks have market capitalization above $9 billion and an average dividend yield of 3.05%.
Kimberly-Clark Corporation (KMB) is a $33-billion consumer goods company, selling mainly paper products. Its popular brands include Kleenex, Huggies, and Scott paper towels. The company's EPS grew at an average rate of 4.2% per year over the past five years, while dividends increased at a rate of 7.1% per year. Analysts forecast that over the next five years, the company's EPS will expand at a rate almost double that achieved over the past five years. Kimberly-Clark has a free cash flow yield of 1.4%, ROE of 32.7%, and return on invested capital [ROIC] of 15.8%. The company recently beat analyst estimates of EPS. Its EPS rose over the past year on organic sales growth, cost savings, and lower commodity prices. Based on additional cost savings and revenue growth, the company recently upped its EPS guidance for the year. It also increased its 2012 share buyback program from between $900 million and $1.1 billion to $1.3 billion.
Kimberly-Clark pays a dividend yield of 3.6% on a payout ratio of 65%. Its peers Procter & Gamble Co. (PG), The Clorox Company (CLX), and Colgate-Palmolive (CL) pay dividend yields of 3.4%, 3.6%, and 2.4%, respectively. On a forward P/E basis, the stock is trading at a discount to its respective industry, despite the recent run up in prices to multi-year highs. The shares are changing hands at $84.40, up 29% over the past 12 months. Billionaires Ken Griffin and Cliff Asness are bullish about the stock.
Archer-Daniels-Midland Company (ADM) is a $17.6-billion company and one of the world's largest processors of agricultural commodities. Over the past five years, the company's EPS contracted at an average annual rate of 11%, while dividends increased at a rate of 9.5% per year. Analysts forecast that the company's EPS will expand at an average rate of 10% per year for the next five years. The company boasts a free cash flow yield of 5.6%, ROE of 7.2%, and ROIC of 5.3%. Generally, the company stands to benefit from population growth, and higher biofuel and meat consumption. The current drought, which has sent corn prices skyrocketing, has slashed ethanol producers' margins. Now, in this segment, the company is losing $0.20 per gallon. Rising grain prices will also hurt its agricultural output margins. Nevertheless, drought conditions could help Archer-Daniels-Midland from a competitive standpoint by driving small producers out of business and making them attractive takeover targets.
The stock is paying a dividend yield of 2.6% on a payout ratio of 38%. Its main competitor Cargill is a privately-held business. Peer Bunge Limited (BG) pays a dividend yield of 1.7%. Based on forward P/Es, the Archer-Daniels-Midland shares are undervalued relative to the food products industry. The shares are trading at $26.60, down 3.5% over the past year. Among fund managers, Phill Gross (Adage Capital Management), Cliff Asness, and Steven Cohen are upbeat about the stock.
The Clorox Company is a $9.4-billion consumer and institutional products company. It sells a variety of cleaning products, bleaches, water filters and food products. Over the past five years, its EPS and dividends grew at average rates of 5% and 13.3% per year, respectively. EPS growth is forecast to average 8% per year for the next five years. The company boasts ROIC of 37%. Clorox recently posted better-than-expected results based on cost-savings, higher sales volumes, price increases, and lower advertising costs. The company's acquisitions of Aplicare Inc. and HealthLink have bolstered its capabilities in the health and wellness areas. The company plans additional acquisitions and alliances, which could help boost its market share in the future.
The stock is paying a dividend yield of 3.6% on a low payout ratio of 63%. Its peers Kimberly-Clark, Procter & Gamble, and Colgate-Palmolive pay dividend yields of 3.6%, 3.4%, and 2.4%, respectively. On a forward P/E basis, the shares are trading almost on par with its respective industry and at a small discount to the company's long-term metrics. The stock is up 13% over the past year to the current $72.34 a share. Investment legend George Soros initiated a new $49-million position in the stock in the second quarter.
Colgate-Palmolive Co. is a $50-billion consumer goods company, providing a broad range of products from dental hygiene and dishwashing liquids to shampoos and pet food. Over the past five years, the company's EPS and dividends grew at 15% and 11.5% per year, respectively. Analysts forecast that its EPS growth will grow at an average rate of 8.8% per year for the next five years. The stock boasts a free cash flow yield of 2.4%, ROE of 93%, and ROIC of 33%. The company has seen good performance based on sales growth, strong pricing, and gross margin expansion. Its growing international presence bodes well for future sales growth; however, it is also posing some foreign exchange risks. The company is operating in a competitive environment in both the U.S. and international markets.
It pays a dividend yield of 2.4% on a payout ratio of 49%. Its rivals Procter & Gamble, Kimberly-Clark Corporation, and The Clorox Company pay higher dividend yields. The shares are trading on a forward P/E that is on par with the company's respective industry. The shares are up 25% over the past year to $106.10 a share. Value investor Jean-Marie Eveillard (First Eagle Investment Management) reported owning more than $300 million in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.